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[Premium] The Only Guide You'll Ever Need for AI Crypto
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AI & BLOCKCHAIN
The Only Guide You'll Ever Need for AI Crypto
In case you are living under a rock, blockchains and cryptocurrencies are back on the menu. And they matter a lot to AI’s future and yours if you intend to profit from AI instead of watching from the sidelines.
But why are we back in the Crypto era, and why do I believe we are at a point of no return? Before fully committing to AI, I wrote about Crypto for years, so I know a thing or two about what matters and what you should avoid.
And I believe this time is it.
Today, I won’t sell you anything or tell you what to do. But Crypto is in direct impact trajectory with AI, meaning that if you care about AI, you should be at least aware of what Crypto is and why it matters to you, especially considering that otherwise you will be fooled by AI Crypto projects once you inevitably run into them.
But after today, you won’t. This is the highest signal-to-noise article I’ve ever written because failing to follow some of this advice could cost you a lot of money. And even if you aren’t considering crypto as an investment, it will still give you plenty of insight into AI’s progress over the next four years and make you a better decision-maker.
Precisely, you will:
Understand why Crypto is back.
Thoroughly examine blockchains in a jargon-free, easy-to-comprehend way to fully grasp their relationship with AI. While blockchains' contribution to the latter is often exaggerated, their true value is deeply underappreciated. I promise that by the end of this article, you will finally understand what blockchains are even used for and their role in the AI value chain.
This is a no-hype-allowed newsletter, so as always, you’ll experience an honest look at their limitations and the key missing piece, the ‘holy grail.’
Finally, receive a set of guidelines, a framework connecting both industries, so that you can make better-educated investing decisions in the world the US Government is about to send us to:
The Golden Age of AI and Decentralization.
But first, why is crypto back, and why is it for real this time?
The Return
A few years ago, President Trump was almost on the verge of “banning Bitcoin” during his presidency but was stopped by Steven Mnuchin at the very last moment.
But today, he seems to have changed his mind completely.
A No-looking Back Moment?
Following President Trump’s re-election on November 5, 2024, Bitcoin’s price experienced a significant surge.
On November 11, it surpassed $86,000, marking an increase of over 20% since the election.
By November 12, Bitcoin reached a record high of $89,000, reflecting a 30% rise in the past week.
This upward trend continued, with Bitcoin briefly topping $90,000 on November 13 before retreating slightly, a position it has maintained over the last few days.
Crypto-related companies surged too, with Coinbase growing 31.1%, Microstrategy (not entirely Crypto-related but has huge Bitcoin bags) up to 10%, and Bitcoin miners (more on that in a minute) like RIOT, surged 26%.
But why all the hype?
The Bitcoin Reserve
President Trump is championing the creation of a $1 billion Bitcoin reserve owned by the US Government.
If you think the US is leading this trend, think again, as Bhutan’s government has just crossed the $1 billion Bitcoin mark recently and El Salvador has been buying Bitcoin for a while now too.
However, one thing is for Bhutan to embrace Bitcoin; another one is the most powerful nation in the world considering Bitcoin a ‘store of value.’ This could very well lead to overall mass adoption by governments around the world, which could, in turn, incentivize institutions to jump onto the ship, too.
Of course, all this means opportunities for you and me. But to avoid getting scalded by scammers, we need to fully understand what this is all about.
Blockchain 101
Before we fully grasp what blockchains provide, we need to understand the world we’re living in.
Toward a Trustless Economy
A blockchain is nothing more than a ledger that stores transactions and their associated metadata (both parties involved, when it occurred, and how much money was exchanged). The difference is that it’s decentralized.
But what does that mean?
In traditional systems of record, the transaction history is stored on centralized servers. This system is easily controllable but has a single point of failure.
Crucially, this is a trusted environment in which the parties involved trust that the centralized actor behind this system of record will not tamper with it.
In fact, our global transaction system is precisely like this, with banks acting as the ‘trust enablers,’ the actors that verify that any given transaction is legit, aka that the person paying actually does and has the liquidity to do so.
Trust is also fundamental in the value of our fiduciary currencies (currencies not associated with any asset that proves their value), such as the US dollar (USD), the euro, the lira… etc.
These currencies work because society trusts their value, as they lack intrinsic value. Instead, their value is derived relative to the value of other fiduciary coins. In layman’s terms, the USD doesn’t have a value relative to gold (as it once did until President Nixon changed that with the ‘Nixon Shock’), but its value is relative to other coins like the Euro (1 EURO = 1.05 USD at the time of writing).
However, if these currencies lose the trust of their citizens, hyperinflation happens, where the value of a coin goes straight to almost zero, as we saw in Germany (Weimar Republic) in the 1920s or, more recently, with the Argentinian Peso.
Everything revolves around trust. But trust can be broken, which means our current systems are imperfect.
So, how does blockchain solve that?
The Real Definition of Crypto
Blockchain is a cool term for a not-so-cool thing: a transaction history. As mentioned, a blockchain is a ledger. The difference is that the parties that secure the ledger (that guarantee transactions are valid) are many, thousands, or ideally millions.
Each of these parties, known as a ‘node’ (‘miner’ in the case of Bitcoin or ‘staker’ in the case of Ethereum) has an exact copy of the ledger. Thus, each new transaction has to be validated by a majority of nodes to count as valid. This way, if you try to insert an invalid transaction into the registry, the other nodes invalidate it.
In turn, as all nodes need to be synchronized, transactions can’t be added asynchronously. Instead, we accumulate transactions in a given time window (this window depends on the blockchain you’re using), and then the nodes validate this ‘block’ of transactions and add it to the ledger.
This is what gives the technology its name. Transactions are added in blocks, creating a ‘block chain’ of validated transactions.
Here’s where one of blockchains' main advantages emerges: immutability. Once approved, a block becomes part of the chain forever.
Thus, if a malicious actor tries to modify a transaction that occurred in the past to get its money back, the nodes in the chain will realize this and prevent it. This makes real blockchains immutable, as to alter the chain, you need to own a majority of the nodes, which is economically unviable.
I can’t explain in full detail, but in Proof-of-Work blockchains like Bitcoin or Proof-of-Stake blockchains like Ethereum, the amount of compute and capital required, respectively, is so large compared to the return on tampering with the blockchain that it doesn’t make economic sense even to try.
But wait, are transactions the only thing a blockchain can store?
No. In reality, you can store any information you want as long as nodes can validate its authenticity. Besides transactions, a common thing inserted into blockchains is smart contracts.
Smart contracts are code snippets that define the logic of a certain contract between two parts, a software application, or other stuff that needs to be verified. By storing the smart contract in the blockchain, it becomes bonded and thus protected.
As a simple example of what you can do with smart contracts, you may want to enter into an agreement with another party that requires a payment if a certain milestone is met.
Acting as an escrow, the smart contract stores the debtor's money and verifies whether the milestone is met. If so, payment is made. Otherwise, the money is returned. This gives cryptographic security that both parties will meet their end of the bargain.
All this is fine, but the real question is: what is the role of a cryptocurrency?
The Incentives Game
It is tempting to idealize independent people or entities jointly securing a blockchain in a purely philanthropic way, but that’s not how the world works. These nodes need incentives to participate.
For that reason, blockchains have associated cryptocurrencies distributed as ‘payment’ to nodes for securing the blockchain. You may wonder why you should not just use USD. Well, that would imply, at some point, a centralized entity making a big USD purchase and starting to distribute those payments.
That would make the process centralized, so to prevent that, the blockchain becomes the issuer, distributing payments automatically without human intervention.
Many people use this argument to say cryptocurrencies come out of ‘thin air,’ but that’s not true because they do play an incentivizing role. To be clear, this process is no different from your central bank printing money like crazy to keep the economy afloat (I just summarized the last twenty years of economic policy in one line, so don’t let skeptics virtual signal you for something as common as a sunny day).
However, does this mean blockchains are perfect? No, not at all.
The Limits And The Search For the Holy Grail
As you may have guessed, blockchains have problems of their own. Having centralized systems of record and verification allows for these to be much more efficient and faster.
If you only need one source of truth to validate a transaction instead of making thousands or potentially millions of nodes agree, transactions are obviously accepted quicker.
As a stark difference, Visa can perform up to 65,000 transactions per second (tps) while Bitcoin manages 7 tps and Ethereum 12 tps (both in their standard form which is not the end form; more on that later).
This not only lengthens the average time it takes for your transaction to ‘settle’ but also increases the cost you have to pay to get the transaction validated (in blockchains, just like Visa will take a commission to approve your transaction, you have to pay a small fee).
In summary, blockchains suffer from scalability issues like any decentralized network.
But is there a way to solve this?
Yes, with a protocol published in the 1990s that is finally within our reach. One so powerful that it is considered fundamental in the future of both Crypto and AI independently, but will also unite both under the ‘decentralized AI’ banner.
A door to a future where you can own the AI models that run the world.
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