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IRA Financial Blog

Blockchain 101 With Ken Gendrich – Episode 328

Adam Talks

Adam Bergman: You have questions about blockchain? You’ve been confused about what blockchain actually means, how it could potentially change the way we enter into financial transactions, just overall confused at its potential impact? Well, I have answers for you. I’m going to be talking with a certified blockchain expert. And finally, you’re going to understand the power of blockchain.

Hey everyone, Adam Bergman here. Welcome to another episode of Adam Talks, tax attorney, founder of IRA Financial, and really excited to have Ken Gendrich, who is, as I mentioned, a certified blockchain expert, also founder of Token Foundry. Known Ken a couple of years; brilliant guy. He’s a crypto enthusiast, software engineer, and he’s going to talk to us about blockchain and finally teach us why it is so interesting. ‘Sup, Ken.

Ken Gendrich: Well, Adam, that’s a pretty big introduction. I hope I can hold up my end of the bargain.

Adam Bergman: Let’s do it. Start with the basics.

Ken Gendrich: Well, you know, blockchain has become this huge topic, and it’s so broad in the areas that it can apply, but it also has been historically very technical. Right? So I want to pull it apart a little bit and make it a little bit less technical and a little bit more value based. Right? So if you think about the Internet, if you were around it, when the Internet started in 1996, it was like this big promise that everything was going to be interconnected and everybody’s going to be able to talk to each other. But it turned out more of that it was more of like a roadway. Right? Like the roads, the infrastructure. And then on top of that, you had things like sites that had content. You learned about businesses that way. They built Amazon and all those eCommerce sites; the ability to buy and sell stuff. But it really didn’t achieve kind of this business to business opportunity and business to consumer opportunities, all just portals into single businesses. And what blockchain offers is like a layer of business rules on top of that, that businesses can use to create these communications and ability for consumers to work with businesses directly and also from businesses to businesses.

So it’s kind of like the trucks and the cars that go on the road. Right? That was never really built. So, we didn’t really have the tools to do that. With blockchain technology, it really is going to enable that. And I want to get into how a little bit few seconds is that if the whole business community is a transaction. Right? Blockchain is about transactions between different organizations. So that was really not built on top of the Internet before. But now with blockchain, you can send information from one system to the other very securely, and you can decide how much is going to be private and how much is going to be shared. So it’s just really, it’s not new, new technology, but it’s being used in a new way that facilitates all this opportunity. So that’s kind of the big picture. Any questions?

Adam Bergman: Yeah. This is a basic question that I always get. So what’s the difference between blockchain and just like a shared Google Doc or shared Excel sheet that you just update based off transactions or business information?

Ken Gendrich: Yeah, so that’s a great question because it’s really more about a ledger kind of system. Right? Where a spreadsheet that you share information on, anybody can change it. You really can’t tell if it’s accurate data. You can’t tell if it’s been; there are some history about who’s changed it, but it’s not unchangeable. So one of the things about blockchain is that those changes are written in ink, so to speak. They’re called immutable, unchangeable. So once the blockchain network confirms that your message is accurate, then we always know who did what to change the value of something in that ledger. So you kind of have this shared accounting ledger between people. Right? Instead of having to say, well, I put mine in here, I put mine in there. They don’t match. We have to reconcile it. Everything can happen in the middle. So you have one source of truth.

Adam Bergman: Okay, so let me just take a step back, if I may. So, Bitcoin, 13 years, it’s, I guess, the first type of cryptocurrency that utilized the concept of blockchain. Can you just very, very briefly, without getting too much technical details, just explain private keys, public keys, and the issue of double spent and what blockchain was trying to solve.

Ken Gendrich: Yeah. Wow. And without getting technical, is the key part here.

Adam Bergman: It’s based off cryptography. So it is technical.

Ken Gendrich: Yeah, it is technical. But the key concept, think of it as the keys to your house. Right? So in order to use blockchain, you have to have an address. So in other words, where is you your money. Right? And then you have to have a unique key that only you can use to transfer that money in and out. And so, it’s simple level it’s that way. The problem is securing these keys in a way that they can be used only by you, takes a lot of thinking and a lot of details. So, we use these things called wallets, kind of like in your pocket, you’ve got your key in your pocket, you now have your key in your wallet, and you need these keys in order to agree to move your money from one place to the next. And that’s really all it is.

Adam Bergman: Okay. So the issue, double spend, right? Where I may have one Bitcoin, and I want to send it to you because you’re providing services to me. How does blockchain stop double spend and how does, in essence, the blockchain know that I’m not giving the Bitcoin to two people?

Ken Gendrich: Well, that’s a great question. So the reality is like in a bank. Right? You might be able to try and spend your money twice because there’s this time delay between when the money is actually moved. In the blockchain community, these smart contracts that govern all this. It’s one unit of money. Right? It’s not in two different places. It’s on the blockchain. So when you move it, it’s moved. It can’t be moved twice because it’s gone. Right? So you can’t double spend it because it’s only in one place.

Adam Bergman: Got you.

Ken Gendrich: That’s a short story. Yeah.

Adam Bergman: Right. So, Blockchain has applicability for individual transactions. Right? I want to send a Bitcoin to Ken because Ken is building a software application for me. Instead of using fiat, I’m going to pay you in Bitcoin. But it also has, I think Blockchain at least, has the utility for inter industry types of transactions. Right?

Where maybe Ford is trying to get information from his manufacturer or anything along the supply chain. How do you see Blockchain working within larger companies and industry?

Ken Gendrich: Yes. The way I look at that is you kind of follow the money. Right.? So, it’s really about businesses make decisions based on how they can increase revenue and then how they can reduce costs. And one of those costs is friction between companies. Right? All this paperwork that has to happen when you do international trade, when you do wire transfers, all that takes time and has people involved and causes delays.

When you introduce Blockchain, these transactions are in very narrow timelines. Right? They’re in the constant, some in milliseconds, some in seconds, and some in minutes. Well, if I’m doing a wire transfer between here and Europe, that would normally take about seven to ten days to clear. Using Blockchain, that’s minutes. So, while the minutes seem like maybe a long time in technology, it’s quite faster than days. Right? And so moving money around is a big deal. But moving data around is a big deal, too.

So, if I have, think about, like, food safety is one of the ways where this was really proven. Microsoft, I’m sorry, IBM and Walmart, put together this food tracking system from the farm to the store, and they were able to prove that when you had a food safety issue like E. Coli, where in the past they destroyed the entire crop, the entire inventory of lettuce all over the United States. That was an extremely expensive endeavor. Since they built this food tracking system that tracks, uses the blockchain to track the food movement from the farm, through the distributors, through the warehousing, back to the store and even into your house. They can now detect in seconds where that source of food was that was contaminated and where it’s been. So they can target what needs to be destroyed and increase food safety.

So, those kinds of applications are already here. And the ones that are getting built are that businesses now can work in a network. Instead of working from one business to one business, you can work from one to many. So that’s kind of star network topology is going to be capable. It’s going to take some time to build all that out. But these use cases that are solving problems are coming first. Right?

Adam Bergman: So, would they have their own blockchain, right? Because there are different blockchains. There’s Bitcoin blockchain, there’s Ethereum blockchain, there’s Polygon blockchain. How does all that work?

Ken Gendrich: So, that’s a great question. We call those systems, networks. So a blockchain network is a bunch of, they’re called nodes, but computers basically that are implementing this blockchain together. And in a public blockchain, like Bitcoin and Ethereum, there are millions of computers that are participating in this network. So it’s effectively a public blockchain. But that means all the data is to some degree visible and shareable by others. Now there’s technology that’s coming that’s on top of that that is able to kind of isolate that and say, if I want to do business with Adam, I can still use the Ethereum or the Bitcoin blockchain, but only he and I can see those transactions going on. Right?

So that’s technology that’s going to help with that. But there are groups that are industry groups that are saying, we really want this to be semiprivate. We want our industry to work together. The cotton industry is doing this. They’re saying we want a marketplace for just us to communicate, but we want to collaborate instead of being these independent silos. We all want to be able to work in a common marketplace. So they’re standing up these industry networks that are just for them, so to speak. Those are considered private networks, private and public.

Adam Bergman: Right. To me, that’s super exciting. As a certified blockchain architect, what are you the most excited, near term, in the next three, four years, what blockchain could potentially do to impact our lives financially? And also just from a health safety perspective. How do you think blockchain can better our lives short term?

Ken Gendrich: There are really a lot of initiatives already kind of going in parallel. So, there’s not like one that you have to land in. One of the ones I think is really already starting is using cryptocurrencies as currencies for exchange for tangible things. So, you see, El Salvador has adopted Bitcoin, for example, as their national currency. And so that’s targeted to stabilize their economic and financial situation and allow people that can’t have banks to participate in the monetary trade. Right? So that’s one area that will continue to grow, particularly in countries that don’t have banking opportunities and allow these people to participate. So that’s a big area that’s going to go forward.

Another big area is the supply chain we talked about; be able to track things all over the place. So, all the paper and all the effort that we’re doing in the supply chain world is going to all turn into digital with this technology. And then the next one I think is really interesting is this thing called NFT technology. So these non-fungible tokens, right? And that’s really where we came with the Token Foundry. We wanted to help enable people to build solutions on top of these tokens.

And what tokens are, I sometimes use a Chuck E. Cheese analogy, right? Tokens for Chuck E. Cheese can only be used at Chuck E. Cheese. So they’re kind of very simple to use tokens, very isolated. But, tokens that can be shared amongst others and traded, that allows you to take your token and use it for other things. So, one of the easiest ones to describe is the gaming industry. So, the gaming industry is a $300 billion industry. It’s no longer just some kids playing video games.

Adam Bergman: I know, I got kids!

Ken Gendrich: Right? They’re always wanting to spend money!

Adam Bergman: Spending money!

Ken Gendrich: And so they buy these assets for these games and it’s gone; never to be used again. But what’s coming now is this concept of you’re able to, and it’s already out there, it’s emerging right now, where these assets can be purchased with cryptocurrency. And then they become these tokens that you can now trade on the marketplace for other tokens and other games. So, people can move around with their assets and earn more assets, and now they’re actually creating real wealth based on real assets that can make real money. So, that opportunity is just a way for NFTs to emerge. That’s one use. And these are very simple NFTs. So you’ve probably also heard about these, like NBA shots where you can buy these collectibles, right? Yeah, I don’t want to say it’s a fad, but I do want to say it’s very community-driven. So, people have been collecting things for a long time, and they’ve been very physical. Well, there’s this movement for people not to want physical things because they’re hard to resell. Right? They’re hard to keep track of and hard to take care of. These digital assets are much more portable.

You can sell them to each other. Right? And that’s driving actually prices up because now there’s available supply and people want to buy them. And there’s also limited supply, so there’s scarcity. So, that’s a whole market of collectibles. But it’s very simple, right? They’re very simple. They’re static things. They represent like a baseball card or those kinds of things. What’s coming, and one of the things we’re working on with Adam’s team, are these more intelligent NFTs. NFTs that can hold other things. Right? So like, the one we’re working on is an NFT that can hold rewards, loyalty rewards, from activities you do in a business. So, instead of getting points for airlines, you’ll get actual cryptocurrency, which will, over time, raise in value and can be used anywhere. And so we really think that that’s one aspect of a much more complex concept where NFTs hold things. Right? They’re containers of things that you can reuse. And will have logic themselves inside of them. So, I think that’s really going to go forward because NFTs have this opportunity to represent real, tangible things, besides digital collectibles, like real estate. So, if your NFT can be your record of real estate, you can do all kinds of things with it. Right? You can fractionalize it. You can rent things out and create monetary real estate, commercial real estate solutions out of that real estate. And you’ve solved all these big problems with liens and tracking and all that stuff becomes just really clean. And once that happens, it becomes much easier to do business with those things.

Adam Bergman:Much easier, more seamless, cheaper.That’s the key. Right?

Ken Gendrich: And safer. You can’t lose these things. You can trust these technologies because how they work is publicized, these smart contracts, you know how they work. So, you can’t either maliciously or accidentally make mistakes.

Adam Bergman: Yeah. The interesting thing I think is really interesting about NFTs is, even if you take an athlete, even a high school basketball player has a highlight, an amazing slam dunk, they can create an NFT and they can create royalties. Every time that NFT gets sold from one party to another, they could potentially take a fraction. And I guess that’s how blockchain comes into this picture. It’s the area that keeps track of all these transactions.

Ken Gendrich: Exactly. And then there’s unlimited ways, like you said, you can do that. You can add fundraising to that concept. Right? And then say, okay, part of that sale is going to go to my favorite fundraising opportunity. And, you know those are unlimited. And then you also have the sense it’s immutable. It’s a history forever. You have now a story of this particular person, who’s not just tied to whatever their agent can do. It also democratizes that value so that the primary go value goes back to the athlete, or that person, rather than the marketing team. So, it’s going to flop. Where now the marketing teams get 90% and the artist gets 10%. We can flop it around, so it happens the other way around. So, yeah, the person that’s helping market and distribute gets a percentage, but it’s no longer the big chunk. So it really allows everybody to participate in economizing themselves.

Adam Bergman: Okay. So, I wanted to just ask you one question. So, for example, let’s just use Ethereum. Okay? So Ethereum has been the core cryptocurrency for a lot of, at least the Ethereum ecosystem for NFTs, and a lot of these tokens. Right? Just a different variety of Ethereum cones. As Ethereum goes up in value and people use it more. Right? It goes from $2000 to $3000 to $4000, so on and so forth. How does that impact the blockchain?

Ken Gendrich: Yeah, it’s like a good and bad thing, right? I mean, the good thing is these cryptocurrencies, to some degree are investments. Right? Because we see them changing in value. So, a couple of things happen is that Ethereum is one of these tokens that has an economy where as you use it, they take some out. It’s called burning. Right? So, they increase the value because there’s less supply. So as more of this stuff gets taken out, the supply gets lowered. And what’s left, the holders that are left, actually have theirs are worth more. So it drives the value up.

The bad thing is that same coin  is used for the transactions to pay for those transactions. And, we call it gas, right? The cost of doing a transaction. And the reason you want a cost for doing transaction is you want to stop people from accidentally using a lot of CPU power and a lot of transfer. So you want this gas as a limiting factor, but you don’t want to spend too much money. If it costs you $100 to do a transaction, you’re going to do less transactions. Right? So there’s like this big challenge.

And what they’re doing now is they’re saying, well, a lot of things are happening to address that. So, the problems come with solutions. Right? As we see problems, innovation comes around and solves those problems. The thing about a token, too, is that one Ethereum is a unit that, we’re used to one dollar, right? But we’re also used to pennies. Well, in Ethereum, in Bitcoin, you can have 1,000,000th of a Bitcoin and 1,000,000th of an Ethereum. So that’s part of the way that helps with that, too. You don’t need to use an Ethereum to send it that’s worth $3,000. These transactions can be pennies. Now over time, what we’re seeing is that because of the popularity, particularly the option of these NFTs, which is used on Ethereum a lot, is that other chains are popping up. Right? To take the load. And right now, only about 3% of businesses are using cryptocurrency for business transactions. And imagine what happens when that turns into 50%? It’s not going to be one network. That one network is going to be very strong because people are going to keep using it. And the Ethereum network has a lot of strength because it has so many participants. So it’s a very safe network.

The other networks that are emerging are becoming safer and safer when more and more people use it. So we get things like the Matic network, the Solano network, the Polka Dot network. So, all these different networks are going to compete for each other for popularity. And what’s happening is that developers are getting on board with these different networks that have different values. Right? And so gaming is moving somewhat away from Ethereum into their other networks that are faster. And then they’re keeping the assets on Ethereum where they’re well known to be traded and safer. So, I’m just trying to say that this is going to just explode and you don’t have to worry about, does one network can handle all the traffic because it won’t. Right? The networks will get faster and faster because the technology will improve, but we’ll have more and more of them. And then those interconnected networks. And that’s kind of how you get the big picture in adoption.

Adam Bergman: Got you. No, it’s super helpful, Ken. One of the last questions I have is, just real basic, Bitcoin mining: proof of work versus proof of stake. Right? All that ties into blockchain. So, just quickly, how would you describe the differences and how it impacts blockchain?

Ken Gendrich: So, the proof of work concept was the original consensus model. And the consensus model is just that we agree that all the networks agree that this transaction wasn’t fake. Right? That’s basically what it’s for. And the reason to do this proof of work is that if you make it hard to figure this out, right? Then one node can’t overpower and say, I want to have all control. So, you actually make this kind of random by making all these nodes do a lot of hard work. That was the first idea. And so, that you consumed a lot of power.

Adam Bergman: Just real quick nodes, computers; nodes means computers, not people.

Ken Gendrich: Fair enough. Nodes are computers on this network, a bunch of computers. Right? These computers use power, obviously. And if we make it very hard to do something, they have to work very hard to use a lot of electricity. What’s happened with proof of stake is that there are several different now new consensus models that are coming out that are saying “how do we get the same outcome without using all this power?” And proof of stake meant, is about, if you are an operator of a node, you have to commit so much money to be that operator. And if you’re discovered to do an illegal operation, you lose all your stake. Right? And so these are not small stakes. In many cases, it’s $10,000 to participate. So, if you start doing transactions that are discovered by the rest of the node to be inappropriate, you lose all your money. So they’re using that proof of stake to offset that. And the computations are much simpler, in that case. Right? But at the same time, when you look at Bitcoin and say, well, Bitcoin is not going there, and isn’t that make it a very ecologically poor solution?

Well, it depends on, you look at the numbers, because, when you look at those numbers in the raw and you say, look at all this electricity being used, it looks like a big number. But when you compare it to, like Amazon and Google, it’s a fraction of what they use to do business. And so every business that uses computers uses computer power. So, you kind of have to be careful how you look at those numbers and take them with the relative cost.

Adam Bergman: Okay, so last question. We talked about potentially, how our world can change, whether it’s sending money to Europe or different parts of the world, or just how consumers transact or even how businesses interact with each other in specific industries. Would you say the biggest risk to blockchain development is what, governments? What’s the one thing that can stop this from becoming a reality?

Ken Gendrich: I don’t know. It has so much upside value proposition. It would be hard to see. The Internet is not something that can be really governed very well. Right? Because it’s international. Right? It’s hard to govern. I think if there was too much governance on the ability for companies to start up, I think that would be a barrier that we would see that would slow things down, particularly in governmental control that says you can’t stand up a blockchain business unless you have a certain amount of regulatory control, kind of like the SEC control. I think that could slow us down. But, there’s a lot of momentum. Right? And it’s very difficult to stop something as my own and very questionable whether you should. Right? I think there’s regulation coming, and I think if it comes in a way that’s consumer protection-based, that’ll be a good thing. If it comes in a way that limits growth, then I think that would be bad.

Adam Bergman: Okay, last question is, and I get this all the time, not, I guess, a very advanced question, but I think I want to ask it anyways, because people ask me this question. So, how do you separate cryptocurrency and investing in Bitcoin and Ethereum and blockchain? Is there a separation? Should we thinking of them differently, or are they just a combined entity?

Ken Gendrich: Well, that’s a great question. I think it depends on how much you’re willing to invest in an education on this industry. Right? It’s kind of similar with stocks. In my opinion it’s similar with stocks and businesses. A lot of these projects are really small businesses that are bringing utility and services to the marketplace, and you’re investing in whether that utility or business and team has something to add value. So, take away the tech, look at the business value, and then start to break that down. If you weren’t wanting to do research on these companies that are doing this. This is probably where the SEC is going to try and get involved in saying, well, these cryptocurrency you’re buying are actually securities. Well, maybe it’s true, but there’s also these groups that are building every solution. They’re building two coins. One is called a governance token, and that’s the value proposition that govern, they get to make decisions on how the business operates or that utility operates. And the other, our usage tokens, utility tokens are called, and that’s what powers the use of them. And the utility tokens really haven’t been designed to be used for investment.

They’ve been really designed; they have to have a monetary value, otherwise the mechanisms don’t work. Right? But, they’re really not as designed as much to raise in value as are the governance tokens, which kind of represent a similarity to business ownership. So, when you’re looking at these investments, sometimes you’ll find that they have two tokens, you’re like, “why would they do that?” Look for the governance token about the business side, general, and then the other tokens are more about the operational, utility side.

Adam Bergman: Right. Because people say, “well, I’m investing in Bitcoin, Ethereum, I believe in the future, the technology,” they’re not thinking about blockchain. And then you get other people saying, “I’m focused on blockchain; that’s the core value of cryptocurrency.” And then I kind of back into that and say, “okay, based off the blockchain technology, these are the tokens I want to invest in because I think they have the most potential.”

Ken Gendrich: Yeah, right. I mean, Bitcoin is very, in terms of cryptocurrency, Bitcoin is very simple. Right? It’s a monetary transfer of value. It’s kind of like, liquid gold, so to speak. Right? It’s gold, but you can use it. Right? So you can transfer it; it’s currency. Ethereum has both a currency value, because it’s so ubiquitous, and it’s being traded every way, that gives it a currency model. You can use it to buy things, but it also has this rich functionality built into it that you can build solutions on top of it. So, it’s kind of both.

And so that’s what’s happening with cryptocurrencies today. They’re both the ability to use as a monetary tool and the ability to use as a functional tool. And that’s where these smart contracts are so powerful. And you need the cryptocurrency to kind of make the system work, and then you need it also to keep people invested in it. Right? And so, it’s kind of, you don’t have to have cryptocurrency in an Ethereum solution, but if you don’t, then it’s value proposition has some limits. So I know that’s a little harder.

Adam Bergman: That’s amazing. Ken, this has been great. So, I think we’ll end today. And hopefully, you’ll come back on, because I would love to pick your brain on some of the coins you like; that you’re looking at, potentially investing (without giving people investment advice). Just the reasons behind why you like certain coins from an engineering technology standpoint.

Ken Gendrich: Yeah. And we’ll talk about that.

Adam Bergman: Let’s save some of that juice for another time. But, I just want to thank you, Ken. Love working with you. You’re brilliant. Besides being a certified blockchain architect, you’re a super nice guy, super smart. I think you keep things simple. You take really tough subjects, break it down, and make it easy to digest. Which, blockchain is scary because it’s based off cryptography. And it took me forever to understand how the heck nodes, these computers can solve these mathematical equations and actually understand how I sent Jane one Bitcoin 20 minutes ago and how some computer in Iceland could figure that out and accept it. It took me forever to understand that. So, appreciate you spending some time with me and kind of keeping it simple. And we’ll get you back on soon to talk more crypto tokens.

Ken Gendrich: And Adam, thank you for the work you do in the space to help people really create wealth.

Adam Bergman: We try. We’ll do another podcast, talk about token, NFT factory and IRA Financial and what we’re doing. We got exciting news, I would say in the next month or so. We’ll definitely do a video/podcast and introduce our token.

Ken Gendrich: That sounds great, Adam.

Adam Bergman: Be well, Ken. Thank you so much. And take care of yourself.

Ken Gendrich: You too.

Adam Bergman: Take care. Bye.


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