Wednesday, July 8, 2020

An Introduction to The Dow Theory


What is the Dow Theory?
Essentially, the Dow Theory is a framework for technical analysis, which is based on the writings of Charles Dow concerning market theory. Dow was the founder and editor of the Wall Street Journal and the co-founder of Dow Jones & Company. As part of the company, he helped create the first stock index, known as the Dow Jones Transportation Index (DJT), followed by the Dow Jones Industrial Average (DJIA).
Dow never wrote his ideas as a specific theory and didn’t refer to them as such. Still, many learned from him through his editorials in the Wall Street Journal. After his death, other editors, such as William Hamilton, refined these ideas and used his editorials to put together what is now known as the Dow Theory.
This article provides an introduction to the Dow Theory, discussing the different stages of market trends based on Dow’s work. As with any theory, the following principles are not infallible and are open to interpretation.

The basic principles of the Dow Theory
The market reflects everything
This principle is closely aligned with the so-called Efficient Market Hypothesis (EMH). Dow believed that the market discounts everything, which means that all available information is already reflected in the price.
For example, if a company is widely expected to report positive improved earnings, the market will reflect this before it happens. Demand for their shares will increase prior to the report being released, and then the price may not change that much after the expected positive report finally comes out.
In some cases, Dow observed that a company might see their stock price reduce after good news because it wasn’t quite as good as expected.
This principle is still believed to be true by many traders and investors, particularly by those that make extensive use of technical analysis. However, those that prefer fundamental analysis disagree and believe the market value does not reflect the intrinsic value of a stock.

Market trends
Some people say that Dow’s work is what gave birth to the concept of a market trend, which is now deemed as an essential element of the financial world. The Dow Theory says that there are three main types of market trends:
·       Primary trend – Lasting from months to many years, this is the major market movement.
·       Secondary trend – Lasting from weeks to a few months.
·       Tertiary trend – Tends to die in less than a week or not longer than ten days. In some cases, they may last only for a few hours or a day.
By examining these different trends, investors can find opportunities. While the primary trend is the key one to consider, favorable opportunities tend to occur when secondary and tertiary trends seem to contradict the primary one.
For example, if you believe a cryptocurrency has a positive primary trend, but it experiences a negative secondary trend, there may be an opportunity to purchase it relatively low, and try to sell once its value has increased.
The problem now, as then, is in recognizing what type of trend you are observing, and that’s where deeper technical analysis comes in. Today, investors and traders use a wide range of analytical tools to help them understand what type of trend they are looking at.

The three phases of primary trends
Dow established that long-term primary trends have three phases. For example, in a bull market, the phases would be:
·       Accumulation – After the preceding bear market, the valuation of assets is still low as the market sentiment is predominantly negative. Smart traders and market makers start to accumulate during this period, before a significant increase in price occurs.
·       Public Participation – The wider market now realizes the opportunity that smart traders have already observed, and the public becomes increasingly active in buying. During this phase, prices tend to increase rapidly.
·       Excess & Distribution – In the third phase, the general public continues to speculate, but the trend is nearing its end. The market makers start to distribute their holdings, i.e., by selling to other participants who are yet to realize that the trend is about to reverse.
In a bear market, the phases would essentially be reversed. The trend would start with distribution from those who recognize the signs and be followed by public participation. In the third phase, the public would continue to despair, but investors who can see the upcoming shift will begin accumulating again. 
There is no guarantee that the principle will hold true, but thousands of traders and investors consider these phases before taking action. Notably, the Wyckoff Method also relies on the ideas of accumulation and distribution, describing a somewhat similar concept of market cycles (moving from one phase to another).

Cross-index correlation
Dow believed that primary trends seen on one market index should be confirmed by trends seen on another market index. At the time, this mainly concerned the Dow Jones Transportation Index and Dow Jones Industrial Average.
Back then, the transportation market (mainly railroads) was heavily linked to industrial activity. This stands to reason: for more goods to be produced, an increase in rail activity was first needed to provide the necessary raw materials. 
As such, there was a clear correlation between the manufacturing industry and the transportation market. If one were healthy, the other would likely be as well. However, the principle of cross-index correlation doesn’t hold up quite as well today because many goods are digital and don’t require physical delivery.

Volume matters
As many investors do now, Dow believed in volume as a crucial secondary indicator, meaning that a strong trend should be accompanied by a high trading volume. The higher the volume, the more likely it is that the movement reflects the true trend of the market. When the trading volume is low, the price action may not represent the true market trend.

Trends are valid until a reversal is confirmed
Dow believed that if the market is trending, it will continue to trend. So, for example, if a business’s stock starts to trend upwards after positive news, it will continue to do so until a definite reversal is shown.
Because of this, Dow believed that reversals should be treated with suspicion until they are confirmed as a new primary trend. Of course, distinguishing between a secondary trend and the beginning of a new primary trend is not easy, and traders often face misleading reversals that end up being just secondary trends.

Closing thoughts
Some critics argue that the Dow Theory is outdated, especially in regard to the principle of cross-index correlation (which states that an index or average must support another). Still, most investors consider the Dow Theory to be relevant today. Not only because it concerns identifying financial opportunities, but also because the concept of market trends that Dow’s work created.


Tuesday, July 7, 2020

What Is Mimblewimble?


Mimblewimble (MW) is a blockchain design that employs a novel way of structuring and storing transactions. It’s a different implementation of a Proof of Work (PoW) blockchain that allows for increased privacy and better network scalability.
The Mimblewimble design was introduced in mid-2016 by pseudonymous Tom Elvis Jedusor. Although he managed to share the core ideas, the first Mimblewimble document left some questions open. This led Blockstream researcher Andrew Poelstra to study and improve the original concept. Soon after, Poelstra wrote a paper entitled Mimblewimble (published in October 2016).
Since then, many researchers and developers are studying the possibilities of the MW protocol. Some say that implementing it on Bitcoin would be quite difficult, though technically possible. Poelstra and others believe Mimblewimble may eventually improve the Bitcoin network as a sidechain solution. 

How Mimblewimble Works

Mimblewimble changes the traditional model of blockchain transactions. It allows for a blockchain to have a more compact history, which is easier and faster to download, synchronize, and verify.
In a MW blockchain, there are no identifiable or reusable addresses, meaning that all transactions look like random data to an outsider. The transaction data is only visible to their respective participants.
So, a Mimblewimble block looks like one large transaction rather than a combination of many. This means that blocks can be verified and confirmed, but they give no details about each transaction. There is no way to link individual inputs with their respective outputs.
Consider the following example. Alice receives 5 MW coins from her mom and 5 from her dad. Then, she sends those 10 coins to Bob. The transactions are verified, but their details aren’t public. The only thing Bob knows is that Alice sent him 10 coins, but he can’t tell who previously sent those to Alice.
To move the coins on a Mimblewimble blockchain, the sender and receiver must exchange verifying information. So we still need Alice and Bob to communicate, but they aren’t required to be online at the same time for the transaction to happen.
Also, Mimblewimble employs a feature called cut-through, which reduces the block data by removing redundant transaction information. So instead of recording each input and output (from Alice’s parents to her, and from Alice to Bob), the block would only record one input-output pair (from Alice’s parents to Bob).
Technically, the Mimblewimble design supports and extends the concept of Confidential Transactions (CT), proposed by Adam Back in 2013 and implemented by Greg Maxwell and Pieter Wuille. Simply put, CT is a privacy tool that hides the amounts of blockchain transfers.

Mimblewimble vs. Bitcoin

The Bitcoin blockchain has maintained the data of every transaction since the genesis block, meaning that anyone is able to download and verify its public history - transaction by transaction.
In contrast, a Mimblewimble blockchain only keeps the essential information - while also providing more privacy. The validators make sure that no unusual activity happens (e.g., double spending), and that the amount of coins in circulation is accurate.
Other than that, Mimblewimble removes the Bitcoin scripting system, which is a list of instructions that defines how transactions are structured. The script removal allowed MW blockchains to be more private and scalable. More private because addresses can’t be traced at all, and more scalable because the blockchain data is smaller.
So, another key difference between Bitcoin and Mimblewimble is the relative data size of their blockchains - which is related to the previously discussed cut-through feature. By removing unnecessary transaction data, Mimblewimble requires less computational resources.

Advantages

Blockchain size

As mentioned, Mimblewimble allows for data compression, reducing the overall blockchain size. Nodes can verify transaction history much faster, using considerably less resources. Besides, it’s easier for new nodes to download and synchronize with a MW blockchain.
The reduced costs to join the network and run a node may eventually lead to a more diversified and distributed community, which would likely reduce the centralization of mining common in many PoW blockchains.

Scalability

Eventually, Mimblewimble may be used as a sidechain solution that could be attached to Bitcoin or another parent chain. The MW design may also improve the performance of payment channels, such as the ones used by the Lightning Network.

Privacy

The removal of the Bitcoin scripting system, combined with the use of Confidential Transactions brings a high level of user privacy, obfuscating the details of transactions.
In addition, coins that are based on Mimblewimble blockchains can be considered fungible. The property of fungibility is what makes every unit of a coin interchangeable with any other unit of the same coin (they are indistinguishable).

Limitations

Transaction throughput

Confidential Transactions tend to reduce transaction throughput significantly due to the larger data size. So when compared to a non-private system, a blockchain that uses CT has more privacy but lower TPS rates (transactions per second). 
Still, we may say that the compact size of MW makes up for the TPS limitation caused by the Confidential Transactions. It's also worth noting that the transaction throughput depends on other factors, such as block size and frequency.

Not quantum-resistant

Generally speaking, the Mimblewimble protocol is not resistant to quantum computers as it relies on relatively simple properties of digital signatures. But, a mature quantum computer is still decades away, and cryptocurrencies using Mimblewimble will likely find ways to prevent quantum attacks in the coming years. In fact, some solutions are already being experimented with (e.g., Switch Commitments).

Closing thoughts

The introduction of Mimblewimble marks a notable milestone in blockchain history. On the one hand, the cut-through feature makes MW networks cheaper and easier to scale. On the other hand, the MW protocol may be implemented as a sidechain or payment channel solution, allowing for more privacy and scalability.
So far, a few blockchain projects are working with the Mimblewimble design, including the Litecoin team. Grin and Beam are two other examples. While Grin is a community-driven project working on a lightweight proof of concept of the MW protocol, Beam adopts a startup-like approach. While both projects are based on Mimblewimble, they are technically distinct as each has a particular way of implementing the MW design.
An open question, for now, is whether Mimblewimble can achieve a significant level of reliability and adoption. It is an exciting and promising idea, but also very young. As such, the potential use cases are under investigation, and the future of Mimblewimble remains uncertain.




Difference Between Blockchain and Bitcoin


For newcomers to cryptocurrency, the terminology can be quite confusing and even misleading. Some people refer to Bitcoin when talking about blockchain technology, while others will mention blockchain when talking about cryptocurrencies in general. However, these terms are not really interchangeable: they refer to distinct but connected concepts. Thus, it is important to understand the differences between them. Hereby we introduce you the basics of blockchain technology, cryptocurrencies, and Bitcoin.

A Very Basic Analogy
Consider this:
·       Websites are a specific technology used to share information.
·       Search engines are one of the most popular and well-known ways to use website technology.
·       In turn, Google is one of the most popular and well-known examples of a search engine.

Similarly:
·       Blockchain is a specific technology used to record information (data blocks).
·       Cryptocurrency is one of the most popular and well-known ways to use blockchain.
·       In turn, Bitcoin is the first and most popular example of a cryptocurrency.

Blockchain: Concept
Most blockchains are designed as a distributed and decentralized digital ledger. In simple terms, blockchain is a digital ledger that is basically an electronic version of a paper ledger, and it is responsible for recording a list of transactions.
More specifically, a blockchain is a linear chain of multiple blocks that are connected and secured by cryptographic proofs. Blockchain technology may also be applied in other activities that do not necessarily require financial operations, but in the cryptocurrencies context, they are responsible for keeping a permanent record of all confirmed transactions.
'Distributed' and 'decentralized' refers to the way the ledger is structured and maintained. To understand the difference, think about common forms of centralized ledgers such as public records of home sales, a bank's record of ATM withdrawals, or eBay's list of sold items. In every case, only one organization controls the ledger: a government agency, the bank, or eBay. Another common factor is that there's only one master copy of the ledger and anything else is simply a backup that is not the official record. Therefore, traditional ledgers are centralized because they are maintained by a single entity and are usually reliant on a single database.
In contrast, a blockchain is usually built as a distributed system that functions as a decentralized ledger. This means that there is no single copy of the ledger (distributed) and no single authority in control (decentralized). Simply put, every user that decides to join and participate in the process of maintaining a blockchain network keeps an electronic copy of the blockchain data, which is frequently updated with all the latest transactions, in synchrony to the other user’s copies. 
In other words, a distributed system is maintained by the collective work of many users, which are spread around the world. These users are also known as network nodes, and all these nodes participate in the process of verifying and validating transactions, according to the rules of the system. Consequently, the power is decentralized (there is no central authority). 

Blockchain: Practice
Blockchain takes its name from the way records are organized: a chain of linked blocks. Basically speaking, a block is a piece of data that contains, among other things, a list of recent transactions (like a printed page of entries). The blocks, as well as the transactions, are public and visible, but they cannot be altered (like putting each page into a sealed glass box). As new blocks are added to the blockchain, a continuous record of linked blocks is formed (like a physical ledger and its many pages of records). This was a very simple analogy, but the process is much more complex than that.
One of the main reasons why blockchains are so resistant to modification is the fact that the blocks are linked and secured by cryptographic proofs. In order to produce new blocks, participants of the network need to engage in a costly and intensive computational activity known as mining. Basically, miners are responsible for verifying transactions and grouping them into newly created blocks that are then added to the blockchain (if certain conditions are met). They are also responsible for introducing new coins into the system, which are issued as a reward for their job.
Every new confirmed block is linked to the block that came immediately before it. The beauty of this setup is that it is practically impossible to change the data in a block once it's been added to the blockchain because they are secured by cryptographic proofs, which are very costly to be produced and extremely difficult to be undone.
Summing up, a blockchain is a chain of linked data blocks that are organized in a chronological order and are secured by cryptographic proofs.

Cryptocurrency
In simple terms, a cryptocurrency is a digital form of money that is used as a medium of exchange within a distributed network of users. Unlike traditional banking systems, these transactions are tracked through a public digital ledger (the blockchain) and may occur directly between the participants (peer-to-peer) without the need for intermediaries.
'Crypto' refers to the cryptographic techniques used to secure the economic system and to ensure that the creation of new cryptocurrency units and the validation of transactions go smoothly.
Although not all cryptocurrencies are mineable, the many that, like Bitcoin, are reliant on the process of mining, have a slow and controlled growth of their circulating supply. Therefore, mining is the only way to create new units of these coins and this avoids the risks of inflation that threat the traditional fiat currencies, where a government is able to control the money supply.

Bitcoin
Bitcoin is the first cryptocurrency ever created and is, naturally, the most famous one. It was introduced in 2009 by pseudonymous developer Satoshi Nakamoto. The main idea was to create an independent and decentralized electronic payment system based on mathematical proofs and cryptography.
Despite being the most well-known, Bitcoin is not alone. There are many other cryptocurrencies, each with its own particular features and mechanisms. Furthermore, not all cryptocurrencies have their own blockchain. Some were created on top of an already existing blockchain, while others were created completely from scratch.
As most cryptocurrencies, Bitcoin has a limited supply, which means that no more Bitcoins will be generated by the system after the max supply is reached. Although this varies from project to project, the max supply of Bitcoin is set to 21 million units. Usually, the total supply is public information that is defined when the cryptocurrency is created. You can check the circulating supply and Bitcoin Price on Binance Info.

The Bitcoin protocol is open source and anyone can review or copy the code. Many developers around the world contribute to the development of the project.

Peer-to-Peer Networks Explained

What is peer-to-peer (P2P)?

In computer science, a peer-to-peer (P2P) network consists of a group of devices that collectively store and share files. Each participant (node) acts as an individual peer. Typically, all nodes have equal power and perform the same tasks.
In financial technology, the term peer-to-peer usually refers to the exchange of cryptocurrencies or digital assets via a distributed network. A P2P platform allows buyers and sellers to execute trades without the need for intermediaries. In some cases, websites may also provide a P2P environment that connects lenders and borrowers.
P2P architecture can be suitable for various use cases, but it became particularly popular in the 1990s when the first file-sharing programs were created. Today, P2P networks are at the core of most cryptocurrencies, making up a great portion of the blockchain industry. However, they are also leveraged in other distributed computing applications, including web search engines, streaming platforms, online marketplaces, and the InterPlanetary File System (IPFS) web protocol.

How does P2P work?

In essence, a P2P system is maintained by a distributed network of users. Usually, they have no central administrator or server because each node holds a copy of the files - acting both as a client and as a server to other nodes. Thus, each node can download files from other nodes or upload files to them. This is what differentiates P2P networks from the more traditional client-server systems, in which client devices download files from a centralized server.
On P2P networks, the connected devices share files that are stored on their hard drives. Using software applications designed to mediate the sharing of data, users can query other devices on the network to find and download files. Once a user has downloaded a given file, they can then act as a source of that file.
Put in another way, when a node acts as a client, they download files from other network nodes. But when they are working as a server, they are the source from which other nodes can download files. In practice, though, both functions can be executed at the same time (e.g., downloading file A, and uploading file B).
Since every node stores, transmits and receives files, P2P networks tend to be faster and more efficient as their user base grows larger. Also, their distributed architecture makes P2P systems very resistant to cyberattacks. Unlike traditional models, P2P networks don’t have a single point of failure.
We may categorize peer-to-peer systems according to their architecture. The three main types are called unstructured, structured, and hybrid P2P networks.

Unstructured P2P networks

Unstructured P2P networks don’t present any specific organization of the nodes. The participants communicate randomly with one another. These systems are considered robust against high churn activity (i.e., several nodes frequently joining and leaving the network).
Although easier to build, unstructured P2P networks may require higher CPU and memory usage because search queries are sent out to the highest number of peers possible. This tends to flood the network with queries, especially if a small number of nodes is offering the desired content.

Structured P2P networks

In contrast, structured P2P networks present an organized architecture, allowing nodes to efficiently search for files, even if the content is not widely available. In most cases, this is achieved through the use of hash functions that facilitate database lookups.
While structured networks may be more efficient, they tend to present higher levels of centralization, and usually require higher setup and maintenance costs. Other than that, structured networks are less robust when faced with high rates of churn.

Hybrid P2P networks

Hybrid P2P networks combine the conventional client-server model with some aspects of the peer-to-peer architecture. For instance, it may design a central server that facilitates the connection between peers.
When compared to the other two types, hybrid models tend to present improved overall performance. They usually combine some of the main advantages of each approach, achieving significant degrees of efficiency and decentralization simultaneously.

Distributed vs. decentralized

Although the P2P architecture is inherently distributed, it’s important to note that there are varying degrees of decentralization. So, not all P2P networks are decentralized. 
In fact, many systems rely on a central authority to guide the network activity, making them somewhat centralized. For instance, some P2P file-sharing systems allow users to search and download files from other users, but they are unable to participate in other processes, like managing search queries.
In addition, small networks controlled by a limited user base with shared goals could also be said to have a higher degree of centralization, despite the lack of a centralized network infrastructure.

The role of P2P in blockchains

In the early stages of Bitcoin, Satoshi Nakamoto defined it as a “Peer-to-Peer Electronic Cash System.” Bitcoin was created as a digital form of money. It can be transferred from one user to another through a P2P network, which manages a distributed ledger called blockchain.
In this context, the P2P architecture that is inherent to blockchain technology is what allows Bitcoin and other cryptocurrencies to be transferred worldwide, without the need for intermediaries nor any central server. Also, anyone can set up a Bitcoin node if they wish to participate in the process of verifying and validating blocks.
So, there are no banks processing or recording transactions in the Bitcoin network. Instead, the blockchain acts as a digital ledger that publicly records all activity. Basically, each node holds a copy of the blockchain and compares it to other nodes to ensure the data is accurate. The network quickly rejects any malicious activity or inaccuracy.
In the context of cryptocurrency blockchains, nodes can take on a variety of different roles. Full nodes, for example, are the ones that provide security to the network by verifying transactions against the system’s consensus rules.
Each full node maintains a complete, updated copy of the blockchain - allowing them to participate in the collective work of verifying the true state of the distributed ledger. It’s worth noting, though, that not all full validating nodes are miners.

Advantages

The peer-to-peer architecture of blockchains provides many benefits. Among the most important is the fact that P2P networks offer greater security than traditional client-server arrangements. The distribution of blockchains over large numbers of nodes renders them virtually immune to the Denial-of-Service (DoS) attacks that plague numerous systems.
Likewise, because a majority of nodes must establish consensus before data is added to a blockchain, it's almost impossible for an attacker to alter the data. This is especially true for big networks like the one of Bitcoin. Smaller blockchains are more susceptible to attacks because one person or group could eventually achieve control over a majority of nodes (this is known as a 51 percent attack).
As a result, the distributed peer-to-peer network, paired with a majority consensus requirement, gives blockchains a relatively high degree of resistance to malicious activity. The P2P model is one of the reasons why Bitcoin (and other blockchains) were able to achieve the so-called Byzantine fault tolerance.
Beyond security, the use of P2P architecture in cryptocurrency blockchains also renders them resistant to censorship by central authorities. Unlike standard bank accounts, cryptocurrency wallets can’t be frozen or drained by governments. This resistance also extends to censorship efforts by private payment processing and content platforms. Some content creators and online merchants adopted cryptocurrency payments as a way to avoid having their payments blocked by third parties.

Limitations

Despite their many advantages, the use of P2P networks on blockchains also has certain limitations.
Because distributed ledgers must be updated on every single node instead of on a central server, adding transactions to a blockchain requires a massive amount of computing power. While this provides increased security, it greatly reduces efficiency and is one of the main obstacles when it comes to scalability and widespread adoption. Nonetheless, cryptographers and blockchain developers are investigating alternatives that may be used as scaling solutions. Prominent examples include the Lightning NetworkEthereum Plasma, and the Mimblewimble protocol.
Another potential limitation relates to attacks that may arise during hard fork events. Since most blockchains are decentralized and open source, groups of nodes are free to copy and modify the code and split away from the main chain to form a new, parallel network. Hard forks are completely normal and not a threat on their own. But if certain security methods are not adopted properly, both chains may become vulnerable to replay attacks.
Moreover, the distributed nature of P2P networks makes them relatively difficult to control and regulate, not only in the blockchain niche. Several P2P applications and companies got involved with illegal activities and copyright infringements.

Closing thoughts

Peer-to-peer architecture can be developed and used in many different ways, and it is at the core of the blockchains that make cryptocurrencies possible. By distributing transaction ledgers across large networks of nodes, P2P architecture offers security, decentralization, and censorship resistance.
In addition to their usefulness in blockchain technology, P2P systems can also serve other distributed computing applications, ranging from file-sharing networks to energy trading platforms.