Preview
Why are proofs valuable?
Since the 1970s, research in cryptographic primitives has led to advances in proofs that have provided two useful innovations. The first is data compression: decreasing computational power or bandwidth required to solve a problem without a material change in the result. The second is security. The first interactive proof involved flipping a “fair” coin over a telephone. What does this mean? Cryptographic primitives1 enabled two people with no physical access to each other or a shared coin (trusted or otherwise) to determine the result of a 50/50 “coin flip” in a completely trustless manner by following a protocol. That protocol is an interactive proof.
Please note that the trust-minimized environment created by proofs is different than the trust-minimized environment created by consensus mechanisms2 which utilize majority rule alongside proofs known as cryptographic signatures. Cryptographic signatures3 are a form of a zero-knowledge proof.
covers:
- Why are proofs valuable?
- What are the current substitute products for proofs?
- Why should you care?
- How do proofs work?
- What are the critical proof strategies and their features?
- Problems that proofs must solve to become commercially viable
- What are the solutions to the problems?
- Who is working on these problems?
- Key terms
Endnotes
- Cryptographic primitives: mathematical algorithms which are owned by no one (for example, no one owns Newton’s or Einstein’s equations).
- Consensus mechanism: a method for validating data that underlies all decentralized ledger technology. For blockchain technology, this method is utilized to validate that data being added to the blockchain is accurate, where majority rules (i.e., the network needs majority of network participants to agree). Bad actors in this validation process may be penalized via electricity (in the proof of work consensus mechanism) or token (in the proof of stake consensus mechanism) slashing.
- Cryptographic signature: a mathematical scheme for verifying the authenticity of an entity or participant, which initiates the viewing of or interaction with a piece of encrypted information.
WHAT ARE THE RISKS?
All investments involve risk, including the loss of principal. Certain Accounts will invest in cryptocurrencies, such as, but not limited to, Bitcoin or Ethereum, as may include but are not limited to any decentralized application tokens and well as other digital representations of value or rights (including for investment, finance or idle cash purposes). Such assets or investments may be transferred and stored electronically, using distributed ledger technology or other technology, and blockchain-based tokens and other digital assets, or instruments for the purchase of such, including but not limited to token rights agreements, token warrants and other instruments (together with cryptocurrencies, “Digital Assets”). Investments in Digital Assets are subject to many specialized risks and considerations, including but not limited to risks relating to (i) immature and rapidly developing technology underlying Digital Assets, (ii) security vulnerabilities of this technology, (iii) credit risk of Digital Asset exchanges that may hold an Account’s Digital Assets in custody, (iv) regulatory uncertainty around the rules governing Digital Assets, Digital Asset exchanges and other aspects and parties involved with Digital Asset transactions, (v) high volatility in the value/price of Digital Assets, (vi) unclear acceptance of some or all Digital Assets by users and global marketplaces, and (vii) manipulation or fraud resulting from the pseudo-anonymous manner in which ownership of Digital Assets is recorded and managed.
Unlisted securities risk: Unlisted securities (i.e., securities not listed on a stock exchange or other markets and for which no liquid secondary trading market exists) may involve a high degree of business and financial risk and may result in substantial losses. The companies underlying such securities may have relatively limited operating and profit histories. Many of these companies may also need substantial additional capital to support expansion or to achieve or maintain a competitive position and there is no assurance that capital will be available to finance such needs. In the absence of a liquid trading market for unlisted securities, they will be difficult to value. It is also possible that such investments will be difficult to liquidate when desired, which may limit the ability to realize their full value. Although it is generally desirable that unlisted securities become listed in due course, there can be no assurance that this will be the case, or that sufficient liquidity for substantial shareholdings will be available following listing.
Valuation: The strategy may directly or indirectly invest in securities for which reliable market quotations are not available. The process of valuing such securities is based on inherent uncertainties, and the resulting values may differ from values that would have been determined had readily available market quotations been available. As a result, the values placed on such securities by the Advisers may differ from values placed on such securities by other investors or a client’s custodian and from prices at which such securities may ultimately be sold.