Effective Ways to Avoid Emotion-Based Investing

Effective portfolio monitoring is essential for navigating the changing tides of financial markets. Still, it is also necessary for individual investors to manage their behavioral impulses of emotional buying and selling of assets that can come from following the market's ups and downs. It is no secret that emotions play a significant role in investment decisions. This is because humans tend to make decisions based on feelings rather than reason. 

Emotion-based investing is a term that refers to selecting stocks or other investments based on factors such as feelings, emotions, and intuition rather than purely objective analysis. The main reason why emotion-based investing can be dangerous is that it leads investors to make decisions without understanding the consequences of their actions. Emotion-based investors are more likely to react emotionally instead of rationally when making investment choices.

If you want to avoid emotion-based investing, it's essential to learn how to control your emotions and to measure how emotionally invested you are in investment. This is easier said than done, but you can use a few techniques to manage the situation, which will be discussed in this article.

Investor Behavior

Investor behavior is an essential topic of research that has been studied and analyzed for many years. Investor behavior can be broadly categorized into two types:

• Behavioral finance
• Financial engineering

Behavioral finance focuses on the psychological factors that influence investment decisions, while financial engineering seeks to use mathematical models and computer simulations to understand how markets work. Behavioral finance considers investor decision-making under uncertainty, which is a critical factor in modern portfolio management. Financial engineers use mathematics to model complex relationships between returns, risk, dividends payouts, stock prices, interest rates, etc.

Recognizing different investor behavior types can help you make more informed investment decisions. Investor behavior is a critical part of successful investing. By understanding different types of investor behavior, you can make informed decisions that will lead to greater returns.

Humanizing Your Investment Decisions

When making investment decisions, we often take into account the potential return on our investment, as well as the potential loss. However, it is often difficult, if not impossible, to divorce ourselves from emotion when making these decisions ultimately. For example, we may feel excitement, fear, or panic when considering a potential investment loss or gain, and this can tilt the scales in favor of an investment that would otherwise be seen as risky.

Image Source Cooperators

We often humanize our investment decisions by attaching emotions, thoughts, and feelings to the different choices we make. We might justify a decision based on how it makes us feel or what it means to us. This tendency can significantly impact our financial decisions because it can lead us to overlook important facts and risks. Our emotional attachments can also distort our judgment about risk-reward relationships, which could result in poor investments.

Time-Tested Theory

The belief that several market participants buy at the top and sell at the bottom has been proven by historical money flow analysis. The analysis looks at the net flow of funds for mutual funds and constantly shows that when markets are hitting highs or lows, buying or selling is at its highest. The notion of a trade cycle has also become accepted as most economic cycles have a 3 to 6-year period where money flows into equities and then flows out for the next ten years or more. 

This theory was first introduced by Benjamin Guggenheim and later popularized by Paul Samuelson, who called it "the efficient market hypothesis" (EMH). Much research has been done on this subject, including work by Eugene Fama, Robert Shiller, Mark Rubinstein, and John Campbell.

While this concept was well known to Wall Street in the 1980s, it's now being applied to individual and institutional investors as we all try to time our investments to make a profit based on price movement rather than fundamentals and timing market tops and bottoms. A Simple strategy that worked over 30 years ago, legendary investor Bruce Kovner described an investment strategy he called "buy and hold."

Image Source Sarwa

It seem like a challenging approach, but it works! His method involves purchasing stocks at low prices and holding them until they rebound. This is a great way to find bargains because the stock market will go up over the long term more than down.

Understand the Benefits of Market Timing

Market timing is an investment technique that predicts the stock market's direction. Market timing has been shown to be a very risky strategy. The main reason why market timing is so dangerous is that it can lead investors to buy high and sell low, which often results in significant losses. There are many reasons why market timers fail: they may incorrectly predict future trends, focus on short-term rather than long-term factors, or make decisions based on emotions rather than sound logic.

There are many benefits to market timing, including:

• Increased returns
• Increased profits
• Better risk management
• More accurate portfolio allocation
• Easier investment 

The best time to invest in stocks or other securities is when the market is undervalued. When the market is overvalued, there is a greater chance that a security will appreciate, regardless of the quality of the underlying business. When the market is correctly valued, you can profit by buying undervalued securities and holding them until they reach their actual value.

The key to good market timing is to use a diversified portfolio that includes a wide range of securities. By diversifying your investments, you reduce the risk of panicking and making poor investment choices. By investing in a variety of assets, you can ensure that you are exposed to a variety of markets and will have a chance to capture favorable market trends.

Techniques to Take the Emotion Out of Investing

Investing is a vital part of any person’s life. It can provide security and stability and help achieve financial goals. However, like any other activity or decision-making process, investing comes with its own emotions and concerns that need to be considered when making an investment choice. The emotional component of supporting stems from the fact that investing involves risk and potential gains and losses.

Two things are difficult to cope with emotionally, especially if you have just started on this journey of building wealth for yourself and your family through investing and savings decisions and actions over time. The first thing to understand about the “emotional” aspect of investing is that it has to do more with how we make decisions rather than what we decide to invest in or not since many factors are involved in such decisions.

The second part is understanding how to get rid of them to make informed decisions based on facts and figures, not feelings and biases which can lead to wrong choices or decisions that may come back to haunt you later on in your investment journey (and life).

There are several strategies that investors can use to take the emotion out of investing so that they can make informed decisions based on facts and figures alone. Let’s have a look at some ways to take the emotion out of investing and start investing more effectively and safely.

Be Patient

Image Source Sarwa

When it comes to investing, patience is key to success! I know that seems contradictory but bear with me for a moment. In my experience, when you think about what you can do to improve your financial situation, it is easy to get caught up in trying to solve all your problems today. Rather than focusing on solving them one step at a time over the long term and ensuring that those steps work for you every day of the week, even if they feel small and unimportant, to begin with. The first step towards increasing your financial literacy level is understanding where you currently stand financially and then deciding how you want your finances to be in the future.

Remember the Past

When the market takes a deep dive, remember that this isn't the first time it's happened. The stock market has overcome many obstacles, such as 9/11, the Great Recession, and the market crash of 1987. It is always destined to recover eventually, although a few people might argue that the market hasn't recovered yet, considering the recent decline in stock prices and unemployment rates, which need attention for countries to come back on track economically and socially.

So when a crisis hits like what we're experiencing now, investors need to remember that panic is the worst thing they can do. Inexperienced investors who have only seen a bull market are more prone to become emotionally charged during times of prolonged volatility.

Benjamin Graham, a British-born American economist, professor, and investor, once said, 

"individuals who can not master their emotions are ill-suited from profiting from the investment process."

Consult With an Expert 

Consulting with a financial expert will help you examine the accuracy of your thinking and give you something else you need; which is time. If you can not afford a financial advisor, at least speak to someone before you make an investment decision. That is, as long as they are knowledgeable enough and not panicking. (Of course, some people are both.)

You must choose the right company for you because many investment companies have investment offers that may be suitable for one type of investor but not another, or investors in certain countries but not others. When choosing an investment firm, you need to know which investment types to look out for. Be sure you're willing to accept the risk level if you want to invest your money with them, such as investing through the stock market, putting cash into bank accounts, bonds, certificates of deposit, crypro, or any other investments.

Control Your Risk Aversion

You can control your risk aversion by understanding why you feel the way you do. We all have a fear of losing, which is based on our past experiences. You are likely to have lost lots of money in the past. You remember this pain very well, and it has influenced your current investment behavior. When we are faced with a risk we do not understand, our brain automatically sends a signal to our body to reduce our intake of that risk. We do this by reducing the amount of dopamine which is a neurotransmitter.

To be able to make informed investment decisions, we need to be able to take the emotion out of it. We can do this by breaking the decision down into smaller steps. This is where the technique of breaking down a problem into manageable steps can be of great help. By doing this, we can reduce the fear of Failure and increase our chances of success.

Other things to consider are:

• Be cautious when investing heavily in shares of any stock
• Evaluate your comfort zone in taking on risk
• Draw a personal financial roadmap
• Evaluate an appropriate mix of investments
• Cultivate and maintain an emergency fund
• Consider rebalancing your portfolio occasionally
• Resist circumstances that can lead to fraud

Develop a System of Investment

There are several benefits to developing a system of investment. One advantage is that an investment system allows you to make prudent decisions concerning your overall financial status. You can adjust your asset allocation as needed to match your risk tolerance and desired return objectives. Furthermore, an investment system allows you to take advantage of compounding returns, resulting in high returns over time.

To create an investment system, you must clearly understand your goals and objectives. You also need to understand your financial situation and risk tolerance clearly. Once you have established these baseline parameters, you can start constructing a system of investment. Many options are available to you, and choosing the appropriate one for your unique circumstances is crucial.

The Bottom Line 

Successfully Investing without emotion is easier said than done, but some key considerations can prevent individual investors from chasing wasted profits or panicking by overselling. Understanding your investment risk is an essential basis for making rational decisions. It is also important to actively understand the market and the forces driving uptrends and downtrends.

The following questions will help you build a solid foundation for investing without emotion:

• What are your expectations?
• How do you feel about your past experiences?
• Do you have any biases that might cloud your ability to make sound decisions?
• Can you clearly define what constitutes a “win”?
• Do you believe in luck or miracles?
• Does your family history affect how you think about money and finance?
• How much time do you want to spend learning?
• Are you willing to pay the price in time, effort, and attention required to develop and maintain a disciplined approach to investing?

If you provided unbiased answers to these questions, then it is possible to invest successfully without emotion. While sometimes aggressive and emotional investing can be successful, overall, data shows that following a realistic investment strategy and staying the course despite market volatility often yields the best long-term performance returns.

 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advise.

 

 

 

 

 

Tim Moseley

Potential Boost for Bitcoin as $12.8 Trillion Worth of Gold Ore Is Discovered in Uganda

The cryptocurrency markets have been on the downside for most of the year. The recent discovery of gold in Uganda may likely be the miracle to help the market make an upward trace.

KAMPALA (Reuters) – Uganda, has revealed recent exploration surveys to show it has discovered gold ore deposits of about 31 million tonnes with an estimated 320,158 tonnes of refined gold valued at $12.8 trillion. The country wants to attract big investors to develop the sector hitherto dominated by small wildcat miners. Solomon Muyita, a Ugandan Ministry of Energy and Mineral Development spokesperson, made this known. 

Most of the gold deposits were found in Karamoja, a scorched sprawling area in the country's northeastern corner on the border with Kenya. Massive reserves were also found in the country's eastern, central, and western regions.

However, the argument on the scarcity of gold which makes it a store of value may be harmed after Uganda announced that it had discovered 31 million metric tonnes of gold waiting to be mined in the area. While gold is often regarded as a scarce asset, the recent development has posed a significant risk to that effect. It may cause panic amongst investors who may be wondering about its potential value shortly. 

If Uganda is truthfully sitting on that massive amount of gold ore, as the government acknowledged, will that not substantially boost the world's gold supply? That could significantly lower the price of gold and make it a less secure "store of value."

​​​​Gold vs. Bitcoin Debate

Source Kenesis

For many years, there has been fierce debate over the supremacy of Bitcoin over Gold. While Bitcoin is primarily praised as a currency, others believe that the coin is also a commodity that could be adopted as a store of value. The main argument for the use of Bitcoin as a store of value is the fact that it will never go bankrupt, and can be used as an investment alternative to gold or other commodities which have fallen in value in recent times because of inflation or recessionary economic conditions respectively. The second factor that propels the adoption of Bitcoin as a store of value is its ability to prevent capital controls and restrictions on banking transactions imposed by central banks due to government intervention in the financial market. For instance, China has banned trading cryptocurrencies such as Bitcoin through domestic exchanges.

Gold historically performs well during market corrections because it maintains its value; its price holds somewhat steady, then tends to rise as investors move from stocks to gold if a recession threatens. This makes it useful as a hedge, an investment that moves opposite another against market corrections or recessions. For example, the stock market may rise as the economy improves, but gold typically declines in value when the economy grows.

Thus, when the stock market falls, and the economy slows down, people will likely turn toward commodities like gold as a haven against inflation and economic weakness. In other words, investors who seek a stable store of value will often buy gold for their money rather than stocks or bonds that can fall in value. The gold's capped supply has helped the discussion that Bitcoin could be used as a store of value, but the recently discovered gold in Uganda may intensify the debate that Bitcoin is better suited. However, Bitcoin mining sites face scrutiny and resistance because of their electricity consumption.

Gold's Expected Loss Might Be the Cryptocurrency's Gain

It should, but the point here is that this sort of thing is logical. There is no way Bitcoin could experience a similar expansionary supply shock because of its strict 21 million supply limit. This makes Bitcoin a non-inflationary asset. Even if the Ugandan spokesperson is lying, which he may or may not be, it's only a matter of time before someone discovers gold on earth or an asteroid that massively increases supply. The critical question is, will Bitcoin potentially be a better store of value than gold?

The question is difficult to answer because it's a matter of opinion. Some people think that Bitcoin is more of a store of value than gold, while others believe it's not. Some argue that gold has had more stability because it has been around for thousands of years. The debate has also come to include how secure is bitcoin's blockchain? Is there any way we could hack it? Are we better off trusting a centralized authority than relying on no one? Some even say you shouldn't use it for anything because "it's just an experiment."

Bitcoin is a cryptocurrency that's built on blockchain technology. It was created in 2009 by Satoshi Nakamoto. The cryptocurrency is decentralized and not controlled by any bank or government. The supply of Bitcoin is limited to 21 million coins, and about 19 million are currently in circulation. Bitcoin can be used to purchase goods and services from vendors who accept it as payment. One way to measure the store of value of Bitcoin is to look at the total market capitalization of all Bitcoin in circulation. As of this writing, the total market capitalization was $366,361,873,280.33 on Coinmarketcap.

On the other hand, it is often said that there are no better investments than real estate and commodities, especially precious metals like gold, silver, platinum, and palladium. But historically, gold has been considered a superior investment and a reliable store of value over the centuries throughout the world, especially when currencies have become unstable and their purchasing power is questionable.

Gold is seen as a safe place to put money because there's a scarcity that provides insurance against inflation or deflation as well as providing a handy measure by which we can estimate the price of something. It also provides an alternative to paper currency, which serves as a hedge in times when governments are in turmoil, such as we're seeing now with Greece. But could these advantages still be attributed to gold after the Ugandan discovery? Who knows!

Could the Ugandan Huge Gold Discovery Be a Mere Fool's Gold?

On  April 1, 1988, an Australian fruit agriculturist in the small town of Beenleigh, Queensland, was publicized to have discovered a massive "gold nugget." The farm owner and his family were excited as they thought that they had found Australia's largest gold coin worth thousands of dollars on their land. 

However, when it was confirmed that this was not the case, he went into hiding rather than face the media storm that would follow from being involved with what could be considered a hoax. Some people worldwide, including President Ronald Reagan, referred to the discovery as "one of the most incredible things I've ever heard".

Fool's gold is common in the mining industry. The Fool's gold is sparkling-yet-worthless mineral pyrite that gold miners in the 19th Century mistook for a bar of natural gold. This mineral pyrite has long been referred to as Fool's gold because its metallic yellow copper-like crystals trick miners into thinking they had struck gold.

The statistics gathered from the U.S Geological Surveys imply that 244,000 metric tonnes of gold, the equivalent of 268,400 tonnes of gold, have been found in the world to date, of which 187,000 metric tonnes (205,700 tonnes) have been produced, leaving a surplus of 57,000 metric tonnes (62,700 tonnes) of known reserves. This implies that Uganda's gold discoveries surpass the global gold discoveries by 115.5 times. Could it be possible that the Ugandan government may have confused metric tons with ounces in its projections?

Nonetheless, Muyita said a Chinese company named Wagagai had set up a mine in Busia in the eastern part of Uganda and was expected to start production this year. Wagagai had invested $200 million, and its mine will have a refining unit. The Russian government also seems interested to hit the gold mine in Uganda.

The massive gold discovery in Uganda brought mixed feelings among investors. Most people see it as a miracle that could finally make Bitcoin be accepted as a store of value, while others see it as a disaster that may eventually affect the value of gold.

Microstrategies CEO Michael Saylor in an interview with CNBC said:

“Every commodity in the world has looked good in a hyperinflationary environment, but the dirty secret is you can make more oil, you can make more silver, you can make more gold […] Bitcoin’s the only thing that looks like a commodity that is scarce and capped.”

 

Garrick Hileman, head of research at Blockchain.com, has this to say during an interview with Cointelegraph:

 

“The Ugandan find underscores why the approximately 200 million holders of Bitcoin believe that ‘digital gold’ — Bitcoin — is superior to actual gold in terms of its scarcity and reliability as a store of value in the decades to come.”

As was the case with other major gold discoveries in history, like the 19th century South African gold rush, the introduction of this much new gold — or even just growing awareness of the Ugandan find — “could have significant negative price implications for gold over the coming years,” Hileman said.

In Summary

Bitcoins and other cryptocurrencies are based on the idea that electronic currency is a secure and efficient transaction. The impact of 31 million tonnes of gold ore on the crypto market will affect prices for cryptocurrencies. This is because the volume of gold ore will create more demand for cryptocurrencies, leading to higher prices. This development will be welcomed by many investors who look for ways to invest their money in safe havens.

This impact on prices may be inflationary because it will increase the supply of cryptocurrencies. It is also possible that this will lead to an increase in the use of cryptocurrencies as a mode of payment. This huge find could quickly push inflation down and provide a much-needed boost to global economies.

 

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Tim Moseley

Effective Ways to Overcome Market Crash in the Global Economy

The global economy is in flux, and many investors are feeling the impact. This unstable environment has led to widespread panic, which has caused some people to make irrational decisions with their investments. To overcome this difficult time, individuals need to understand how these crashes happen and what steps they can take to minimize the damage done. There are different ways that investment crashes occur, and each one presents its own set of risks and challenges.

The investment crash is a devastating event that has impacted many people differently. However, by being prepared for the crisis and employing various methods to overcome it, most people were able to restore their wealth and rebuild their lives.

A few effective ways can help investors overcome these crashes and stay safe throughout this turbulent time. Let's get started!

What is a market crash?

The term "market crash" refers to a sudden and sharp decline in the value of one or more markets or assets that can trace directly to an economic factor. Such as a shortage of currency or a decline in demand due to bad weather or political events, or because there has been a market bubble inflated by excessive exuberance or greed among investors (people who trade securities).

The market crash can also be seen as anything from a mild drop in prices to a total market collapse in less than a day. It can happen when there is too much demand for one particular product, and the sellers cannot supply enough to meet that demand. Hence, prices start to drop rapidly to try and clear out excess stock before it falls into the hands of someone else who wants it more than you do or who will pay less than your price because they are buying on credit, etc.

A market crash may be temporary, with prices recovering in days or weeks. However, a market crash can signal the start of a more prolonged downturn that can last for months or even years. A perfect example is the U.S housing market crash of 2007, which started with a relatively mild decline in home prices leading up to 2005.

What causes a market crash?

An eventual crash is inevitable in a market so full of madness.

The best place to start is with "Why did it happen" (what caused the crash)? And then from there, you can get an idea of what caused the crash, how it was created, and why people didn't do anything about it until it was too late to prevent it from becoming so big that nobody could recover from it before it became terrible. It would cause substantial social upheaval, leading to chaos, war, economic collapse, etc. This seems to be the same problem we are facing now: a large-scale problem that is not being dealt with but will become much worse over time without being dealt with, creating massive civil unrest which may lead to widespread chaos and mass death from starvation, etc. So we need to try to understand this problem and hopefully find some way to solve it. The first step is to understand the reason for the crash.

A common answer is that there are just too many people trying to buy assets simultaneously or too much money being thrown into the market by too many investors. This leads to over-speculation and a bubble that bursts when it inevitably collapses under its weight in a process known as a "crash."

For instance, an economic bubble occurs when too many people try to buy assets such as stocks, crypto, bonds, etc., resulting in overinflated prices and consequently more losses than gains for those who try to sell them when the SMART MONIES (top firms and individual wealthy investors) have already left the market. This leads to widespread bankruptcies, as individuals or businesses with debts cannot afford to pay off their mortgages and can no longer keep up with their interest payments on their loans, so they default and lose all their assets.

When investors start to sell their assets as they believe market prices are unrealistic and will fall in the future, this can cause wide-scale panic selling of assets. This creates a downward spiral of further market price falls as investors lose confidence in holding a particular asset and selling it as quickly as possible.

Every investor lives with the risk of a major economic meltdown, no matter how small. It has occurred before, and it can happen again. If it does, years of hard-earned savings and retirement funds could be wiped out in hours, days, weeks, or months.

Fortunately, you can take measures to safeguard most of your assets from a market crash or even a global economic depression. Preparation and diversification are the pivotal elements of a sound defensive strategy. Altogether, they can help you withstand a financial storm.

Diversify

Diversifying your portfolio is possibly the single most significant measure that you can take to safeguard your investments from a severe bear market. In other words, if you're 100% invested in one particular stock or sector, then when the market goes into freefall, you will be devastated financially and emotionally, as well, as it might take years to recover from such an experience! 

Diversification means exposure to different assets, including stocks, bonds, crypto, etc, and being exposed to various sectors of the economy (e.g., banking/finance, consumer discretionary, technology, etc.). However, if you diversify too much, you risk spreading yourself thin and thus exposing yourself to potential risks that might impact your investment returns.

Be Quick to Run to Safety

Whenever natural market turbulence or new unfavorable policies are enacted by the government in most notable nations of the world, most people quickly liquidate their assets into cash equivalents. You may also want to do the same if you can do it before the crash.

Although this depends on the economic sector you invested in. You can always get back in when prices are much lower. Then, when the trend or economy eventually reverses, you can profit much more from the appreciation.

When you wait too long to exit the market during a turbulent time, you may be forced into a position that is not the best for you financially to maintain capitalization and stay profitable, if at all possible.

Make Guaranteed Investments 

You may likely don't want all of your savings in guaranteed investments. They don't pay off well enough. But it's wise to keep at least a small portion in something that isn't going to fall with the markets. The best part about this is that you can be confident that you have some money set aside to take care of yourself, so if things go south, you won't be too worried because you have a safety net in place.

Bank certificate of deposit (CD) and Treasury securities are a good bet for the long term, especially if they earn higher yields than what you'd get on your money in cash or other investments that pay little interest (like government bills). That's why these are often called "safety" issues. If rates go up, your principal is protected; but as long as rates stay low, the return is generally higher than that offered by cash or Treasuries (which also come with risks). The downside is that it can take years to make back what you paid.

Hedge Your Bets

When you see a significant downturn ahead, don't hesitate to set yourself up to profit directly from it. There are several ways you can do this, and one of the best is by hedging your bets with options trading strategies designed to take advantage of declines in stock prices and other financial markets.

One popular strategy is buying covered calls, which pay out if the underlying security price falls enough, so the call expires worthless. This means that you have earned 100% on your money (unless the option contract was written so the writer could exercise his right to repurchase the shares at the strike price). This strategy works great when a particular company has been experiencing declining sales over time but is currently selling at a premium because of investor optimism.

Offset Your Debts

Do you have considerable debts, you may be better off liquidating some or all of your holdings and settling off the debts if you see bad weather approaching in the markets. You will probably lose money doing this, but it's possible that the loss could be less than what you would have suffered if you had kept the assets in place and the market went down when you needed to sell them most heavily because they were now worth much more than they were then.

Suppose you are going to pay down debt. You might consider making a lump sum payment over time rather than paying it off install mentally. This could cause problems with your retirement savings or investments if you cannot afford them now because you are losing money on the market and need the cash to live on during the worst of times before things improve.

In Summary

Finally, remember that while a crash is never easy, it is essential to emerge stronger. Don't give up on your goals, and don't let the market defeat you. Use these tips to make the most of a difficult situation and succeed where others have failed.

There is no one answer to overcoming an investment crash. However, staying informed, having a plan, and being resilient are all essential steps in avoiding a crash and succeeding when it does happen. In the last five years or so we have witnessed some of the most extreme market corrections on record.

I believe we are likely headed for another one soon as markets continue to be driven by exuberance fueled by easy money from central banks around the world. Hence the rising government deficits that are rapidly growing our national debt, and further eroding investors’ confidence in their ability to withstand a significant loss of wealth over some time if they should choose to do so all without negative implications for the economy.

 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

 

 

 

Tim Moseley

CBDC: The Greatest Violations of Human Rights in the Central Banking History 

The creation of blockchain technology solved a decades-long computer science problem and released a financial revolution in the form of cryptocurrency. Digital currency has taken the world by surprise. It has been adopted by hundreds of millions of people globally and is worth approximately $1 trillion in market capitalization based on daily fluctuations in US dollar prices.

As you can see, the legacy system has closely watched the rise of bitcoin with a combination of admiration and fear. Many traditional institutions, especially central banks, are impressed with the creation of genuinely digital currency, along with how quickly people have adopted this technology in every economy. These people are observing in fear as they admit that their institutions have no control over the money supply in this new digital financial system.

The control and production of money have historically been reserved for central banks, but this monopoly on money is directly tied to the central bank's close relationship with the government. The government has a monopoly on violence, so they can ensure that central banks will continue their precise control and production of money. Any attempt to circumvent the main banking structure has been met with a swift and ruthless response.

This is why the decentralization of cryptocurrency is so essential. Since central banks can not rely on governments to close down this new entrant to the financial system, central bankers have been forced to examine how they can contend in the free market.

Central bankers aren't known for being innovative. I would argue that central bankers are profitable because they move at a glacial pace and make systemic bets on the world-changing very slowly. But crypto has threatened these institutions to consider digitizing their fiat currencies in a way that emulates the blockchain technology but contains some key differences.

Digitizing the dollar, euro, peso, naira, etc. is merely a technology upgrade. The monetary policy of these fiat currencies is unchanged. Similar to how fiat currencies were transitioned to electronic CUSIPs in centralized databases, central banks are considering a technology upgrade to token-based fiat currencies that are compatible with digital wallets.

So why are they considering this transition?

The optimistic person would argue that incorporating new technology is an attempt at modernization for an antiquated system. Users of central bank digital currencies (CBDCs) could send any amount of money whenever they want. The idea of long hours of operations would be a thing of the past. The payment rails that CBDCs will be built on would be more efficient, faster, have reasonable transaction fees, etc. Lastly, there would be increased transparency in the system, which theoretically could decrease crime and improve the market's safety.

That is the positive perspective. But we have to be extremely careful here. Central bank digital currencies will likely be one of the most significant human rights violations in history.

Central bank digital currencies eliminate the privacy and decentralized nature of physical cash. It creates an environment where central banks control every aspect of a citizen's financial life.

Here are some instances of the awful events that we can expect to see in the coming decades:

Personalized inflation

Central banks can manipulate interest rates and expand/contract the money supply. Any modifications that they make are applied to all citizens equally. Market participants may likely make decisions to benefit or suffer from these outcomes. Nonetheless, the dollars I hold are subject to the same monetary policy as yours. This is going to change with CBDCs.

The central bank can personalize the financial approach to the individual. Just as your search results, newsfeed, and music playlists are personalized based on enormous amounts of data, the same is coming to money. Maybe I get a higher inflation rate to get me to spend money while you receive a lower inflation rate. Differentiation of Monetary Policy can be reduced in a million ways, including where you live, who you are, your wealth status, your occupation, your purchase history, and much more.

Financial censorship

Once a central bank's digital currency is in a population's hands, the central bank has solidified complete control. They will no longer need the court system or summon emergency authorities to tell you whom you can transact with. This can all be executed through remote, digital technologies.

These central bankers can see what is in your bank account, whom you transact with, what you purchase, and anything else they are curious about in your financial life. That full transparency with the state removes all elements of privacy while also allowing the institutions to censor any transactions that go against what they want, regardless of whether they have a legitimate reason or not.

Social credit system

When central banks and governments gain complete control over the financial system, they can reward or punish individual citizens for their actions. Have you been overeating candy? You can't buy candy anymore. Have you been gambling? Now you can't use public transportation heading in the casino's direction.

This sounds like crazy talk until you realize that the Bank of England is openly discussing this in public now. China already has one in place. Canada is executing one in real-time right now. Are you fat? Only healthy food can be purchased. Do you associate with people the central bank doesn't like? No entertainment for you. This is a deadly slippery slope that is coming quickly.

Expiration of money

Central banks would constantly try to incentivize people to spend more money in the economy to increase the momentum of money. Without the speed of cash, the system starts to break down. So what better way to increase the money rate than to have people's money expire if they don't spend it in a certain period. The United States already has a version of this in operation through SNAP benefits and EBT cards, where the money expires one year after it is issued unless it has been used. The intention is that the government will enhance this idea of expiration of funds to include shorter timelines and a more specific number of programs in the future.

Image courtesy of Digitalasset

These are just four examples of various activities that I anticipate central banks will engage in once they successfully create and distribute central bank digital currencies (CBDCs). As the saying goes, absolute power corrupts absolutely. The dream of every dictator or authoritarian leader globally is to have complete control over every aspect of their citizens' lives. Suppose the government can not only censor your financial transactions based on a social credit system, but it can also personalize the monetary policy and give you money with an expiration date. In that case, we are headed to a dystopian future that no one will want to live in.

The fundamental human right is that we are all born free people. The creation of central bank digital currencies will eliminate that premise. Every human born will be starting in an authoritarian state that requires them to be a digital slave to a central bank with total control over their life. If you don't have the freedom to transact, you don't have freedom at all.

Central bank digital currencies are the next frontier for the battle for freedom. Every human being should have the right to financial privacy and independence. This is a meaningful conversation that must start now. Without global awareness, central banks will pull off the most significant human rights violation, and citizens will cheer them on while they do it.

 

References:

ecb.europa.eu

Sciencedirect

 

 

Tim Moseley

The Revolutionization of the Supply Chain Management by Vechain

VeChain (VET) is a project that aims to transform the way consumers and producers do business by making traceability of products, services, and transactions easy, efficient, transparent, and secure, all powered through blockchain technology using smart contracts and digital identity. In addition to its primary objective, VeChain has also been trying to create a more decentralized economy with its DaaS (Decentralized Application Service) platform and other solutions such as its enterprise-oriented IoT products.

The Vechain network was launched in 2015 as a private consortium chain. Afterward, it transited to a public blockchain in 2017, launching its main net in 2018. One of the substantial benefits brought by VeChain is its toolchain.

Image courtesy of moralis

What is toolchain technology, and why did Vechain implement it?

Vechain's founder Sunny Lu, has been working on developing Vechain-PoA and its related technologies for quite a while. The technology was not very popular in the crypto industry due to its complicated implementation process and high cost of development in the traditional industry compared with other solutions based on blockchain technology such as Ethereum. However, the Vechain team has recently started implementing new technologies such as the VeChainThor and VeChainGO.

Toolchains are an essential part of any blockchain project to build, develop, test, debug, and deploy smart contracts safely, ensuring the validity of each transaction made on its network. Without the need for third-party validation or audits to ensure correctness in transactions and blockchains, making them more transparent and auditable and improving efficiency and security. So you can be sure that this is where VeChain comes into play as the best blockchain technology provider of all time with its unique features in supply chain management, which include:

Security

As they use the latest version of Hyperledger Fabric, this offers an immutable ledger that is distributed to every participant, which means that it is safe from hacking, attacks, and fraudulent activities.

It is based on a tamper-proof public ledger and records each transaction through cryptographic hash values (a chain of blocks). So you can ensure that your data will not get lost if someone tries to hack or manipulate the network. 

Tracking

It allows tracking of products from origin to end-user without any intermediary services Smart Contracts. The code on top of the VET blockchain can automatically execute smart contracts, allowing you to set up agreements between parties.

Scalability

This feature can be used to store a large amount of data and process it in real-time for a faster transaction rate with smart contracts.

Reliability

IBM has tested them to ensure that everything works perfectly without any glitches or errors that may occur.

The Vechain technology is transparent and offers a traceable supply chain management system that allows every single detail of a product's movement to be tracked, recorded, and verified in real-time on a distributed ledger. It allows users to scan QR codes attached to products or use NFC (Near Field Communication) enabled devices to get instant access to product details, ingredients, expiry dates, certifications, and other data about the item. Enabling manufacturers to track their products from the production stage to retail allows consumers to see exactly where the product they bought came from and what it was made of.

Accessible Supply Chain Management Solutions

The VeChain toolchain is a network that allows the blockchain to get information from IoT devices. It delivers an expansive network with no code or low code blockchain solutions meeting the most demanding industry requirements.

The supply chain management process occasionally requires tools that are frequently assembled and complicated to use. The toolchain brings clarity, comfort, and affordability.

Essentially, the toolchain introduces a pay-as-you-earn pricing model that is quite affordable. The toolchain provides a complete set consisting of;

• IoT chip and equipment
• A management platform
• A mobile app
• H5 technology

Image Courtesy of moralis

Fight Against Counterfeiting Products

Vechain has become a significant player in anti-counterfeiting products by combining an innovative blockchain with modern technology to protect intellectual property rights and offer secure identification solutions to consumers worldwide for consumer goods, healthcare, financial services, Etc.

Today's counterfeits are getting increasingly sophisticated, making it harder and harder for brand owners to trace their origins back to the original manufacturer and source of their product. As a result, brand owners have been forced to take more drastic steps to combat this problem.

In 2017 alone, brand owners saw sales decline by $25 billion due to counterfeit goods being sold on websites such as Amazon and eBay, while others claim that there has been a "$200 billion a year loss of revenue to illegal manufacturers around the world" (Wakefield & Lacy, 2015). According to the World Intellectual Property Organization (WIPO), counterfeit products account for an estimated $1 trillion per year worldwide (WIPO, 2019) – which is not only bad news for businesses but also has a direct impact on consumers.

VeChain delivers a fence against the risk of counterfeiting. Because of the linking with IoT devices allows both parties to a trade, i.e., supplier and buyer, to recognize the products and location in real-time. If the delivery vehicles stop, the IoT devices will transmit the information through the toolchain to the DLT. 

The constant tracking of products' data in the supply process guarantees that the persons delivering the products cannot provide counterfeited products.

Highly Convenient

The problem of supply chain management begins from the roots, which happens to be software support. Vechain toolchain makes it very easy for any project, individual, or company to create a blockchain with little to zero coding knowledge. Therefore, businesses can create apps that use the toolchain to offer their supply chain solutions. 

Final Word

This article has explored how the Vechain toolchains revolutionize supply chain management, offering privileges to participants. As mentioned, the toolchain touches on different aspects of the supply chain, including security, tracking, and reliability, all while offering convenience.

By touching on various aspects of the supply chain, the toolchain guarantees that the quality and health of products in supply are protected at high standards. Top networks have already been linking with the toolchain to enjoy its benefits. They include DNV, BitOcean, National Research Consulting Center, and Groupe Renault.

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Tim Moseley

Cryptocurrency Has Changed the Dynamics of Savings and Investment: Will Banks Survive the Storm?

Cryptocurrency has changed the dynamics of savings and investment, but the effects of this change are not yet fully understood. This article discusses the impact of cryptocurrency on the global economy and the implications for banks.

Blockchain technology is revolutionizing the banking industry. As banks continue to evolve and adopt new strategies, they may need a strong understanding and implementation of blockchain technology if they want to remain relevant in the future.

A blockchain is a public ledger that stores data without a centralized intermediary such as a bank or government agency that could become corrupted by fraudulent transactions, data loss, or malicious behavior on its part. Instead, it relies on consensus protocols that ensure trust between all users on the network when recording financial transactions on the shared ledger across multiple participants (called nodes).

Blockchain technology provides a secure way to store information and track transactions because it is not stored in any one place but dispersed across multiple networks.

Background of the Digital Currency 

Cryptocurrencies are a new form of digital currency that can be used to make purchases and transfer money anonymously. These currencies have no physical form and exist only in the digital world. The emergence of cryptocurrency has affected the banking industry: will banks survive the storm?

Cryptocurrency is decentralized, meaning any government or central authority does not control it. The transactions are verified through a process called mining, which involves solving complicated math problems with powerful computers to crack cryptographic codes. Blockchain technology enables cryptocurrency users to purchase goods and services online without having to worry about fraud or identity theft because all transactions are recorded on this shared public ledger for anyone to see.

The blockchain technology industry has been developing rapidly in recent years. Some projects are being used by well-known global organizations, including JPMorgan Chase and Accenture, to streamline the supply chain process. Others have been developed specifically for cryptocurrencies such as Bitcoin and Litecoin (although they can be applied to any form of digital currency).

However, despite the widespread interest in blockchain and how it could revolutionize business processes, there remains a lack of understanding among many businesses around its actual value and potential use cases, which limits their ability to benefit from using it.

Image courtesy of Vecteezy

Impacts of Cryptocurrency on the Global Economy

Cryptocurrency has a significant impact on the global economy. It affects the exchange of goods and services and the transfer of funds from one country to another, weakening the foreign exchange rates. As of March 2022, there are approximately 18,000 cryptocurrencies in existence. The number of cryptocurrencies is growing daily and its market capitalization is estimated to grow to $5 trillion by 2025.

Blockchain technology has already penetrated many industries, including the financial sector, government, healthcare, media, retail, etc. However, many issues with cryptocurrencies still need to be resolved before they can be used in a mainstream society like traditional currency.

Its significant benefits of being fast, easy, cheap, and secure have been widely accepted and embraced by people worldwide for years despite some shortcomings such as volatility, lack of regulation, etc. The digital currency has been used in various ways so far, most notably for online gambling, but also as an alternative to fiat currencies in some countries where they offer a better exchange rate (and are sometimes even preferred).

The use case of cryptocurrencies is also evolving; while many people will continue to use them as a form of money or payment systems, many others might use them for trading, which includes buying goods and services; using cryptocurrency instead of fiat currency.

Cryptocurrency and the Banking Industry 

Bitcoin, the first and most popular cryptocurrency, was created in 2009. It was created as a decentralized form of currency that is not controlled by any one country. It functions as a peer-to-peer payment system that does not require any middlemen, and a network of nodes verifies transactions.

Bitcoin and other cryptocurrencies have gained traction in recent years, but the regulatory environment for cryptocurrencies is still unclear. There are advantages to using cryptocurrencies, such as security, transparency, and no central control.

However, there are also disadvantages to using cryptocurrencies, such as price volatility, potential hacking, and lack of regulatory oversight. There are two sides to the cryptocurrency debate. One side argues that cryptocurrencies are the future of money and will replace cash, credit cards, and other payment methods. The other side argues that cryptocurrencies are a speculative bubble that will soon burst.

Some say that the implications of cryptocurrency on the global economy are not yet fully understood, but there are some apparent effects. For example, cryptocurrency has allowed individuals to transfer money internationally without banks or a third-party service. Cryptocurrency has also led to a decrease in demand for gold and other precious metals, as well as a reduction in cash usage.

The effects of cryptocurrency on banks are unclear. Some argue that banks will be irrelevant shortly, while others argue that banks will survive the storm. Cryptocurrency has caused a decrease in demand for banks' services and has led to an increase in financial risk. Banks may likely weather the storm by embracing cryptocurrencies and exploring new technologies like Blockchain. But will this ever happen? Who knows!

Roles of the Banking Sector in an Economy

In an economy, the banking sector plays a crucial role in facilitating the flow of money and providing loans to businesses and individuals. They have the power to regulate the money supply, which means they can determine how much money is in circulation.

This gives them control over inflation and deflation in the economy, so their actions must be responsible and transparent to avoid economic instability and financial crises such as the Great Recession from December 2007 to June 2009 and the recent financial crisis.

The central banks also determine whether the banks charge interest on loans and, if so, what the interest rate will be (known as the "prime rate" in the United States). Since banks can lend funds out of their reserves, there is a limit to the amount of capital they must hold; therefore, banks should borrow from other banks when necessary rather than from the public.

According to the conventional wisdom of financial economics, financial crises are inevitable in any economy that runs on fiat money because they occur when banks borrow more than they have and then fail to repay what they owe (Minsky, 1973).

The Federal Reserve System has attempted to prevent financial panics by keeping the supply of money constant and increasing it through open-market operations whenever the volume of outstanding debt increases by an amount greater than or equal to the Fed’s target for M1, which represents currency plus demand deposits at commercial banks. This method is commonly referred to as “monetizing the deficit.”

Why Are the Banks Cautious of Cryptocurrencies?

Undoubtedly, cryptocurrency has given rise to new, disruptive technology for money transfers and payment systems at large. Still, the central banking industry remains skeptical about its potential for displacing fiat currency as a medium of exchange or store of value, particularly when considering the risks associated with digital currencies like Bitcoin. 

The cryptocurrency pioneer relies on decentralized networks and cryptography for security purposes instead of traditional regulation and oversight methods employed by central bank regulators worldwide and their regulatory bodies (the Financial Services Authority in the UK is an example).

According to research conducted by the Association of Certified Anti-Money Laundering Specialists (ACAMS) and the U.K.’s Royal United Services Institute (RUSI), nearly 63% of survey respondents who work in the banking sector view cryptocurrency as a potential risk rather than an opportunity.

Bitcoin has been around for over a decade and is the most well-known cryptocurrency. But as more and more digital currencies come into the marketplace, banks are starting to get cautious. They are concerned about potential losses resulting from transactions on these platforms. They don’t know what regulations governments will put in place to ensure these cryptocurrencies are not used for illicit purposes such as money laundering or terrorism financing.

One of the world’s largest bitcoin exchanges, Bitfinex, was hacked in August 2016 and had millions of dollars worth of bitcoins stolen from its customer's wallets and accounts. This has raised many valid questions about why the banks are concerned about the emergence of cryptocurrency.

Cryptocurrencies can also circumvent government-imposed capital controls, and it is now increasingly being used by international companies to avoid or evade taxes in various countries around the world.

This is due to the use of cryptography, allowing people worldwide to send funds to each other with complete anonymity and in a decentralized manner, using a peer-to-peer network of computers rather than a central server as traditional financial institutions do today.

However, because of its decentralized nature, bitcoin poses a risk of anonymous money laundering and terrorism financing, especially when combined with other forms of digital anonymity, such as “mixers” and other privacy-enhancing technology like Tor (The Onion Router) and VPNs (virtual private networks), which are used to mask IP addresses.

Can Cryptocurrency Eliminate the Banking Sector?

​​​​​ Image Courtesy of Medium

The latest trend in the financial sector is the rise of cryptocurrency. In 2009, a person or group under the pseudonym Satoshi Nakamoto published a paper describing digital currency. The paper introduced bitcoin, which became the first decentralized cryptocurrency in the world. Bitcoin and other cryptocurrencies have since become increasingly popular but also volatile.

For example, the price of Bitcoin rose from $2,500 in January 2017 to $19,000 in December 2017. Cryptocurrency is decentralized and relies on blockchain technology, and a central bank or government does not regulate Bitcoin and other cryptocurrencies. This makes cryptocurrency appealing to those weary of the unpredictable monetary policies of central banks and governments.

Many advantages come with cryptocurrency, such as its decentralized nature and independence from government interference, making it a great alternative to fiat currency systems (e.g the $USD).

However, it is essential to note that not all currencies have the same benefits as Bitcoin or other cryptocurrencies. It is also safe to say there is no guarantee that Bitcoin will be successful in the long run when compared to fiat currency, which has been around for thousands of years and has proven itself over time to be a stable medium of exchange for both individuals and businesses alike.

Nevertheless, if you look at the current state of cryptocurrency and the new development of blockchain technology today, many believe that it could be the future of money in this century. So they are trying to create more decentralized systems like Bitcoin or Ethereum, etc., but these systems are still in the early stages of development. We need more time before we can see what will happen with these currencies and applications.

So, for now, we need to find ways to secure our money from banks and other traditional financial institutions because as long as we have centralized systems that control how much currency and transactions are allowed, it is very easy for them to steal your funds or freeze your account whenever they deem it necessary.

In Summary

The Central Banks are at the heart of the modern global financial infrastructure in the current economic system, and as such, they have become a powerful force in society. In many cases dominating the economic life of nations to the extent that can be likened to that of feudal rulers controlling their kingdoms and duchies during times past. 

Today we have what amounts to the equivalent of the Royal Family controlling central banks worldwide! In recent years, with the onset of a global economic collapse and with the Federal Reserve’s power over the American economy and the global economy increases, the Federal Reserve has become ever more influential over the entire planet.

Blockchain technology depends on algorithmic confidence, and its decentralized system offers an option to the current system. But the cryptocurrency has little adoption rates, and its legal reputation is still under the cloud. Cryptocurrencies are a new digital asset class with no central authority or bank behind them. 

Instead, it relies on a distributed network of computers and users to maintain order and security in exchange for incentives and rewards, which is why they are often called “digital cash” as opposed to more traditional means of storing value like paper currency and gold. Many different cryptocurrencies are available today: Bitcoin Cash, Litecoin, Ethereum, Ripple, Dash, Zcash, Monero, Dogecoin, and so on.

There are possibilities at this point that Central Banks will start to introduce their own central bank digital currencies (CBDC). The problem is that nobody has yet been able to provide a solution for what happens when CBDCs across international borders fail. The associated costs and risks become more challenging to manage than they currently are today for national fiat currency systems. 

The global financial system remains reliant on national monetary policymakers being willing to let the exchange rate of their respective countries weaken over time as part of ‘internal devaluation to encourage domestic consumption and investment spending via the money multiplier mechanism – something that can only be achieved if there are sufficient savings available.

 

References:

Investopedia 

​​​Wolfandco

Wikipedia

 

 

Tim Moseley

What Is Solana? And More Importantly, How Does It Work?

 

Have you heard of the term Solana, and wondered what it might be? Discover the Solana Blockchain and how its unique technology works in more detail.

Cryptocurrencies marked the beginning of an entirely new era for finance and technology. The crypto sector has taken away intermediaries from the structure of conventional financial services by introducing peer-to-peer transactions. However, established cryptocurrencies such as Bitcoin and Ethereum have significant limitations in terms of scalability. Why? It is challenging to scale up the time required to reach a consensus on a specific order of transactions. 

Due to scalability problems, alternatives like Solana have emerged as promising solutions for such issues. Now, you might marvel at how the new cryptocurrency company could solve problems that the crypto pioneers could not. Let us dive deeply into the Solana blockchain and learn more about their system. This article will also help you discover the new and unique features introduced with the Solana Blockchain.

Image courtesy of Medium

Solana: What Is It?

Solana is a new blockchain platform with a unique consensus mechanism called Proof of History (PoH). Proof of History allows Solana to achieve a sustained transaction rate of up to 65,000 transactions per second, much faster than Bitcoin and Ethereum. Solana’s programming language is similar to JavaScript and allows developers to build smart contracts with ease. 

The platform comprises three layers: the Protocol Layer, the Transaction Layer, and the Application Layer. The Protocol Layer is the Solana Blockchain's core, providing a framework for the rest of the platform. The Transaction Layer is the foundation for executing transactions and is made up of blocks. The Application Layer is where developers can create applications that use the protocol. 

Solana’s blockchain is built to solve many of the problems other blockchains face. For example, Solana doesn’t have any hard-coded limits for gas prices or gas limits, which can lead to users running out of gas and failing to complete their transactions. This has happened to users on Ethereum in the past, which has caused many issues for them. Solana’s Proof of History consensus mechanism also makes it possible for users to complete transactions quickly and reliably.

Who Are The Developers Of Solana?

Solana is the brainchild of a group of developers and entrepreneurs who saw an opportunity to create a more efficient and secure form of blockchain technology. CEO Anatoly Yakovenko leads the team, and CTO Greg Fitzgerald, have both had extensive experience in the blockchain industry.

The team strongly believes in the potential of blockchain technology and is committed to using it to create a more equitable and secure world. They are also passionate about creating a product that can be used for trading digital assets and as a daily tool for consumers and merchants alike. 

This is a platform with genuine utility and value-added features such as a decentralized marketplace, exchange, and payment system. Users will benefit from increased security, transparency, and efficiency when purchasing online or at brick-and-mortar stores and shops worldwide. 

A truly global and unified currency system, enabling anyone anywhere to trade directly and instantly with other people within their community or across borders without any middlemen.

Solana's Key Innovation: Proof-of-Elapsed-Time

Proof-of-elapsed-time is the key innovation of Solana, which allows nodes to verify data without having to trust one another or confirm transactions through expensive intermediaries like banks. Instead, Solana's peer-to-peer network eliminates these middlemen and ensures that data that several parties in real-time have approved is valid. 

The proof-of-elapsed-time is implemented using an optional consensus mechanism called  "Tick Time Consensus" or TICK which relies on a timestamping system to establish the elapsed time since the last successful transaction (TICK_TIME). 

It was initially developed to improve privacy for the Bitcoin blockchain. However, it has since been adapted for use with any decentralized application platform such as Ethereum, Hyperledger Fabric, or even DFINITY.

So far, the network has been deployed in dozens of decentralized applications and has become the industry standard for distributed computing applications.

How Does Solana Deliver Scalability?

Solana delivers scalability using a unique combination of proof of stake and Byzantine Fault Tolerance. Proof of stake is a consensus algorithm that helps secure the blockchain by allowing stakeholders to vote on proposed blocks. This system is more efficient and environmentally friendly than proof of work and allows for faster transaction speeds.

Byzantine Fault Tolerance is a system that allows nodes in a network to agree on the validity of transactions without any single node being able to manipulate the system or change data on the blockchain because of malicious behavior or malfunctioning components. This ensures trustless networks and high availability with no downtime, censorship, or fraud as long as there are honest majority participants in the network.

When it comes to scaling, proof of stake can be used as an effective method of achieving fast confirmation times for smart contracts while avoiding the use of expensive hardware and energy consumption to validate blockchains.

Solana's Core Components

Image courtesy of Medium

For Solana to achieve all its goals, the developers have developed the essential technical components to make the blockchain suitable for the capabilities of a centralized system. As a result, the network is full of several kinds of systems, and these systems work together to create a useful and reliable blockchain network. Here are the core components of Solana Blockchain:

• Proof of History
• Tower BFT 
• Gulf Stream 
• Sealevel
• Pipelining
• Turbine
• Cloud break
• Archivers

Proof of History (PoH)

The important and key feature is that the PoH mechanism serves a vital role in the Solana blockchain. It creates more efficiency and a greater throughput rate within the network. This protocol improves the efficiency of blockchain by integrating timestamps in every transaction approval. So, historical records of transactions, blocks, etc., are stored on a distributed ledger which can be used for the security and verifiability of any smart contract or transaction that has been approved with the PoH function and time-stamp verification feature in the blockchain.

Tower BFT

The Tower BFT is the second and most crucial component of Solana Blockchain, and the system strengthens network responsiveness by empowering validators to vote on the state of the ledger. This mechanism also records the previous votes and the time stamp of each transaction, ensuring that the data cannot be altered later on (data integrity).

Gulf Stream

The gulf stream feature works with the mempool concept. You might be thinking about what mempool is. Mempool is a part of the blockchain that stores all transactions from previous blocks and is used to add new transactions to the blockchain.  

This is much like how banks use their vaults to store your money as it comes in and goes out of your bank account without losing it permanently, just temporarily stored in the vault. The same thing happens here; when money goes into a new transaction, it gets recorded on the blockchain forever to show where it came from and where it went.

Sealevel

The Sealevel feature provides a significant benefit over the most well-known smart contract-based networks out there today. This is used to perform smart contracts that can operate in parallel, and this system likewise allows compatible smart contracts to leverage the same protocols. 

As such, it permits easy interoperability with other blockchains, especially those that don’t have their custom-built systems or protocol layer for smart contracts, allowing the user to connect with them instead of learning entirely new technology and infrastructure. This helps users to start working on a project together and interact with each other more easily and efficiently than ever before.

Pipelining

The Solana Blockchain is an open-source hardware system that integrates a transaction processing unit called pipelining. The protocol works by processing the transactions in batches instead of one by one using the pipelined operation mode. It minimizes latency and increases throughput on a single machine/hardware platform running Solana Blockchain software or node application code, increasing overall network bandwidth and stability of the network and its applications (blockchain).

Turbines

The turbine is another blockchain feature introduced by Solana. The Solana blockchain distributed system takes massive data and segments it into smaller chunks, and this data can be sent to the computer faster and use less bandwidth.

Cloudbreak

The cloudbreak is another Solana network’s account database, and this system enhances iterations by enabling the system to read and write data simultaneously. Cloudbreak works in line with pipelining and other protocols.

Archivers

Archivers represent a group of nodes that are interconnected in a system outside the main Solana network and work as storage for Solana.

This means that if a node joins a network, it will not be able to join the Archiver network until it has been synced from one of the Archiver nodes or has its Archiver node created by another node in the main Solana network.

The reason is that nodes in the archiver network do not store any data; rather they only provide a connection between other nodes in the main network with each other to facilitate transactions without the need to transmit all the data over the network and increase transaction speeds.

What Is The Future Of Solana?

Solana is undoubtedly a new type of blockchain that can handle large amounts of transactions without ever clogging up the system. What does that mean for the future of Solana? It means that Solana has the potential to handle the load that traditional blockchains are not able to. 

Think about it this way: right now, Bitcoin can only manage seven transactions per second, and Ethereum can only manage fifteen. Solana has the potential to manage up to sixty-five thousand transactions per second. 

That's huge compared to the many transactions like Bitcoin and Ethereum execute altogether in a second. This makes Solana one of the most promising next-gen blockchain projects, with tremendous upside potential for those who invest in Solana early enough.

Conclusion

The Solana blockchain protocol is designed for scalability. It achieves scalability by implementing a proof of stake algorithm and by utilizing a revolutionary decentralized data storage technology known as Inter-Blockchain Communication (IBC). IBC allows the nodes to communicate directly with each other without going through the network’s primary layer or any intermediary node on the blockchain network. 

The complete process happens via the IBC channel between two blockchains in real-time, allowing transactions to be processed almost instantly instead of waiting for blocks to be mined and confirmed on the network’s main chain first before moving forward with the transaction or block execution.

 

 

References:

Medium

Hashnode
 

 

 

Tim Moseley