FIN310 Class Web Page, Fall ' 21

Instructor: Maggie Foley

Jacksonville University


The Syllabus 

Term project (due with final) Please refer to the following for the weblinks of the databases needed for the term project -- mergent - value line LexisNexis



Weekly SCHEDULE, LINKS, FILES and Questions


Coverage, HW, Supplements

-        Required



Chapter 1, 2



Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.      URL for your game:

2.   Password for this private game: havefun

3.      Click on the 'Join Now' button to get started.

4.      If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5.      Follow the instructions and start trading!

Discussion: How to pick stocks (


How To Win The MarketWatch Stock Market Game


Daily earning announcement:

IPO schedule:



Chapter 1 Introduction 





Flow of funds describes the financial assets flowing from various sectors through financial intermediaries for the purpose of buying physical or financial assets.

*** Household, non-financial business, and our government


Financial institutions facilitate exchanges of funds and financial products.

*** Building blocks of a financial system. Passing and transforming funds and risks during transactions.

*** Buy and sell, receive and deliver, and create and underwrite financial products.

*** The transferring of funds and risk is thus created. Capital utilization for individual and for the whole economy is thus enhanced.


For class discussion:

1.     What is the business model of each player in the above graph?

2.     Which player is the most important one in the financial market?

3.     Can any of the players be removed from the system?

4. What might trigger the next financial crisis


The factors that could cause the next financial crisis are (based on class discussion)


      Global warming




      student loan

      government debt

      tax reform

      unemployment rate

      stimulus check


  How it Happened - The 2008 Financial Crisis: Crash Course Economics #12



Q&A based on class discussion: QE money comes from budget. Where does the Fed get money for quantitative easing?

      Answer: Fed buys assets. The Fed can make money appear out of thin airso-called money printingby creating bank reserves on its balance sheet. With QE, the central bank uses new bank reserves to purchase long-term Treasuries in the open market from major financial institutions (primary dealers).

      Fed Balance Sheet 2020 (PDF)

For discussion:

      Which item under assets has increased the most from 2019 to 2020?

      Which item under liability has increased the most from 2019 to 2020?

      So where does the stimulus money come from?




Chapter 1 





1.       What are the six parts of the financial markets


         To pay for purchases and store wealth (fiat money, fiat currency)


What is Bitcoin for BEGINNERS in 7-Min. & Bitcoin Explained | What is Cryptocurrency Explained 2019



Financial Instruments:

         To transfer resources from savers to investors and to transfer risk to those best equipped to bear it.  


Where do student loans go? (video)

An Introduction to Securitized Products: Asset-Backed Securities (ABS) (video)



Financial Markets:

         Buy and sell financial instruments

         Channel funds from savers to investors, thereby promoting economic efficiency

         Affect personal wealth and behavior of business firms. Example?


Financial Institutions.

         Provide access to financial markets, collect information & provide services

         Financial Intermediary: Helps get funds from savers to investors


Central Banks

         Monitor financial Institutions and stabilize the economy


Regulatory Agencies

         To provide oversight for financial system.


The role of financial regulation (Video)


What Does the Federal Reserve Do? (youtube)


What is the FDIC? (video)

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933 to provide insurance on deposits to guarantee the safety of funds kept by depositors at banks. Its mandate is to protect up to $250,000 per depositor. The catalyst for creating the FDIC was the run on banks during the Great Depression of the 1920s.


Checking accounts, savings accounts, CDs, and money market accounts are generally 100% covered by the FDIC. Coverage extends to individual retirement accounts (IRAs), but only the parts that fit the type of accounts listed previously. Joint accounts, revocable and irrevocable trust accounts, and employee benefit plans are covered, as are corporate, partnership, and unincorporated association accounts.


FDIC insurance does not cover products such as mutual funds, annuities, life insurance policies, stocks, or bonds. The contents of safe-deposit boxes are also not included in FDIC coverage. Cashier's checks and money orders issued by the failed bank remain fully covered by the FDIC. (


What Is The SEC? (video)

The SEC acts independently of the U.S. government and was established by the Securities Exchange Act of 1934.11 One of the most comprehensive and powerful agencies, the SEC enforces the federal securities laws and regulates the majority of the securities industry. Its regulatory coverage includes the U.S. stock exchanges, options markets, and options exchanges as well as all other electronic exchanges and other electronic securities markets. It also regulates investment advisors who are not covered by the state regulatory agencies.


The SEC consists of six divisions and 24 offices.12 Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government.



Financial Industry Regulatory Authority (FINRA)

The Securities and Exchange Commission (SEC) vs. Financial Industry Regulatory Authority (FINRA) (youtube)


The Financial Industry Regulatory Authority (FINRA) was created in 2007 from its predecessor, the National Association of Securities Dealers (NASD). FINRA is considered a self-regulatory organization (SRO) and was originally created as an outcome of the Securities Exchange Act of 1934.


FINRA oversees all firms that are in the securities business with the public. It is also responsible for training financial services professionals, licensing and testing agents, and overseeing the mediation and arbitration processes for disputes between customers and brokers. (





2.      What are the five core principals of finance

  • Time has value
  • Risk requires compensation
  • Information is the basis for decisions
  • Markets determine prices  and allocation resources
  • Stability improves welfare



3.   An example of the financial market innovation: High Frequency Trading   






High Frequency Trading (video)

  • High frequency trading
  • Spoofing
  • Regulatory reform to prevent HFT from exploiting the market




Strategies And Secrets Of High Frequency Trading (HFT) Firms


Updated Sep 21, 2014


Secrecy, Strategy and Speed are the terms that best define high frequency trading (HFT) firms and indeed, the financial industry at large as it exists today.



HFT firms are secretive about their ways of operating and keys to success. The important people associated with HFT have shunned limelight and preferred to be lesser known, though that's changing now.



The firms in the HFT business operate through multiple strategies to trade and make money. The strategies include different forms of arbitrage index arbitrage, volatility arbitrage, statistical arbitrage and merger arbitrage along with global macro, long/short equity, passive market making, and so on.



HFT rely on the ultra fast speed of computer software, data access (NASDAQ TotalView-ITCH, NYSE OpenBook, etc) to important resources and connectivity with minimal latency (delay).


Lets explore some more about the types of HFT firms, their strategies to make money, major players and more.


HFT firms generally use private money, private technology and a number of private strategies to generate profits. The high frequency trading firms can be divided broadly into three types.


The most common and biggest form of HFT firm is the independent proprietary firm. Proprietary trading (or "prop trading") is executed with the firms own money and not that of clients. LIkewise, the profits are for the firm and not for external clients.

Some HTF firms are a subsidiary part of a broker-dealer firm. Many of the regular broker-dealer firms have a sub section known as proprietary trading desks, where HFT is done. This section is separated from the business the firm does for its regular, external customers.

Lastly, the HFT firms also operate as hedge funds. Their main focus is to profit from the inefficiencies in pricing across securities and other asset categories using arbitrage.


Prior to the Volcker Rule, many investment banks had segments dedicated to HFT. Post-Volcker, no commercial banks can have proprietary trading desks or any such hedge fund investments. Though all major banks have shut down their HFT shops, a few of these banks are still facing allegations about possible HFT-related malfeasance conducted in the past.



How Do They Make Money?


There are many strategies employed by the propriety traders to make money for their firms; some are quite commonplace, some are more controversial.


These firms trade from both sides i.e. they place orders to buy as well as sell using limit orders that are above the current market place (in the case of selling) and slightly below the current market price (in the case of buying). The difference between the two is the profit they pocket. Thus these firms indulge in market making only to make profits from the difference between the bid-ask spread. These transactions are carried out by high speed computers using algorithms.


Another source of income for HFT firms is that they get paid for providing liquidity by the Electronic Communications Networks (ECNs) and some exchanges. HFT firms play the role of market makers by creating bid-ask spreads, churning mostly low priced, high volume stocks (typical favorites for HFT) many times in a single day. These firms hedge the risk by squaring off the trade and creating a new one.


Another way these firms make money is by looking for price discrepancies between securities on different exchanges or asset classes. This strategy is called statistical arbitrage, wherein a proprietary trader is on the lookout for temporary inconsistencies in prices across different exchanges. With the help of ultra fast transactions, they capitalize on these minor fluctuations which many dont even get to notice.


HFT firms also make money by indulging in momentum ignition. The firm might aim to cause a spike in the price of a stock by using a series of trades with the motive of attracting other algorithm traders to also trade that stock. The instigator of the whole process knows that after the somewhat artificially created rapid price movement, the price reverts to normal and thus the trader profits by taking a position early on and eventually trading out before it fizzles out.


The Players


The HFT world has players ranging from small firms to medium sized companies and big players. A few names from the industry (in no particular order) are Automated Trading Desk (ATD), Chopper Trading, DRW Holdings LLC, Tradebot Systems Inc., KCG Holdings Inc. (merger of GETCO and Knight Capital), Susquehanna International Group LLP (SIG), Virtu Financial, Allston Trading LLC, Geneva Trading, Hudson River Trading (HRT), Jump Trading, Five Rings Capital LLC, Jane Street, etc.




The firms engaged in HFT often face risks related to software anomaly, dynamic market conditions, as well as regulations and compliance. One of the glaring instances was a fiasco that took place on August 1, 2012 which brought Knight Capital Group close to bankruptcy--It lost $400 million in less than an hour after markets opened that day. The trading glitch, caused by an algorithm malfunction, led to erratic trade and bad orders across 150 different stocks. The company was eventually bailed out. These companies have to work on their risk management since they are expected to ensure a lot of regulatory compliance as well as tackle operational and technological challenges.


The Bottom Line


The firms operating in the HFT industry have earned a bad name for themselves because of their secretive ways of doing things. However, these firms are slowly shedding this image and coming out in the open. The high frequency trading has spread in all prominent markets and is a big part of it. According to sources, these firms make up just about 2% of the trading firms in the U.S. but account for around 70% of the trading volume. The HFT firms have many challenges ahead, as time and again their strategies have been questioned and there are many proposals which could impact their business going forward.




6.      What is flash crash? (refer to the two articles on the right)

Flash crash

From Wikipedia, the free encyclopedia

flash crash is a very rapid, deep, and volatile fall in security prices occurring within an extremely short time period. A flash crash frequently stems from trades executed by black-box trading, combined with high-frequency trading, whose speed and interconnectedness can result in the loss and recovery of billions of dollars in a matter of minutes and seconds.


The Flash Crash

This type of event occurred on May 6, 2010. A $4.1 billion trade on the New York Stock Exchange (NYSE) resulted in a loss to the Dow Jones Industrial Average of over 1,000 points and then a rise to approximately previous value, all over about fifteen minutes. The mechanism causing the event has been heavily researched and is in dispute. On April 21, 2015, the U.S. Department of Justice laid "22 criminal counts, including fraud and market manipulation" against Navinder Singh Sarao, a trader. Among the charges included was the use of spoofing algorithms.

2017 Ethereum Flash Crash

On June 22, 2017, the price of Ethereum, the second-largest digital cryptocurrency, dropped from more than $300 to as low as $0.10 in minutes at GDAX exchange. Suspected for market manipulation or an account takeover at first, later investigation by GDAX claimed no indication of wrongdoing. The crash was triggered by a multimillion-dollar selling order which brought the price down, from $317.81 to $224.48, and caused the following flood of 800 stop-loss and margin funding liquidation orders, crashing the market.

British pound flash crash

On October 7, 2016, there was a flash crash in the value of sterling, which dropped more than 6% in two minutes against the US dollar. It was the pound's lowest level against the dollar since May 1985. The pound recovered much of its value in the next few minutes, but ended down on the day's trading, most likely due to market concerns about the impact of a "hard Brexit"a more complete break with the European Union following Britain's 'Leave' referendum vote in June. It was initially speculated that the flash crash may have been due to a fat-finger trader error or an algorithm reacting to negative news articles about the British Government's European policy.

FLASH CRASH! Dow Jones drops 560 points in 4 Minutes! May 6th 2010 (video)


Flash Crash 2010 - VPRO documentary 2011 (video, optional)


For discussion:

      Next time, when a flash crash happens, can you think of a strategy to make money from this incident? Why or why not?

      After the flash crash, the price will recover almost completely. So why the market is afraid of it. It is not a big deal, right?



Spoofing is a disruptive algorithmic trading activity employed by traders to outpace other market participants and to manipulate markets.

      Spoofers feign interest in trading futures, stocks and other products in financial markets creating an illusion of the demand and supply of the traded asset. In an order driven market, spoofers post a relatively large number of limit orders on one side of the limit order book to make other market participants believe that there is pressure to sell (limit orders are posted on the offer side of the book) or to buy (limit orders are posted on the bid side of the book) the asset.

      Under the 2010 DoddFrank Act spoofing is defined as "the illegal practice of bidding or offering with intent to cancel before execution."

      High-frequency trading, the primary form of algorithmic trading used in financial markets is very profitable as it deals in high volumes of transactions.

      The five-year delay in arresting the lone spoofer, Navinder Singh Sarao, accused of exacerbating the 2010 Flash Crashone of the most turbulent periods in the history of financial marketshas placed the self-regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and Chicago Mercantile Exchange & Chicago Board of Trade under scrutiny. The CME was described as being in a "massively conflicted" position as they make huge profits from the HFT and algorithmic trading.


JPMorgan to Pay $920 Million in Record Spoofing Case (youtube)

Spoofing & Layering - Market Manipulation - Self-Study | Online Courses (youtube)




Homework of the 1st week (due with the first mid-term exam):

1.     Name at least one factor that might trigger the next financial crisis and provide the rational.

2.     Compare between SEC and FINRA, FDIC and the Fed

3.     What is high frequency trading (HFT)? How does it work?

4.     What is spoofing? Why is it harmful to the market?

5.     What is flash crash? How does it make investors so worried? How can HFT trigger flash crash?


8/17 Class video: syllabus and market watch game

8/19 class video: chapters 1, discussion on factors for next financial crisis


8/24 Class video:

  • chapter 1: SEC, FINRA, the Fed, FDIC
  • Fed balance sheet
  • fractional reserve banking system

8/26 class video

  • High frequency trading pro and con
  • Flash crash
  • spoofing


8/31 Class video

      M0, MB, M1, M2

      Fed balance sheet


9/2 class video

      Fractional reserve banking system


9/7 Class video

      Bitcoins impact on economy, on banks, on central banks



9/9 class video (Thanks Jack, Madeline, Thomas)





9/14 Class video: Order types, money market, financial instruments


9/16 class video: IPO, SEO, NYSE vs. NASDAQ


9/21 Class video (Sorry I forgot to record the class today)

      Chapter 4 (Time value of money) (hw solution posted)

      Prepare HFT and flash crash for the midterm

      Prepare IPO under pricing question for the midterm


9/23 class video: First mid term exam (Study guide posted) and homework due



9/28 Class video

      What is bond?

      The risks of investing in a bond.

      Types of bonds

9/30 class video

      What is muni bond?

      What is TIPS?

       High yield bonds


10/5 Class video (cancelled)

10/7 class video

      International bond

      Bond rating


      Airline companies z-scores



10/12 Class video

      Discussion of airline bond and airline stock

      Yield curve


10/14 class video

      Inverted yield curve

      Steepening yield curve

      S&P500 vs. Apple stock


10/19 Class video

      S&P500 index

      Pro and Con

10/21 class video

      Mutual fund vs. ETF



10/26 Class video:

      QQQ vs. SPY

      Bond mutual fund

      Stock chapter Q&A

10/28 class video

      Behavior finance


11/2 Class video - Second mid term exam (in class, close book, close notes)

      Study guide (see blow)

11/4 Class video:

      Call and put option

      Futures contract for bitcoin


11/9 Class video: Commercial banks

11/11 Class video: Veterans day, no class


11/16 Class video: Introduction of the Fed (Thanks, Madeline, Jack, Thomas)

11/18 Class video: Monetary Policy


11/20, 4-6 pm: Final Exam; Term project due


Will choose 15 questions out of the  following 25 questions

1. Anything wrong of the above balance sheet of Wells Fargo? Where do the loans and deposits go?

3. What is bank run? It is rare. Why?

4. Why are banks reluctant to lend out to small business, but offer loans to homebuyers?

5. Too big too fail. What is your opinion on this statement? Should we worry about banks getting bigger and bigger? Why or why not?

6. Similar to the homework question.

Bank has one million dollars that can be lent out. Shall the bank lend it out to a small business owners or to a house buyer? Why?

7. How to explain the uniqueness of banks balance sheet. For example, banks are highly leveraged.

8. What are the differences between commercial bank and investment bank?

9. What are the pro and con for big banks?

10. As compared with small banks, do big banks are relatively more burdened by regulations? Or vice versa?

11. What is the purpose of the Fed? The structures of the Fed?

12. The duties of the Fed?

13. What are the changes in monetary policy?

14. The three approaches to conduct Monetary policy.

15. Compare fed fund rate with discount rate. Which rate is targeted by Fed to implement monetary policy?

16. What is interest rate on bank reserve balance?

17. What is open market operation? When Fed plans to increase interest rate, how can Fed do so via open market operation? Draw the supply and demand curve to show the results.

18. What is your opinion regarding the interest rate that Fed will determine in the upcoming FOMC meeting

19. If Fed does increase interest rate in mid Dec, what is your prediction of its impact in the stock market? If Fed does not increases interest rate, what will happen to the stock market?

20. What is easing monetary policy? What is contractary monetary policy?

21. Why is there a futures market for bitcoin?

22. Why shall you consider investing in Bitcoin futures market? Or otherwise, why should not you?

23. What is call option? What is put option? Between a call option holder and a put option holder, who is going to benefit from the stock price falling? Who is going to benefit from stock price rising?

24. Name three professions in the banking industry

25. Name three types of banks





The World of High-Frequency Algorithmic Trading

In the last decade, algorithmic trading (AT) and high-frequency trading (HFT) have come to dominate the trading world, particularly HFT. During 2009-2010, more than 60% of U.S. trading was attributed to HFT, though that percentage has declined in the last few years.1



Heres a look into the world of algorithmic and high-frequency trading: how they're related, their benefits and challenges, their main users and their current and future state.



High-Frequency Trading HFT Structure

First, note that HFT is a subset of algorithmic trading and, in turn, HFT includes Ultra HFT trading. Algorithms essentially work as middlemen between buyers and sellers, with HFT and Ultra HFT being a way for traders to capitalize on infinitesimal price discrepancies that might exist only for a minuscule period.



Computer-assisted rule-based algorithmic trading uses dedicated programs that make automated trading decisions to place orders. AT splits large-sized orders and places these split orders at different times and even manages trade orders after their submission.


Large sized-orders, usually made by pension funds or insurance companies, can have a severe impact on stock price levels. AT aims to reduce that price impact by splitting large orders into many small-sized orders, thereby offering traders some price advantage.


The algorithms also dynamically control the schedule of sending orders to the market. These algorithms read real-time high-speed data feeds, detect trading signals, identify appropriate price levels and then place trade orders once they identify a suitable opportunity. They can also detect arbitrage opportunities and can place trades based on trend following, news events, and even speculation.



High-frequency trading is an extension of algorithmic trading. It manages small-sized trade orders to be sent to the market at high speeds, often in milliseconds or microsecondsa millisecond is a thousandth of a second and a microsecond is a thousandth of a millisecond.



These orders are managed by high-speed algorithms which replicate the role of a market maker. HFT algorithms typically involve two-sided order placements (buy-low and sell-high) in an attempt to benefit from bid-ask spreads. HFT algorithms also try to sense any pending large-size orders by sending multiple small-sized orders and analyzing the patterns and time taken in trade execution. If they sense an opportunity, HFT algorithms then try to capitalize on large pending orders by adjusting prices to fill them and make profits.



Also, Ultra HFT is a further specialized stream of HFT. By paying an additional exchange fee, trading firms get access to see pending orders a split-second before the rest of the market does.


Profit Potential from HFT

Exploiting market conditions that can't be detected by the human eye, HFT algorithms bank on finding profit potential in the ultra-short time duration. One example is arbitrage between futures and ETFs on the same underlying index.

Automated Trading

In the U.S. markets, the SEC authorized automated electronic exchanges in 1998. Roughly a year later, HFT began, with trade execution time, at that time, being a few seconds. By 2010, this had been reduced to millisecondssee the speech by the Bank of England's Andrew Haldane's "Patience and finance"and today, one-hundredth of a microsecond is enough time for most HFT trade decisions and executions. Given ever-increasing computing power, working at nanosecond and picosecond frequencies may be achievable via HFT in the relatively near future.


Bloomberg reports that while in 2010, HFT "accounted for more than 60% of all U.S. equity volume, that proved to be a high-water mark. By 2013, that percentage had fallen to roughly 50%. Bloomberg further noted that where, in 2009, "high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day and average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.


HFT Participants

HFT trading ideally needs to have the lowest possible data latency (time-delays) and the maximum possible automation level. So participants prefer to trade in markets with high levels of automation and integration capabilities in their trading platforms. These include NASDAQ, NYSE, Direct Edge, and BATS.


HFT is dominated by proprietary trading firms and spans across multiple securities, including equities, derivatives, index funds, and ETFs, currencies and fixed income instruments. A 2011 Deutsche Bank report found that of then-current HFT participants, proprietary trading firms made up 48%, proprietary trading desks of multi-service broker-dealers were 46% and hedge funds about 6%. Major names in the space include proprietary trading firms like KWG Holdings (formed of the merger between Getco and Knight Capital) and the trading desks of large institutional firms like Citigroup (C), JP Morgan (JPM) and Goldman Sachs (GS).


HFT Infrastructure Needs

For high-frequency trading, participants need the following infrastructure in place:


  • High-speed computers, which need regular and costly hardware upgrades;
  • Co-location. That is, a typically high-cost facility that places your trading computers as close as possible to the exchange servers, to further reduce time delays;
  • Real-time data feeds, which are required to avoid even a microsecond's delay that may impact profits; and
  • Computer algorithms, which are the heart of AT and HFT.


Benefits of HFT

HFT is beneficial to traders, but does it help the overall market? Some overall market benefits that HFT supporters cite include:


  • Bid-ask spreads have reduced significantly due to HFT trading, which makes markets more efficient. Empirical evidence includes that after Canadian authorities in April 2012 imposed fees that discouraged HFT, studies suggested that the bid-ask spread rose by 9%," possibly due to declining HFT trades.7
  • HFT creates high liquidity and thus eases the effects of market fragmentation.
  • HFT assists in the price discovery and price formation process, as it is based on a large number of orders


Challenges Of HFT

Opponents of HFT argue that algorithms can be programmed to send hundreds of fake orders and cancel them in the next second. Such spoofing momentarily creates a false spike in demand/supply leading to price anomalies, which can be exploited by HFT traders to their advantage. In 2013, the SEC introduced the Market Information Data Analytics System (MIDAS), which screens multiple markets for data at millisecond frequencies to try and catch fraudulent activities like spoofing."


Other obstacles to HFT's growth are its high costs of entry, which include:


  • Algorithms development
  • Setting up high-speed trade execution platforms for timely trade execution
  • Building infrastructure that requires frequent high-cost upgrades
  • Subscription charges towards data feed


The HFT marketplace also has gotten crowded, with participants trying to get an edge over their competitors by constantly improving algorithms and adding to infrastructure. Due to this "arms race," it's getting more difficult for traders to capitalize on price anomalies, even if they have the best computers and top-end networks.


And the prospect of costly glitches is also scaring away potential participants. Some examples include the Flash Crash" of May 6, 2010, where HFT-triggered sell orders led to an impulsive drop of 600 points in the DJIA index.9 Then there's the case of Knight Capital, the then-king of HFT on NYSE. It installed new software on Aug 1, 2012, and accidentally bought and sold $7 billion worth of NYSE stocks at unfavorable prices.10 Knight was forced to settle its positions, costing it $440 million in one day and eroding 40% of the firms value. Acquired by another HFT firm, Getco, to form KCG Holdings, the merged entity still continues to struggle.


So, some major bottlenecks for HFT's future growth are its declining profit potential, high operational costs, the prospect of stricter regulations and the fact that there is no room for error, as losses can quickly run in the millions.



The Bottom Line

The growth of computer speed and algorithm development has created seemingly limitless possibilities in trading. But, AT and HFT are classic examples of rapid developments that, for years, outpaced regulatory regimes and allowed massive advantages to a relative handful of trading firms. While HFT may offer reduced opportunities in the future for traders in established markets like the U.S., some emerging markets could still be quite favorable for high-stakes HFT ventures.









Goldman Sachs says computerized trading may make next 'flash crash' worse (optional)

         Goldman Sachs is worried the increasing dominance of computerized trading may cause more volatility during market downturns.

         The firm says high-frequency trading machines may "withdraw liquidity" at the worst possible moment in the next financial crisis.



Goldman Sachs is cautioning its clients that computerized trading may exacerbate the volatility of the next big market sell-off.

"One theory that has been proposed for why market fragility could be higher today is that because HFTs [high-frequency trading] supply liquidity without taking into account fundamental information, they are forced to withdraw liquidity during periods of market stress to avoid being adversely selected," Charles Himmelberg, co-head of global markets research at Goldman, said in a report Tuesday. "In our view, this at least raises the risk that as machines have replaced people, and speed has replaced capital, the inability of the market's liquidity providers to process complex information may lead to surprisingly large drops in liquidity when the next crisis hits."

Himmelberg noted the higher level of computerized trading has not been truly "stress tested" during the bull market since the financial crisis. He said the increasing incidents of volatility in various markets such as the VIX spike on Feb. 5, the 10-year Treasury bond on Oct. 15, 2014, and the British pound on Oct. 6, 2016, may be precursors of a bigger one to come.

"The rising frequency of 'flash crashes' across many major markets may be an important early warning sign that something is not quite right with the current state of trading liquidity," he said. "These warning signs plus the rapid growth of high-frequency trading (HFT) and its near-total dominance in many of the largest and most widely traded markets prompt us to more carefully consider the possibility (not necessarily the probability) that the long expansion accompanied by relatively low market volatility may have helped disguise an under-appreciated rise in 'market fragility.'"

The strategist said computerized trading is generally not backed by large levels of capital, which could drive the "collapse" of liquidity if the machines suffer any big losses during a significant market downturn.

"Future flash crashes may not end well," he warned. "The quality of trading liquidity for even the biggest, most heavily-traded markets should not be taken for granted."

 With reporting by CNBC's Michael Bloom.



The stock market halted trading Mondayheres why younger investors shouldnt panic (optional)

Published Mon, Mar 9 202011:30 AM EDTUpdated Tue, Mar 10 20209:25 AM EDT



The stock market opened on a rough note this week as fears that the coronavirus will continue to have widespread economic impact drove down stock prices. On Monday morning, the S&P 500 fell more than 7% at the open, triggering circuit breakers that led the New York Stock Exchange to halt all market trading for 15 minutes.

The plunge, which occurred just after the market opened, triggered whats called a circuit breaker that immediately halted trading. Basically, this is a fail-safe thats built into the system to allow for a short cool down period.

The market circuit breakers are designed to slow trading down for a few minutes, give investors the ability to understand whats happening in the market, consume the information and make decisions based on market conditions, New York Stock Exchange President Stacey Cunningham told CNBCs Bob Pisani. This is operating as its supposed to.

The current system of circuit breakers has never been tripped. A revamped system was put in place in February 2013 after the last set failed to prevent the May 2010 flash crash.


During regular trading hours, a circuit breaker can be triggered in a few situations:

1. If the S&P 500 drops 7%, then trading will pause for 15 minutes.

2. If the S&P 500 declines 13% on or before 3:25 p.m. ET, then trading will be paused again for 15 minutes. If the drop occurs after 3:25 p.m., then theres no halt.

3. If the S&P 500 falls 20%, then trading will be suspended for the rest of the day.


Trading started back up at 9:49 a.m. ET and the S&P 500 continued to slide. Meanwhile, the Dow Jones Industrial Average, which tracks 30 stocks, fell 2,000 points, or 7.3%, at one point during morning trading. The Nasdaq, which features some of the markets biggest technology names as well as an assortment of other companies, fell 6.9% during the same period.

The bull markets 11-year birthday is today, but investors are not in a celebratory mood, says Greg McBride, chartered financial analyst and chief financial analyst at


What it means for you

Over 66% of millennials have investments of some type. About a third of millennials invested in a taxable brokerage account in 2018, while another third invested in a retirement account, according to a study of over 1,800 millennials (ages 23 to 38) sponsored by the CFA Institute and the FINRA Investor Education Foundation.

If youre part of that group, the roller coaster markets do have an impact on your investments, including your 401(k). But before you panic, keep in mind that market downturns are fairly common. Market pullbacks with declines of less than 20% have occurred over 100 times since 1946, according to investment firm Guggenheim Funds.

Investing should never be about a moment in time; it should always be about a process over time, Liz Ann Sonders, chief investment strategist at Charles Schwab, tells CNBC Make It.

Thats a nice way of saying: Dont time the market. Most millennials (ages 24 to 39) have a long time horizon for their investments. Since there are likely decades before you retire, even if a recession hits tomorrow or next year, theres plenty of time for your investments to bounce back. Recessions and market downturns are part of a normal, healthy market cycle.


NYSE President Stacey Cunningham explains why stock trading was halted for 15 minutes

The best course of action right now is to keep investing and making regular contributions to your 401(k). This routine influx of money into your investment accounts is a strategy that experts call dollar-cost averaging. Its great for long-term investors because it takes emotion out of the equation and keeps you from selling out during market lows and buying in at market highs.

A 401(k) is actually a good place to invest amid market volatility, Sonders says. Typically, theyre structured in a way so that youre buying on a regimented basis and many have the option to invest in target date funds, which have an automatic rebalancing process.

As the uncertainty persists, the market frenzy will continue, perhaps for weeks, perhaps for months, McBride says. But long-term investors must think in terms of years or decades.

Finally, just take a deep breath. Many millennials have strong muscle memory from their own involvement, or their parents experiences, with the market during the last financial crisis, Sonders says. Yet the reality is that that market event was not the rule; it was more on the exceptional end of the spectrum.

Markets fall sharply, but can also rebound quickly, McBride says. No one knows when that comes and you dont want to be sitting on the sidelines when that happens.









































Chapter 2 What is Money




Part I What is Money?  


         There is no single "correct" measure of the money supply: instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates.

         Narrow measures include only the most liquid assets, the ones most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.)


Type of money






Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency) 

Notes and coins in bank vaults (Vault cash)

Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks)

Travelers checks of non-bank issuers

Demand deposits

Other checkable deposits (OCDs)

Savings deposits

Time deposits less than $100,000 and money market deposit accounts for individuals

Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets

All money market funds

         M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.

         MB: is referred to as the monetary base or total currency.  This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.

         M1: Bank reserves are not included in M1. (M1 and Components @ Fed St. Louise website)

         M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. (M2 and components @ Fed St. Louise website)

         M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank. However, there are still estimates produced by various private institutions. (M3 and components at Fed St. Louise website)


Lets watch this money supply video: Khan academy money supply M0, M1, M2 (video)


Draw Me The Economy: Money Supply (video)


For discussion:

  • What could happen if we increase money supply?
  • What about reduce money supply?
  • What are the possible ways to reduce money supply?
  • Among M0, M1, M2, M3, which one is the correct measure of money?
  • Why M2 is >> M0?
  • Why does M2 increase much faster than M1? Does it has any impact on you?




 FYI: Fed balance sheet


Fed balance sheet over $5 trillion for first time (video)


Whiteboard Economics: The Feds Balance Sheet Unwind (youtube) 2017


Federal Reserve Balance Sheet (Khan academy)- 2009 (optional)





M0, M1, and M2 Over Time

The top three graphs show M0, M1, and M2 money supply indicators over the past 40 odd years. The bottom three graphs show M0, M1, and M2 money supply indicators from June 2010. We see that the money supply has increased steadily over the years. In particular, the increase in money supply has been greatest in the recession years. This correlates to attempts made by the government to stimulate the economy and follow an expansionary monetary policy.




For discussion:

  • Among M0, M1, and M2, which one is used as a measure for money supply in US?
  • Why is M2 multiple times of Mo?
  • What are the expected consequences resulted from a big increase in money supply?
  • Do you think that US$ will devalue in the near future?
  • What do you suggest in terms of investment? Bitcoin? Commodity? Stock? Bond? Why?





Money Supply M2 in the United States averaged 4121.70 USD Billion from 1959 until 2019, reaching an all time high of 14872.10 USD Billion in July of 2019 and a record low of 286.60 USD Billion in January of 1959.









Beyond Bitcoin bubble New York Times (FYI only)


The sequence of words is meaningless: a random array strung together by an algorithm let loose in an English dictionary. What makes them valuable is that theyve been generated exclusively for me, by a software tool called MetaMask. In the lingo of cryptography, theyre known as my seed phrase. They might read like an incoherent stream of consciousness, but these words can be transformed into a key that unlocks a digital bank account, or even an online identity. It just takes a few more steps.

On the screen, Im instructed to keep my seed phrase secure: Write it down, or keep it in a secure place on your computer. I scribble the 12 words onto a notepad, click a button and my seed phrase is transformed into a string of 64 seemingly patternless characters:


This is whats called a private key in the world of cryptography: a way of proving identity, in the same, limited way that real-world keys attest to your identity when you unlock your front door. My seed phrase will generate that exact sequence of characters every time, but theres no known way to reverse-engineer the original phrase from the key, which is why it is so important to keep the seed phrase in a safe location.

That private key number is then run through two additional transformations, creating a new string:


That string is my address on the Ethereum blockchain.

Ethereum belongs to the same family as the cryptocurrency Bitcoin, whose value has increased more than 1,000 percent in just the past year. Ethereum has its own currencies, most notably Ether, but the platform has a wider scope than just money. You can think of my Ethereum address as having elements of a bank account, an email address and a Social Security number. For now, it exists only on my computer as an inert string of nonsense, but the second I try to perform any kind of transaction say, contributing to a crowdfunding campaign or voting in an online referendum that address is broadcast out to an improvised worldwide network of computers that tries to verify the transaction. The results of that verification are then broadcast to the wider network again, where more machines enter into a kind of competition to perform complex mathematical calculations, the winner of which gets to record that transaction in the single, canonical record of every transaction ever made in the history of Ethereum. Because those transactions are registered in a sequence of blocks of data, that record is called the blockchain.

The whole exchange takes no more than a few minutes to complete. From my perspective, the experience barely differs from the usual routines of online life. But on a technical level, something miraculous is happening something that would have been unimaginable just a decade ago. Ive managed to complete a secure transaction without any of the traditional institutions that we rely on to establish trust. No intermediary brokered the deal; no social-media network captured the data from my transaction to better target its advertising; no credit bureau tracked the activity to build a portrait of my financial trustworthiness.

And the platform that makes all this possible? No one owns it. There are no venture investors backing Ethereum Inc., because there is no Ethereum Inc. As an organizational form, Ethereum is far closer to a democracy than a private corporation. No imperial chief executive calls the shots. You earn the privilege of helping to steer Ethereums ship of state by joining the community and doing the work. Like Bitcoin and most other blockchain platforms, Ethereum is more a swarm than a formal entity. Its borders are porous; its hierarchy is deliberately flattened.

Oh, one other thing: Some members of that swarm have already accumulated a paper net worth in the billions from their labors, as the value of one coin of Ether rose from $8 on Jan. 1, 2017, to $843 exactly one year later.

You may be inclined to dismiss these transformations. After all, Bitcoin and Ethers runaway valuation looks like a case study in irrational exuberance. And why should you care about an arcane technical breakthrough that right now doesnt feel all that different from signing in to a website to make a credit card payment?

The Bitcoin bubble may ultimately turn out to be a distraction from the true significance of the blockchain.

But that dismissal would be shortsighted. If theres one thing weve learned from the recent history of the internet, its that seemingly esoteric decisions about software architecture can unleash profound global forces once the technology moves into wider circulation. If the email standards adopted in the 1970s had included public-private key cryptography as a default setting, we might have avoided the cataclysmic email hacks that have afflicted everyone from Sony to John Podesta, and millions of ordinary consumers might be spared routinized identity theft. If Tim Berners-Lee, the inventor of the World Wide Web, had included a protocol for mapping our social identity in his original specs, we might not have Facebook.

The true believers behind blockchain platforms like Ethereum argue that a network of distributed trust is one of those advances in software architecture that will prove, in the long run, to have historic significance. That promise has helped fuel the huge jump in cryptocurrency valuations. But in a way, the Bitcoin bubble may ultimately turn out to be a distraction from the true significance of the blockchain. The real promise of these new technologies, many of their evangelists believe, lies not in displacing our currencies but in replacing much of what we now think of as the internet, while at the same time returning the online world to a more decentralized and egalitarian system. If you believe the evangelists, the blockchain is the future. But it is also a way of getting back to the internets roots.

Once the inspiration for utopian dreams of infinite libraries and global connectivity, the internet has seemingly become, over the past year, a universal scapegoat: the cause of almost every social ill that confronts us. Russian trolls destroy the democratic system with fake news on Facebook; hate speech flourishes on Twitter and Reddit; the vast fortunes of the geek elite worsen income equality. For many of us who participated in the early days of the web, the last few years have felt almost postlapsarian. The web had promised a new kind of egalitarian media, populated by small magazines, bloggers and self-organizing encyclopedias; the information titans that dominated mass culture in the 20th century would give way to a more decentralized system, defined by collaborative networks, not hierarchies and broadcast channels. The wider culture would come to mirror the peer-to-peer architecture of the internet itself. The web in those days was hardly a utopia there were financial bubbles and spammers and a thousand other problems but beneath those flaws, we assumed, there was an underlying story of progress.

Last year marked the point at which that narrative finally collapsed. The existence of internet skeptics is nothing new, of course; the difference now is that the critical voices increasingly belong to former enthusiasts. We have to fix the internet, Walter Isaacson, Steve Jobss biographer, wrote in an essay published a few weeks after Donald Trump was elected president. After 40 years, it has begun to corrode, both itself and us. The former Google strategist James Williams told The Guardian: The dynamics of the attention economy are structurally set up to undermine the human will. In a blog post, Brad Burnham, a managing partner at Union Square Ventures, a top New York venture-capital firm, bemoaned the collateral damage from the quasi monopolies of the digital age: Publishers find themselves becoming commodity content suppliers in a sea of undifferentiated content in the Facebook news feed. Websites see their fortunes upended by small changes in Googles search algorithms. And manufacturers watch helplessly as sales dwindle when Amazon decides to source products directly in China and redirect demand to their own products. (Full disclosure: Burnhams firm invested in a company I started in 2006; we have had no financial relationship since it sold in 2011.) Even Berners-Lee, the inventor of the web itself, wrote a blog post voicing his concerns that the advertising-based model of social media and search engines creates a climate where misinformation, or fake news, which is surprising, shocking or designed to appeal to our biases, can spread like wildfire.

For most critics, the solution to these immense structural issues has been to propose either a new mindfulness about the dangers of these tools turning off our smartphones, keeping kids off social media or the strong arm of regulation and antitrust: making the tech giants subject to the same scrutiny as other industries that are vital to the public interest, like the railroads or telephone networks of an earlier age. Both those ideas are commendable: We probably should develop a new set of habits governing how we interact with social media, and it seems entirely sensible that companies as powerful as Google and Facebook should face the same regulatory scrutiny as, say, television networks. But those interventions are unlikely to fix the core problems that the online world confronts. After all, it was not just the antitrust division of the Department of Justice that challenged Microsofts monopoly power in the 1990s; it was also the emergence of new software and hardware the web, open-source software and Apple products that helped undermine Microsofts dominant position.

The blockchain evangelists behind platforms like Ethereum believe that a comparable array of advances in software, cryptography and distributed systems has the ability to tackle todays digital problems: the corrosive incentives of online advertising; the quasi monopolies of Facebook, Google and Amazon; Russian misinformation campaigns. If they succeed, their creations may challenge the hegemony of the tech giants far more effectively than any antitrust regulation. They even claim to offer an alternative to the winner-take-all model of capitalism than has driven wealth inequality to heights not seen since the age of the robber barons.

That remedy is not yet visible in any product that would be intelligible to an ordinary tech consumer. The only blockchain project that has crossed over into mainstream recognition so far is Bitcoin, which is in the middle of a speculative bubble that makes the 1990s internet I.P.O. frenzy look like a neighborhood garage sale. And herein lies the cognitive dissonance that confronts anyone trying to make sense of the blockchain: the potential power of this would-be revolution is being actively undercut by the crowd it is attracting, a veritable goon squad of charlatans, false prophets and mercenaries. Not for the first time, technologists pursuing a vision of an open and decentralized network have found themselves surrounded by a wave of opportunists looking to make an overnight fortune. The question is whether, after the bubble has burst, the very real promise of the blockchain can endure.

To some students of modern technological history, the internets fall from grace follows an inevitable historical script. As Tim Wu argued in his 2010 book, The Master Switch, all the major information technologies of the 20th century adhered to a similar developmental pattern, starting out as the playthings of hobbyists and researchers motivated by curiosity and community, and ending up in the hands of multinational corporations fixated on maximizing shareholder value. Wu calls this pattern the Cycle, and on the surface at least, the internet has followed the Cycle with convincing fidelity. The internet began as a hodgepodge of government-funded academic research projects and side-hustle hobbies. But 20 years after the web first crested into the popular imagination, it has produced in Google, Facebook and Amazon and indirectly, Apple what may well be the most powerful and valuable corporations in the history of capitalism.

Blockchain advocates dont accept the inevitability of the Cycle. The roots of the internet were in fact more radically open and decentralized than previous information technologies, they argue, and had we managed to stay true to those roots, it could have remained that way. The online world would not be dominated by a handful of information-age titans; our news platforms would be less vulnerable to manipulation and fraud; identity theft would be far less common; advertising dollars would be distributed across a wider range of media properties.

To understand why, it helps to think of the internet as two fundamentally different kinds of systems stacked on top of each other, like layers in an archaeological dig. One layer is composed of the software protocols that were developed in the 1970s and 1980s and hit critical mass, at least in terms of audience, in the 1990s. (A protocol is the software version of a lingua franca, a way that multiple computers agree to communicate with one another. There are protocols that govern the flow of the internets raw data, and protocols for sending email messages, and protocols that define the addresses of web pages.) And then above them, a second layer of web-based services Facebook, Google, Amazon, Twitter that largely came to power in the following decade.

The first layer call it InternetOne was founded on open protocols, which in turn were defined and maintained by academic researchers and international-standards bodies, owned by no one. In fact, that original openness continues to be all around us, in ways we probably dont appreciate enough. Email is still based on the open protocols POP, SMTP and IMAP; websites are still served up using the open protocol HTTP; bits are still circulated via the original open protocols of the internet, TCP/IP. You dont need to understand anything about how these software conventions work on a technical level to enjoy their benefits. The key characteristic they all share is that anyone can use them, free of charge. You dont need to pay a licensing fee to some corporation that owns HTTP if you want to put up a web page; you dont have to sell a part of your identity to advertisers if you want to send an email using SMTP. Along with Wikipedia, the open protocols of the internet constitute the most impressive example of commons-based production in human history.

To see how enormous but also invisible the benefits of such protocols have been, imagine that one of those key standards had not been developed: for instance, the open standard we use for defining our geographic location, GPS. Originally developed by the United States military, the Global Positioning System was first made available for civilian use during the Reagan administration. For about a decade, it was largely used by the aviation industry, until individual consumers began to use it in car navigation systems. And now we have smartphones that can pick up a signal from GPS satellites orbiting above us, and we use that extraordinary power to do everything from locating nearby restaurants to playing Pokmon Go to coordinating disaster-relief efforts.

But what if the military had kept GPS out of the public domain? Presumably, sometime in the 1990s, a market signal would have gone out to the innovators of Silicon Valley and other tech hubs, suggesting that consumers were interested in establishing their exact geographic coordinates so that those locations could be projected onto digital maps. There would have been a few years of furious competition among rival companies, who would toss their own proprietary satellites into orbit and advance their own unique protocols, but eventually the market would have settled on one dominant model, given all the efficiencies that result from a single, common way of verifying location. Call that imaginary firm GeoBook. Initially, the embrace of GeoBook would have been a leap forward for consumers and other companies trying to build location awareness into their hardware and software. But slowly, a darker narrative would have emerged: a single private corporation, tracking the movements of billions of people around the planet, building an advertising behemoth based on our shifting locations. Any start-up trying to build a geo-aware application would have been vulnerable to the whims of mighty GeoBook. Appropriately angry polemics would have been written denouncing the public menace of this Big Brother in the sky.

But none of that happened, for a simple reason. Geolocation, like the location of web pages and email addresses and domain names, is a problem we solved with an open protocol. And because its a problem we dont have, we rarely think about how beautifully GPS does work and how many different applications have been built on its foundation.

The open, decentralized web turns out to be alive and well on the InternetOne layer. But since we settled on the World Wide Web in the mid-90s, weve adopted very few new open-standard protocols. The biggest problems that technologists tackled after 1995 many of which revolved around identity, community and payment mechanisms were left to the private sector to solve. This is what led, in the early 2000s, to a powerful new layer of internet services, which we might call InternetTwo.

For all their brilliance, the inventors of the open protocols that shaped the internet failed to include some key elements that would later prove critical to the future of online culture. Perhaps most important, they did not create a secure open standard that established human identity on the network. Units of information could be defined pages, links, messages but people did not have their own protocol: no way to define and share your real name, your location, your interests or (perhaps most crucial) your relationships to other people online.

This turns out to have been a major oversight, because identity is the sort of problem that benefits from one universally recognized solution. Its what Vitalik Buterin, a founder of Ethereum, describes as base-layer infrastructure: things like language, roads and postal services, platforms where commerce and competition are actually assisted by having an underlying layer in the public domain. Offline, we dont have an open market for physical passports or Social Security numbers; we have a few reputable authorities most of them backed by the power of the state that we use to confirm to others that we are who we say we are. But online, the private sector swooped in to fill that vacuum, and because identity had that characteristic of being a universal problem, the market was heavily incentivized to settle on one common standard for defining yourself and the people you know.

The self-reinforcing feedback loops that economists call increasing returns or network effects kicked in, and after a period of experimentation in which we dabbled in social-media start-ups like Myspace and Friendster, the market settled on what is essentially a proprietary standard for establishing who you are and whom you know. That standard is Facebook. With more than two billion users, Facebook is far larger than the entire internet at the peak of the dot-com bubble in the late 1990s. And that user growth has made it the worlds sixth-most-valuable corporation, just 14 years after it was founded. Facebook is the ultimate embodiment of the chasm that divides InternetOne and InternetTwo economies. No private company owned the protocols that defined email or GPS or the open web. But one single corporation owns the data that define social identity for two billion people today and one single person, Mark Zuckerberg, holds the majority of the voting power in that corporation.

If you see the rise of the centralized web as an inevitable turn of the Cycle, and the open-protocol idealism of the early web as a kind of adolescent false consciousness, then theres less reason to fret about all the ways weve abandoned the vision of InternetOne. Either were living in a fallen state today and theres no way to get back to Eden, or Eden itself was a kind of fantasy that was always going to be corrupted by concentrated power. In either case, theres no point in trying to restore the architecture of InternetOne; our only hope is to use the power of the state to rein in these corporate giants, through regulation and antitrust action. Its a variation of the old Audre Lorde maxim: The masters tools will never dismantle the masters house. You cant fix the problems technology has created for us by throwing more technological solutions at it. You need forces outside the domain of software and servers to break up cartels with this much power.

But the thing about the masters house, in this analogy, is that its a duplex. The upper floor has indeed been built with tools that cannot be used to dismantle it. But the open protocols beneath them still have the potential to build something better.

One of the most persuasive advocates of an open-protocol revival is Juan Benet, a Mexican-born programmer now living on a suburban side street in Palo Alto, Calif., in a three-bedroom rental that he shares with his girlfriend and another programmer, plus a rotating cast of guests, some of whom belong to Benets organization, Protocol Labs. On a warm day in September, Benet greeted me at his door wearing a black Protocol Labs hoodie. The interior of the space brought to mind the incubator/frat house of HBOs Silicon Valley, its living room commandeered by an array of black computer monitors. In the entrance hallway, the words Welcome to Rivendell were scrawled out on a whiteboard, a nod to the Elven city from Lord of the Rings. We call this house Rivendell, Benet said sheepishly. Its not a very good Rivendell. It doesnt have enough books, or waterfalls, or elves.

Benet, who is 29, considers himself a child of the first peer-to-peer revolution that briefly flourished in the late 1990s and early 2000s, driven in large part by networks like BitTorrent that distributed media files, often illegally. That initial flowering was in many ways a logical outgrowth of the internets decentralized, open-protocol roots. The web had shown that you could publish documents reliably in a commons-based network. Services like BitTorrent or Skype took that logic to the next level, allowing ordinary users to add new functionality to the internet: creating a distributed library of (largely pirated) media, as with BitTorrent, or helping people make phone calls over the internet, as with Skype.

Were not trying to replace the U.S. government. Its not meant to be a real currency; its meant to be a pseudo-currency inside this world.

Sitting in the living room/office at Rivendell, Benet told me that he thinks of the early 2000s, with the ascent of Skype and BitTorrent, as the summer of peer-to-peer its salad days. But then peer-to-peer hit a wall, because people started to prefer centralized architectures, he said. And partly because the peer-to-peer business models were piracy-driven. A graduate of Stanfords computer-science program, Benet talks in a manner reminiscent of Elon Musk: As he speaks, his eyes dart across an empty space above your head, almost as though hes reading an invisible teleprompter to find the words. He is passionate about the technology Protocol Labs is developing, but also keen to put it in a wider context. For Benet, the shift from distributed systems to more centralized approaches set in motion changes that few could have predicted. The rules of the game, the rules that govern all of this technology, matter a lot, he said. The structure of what we build now will paint a very different picture of the way things will be five or 10 years in the future. He continued: It was clear to me then that peer-to-peer was this extraordinary thing. What was not clear to me then was how at risk it is. It was not clear to me that you had to take up the baton, that its now your turn to protect it.

Protocol Labs is Benets attempt to take up that baton, and its first project is a radical overhaul of the internets file system, including the basic scheme we use to address the location of pages on the web. Benet calls his system IPFS, short for InterPlanetary File System. The current protocol HTTP pulls down web pages from a single location at a time and has no built-in mechanism for archiving the online pages. IPFS allows users to download a page simultaneously from multiple locations and includes what programmers call historic versioning, so that past iterations do not vanish from the historical record. To support the protocol, Benet is also creating a system called Filecoin that will allow users to effectively rent out unused hard-drive space. (Think of it as a sort of Airbnb for data.) Right now there are tons of hard drives around the planet that are doing nothing, or close to nothing, to the point where their owners are just losing money, Benet said. So you can bring online a massive amount of supply, which will bring down the costs of storage. But as its name suggests, Protocol Labs has an ambition that extends beyond these projects; Benets larger mission is to support many new open-source protocols in the years to come.

Why did the internet follow the path from open to closed? One part of the explanation lies in sins of omission: By the time a new generation of coders began to tackle the problems that InternetOne left unsolved, there were near-limitless sources of capital to invest in those efforts, so long as the coders kept their systems closed. The secret to the success of the open protocols of InternetOne is that they were developed in an age when most people didnt care about online networks, so they were able to stealthily reach critical mass without having to contend with wealthy conglomerates and venture capitalists. By the mid-2000s, though, a promising new start-up like Facebook could attract millions of dollars in financing even before it became a household brand. And that private-sector money ensured that the companys key software would remain closed, in order to capture as much value as possible for shareholders.

And yet as the venture capitalist Chris Dixon points out there was another factor, too, one that was more technical than financial in nature. Lets say youre trying to build an open Twitter, Dixon explained while sitting in a conference room at the New York offices of Andreessen Horowitz, where he is a general partner. Im @cdixon at Twitter. Where do you store that? You need a database. A closed architecture like Facebooks or Twitters puts all the information about its users their handles, their likes and photos, the map of connections they have to other individuals on the network into a private database that is maintained by the company. Whenever you look at your Facebook newsfeed, you are granted access to some infinitesimally small section of that database, seeing only the information that is relevant to you.

Running Facebooks database is an unimaginably complex operation, relying on hundreds of thousands of servers scattered around the world, overseen by some of the most brilliant engineers on the planet. From Facebooks point of view, theyre providing a valuable service to humanity: creating a common social graph for almost everyone on earth. The fact that they have to sell ads to pay the bills for that service and the fact that the scale of their network gives them staggering power over the minds of two billion people around the world is an unfortunate, but inevitable, price to pay for a shared social graph. And that trade-off did in fact make sense in the mid-2000s; creating a single database capable of tracking the interactions of hundreds of millions of people much less two billion was the kind of problem that could be tackled only by a single organization. But as Benet and his fellow blockchain evangelists are eager to prove, that might not be true anymore.

So how can you get meaningful adoption of base-layer protocols in an age when the big tech companies have already attracted billions of users and collectively sit on hundreds of billions of dollars in cash? If you happen to believe that the internet, in its current incarnation, is causing significant and growing harm to society, then this seemingly esoteric problem the difficulty of getting people to adopt new open-source technology standards turns out to have momentous consequences. If we cant figure out a way to introduce new, rival base-layer infrastructure, then were stuck with the internet we have today. The best we can hope for is government interventions to scale back the power of Facebook or Google, or some kind of consumer revolt that encourages that marketplace to shift to less hegemonic online services, the digital equivalent of forswearing big agriculture for local farmers markets. Neither approach would upend the underlying dynamics of Internet Two.



The first hint of a meaningful challenge to the closed-protocol era arrived in 2008, not long after Zuckerberg opened the first international headquarters for his growing company. A mysterious programmer (or group of programmers) going by the name Satoshi Nakamoto circulated a paper on a cryptography mailing list. The paper was called Bitcoin: A Peer-to-Peer Electronic Cash System, and in it, Nakamoto outlined an ingenious system for a digital currency that did not require a centralized trusted authority to verify transactions. At the time, Facebook and Bitcoin seemed to belong to entirely different spheres one was a booming venture-backed social-media start-up that let you share birthday greetings and connect with old friends, while the other was a byzantine scheme for cryptographic currency from an obscure email list. But 10 years later, the ideas that Nakamoto unleashed with that paper now pose the most significant challenge to the hegemony of InternetTwo giants like Facebook.

The paradox about Bitcoin is that it may well turn out to be a genuinely revolutionary breakthrough and at the same time a colossal failure as a currency. As I write, Bitcoin has increased in value by nearly 100,000 percent over the past five years, making a fortune for its early investors but also branding it as a spectacularly unstable payment mechanism. The process for creating new Bitcoins has also turned out to be a staggering energy drain.

History is replete with stories of new technologies whose initial applications end up having little to do with their eventual use. All the focus on Bitcoin as a payment system may similarly prove to be a distraction, a technological red herring. Nakamoto pitched Bitcoin as a peer-to-peer electronic-cash system in the initial manifesto, but at its heart, the innovation he (or she or they) was proposing had a more general structure, with two key features.

First, Bitcoin offered a kind of proof that you could create a secure database the blockchain scattered across hundreds or thousands of computers, with no single authority controlling and verifying the authenticity of the data.

Second, Nakamoto designed Bitcoin so that the work of maintaining that distributed ledger was itself rewarded with small, increasingly scarce Bitcoin payments. If you dedicated half your computers processing cycles to helping the Bitcoin network get its math right and thus fend off the hackers and scam artists you received a small sliver of the currency. Nakamoto designed the system so that Bitcoins would grow increasingly difficult to earn over time, ensuring a certain amount of scarcity in the system. If you helped Bitcoin keep that database secure in the early days, you would earn more Bitcoin than later arrivals. This process has come to be called mining.

For our purposes, forget everything else about the Bitcoin frenzy, and just keep these two things in mind: What Nakamoto ushered into the world was a way of agreeing on the contents of a database without anyone being in charge of the database, and a way of compensating people for helping make that database more valuable, without those people being on an official payroll or owning shares in a corporate entity. Together, those two ideas solved the distributed-database problem and the funding problem. Suddenly there was a way of supporting open protocols that wasnt available during the infancy of Facebook and Twitter.

These two features have now been replicated in dozens of new systems inspired by Bitcoin. One of those systems is Ethereum, proposed in a white paper by Vitalik Buterin when he was just 19. Ethereum does have its currencies, but at its heart Ethereum was designed less to facilitate electronic payments than to allow people to run applications on top of the Ethereum blockchain. There are currently hundreds of Ethereum apps in development, ranging from prediction markets to Facebook clones to crowdfunding services. Almost all of them are in pre-alpha stage, not ready for consumer adoption. Despite the embryonic state of the applications, the Ether currency has seen its own miniature version of the Bitcoin bubble, most likely making Buterin an immense fortune.

These currencies can be used in clever ways. Juan Benets Filecoin system will rely on Ethereum technology and reward users and developers who adopt its IPFS protocol or help maintain the shared database it requires. Protocol Labs is creating its own cryptocurrency, also called Filecoin, and has plans to sell some of those coins on the open market in the coming months. (In the summer of 2017, the company raised $135 million in the first 60 minutes of what Benet calls a presale of the tokens to accredited investors.) Many cryptocurrencies are first made available to the public through a process known as an initial coin offering, or I.C.O.

The I.C.O. abbreviation is a deliberate echo of the initial public offering that so defined the first internet bubble in the 1990s. But there is a crucial difference between the two. Speculators can buy in during an I.C.O., but they are not buying an ownership stake in a private company and its proprietary software, the way they might in a traditional I.P.O. Afterward, the coins will continue to be created in exchange for labor in the case of Filecoin, by anyone who helps maintain the Filecoin network. Developers who help refine the software can earn the coins, as can ordinary users who lend out spare hard-drive space to expand the networks storage capacity. The Filecoin is a way of signaling that someone, somewhere, has added value to the network.

. You need new code.



Part II What is Fractional Reserve Banking System?


The Money Multiplier (video)


Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy


In a fractional reserve banking system, banks create money when they make loans. 

Bank reserves have a multiplier effect on the money supply.


What Is Fractional Reserve Banking?

  • Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.


Understanding Fractional Reserve Banking


Banks are required to keep on hand and available for withdrawal a certain amount of the cash that depositors give them. If someone deposits $100, the bank can't lend out the entire amount.


Nor are banks required to keep the entire amount on hand. Many central banks have historically required banks under their purview to keep 10% of the deposit, referred to as reserves. This requirement is set in the U.S. by the Federal Reserve and is one of the central bank's tools to implement monetary policy. Increasing the reserve requirement takes money out of the economy while decreasing the reserve requirement puts money into the economy.


Historically, the required reserve ratio on non-transaction accounts (such as CDs) is zero, while the requirement on transaction deposits (e.g., checking accounts) is 10 percent. Following recent efforts to stimulate economic growth, however, the Fed has reduced the reserve requirements to zero for transaction accounts as well.


Fractional Reserve Requirements

Depository institutions must report their transaction accounts, time and savings deposits, vault cash, and other reservable obligations to the Fed either weekly or quarterly. Some banks are exempt from holding reserves, but all banks are paid a rate of interest on reserves called the "interest rate on reserves" (IOR) or the "interest rate on excess reserves" (IOER). This rate acts as an incentive for banks to keep excess reserves.


Banks with less than $16.3 million in assets are not required to hold reserves. Banks with assets of less than $124.2 million but more than $16.3 million have a 3% reserve requirement, and those banks with more than $124.2 million in assets have a 10% reserve requirement.


Fractional banking aims to expand the economy by freeing capital for lending.


Fractional Reserve Multiplier Effect

"Fractional reserve" refers to the fraction of deposits held in reserves. For example, if a bank has $500 million in assets, it must hold $50 million, or 10%, in reserve.

Analysts reference an equation referred to as the multiplier equation when estimating the impact of the reserve requirement on the economy as a whole. The equation provides an estimate for the amount of money created with the fractional reserve system and is calculated by multiplying the initial deposit by one divided by the reserve requirement. Using the example above, the calculation is $500 million multiplied by one divided by 10%, or $5 billion.

This is not how money is actually created but only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics professors, it is generally regarded as an oversimplification by policymakers.


The Bottom Line

Fractional reserve banking has pros and cons. It permits banks to use funds (the bulk of deposits) that would be otherwise unused to generate returns in the form of interest rates on loansand to make more money available to grow the economy. It also, however, could catch a bank short in the self-perpetuating panic of a bank run.

Many U.S. banks were forced to shut down during the Great Depression because too many customers attempted to withdraw assets at the same time. Nevertheless, fractional reserve banking is an accepted business practice that is in use at banks worldwide.


Example: You deposited $1,000 in a local bank




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Weaknesses of fractional reserve lending (khan academy)


(continuing from above)

Advocates like Chris Dixon have started referring to the compensation side of the equation in terms of tokens, not coins, to emphasize that the technology here isnt necessarily aiming to disrupt existing currency systems. I like the metaphor of a token because it makes it very clear that its like an arcade, he says. You go to the arcade, and in the arcade you can use these tokens. But were not trying to replace the U.S. government. Its not meant to be a real currency; its meant to be a pseudo-currency inside this world. Dan Finlay, a creator of MetaMask, echoes Dixons argument. To me, whats interesting about this is that we get to program new value systems, he says. They dont have to resemble money.

Pseudo or not, the idea of an I.C.O. has already inspired a host of shady offerings, some of them endorsed by celebrities who would seem to be unlikely blockchain enthusiasts, like DJ Khaled, Paris Hilton and Floyd Mayweather. In a blog post published in October 2017, Fred Wilson, a founder of Union Square Ventures and an early advocate of the blockchain revolution, thundered against the spread of I.C.O.s. I hate it, Wilson wrote, adding that most I.C.O.s are scams. And the celebrities and others who promote them on their social-media channels in an effort to enrich themselves are behaving badly and possibly violating securities laws. Arguably the most striking thing about the surge of interest in I.C.O.s and in existing currencies like Bitcoin or Ether is how much financial speculation has already gravitated to platforms that have effectively zero adoption among ordinary consumers. At least during the internet bubble of late 1990s, ordinary people were buying books on Amazon or reading newspapers online; there was clear evidence that the web was going to become a mainstream platform. Today, the hype cycles are so accelerated that billions of dollars are chasing a technology that almost no one outside the cryptocommunity understands, much less uses.

Lets say, for the sake of argument, that the hype is warranted, and blockchain platforms like Ethereum become a fundamental part of our digital infrastructure. How would a distributed ledger and a token economy somehow challenge one of the tech giants? One of Fred Wilsons partners at Union Square Ventures, Brad Burnham, suggests a scenario revolving around another tech giant that has run afoul of regulators and public opinion in the last year: Uber. Uber is basically just a coordination platform between drivers and passengers, Burnham says. Yes, it was really innovative, and there were a bunch of things in the beginning about reducing the anxiety of whether the driver was coming or not, and the map and a whole bunch of things that you should give them a lot of credit for. But when a new service like Uber starts to take off, theres a strong incentive for the marketplace to consolidate around a single leader. The fact that more passengers are starting to use the Uber app attracts more drivers to the service, which in turn attracts more passengers. People have their credit cards stored with Uber; they have the app installed already; there are far more Uber drivers on the road. And so the switching costs of trying out some other rival service eventually become prohibitive, even if the chief executive seems to be a jerk or if consumers would, in the abstract, prefer a competitive marketplace with a dozen Ubers. At some point, the innovation around the coordination becomes less and less innovative, Burnham says.

The blockchain world proposes something different. Imagine some group like Protocol Labs decides theres a case to be made for adding another basic layer to the stack. Just as GPS gave us a way of discovering and sharing our location, this new protocol would define a simple request: I am here and would like to go there. A distributed ledger might record all its users past trips, credit cards, favorite locations all the metadata that services like Uber or Amazon use to encourage lock-in. Call it, for the sake of argument, the Transit protocol. The standards for sending a Transit request out onto the internet would be entirely open; anyone who wanted to build an app to respond to that request would be free to do so. Cities could build Transit apps that allowed taxi drivers to field requests. But so could bike-share collectives, or rickshaw drivers. Developers could create shared marketplace apps where all the potential vehicles using Transit could vie for your business. When you walked out on the sidewalk and tried to get a ride, you wouldnt have to place your allegiance with a single provider before hailing. You would simply announce that you were standing at 67th and Madison and needed to get to Union Square. And then youd get a flurry of competing offers. You could even theoretically get an offer from the M.T.A., which could build a service to remind Transit users that it might be much cheaper and faster just to jump on the 6 train.

How would Transit reach critical mass when Uber and Lyft already dominate the ride-sharing market? This is where the tokens come in. Early adopters of Transit would be rewarded with Transit tokens, which could themselves be used to purchase Transit services or be traded on exchanges for traditional currency. As in the Bitcoin model, tokens would be doled out less generously as Transit grew more popular. In the early days, a developer who built an iPhone app that uses Transit might see a windfall of tokens; Uber drivers who started using Transit as a second option for finding passengers could collect tokens as a reward for embracing the system; adventurous consumers would be rewarded with tokens for using Transit in its early days, when there are fewer drivers available compared with the existing proprietary networks like Uber or Lyft.

As Transit began to take off, it would attract speculators, who would put a monetary price on the token and drive even more interest in the protocol by inflating its value, which in turn would attract more developers, drivers and customers. If the whole system ends up working as its advocates believe, the result is a more competitive but at the same time more equitable marketplace. Instead of all the economic value being captured by the shareholders of one or two large corporations that dominate the market, the economic value is distributed across a much wider group: the early developers of Transit, the app creators who make the protocol work in a consumer-friendly form, the early-adopter drivers and passengers, the first wave of speculators. Token economies introduce a strange new set of elements that do not fit the traditional models: instead of creating value by owning something, as in the shareholder equity model, people create value by improving the underlying protocol, either by helping to maintain the ledger (as in Bitcoin mining), or by writing apps atop it, or simply by using the service. The lines between founders, investors and customers are far blurrier than in traditional corporate models; all the incentives are explicitly designed to steer away from winner-take-all outcomes. And yet at the same time, the whole system depends on an initial speculative phase in which outsiders are betting on the token to rise in value.

You think about the 90s internet bubble and all the great infrastructure we got out of that, Dixon says. Youre basically taking that effect and shrinking it down to the size of an application.

Bitcoin is now a nine-year-old multibillion-dollar bug bounty, and no ones hacked it. It feels like pretty good proof.

Even decentralized cryptomovements have their key nodes. For Ethereum, one of those nodes is the Brooklyn headquarters of an organization called ConsenSys, founded by Joseph Lubin, an early Ethereum pioneer. In November, Amanda Gutterman, the 26-year-old chief marketing officer for ConsenSys, gave me a tour of the space. In our first few minutes together, she offered the obligatory cup of coffee, only to discover that the drip-coffee machine in the kitchen was bone dry. How can we fix the internet if we cant even make coffee? she said with a laugh.


Part III: Could Cryptocurrency Put Banks out of Business?




What is Cryptocurrency? What is blockchain?


How the blockchain is changing money and business | Don Tapscott (TED, video)


Impact of Cryptocurrency on economy


For discussion:

  • What is the major impact of Cryptocurrency on the global economy?

       The first crypto currency discussed in this paper as an example is Bitcoin which is technically, an algorithm that records an ongoing chain of transactions between members of a decentralized peer-to-peer network and broadcasts these records to all members of the network.

       Secondly, Ethereum is used as an example which is a blockchain-based, public, open-source, computing platform and operating system for smart contracts.

       The first advantage is that crypto currencies combine important properties to foster trust, such as accountability and transparency, which allows trust free interactions between counterparties.

       Another benefit of the decentralization of crypto currencies is that governments cannot manage them. Hence, crypto currencies are not restricted to a specific geographic area and can be traded around the world. Therefore, Bitcoin can be used to provide low-cost money transfers, particularly for those seeking to transfer small amounts of money internationally, such as remittance payments

       One characteristic is that it makes it easy to transfer money from illegal activities or to finance terror activities without the possibility of government intervention

       the decentralization and the lack of flexibility in the Bitcoin supply schedule results in high price volatility

       Furthermore, no government or central bank can influence the supply of crypto currencies.

       Cryptocurrency has not changed existing job markets, however it created jobs in a new category of its own. Cryptocurrency job availability has increased demand for software engineers, and provided many new jobs for US workers.


  • Could crypto currency put banks out of business?

Could digital currencies put banks out of business? | The Economist (video)


The short answer is yes. Cryptocurrencies are an existential threat to central banks, and the response from national financial authorities thus far seems to be, If you can't beat them, join them.


Ages 25-34 (

The youngest age demographic is most likely to participate in crypto, with 58% of digital currency owners worldwide being under 34, according to a 2021 survey.

A whopping 27% of people ages 18-34 prefer Bitcoin (the largest crypto by market cap) over stocks (April 2019 study). The youngest age demographic of investors is the most likely to adopt Bitcoin and other cryptocurrencies as a large or maybe the largest portion of their portfolios.


Additionally, 54.9% of retail investors are between the ages of 26 and 40. This class of investors has shown increasing interest in crypto in 2021 after it provided unprecedented short-term opportunities.


From Dogecoin to Ethereum, speculation and value investing have been off the charts in a crypto bull run. This young investor demographic has grown impatient and used to sky-high returns and volatility.


Ages 35-44

This age category is the next most likely to enter the crypto scene. 36% of crypto investors worldwide have an income of over 100,000 USD. The next wave of crypto buyers is older, with an average age of 44 in the USA.


With more education and more disposable income, this investor class is looking to cash in on early crypto adoption and coin trading. These two youngest groups of investors on the chart are also most likely to use DeFis other tools like staking and borrowing currency.


Ages 45-54

Even ages 45-54 show signs of adopting crypto as the average age of the crypto-curious settles around 44. Many in this age group are looking for extra portfolio allocations that may help them reach a comfier retirement. However, many Gen Xers prefer a relationship with mutual funds and safe stocks like Apple or Amazon.


‍Ages 55-64

The Baby Boomer generation shows a less than 1% likelihood of investing in Bitcoin as a long-term investment (July 2018 study). They have little trust for digital currency and prefer mainstream investments as safer vehicles for their wealth as they look to transition out of the workforce.


Age 65+

Those ages 65 and over arent likely to contribute to cryptocurrencys rise, as they are mostly concerned with safe investments to hold them through retirement. This age demographic is not as familiar with tech and has very low trust for digital assets. They are more likely to stay the path of 90-year-old investor Warren Buffet with a background in safer blue-chip stocks and mutual funds.


We shouldnt forget that Asia and China make up a huge portion of these demographics, with over 59 million crypto users.




Top 5 cryptocurrency





For discussion:

  • Why Bitcoin?
  • Can other Cryptocurrencies beat Bitcoin?
  • What is the difference between Ethereum and Bitocion? Between Cardano and Bitcoin?


What is Bitcoin? (video)

What is bitcoin? By Khan Academy (video) (optional)

Bitcoin vs. Ethereum - Everything you need to know! (Similarities & differences)



Is Ethereum More Important Than Bitcoin?

By ADAM HAYES Reviewed by ERIKA RASURE Updated Aug 26, 2021


Blockchain technology, the distributed ledger system that underpins the digital currency Bitcoin, is getting a lot of attention from Wall Street lately. With uses ranging from cross-border payments to settlements and clearing of over-the-counter derivatives to streamlining back-office processes, the potential for disruption in the financial industry and elsewhere is growing more real each day. While bitcoin is the most widely used and well-known use case of blockchain, Ethereum may be the killer app that allows for this disruption to finally take place.

The token native to the Ethereum blockchain, Ether (ETH), currently trades around $230, and the market capitalization of all ether around $25 billion, making it the second most valuable blockchain behind Bitcoin (which represents approximately $185 billion of value). What is Ethereum and why is it interesting?



  • Ethereum is a blockchain that was developed to support scripting and the creation of decentralized applications and 'smart contracts' through its virtual machine (EVM).
  • Ethereum's native token, Ether (ETH) is a cryptocurrency used to pay for the processing power of the EVM in order to run smart contracts or other Dapps, in what is called 'gas'.
  • Smart contracts have been used on Ethereum for a variety of purposes, from issuing ICO tokens to creating entire decentralized autonomous organizations (DAOs).

A Brief Overview of Ethereum

Ethereum was developed to augment and improve on bitcoin, expanding its capabilities. Importantly, it was developed to feature prominently smart contracts: decentralized, self-executing agreements coded into the blockchain itself. Ethereum was first proposed by Vitalik Buterin in 2013 and went live with its first beta version in 2015. Its blockchain is built with a turing-complete scripting language that can simultaneously run such smart contracts across all nodes and achieve verifiable consensus without the need for a trusted third party such as a court, judge or legal system.  According to its website, Ethereum can be used to codify, decentralize, secure and trade just about anything. In late 2014, Ethereum raised almost $18 million in bitcoin by way of a crowd sale to fund its development.6


The Ethereum Virtual Machine (EVM) is capable of running smart contracts that can represent financial agreements such as options contracts, swaps or coupon-paying bonds. It can also be used to execute bets and wagers, to fulfill employment contracts, to act as a trusted escrow for the purchase of high-value items, and to maintain a legitimate decentralized gambling facility. These are just a few examples of what is possible with smart contracts, and the potential to replace all sorts of legal, financial and social agreements is exciting.


Currently, the EVM is in its infancy, and running smart contracts is both expensive in terms of ether consumed, as well as limited in its processing power. According to its developers, the system is currently about as powerful as a late 1990s-era mobile phone. This, however, is likely to change as the protocol is developed further. To put this into perspective, the computer on the Apollo 11 lander had less power than an iPhone; it is certainly plausible that in a few short years, the EVM (or something like it) will be able to handle sophisticated smart contracts in real time.8

Within the Ethereum ecosystem, ether exists as the internal cryptocurrency which is used to settle the outcomes of smart contracts executed within the protocol. Ether can be mined for and traded on cryptocurrency exchanges with bitcoin or fiat currencies such as US Dollars, and is also used to pay for computational effort employed by nodes on its blockchain.

Ethereum and Decentralized Autonomous Organizations

Smart contracts could be the building blocks for entire decentralized autonomous organizations (DAO's) that function like corporations, engaging in economic transactionsbuying and selling things, hiring labor, negotiating deals, balancing budgets and maximizing profitswithout any human or institutional intervention. If one takes the view that corporations are just a complex web of contracts and obligations of varying size and scope, then such DAO's could be coded into Ethereum.

This opens the door for all sorts of new and interesting possibilities such as emancipated machines that literally own themselves and people being employed directly by pieces of software.


Ethereum and Decentralized Applications

While DAO's may be a concept to be realized in the future, decentralized applications (Dapps) are currently being developed for Ethereum today. These standalone applications utilize smart contracts and run on the EVM.9 Some examples include micro-payments platforms, reputation functions, online gambling apps, schedulers and P2P marketplaces.


The key feature to Dapps is that they run across a decentralized network and are enforced without the need for a central authority or overseer. Any sort of multi-party application that today relies on a central server can be disintermediated via the Ethereum blockchain.9 This can eventually include chat, gaming, shopping and banking.


The Bottom Line

What Bitcoin did for money and payments by harnessing blockchain technology, Ethereum may do for applications of all shapes and sizes. With a built-in scripting language and distributed virtual machine, smart contracts can be built to carry out all sorts of functions without the need for a trusted third party or central authority. Using its internal cryptocurrency, ether, nodes can be paid for their processing power in running these decentralized apps, and eventually, entire decentralized autonomous organizations may exist in an ether economy.



Cardano joins cryptos creative destruction loop

By John Foley

September 3, 2021


Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021.

NEW YORK, Sept 3 (Reuters Breakingviews) - Watch out, bitcoin and ether. Cryptocurrency platform Cardano had its ADA token pass the $3 mark for the first time on Sept. 1, just weeks after becoming the worlds third-biggest virtual tender. While its total value at that price of $96 billion is roughly a fifth of that of Ethereums currency and a 10th of that of leader bitcoin, according to Coinbase, the No. 3 has doubled in a month.

Cardano differs from its bigger cousins because transactions are verified using proof of stake, which rewards ownership, rather than proof of work, which rewards effort. The former uses much less energy. Ethereum is switching to proof of stake, but maybe not for a year or two. On the other hand, Cardano is less suited to so-called smart contracts, which automatically execute certain agreed actions, until a revamp later in September. Another difference is that the supply of Cardanos ADA is limited, like bitcoins but unlike ethers.

Crypto-believers may just hedge their bets by investing in all of them. But Cardanos rise shows how the space is evolving collectively. New entrants from Polkadot to Iota each bring some perk that the others dont. Variations run into the thousands. Cardanos success could be fleeting as copycats take its charms and build on them to create more appealing alternatives.

Those with long memories might remember Altavista, the 1990s search engine that introduced firsts like web-page translation. It stormed ahead until Google wiped it off the map, in part by piggybacking off the advances of its predecessors. A dollar invested in Googles forebears might have been wasted, but without that, search wouldnt be what it is today. Thats the paradox of crypto too: only through todays investors losing fortunes will the sector deliver sustainable riches.



How Does Cardano Work? (video, optional)


Dogecoin (DOGE)

By JAKE FRANKENFIELD Updated December 21, 2020