Gerardo Lemus

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Quantitative Finance Practitioner: Applying all available data to get an edge over the market.

Given my background, I am often asked my views on blockchain, so I decided to take some time to try to understand what is going on. First, I had to sort between extremes: either tons of fanatic drivel, ‘high-level’ presentations which left me with more questions than answers, and then extremely geeky material ( Satoshi’s paper anyone ?).

But finally I struck gold (pun intended) when I found Princeton’s Coursera course on Cryptocurrencies — If you want to understand the basics this is a course that explains them without any hype — from a dispassionate and critical academic perspective.

After viewing the lectures, I was able to identify many of the assumptions that the ‘high-level documents’ would parrot (because some else had written somewhere else)

Bitcoin mining consumes more electricity than Ireland …

For example:

… as the Guardian writes. Then they quote DigiEconomist, which has a very technical section explaining their assumptions (and burying the explanation with lots of jargon, references to other methods to compute energy, links to different reports …).

Well, in Week 5 of Princeton’s course, in the ‘ Energy Consumption and Ecology’, they explain in simple English how to really compute the energy consumption (a 15 minute lecture) using a top down and bottom up approach — at minute 9:30 they say (for 2015):

See the lecture — you will find out that as new mining chips are developed, they increase energy efficiency.

Bitcoin is anonymous

But what applies to bitcoin does not need to be generalised to all cryptocurrencies — in lecture 8 they introduce ‘Virtual Mining’ (proof-of-stake) as a way to get rid of the energy issue.

This myth already has been busted elsewhere (it is not anonymous, but pseudonymous — if you do not change your pseudonym for each transaction an ‘adversary’ can eventually identify you).

Bitcoin transactions are deterministic

Princeton’s course deals with the issue in Week 6 — showing some amazing examples of de-anonymizing. But the clincher is section ‘Zerocoin and Zerocash’. Just because bitcoin is not anonymous, there is no reason why another cryptocurrency cannot be made anonymous.

I mean — you would think once you have done a transaction it just happens, right ? It turns out ( Week 2, Distributed Consensus), that

Whoever has 51% of mining rigs controls Bitcoin

I was amazed when I learnt this fact — and it all comes from the way the blockchain is designed — as the peer to peer network needs to achieve consensus, the time required to validate a transaction becomes a function of network size — beware of projects claiming that blockchain can be used to reduce settlement periods !

Just read this blog ‘ How to destroy bitcoin’. The 51% number is also quoted in almost all ‘serious’ high level introductions to bitcoin.

Just flip to Week 5, ‘ Mining Incentives and Strategies’ — at minute 4:37 you have:

So the blogger above is right in the sense that to crash the bitcoin you need to have more that 50% of the mining rigs, but even then the community might decide to fork it out.

Well, there are more myths to be busted, but I’ll leave them for another post.

Quantitative Finance Practitioner: Applying all available data to get an edge over the market.

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Originally published at https://www.linkedin.com on February 1, 2018.

Co-Founder of Lamat, a company specialized in solving high-value problems in finance by applying cutting edge numerical methods. www.lamat-uk.com