Musing #69: Modern Monetary Theory

Heterodoxy can usher in amusement and stimulation in equal measure. In the context of economics, I have seen it pop up quite often at the mention of Modern Monetary Theory, to the extent that I have run out of fingers to count on. In the same breath, MMT (not this one) is equated with the license to print as much money as needed with it being a "creature of law". This makes nought sense to anyone having the faintest idea of economics and neither does the zero sum game between government spending and private saving.

Even if the theory has merits, it is often over-simplified by those pushing for its acceptance in the mainstream, which in turn makes it sound quite crazy. After quite some time, I have come across a source that does a simple and good job of discussing it. In general, I would recommend subscribing to the 'After Hours' podcast considering the fact that I ended up binge listening to it the first time I "tuned in".

Considering what happened in Zimbabwe, it will take a lot of effort to convince anyone that "unlimited printing of money by government" is a good idea, all things considered. At the same time, running fiscal deficits is a great idea, assuming there is a limit to it and that you are getting your money's worth. After all, debt makes the world go round. Running a deficit with a manageable debt-to-GDP ratio makes a lot of sense provided the government is getting a positive ROI in terms of social and economic benefits. What makes less sense is turning fiscal and monetary policies on their head without understanding their due impact.

There is no denying that the economic system is a belief and a social construct but there is no turning back the clock as well. Instead, the idea is to bring in meaningful change and MMT can contribute to that in parts, though not as a complete alternative. In the meantime, Calvinball anyone?

Musing #58: Mutual Fund (SIP) Portfolio Overlap Analyser

Being from a finance background, I made it a point to invest in SIPs early on. Over the years, while the investment amount has increased steadily, the number of funds being invested in has remained more or less constant. Hence, I need not emphasis how important it is to know where exactly the money is going.

Too often, the choice of a fund is made simply on returns and diversification is achieved by selecting a different fund class. However, it provides no indication of the extent of value creation. I prefer to keep an eye out on what's happening with my portfolio and it is not only when selecting a new fund but also for keeping tabs on what's going on with the existing investments.

My search for websites/files providing this information yielded a few options that were quite limited in nature, dispensing basic overlap information between two or three funds. Unable to find the requisite information, I decided to go on my own and create an Excel workbook that provides overlap analysis for up to six funds. The other target I had set for myself was to do so without the use of VBA, so the only permission required is to access the external data source -

The workbook is structured in to distinct sheets for input and detailed analysis. The 'Input' sheet is pretty straightforward and is essentially a two-step process requiring the funds and investment amount to be entered along with the selection of the fund that would form the basis of checking the overlap. It would be a good idea to read through the notes prior to using the workbook. The sheet has some safeguards built in to alert the user about inconsistent inputs, like missing investment values/funds and failure to refresh the 'base fund' selection. At the same time, it is robust enough to still function immaculately when any of the selected funds are deleted.

Note that although the sheet includes funds with equity holdings from various classes, some of them do not have their holdings listed on which may cause an error illustrated above. As such, there is nothing that can be done about it. Also, to state the obvious, the default funds selected in the sheet are for illustration and are not suggestive.

The 'Analysis' sheet provides the primary analysis of the portfolio. Besides listing the fund class and the equity holdings of each fund, it provides the percentage overlap of the base fund with all the other funds in the portfolio, both, in terms of the number of stocks and the value invested. The charts in turn provide 'Top 10' visualisations for individual stocks as well as the different sectors.

The 'Detail' sheet provides the tabular information that form the basis of the analysis and lists all the values as against only the Top 10 in the charts.

The 'MFx' sheets list the holdings of each fund, as retrieved from and is subsequently used for the overlap calculations.

Finally, the 'List' sheet is a list of the funds retrieved from and covers the various equity fund classes. It is easy to add any new funds to the list in the specified format and the information can be scraped en masse from the MoneyControl site.

As is often the case, I have created something to primarily fulfil my needs but with the intention of sharing it with other netizens. Consequently, I am open to any suggestions for improvement which you may leave in the comments section.

Link: Download from Google Drive

Musing #54: Impact of standard deduction in FY2019

The introduction of standard deduction in FY2019 lieu of transport allowance and medical reimbursement is unanimously portrayed as being beneficial to employees, at least by HR personnel. To a large extent that is true, even though the mention of the additional 1% education cess is conveniently omitted.

However, I had a query from a lesser financially inclined colleague of mine about the extent of benefit  that this change brings about. Considering my past example of helping out colleagues and my interest in economics and taxation, I decided to get cracking on preparing a spreadsheet capturing the difference in taxation in FY2019 over the past financial year based on these specific changes. It is a simplistic model created in a few minutes for the purpose of understanding. It considers the taxable income to be the income post all exemptions apart from the ones that are part of the subject matter.

As can be seen by the graph, benefit is a subjective consideration but it is helps to be an optimist. The crossover happens at ₹12,64,000, so I assume a large proportion of the population would be happy about the change, especially if they couldn't produce the necessary medical bills in the past years for reimbursement. The maximum benefit of ₹1070 is, of course, at a taxable income of ₹5,40,000 which would have been in the 20% bracket in FY2018 compared to the 5% bracket in FY2019.

The spreadsheet, formatted for Google Sheets can be accessed here.

Tutorial #17: A batter(!) understanding of dosa economics

Raghuram Rajan has been featuring a lot in the media recently in promotion of his book 'I Do What I Do'. While I am yet to read it, there has been no escaping it as select excerpts and anecdotes have been making their way to the news every day now. Earlier today it was the turn of 'Dosa Economics' on BBC.

On the face of it, it is a simple concept of understanding the real interest rate as against the nominal one. Most people tend to look at interest rate in absolute terms since it is the most visible one and inflation as the silent killer is rarely understood. It was a noble attempt by Rajan at explaining this concept, though how many pensioners received the message even after the simplification of numbers is debatable.

However, I see no reason for Raghuram Rajan to have a monopoly on dosas in economics. Moreover, one would be hard pressed to find a dosa for ₹50 in a city like Mumbai, let alone 1-year fixed deposits at 8% and real-life consumer inflation at 5.5%. So, now you get to create your own realistic dosa economics, provided you have the appetite for it.

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Tutorial #16: The Securities Trade Lifecycle

Trade is one of the basic tenets of investment banking. Yet, detailed information on its lifecycle is not easily forthcoming on the web. There are of course articles available describing the same at a high level, though it seems that few agree on the exact terminologies and sequence to be used. Books on the other hand, even the eponymous ones, divert to discussing trade strategies rather than the lifecycle itself.

They key then seems to be in garnering the details of the process. Having gone through a number of sources, I can recommend the tutorial available on Udemy. It covers the lifecycle starting from trade execution, though some would prefer to start from sale or trade initiation. What's important is that it covers all the steps in sequence and builds up on the details chronologically with illustrative examples. This facilitates a far better understanding than what most words would do.

It is certainly not free, but worth its price or indeed a trial. The tutorial spans over 22 videos (with accompanying PDF files) and may take up to 4 hours of your time, if you are running it an 1x speed. I found it convenient to follow even at 1.6x, so your mileage may vary. While this may sound more of a review than a tutorial, especially compared to my other ones, I found it best to classify it as one since it is aimed at promoting learning more than anything else.

Musing #37: Revisiting the Bitcoin Frenzy

I always thought that I was a bit late to the uptake of Bitcoins when I made my first purchase in 2015, having read about it for a long time as a technology enthusiast. However, I never imagined that the real frenzy would come much later. Along with it, comes the regret of immediately selling off the miniscule number of bitcoins I had purchased. Perhaps the bigger regret should be of not purchasing more of it and just letting it sit idle. If I remember it right, bitcoins were around the $300 mark at that time and what else would have ever provided a 10x return in less than 2 years?

While regrets live and die with the sole purpose of being detrimental, my purpose then was served which was understanding the workings of it. Of course, it came with the added benefit of arbitrage for back then the merchants that accepted it had a lower rate for BTC than for USD when converted from my local currency. My focus and hope for bitcoins was that it would be an effective alternate payment channel. Unfortunately, recent developments have shown it to not be the case.

Throughout this year, bitcoin has been in the news for all the wrong reasons which culminated in the forking of the currency earlier this month. It was this event that made me revisit bitcoins. What is now truly evident is that bitcoin has passed the point of no return in terms of being a viable alternate currency. Rather, it has become an instrument of speculation and greed. Merchant adoption has diminished with the passing of the day as the long waiting times and high transaction fees have made it the antithesis of what an ideal payment instrument should be. The only ones really vested in it are hoarders and miners who continue to thrive with each executed transaction.

For some, it would still make sense to purchase bitcoins even today, despite the fact that it saw a swing of 40-60% just in the past month (or may be because of it). A scarce resource will see appreciation in time as long as the want is there; want since no one really needs it at the moment. The association of idealism, freedom and anarchy with bitcoins has long passed. Now it is only about greed and nothing else. This is precisely the reason why I don't wish to purchase bitcoins again. However, I still see a transactional value for it since the world needs better cross-border instrument than PayPal.

This also gave me a reason to login to my years-old accounts in Indian bitcoin exchanges and see how they have fared over time.

1. Zebpay: The reasons why I had registered for it in the first place were its accessibility on the mobile, purchase price lock-in and vendor offers. Unfortunately, none of it seems to be of any value at the moment. While the main attraction in terms of purchase price protection has been discarded, it would have mattered if I could access my account in the first place. Despite contacting customer service, they haven't been able to unblock my account for over a week. The unblocking from the app fails to work as the SMS is never received (probably being sent from a number on the TRAI DND list) and the call option leads to an app error. While "caveat emptor" applies to any purchase, it seems to be particularly relevant here when you also consider the non-transparent fees and high purchase/withdrawal limitations. Definitely, a no-go for me.

2. Unocoin: You can never be too careful and in my case, it meant having to get 2FA disabled on my account, having long deleted it from my Authy accounts list. The call from customer care came within 24 hours which was a good sign considering that most wallet credits used to take a significantly long time. However, I would put this down to the fact that I did it when bitcoin trading was suspended for the fork and the customer service might not have had anything better to do. The big change that I was looking forward to was the support for PayUMoney which I hoped would finally enable me to bypass the frustrating wait for the amount to be credited to the wallet. Unfortunately, my spirits were dampened the moment I saw the 1.9% transaction fee. It just lobs the ball in my court once again and I can't simply figure out a better use case for considering Unocoin over other options.

3. Coinsecure: Since I only intend to use bitcoins for transactions, time is of the essence considering the volatility of bitcoin. In that respect, coinsecure performs really well even though it doesn't have the same accessibility due to lack of an app. The Material Design interface gets in the way more often than not, especially when there are notifications flying all over the screen like the persistent one about the fork and subsequent closure. However, my deposit through IMPS was registered in a matter of minutes and subsequent withdrawal of the same amount was executed during working hours. The real trouble was finding the matching order volume which in the least was for a few thousand bucks. I remember that in the past I could place a buy order without a matching order volume hoping for it to be fulfilled some time later, but that doesn't seem to be the case anymore. Despite this, I prefer it over the other exchanges.

There are other references that I came across such as bitxoxo but I can't be bothered to test them out for as I said before I am out of the bitcoin bubble for good. It certainly feels odd to not be part of something that is going to appreciate monetarily but then it is a matter of principle and belief, the belief that bitcoin could have been a low-cost, global payment channel. The soaring prices have tilted the scale against currency arbitrage; the high transaction fees would put PayPal to shame and the transaction times are nothing to write home about. Thus, bitcoin has become analogous to gold as a hoarder's asset, only difference being its wild swings lending it to immense speculation. Bitcoin's relative anonymity has tilted more in favour of the dark side rather than the envisaged utopia of freedom and invisible borders.

Bitcoin's lasting legacy would be the blockchain which still has a significant potential in having a real-world impact. Bitcoin itself is now no more than a game of timing and pricing, leaving the scope for the rise of a true nationless currency that is without its pitfalls.

Musing #35: An investor's dilemma

Time is an ethereal dimension. Here on earth, it is imperceptible and yet so vital. None so heed it as the sanguine investor. This is not to say that we shouldn't be optimistic about the current state of markets, which is at an all-time high. However, it comes with its own set of dilemmas that we need to address.

On one side, there are those who can't wait to exit for this is as much faith as they have in the markets. They may be right in assuming so, considering the fact that the market always seems due for a correction when there is a spurt and things seem too good to be true. Doing so however, is dependent on when you entered the market and what your needs are. Too often, the only reason for exiting is that you are finally in to the black.

On the other hand, I have friends who can't bear to see the single digit returns from their fixed deposits and in their desperation, have broken the same to invest in to the market at any costs. For them, is it unreasonable to expect the market to hit 50,000 after the next general elections? I think not. But, does it make sense to do so when you have an imminent expense hanging over your head within the next year? Is it rational to expect your money to grow by double digits before the year is over? The answer to both is no but few would feel the need to justify these decisions.

It is inevitable that for most, judgements are based on the past. History is a great teacher but you need to know which lessons to learn and which to ignore. The financial crisis of 2007/08 was a humbling lesson for many and is bound to repeat itself, for greed will manifest itself in another form. Most of the lessons learnt are also steeped in the past and wouldn't catch up to the future in the way ingenuity would. Hence, the only insurance is to be able to ride through the bumps.

The best investment strategy then is to have a strategy. Setting up a target, time horizon and understanding the means to get there is all that it takes, all of which requires immense discipline. Hence, the oft repeated suggestion of starting out with a SIP at the earliest is still the best one. It relieves you of the most important decision that one has to make - timing the market. Time, the most agnostic of all entities. Yet, it is with time that your accumulated fortune compounds and helps you attain the target that seemed too farfetched in the past.

However, investment discipline also involves setting up the right mix of products along with the horizon. Contingencies need to be provided for which the pithy savings account comes to the fore. Short term fixed deposits provide the stability needed to meet near term life goals that cannot be gambled with. Then, there is the safe discretionary investment, the good EMI that you need to forget altogether when putting in to a long-term SIP along with regular bumps that become possible as you move along in life. Lastly, if you are up to it or really have a person dedicated to it, comes the direct investment in the stock market. One must understand that all expert opinions are lagging indicators and hence not the guidance you should take up when doing in alone. Instead, leave it to the experts.

As is the case with life, simplicity and planning is the gateway to successful investment.

Tutorial #12: Converting calendar (CY) dates to fiscal year (FY) and quarter

I had a recent request from a colleague who wanted to arrange a bunch of dates in to fiscal quarters. So, I went about creating an Excel workbook  that would implement the same with the freedom of selecting the starting month of the fiscal year and decided to post it here along the lines of my previous tutorial. The following steps explain the logic behind my implementation.

Note that the steps below refer to the formula in cell C5. Hence B5 refers to the input date whereas the fiscal start month is captured in the cell C2.

Step 1: Input for FY Start Month

The 'FY Start Month" is the only input to this sheet and enables adaptation to any fiscal year. To prevent errors, I used Data Validation to limit the inputs to whole numbers ranging from 1 to 12.

Step 2: Calculating Fiscal Year

To calculate the fiscal year I used the simple logic wherein if the month of the date is equal to or greater than the fiscal starting month then the fiscal year is incremented by one compared to the calendar year or else it remains the same.
This works for all scenarios apart from when the fiscal year is same as the calendar year since in that case we have to create an exception where the fiscal year is same as the calendar year. This is done with the help of the additional IF statement.
Step 3: Calculating Fiscal Quarter

To identify the quarter, I decided to go with the CHOOSE function which makes it imperative that the calendar months are rearranged to fiscal months.

The difference in the numerical value between the calendar month and the fiscal month can range from -11 (1 minus 12) to +11 (12 minus 1). Hence the logic below offsets the value such that it lies between 1 to 12. This is done by adding 13 whenever the difference is negative and adding 1 whenever the difference is positive.
Step 4: Combination of fiscal quarter and year

The final step is to join the two formulae with the fiscal quarter leading the fiscal year with suitable spacing.
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Since Google Sheets supports the same semantics as Microsoft Excel in this case, you can access the same using this link.

Review #32: The Digital Money Game

I will admit that my interest in the book was piqued by the recent demonetization exercise. For most of us, digital money extends to any non-cash means of payment. Thus, in India, digital wallets like PayTM, Mobikwik and Freecharge are synonymous with digital money. However, as the book points out, digital wallets form only a small proportion of digital money which consists of any form of digital value transfer.

A thing to keep in mind before starting off with the book is that it considers its target audience to be those who are looking to enter in to this line of business more than any other subset of people. Hence, the book is not as strong conceptually as it is in helping understand the market through its myriad of case studies. It also uses a gaming paradigm which works really well. Normally, a game paradigm would work for any industry but it fits really well over here since it is an emerging and evolving industry.

Section I (The Game Space) of the book introduces the concept of digital money by dispelling the myths most commonly associated with digital money and gives an indication to the size of the addressable market. Section II (Player Perspectives) focuses mainly on the stakeholders in this sphere of business and this is where the gaming paradigm of the book comes to the fore. The inclusion of past play, current status and future play for each category of player (eg. Mobile Network Operators) puts one on a coherent path that is easy to grasp. Section III (The Endgame) of the book sets up a formal framework and explains the characteristics of digital money in further detail before laying out a future vision.

In terms of the Indian landscape, the book mentions the presence of 8 pre-paid payment providers but the only notable name included is Airtel Money. Aadhar is spoken of as an enabler though recent developments like Aadhar enabled payments don't find a mention in terms of future possibilities. ICICI Bank finds a mention because of its size. A prominent case study from the Indian perspective mentioned in the book is that of FINO which I was not aware of.

Ultimately, the book falls short in 2017 on account of being a victim of time. The latest reference I could find is from July 2014 which is a lifetime in this fast evolving sector. This anachronism is amusing in the way the book speaks of European Unity, the revolutionary Amazon Fire phone and Bitcoin. Consequently, the vibrant Indian payments landscape that has developed since is sorely absent. The book feels like a plug-in for the Shift Thought portal which itself is terribly dated. Hence, while the book is a decent read, it is perhaps worth less of the time it necessitates.

Musing #21: Going cashless

I have never been one for blind jingoism but wholeheartedly support the demonetization move, at least in its intent even though the execution seems to be lacking. While the move has certainly flushed a modicum of black money out of the system, it was never going to extinguish it. In fact, success of this move depends on the steps taken henceforth to prevent the re-occurrence of this unwanted phenomenon. Reintroduction of new notes with enhanced security features is never going to be a deterrent since it will eventually be counterfeited and hoarded over the long term. So hopefully, there are better means of tracing the flow of the higher denomination notes in place and also a limit on its quantum wherein it is not allowed to grow to 86% of the cash economy once again. While the rumours of the presence of various chips was simply ludicrous, any smart features that enable immediate electronic validation of the note would have been a great addition even though it would have admittedly been not economically feasible. Speaking of economics, the true benefits and costs won't be realized until some time, but beyond the numbers, I hope that this initiative does something to change the cash-driven mindset of the masses. Education along with eradication of corruption will be the real game changer over the long term.

While demonetization will certainly lower the cost of funds for banks and will be a welcome relief for loan seekers, it has not come without a cost to the common man. I should define the common man here as the everyday worker, vendor and rural population rather than even the middle class since they have been impacted the worse. A significant section of this population subsists on small cash holdings carried forward on a daily basis and demonetization has perhaps hit them the hardest even though they are the smallest spenders. This section of the population can ill-afford to stand in queues during working hours and they really don't have the need for Rs. 500 or Rs. 2000 notes. But the collective panic of the population has resulted in them being unable to withdraw even Rs. 100 notes that they are in dire need of. The mass hysteria and herd mentality is something that should have been accounted for since people can tend to be irrational as far as money is concerned.

While I am sure the wise men would have given a lot of thought to the process, the problem seems to be more technical than financial in most cases. So, would it have helped to introduce the new Rs. 500 notes and to a lesser extent the new Rs. 2000 notes in a phased manner? Would the introduction of these notes in small quantities a week or two prior to the demonetization ticked off the hoarders? If not, it would have certainly taken care of the hardware, software and logistical problems that are being faced by the banks and the ATM loaders. If the entire banking machinery worked seamlessly during the transition, then the hardship would certainly have been less noticeable. While government monitoring of any aspect of life is usually worrisome, I hope that no effort is spared in scrutinizing financial transactions and identifying illicit ones.

The real solution, however, is limiting cash usage altogether and shifting to cashless in a major manner. This demonetization move will certainly act like a catalyst for a huge section of the population that might have till now hesitated in even using their debit cards. But for this to have a lasting effect, cashless has to become a more convenient avenue than cash itself for the vast majority of the population. Sadly, that is not yet the case. While expecting a majority of the population to have internet access is unrealistic, the fact is that USSD mobile banking is already in place and allows for IMPS transfers without internet access. However, the awareness is sorely lacking.

For me, cashless has always been the defacto option and demonetization has not even registered a blip on my radar for all I had were a couple of Rs. 500 notes that were gracefully accepted at the bus depot allowing me to rid myself of old world money in a matter of minutes. Not everyone might be comfortable using BigBasket, Grofers for grocery or Swiggy, Zomato, Scootsy for food or Amazon, Flipkart for everything else; but it is heartening to see that even the sedate governmental machinery has taken baby steps towards a cashless economy by allowing online payments for local rail, bus passes and gas refills, though few may be aware of it. It is seldom the case, but in this instance plastic is indeed better than paper/cloth.

Musing #17: Universal basic income

On the face of it, who wouldn't like free money? However, as the recent referendum in Switzerland has shown, if nothing else, people are skeptical of this concept for the time being for the additional expense it will entail. But a concept that had the backing of Thomas Jefferson, Abraham Lincoln, Franklin Roosevelt, Martin Luther King Jr., Peter Drucker, Milton Friedman in some form is bound to hold some weight.

The primary reason stated in its favour is the rise of automation, its inevitable takeover and outsourcing. The irony of the latter is not lost on me for it is what is driving the economy of the country I live in and hence this concept wouldn't see the light of the day over here for decades to come. However, it doesn't prevent one from having an opinion on it.

If this argument on the loss of jobs sounds familiar, then you are acquainted with the story of the Luddites from the 19th century. It suffices to say that it ended with the epitaph "resistance is futile". Hence, the dogma of embracing change rather than fighting it. With self-driving cars and robotic assembly, one can definitely see the writing on the wall. It would be naive to think otherwise.

To counter it, one can refer to previous revolutions where someone's job loss was someone else's job gain. It only meant a reshuffle to a higher skill level. The same can be said of the next revolution where people equipped with AI and robotics skills will lead the way. It would simply be a question of skill readjustment.

However, the question here is whether such roles would be too much of a niche so as to cause large scale disruption in the general population. The fact is that automation will simultaneously impact multiple facets of life and maintenance of these machines might not require as much manpower as machines of the past have required. This doesn't imply sentient machines that will take over the world but rather that the efficiency of developing and maintaining machines would have reached such a level that the job of not hundreds, but thousands, if not millions can be replaced by one person tending to the machines.

Turning heads to the benefits of universal basic income, it all boils down to social security. The premise is that secure people are happy people. There would hardly be anyone who isn't anxious of the vagaries of the everyday job. This undoubtedly tends to impact personal life as well. The idea is that a basic income would substantially change the outlook of a person towards life. If you have a safety net, you are bound to engage yourself in much more meaningful tasks. To most, that would imply taking up jobs that supplement you happiness rather than income and being able to spend more time with loved ones. Also, government subsidies are a fact of life in most parts of the world and the basic income can only be seen to be a more inclusive extension of that concept.

On the other side is the possibility that any sort of guaranteed money will only beget laziness. It will result in a more self-indulgent society that partakes in anti-social activities. There simply won't be an incentive to work for those who are not inclined to do so. It will end up creating a more bipartisan society than ever before. Then, there is the elephant in the room - who will pay for it?

When you weight the two sides, you can realize how much it relies on trust. Is trust in citizens a good or a bad thing? The fact that we need the police and judiciary would imply that inherently trusting people may not be a good idea. But then, various pilot projects around the world have indicated an upliftment in the lives of those strucken with poverty. The fact of life is that everyone wants a better life and most people will grab the opportunity of getting one. A safety net is as safe as what you do with it. You can't protect a person who cuts a hole in the net and then takes a leap of faith.

This gives rise to the question - just how much is enough? Surely, it just needs to be enough to alleviate poverty and most countries already have a poverty line to determine this limit. Perhaps, the basic income needs to be just about survival for the incentive to live a better life will be in the offing for those engaging in paid jobs. After all basic income is about security and not luxury. Whichever way you cut it, basic income will undoubtedly have an enormous social, political and economic impact.

The Indian context:

As I mentioned previously, I don't expect basic income to become a reality in India for quite a few decades due to the social, political structure and population of the country. However, since then I searched for it online and came across the 'Basic income in India' article on Wikipedia which presents a positive picture. So even if it is hypothetical, can India afford such a scheme? Let us delve a bit in to the numbers and see what comes out of it.

Assuming the same per capita tax payment and not considering indirect taxes, it would be possible to meet the basic income expenditure if the tax base is increased to 21%. In the face of reality, that seems improbable. However, at the same time, it is not impossible. So, as we move towards being a more progressive and inclusive society, one can imagine that the target should be within reach in the next decade or so.


Who wouldn't like to be paid more? Who wouldn't like to work less? The answer to these questions summarizes the utopian nature of this concept. The fact is that as a society, the need for longer working hours is purely derived from a need for higher economic output. If machines can provide much higher productivity and economic output, then it certainly de-emphasizes the need for manual labour. At the same time, the society, based on its consumption patterns, would ensure that the money flow isn't impacted. This then leaves humans to focus a lot more on living and enjoying their lives. At a fundamental level, this is what humanity is about and the basic income only goes some way in ensuring that. As humans, we have always been suspectful of parting with money that does not seem to directly benefit us and in a way that forms the basis of income inequality. Hence it is a question of the correct mentality as much as it is about the economics of funding such an initiative. Hence, it is inevitable that some country would pave the path for others not too far ahead in the distant future.

Tutorial # 4.2: Understanding cryptocurrency (Bitcoin) - The workings

As I mentioned previously (in the other post), cryptography is at the heart of a cryptocurrency. Hash functions and public-key cryptography play a key role here.

      a.  Hash function and digest: A hash function outputs a fixed sized data called digest for an arbitrary sized input. This fixed size makes it ideal as input for various mathematical operations. Hashes are deterministic (always produce the same output for the same inputs), computationally efficient (requires little computation to process) and collision resistant (difficult to find two inputs that produce the same digest). The major application of the hash function is the creation of digital signatures.

      b.  Public-key cryptography: Public-key cryptography uses a pair of keys, a public key that is known to everyone and a private key that is known only to the owner. While the public key can be used to verify the identity of the sender, it cannot be used to derive the private key and thus imitate the sender. 

First, let me cover what a transaction consists of. A transaction record covering a transaction contains an input side consisting of the digest of the transactions received the sender that are unspent. This can be used to publicly verify the amount as well as from whom the bitcoins were received by the sender. It also contains an output side which indicates to whom and how much is to be sent. Depending on the amount to be sent, multiple input transactions are combined so as to cover the amount. It is important to note that the amount so derived is to be completely spent. For this reason, the output side would most probably also include the sender along with the amount that is to be received as change. Any difference will go to the miner as transaction fee.
Eg. Alice has 50 bitcoins as a result of receiving 20 each from Carol, Dan and 10 from Erin. She is to send 45 bitcoins to Frank. Thus, all 50 bitcoins are included on the input side and 45 is included on the output side. However, Alice wishes to receive 4 bitcoins as change (with 1 contributed as transaction fee) and so will include her own name on the output side.

It is important to note here that using the names above we are speaking of virtual identities. In the cryptocurrency universe, you are only identified by your public key. Thus, the transaction record contains the public keys of the sender, from whom the sender received the bitcoins and to whom the bitcoins is being sent.

Now the public key cryptography mechanism works as follows:
  • The digest of the transaction record and the private key of the sender are mathematically combined to generate a digital signature
  • The digital signature is appended to the transaction record and shared publicly
  • The transaction record, digital signature and the sender’s public key are used by the various nodes in the bitcoin network to mathematically validate that the transaction record has indeed come from the sender.
  • Once validated, the transaction is then processed further to ensure that the payment is transferred to the receiver as per the transaction record.

The transaction validation and its recording in the public ledger takes place in the following manner.

Multiple transactions, similar to the one described above, are combined together in to a transaction block by a miner. A miner is like any other node (user or peer) in the system, but one that is specifically trying to solve a mathematical problem. Solving of this mathematical problem results in the validation of the transaction block and thus all the transactions in it.

So what kind of mathematical problem are we talking about here?

The solution to the mathematical problem involves another cryptographic concept known as proof of work puzzle. The premise here is that mathematical combination of a challenge string with proof of work has to generate a pre-defined output string.

The challenge string is basically a digest of the transaction block. The digest is calculated by hashing two pairs of transaction at a time till a single hash is obtained for all the transactions in the block. This hash in turn is combined with the hash of the previously accepted transaction block. Thus, each new transaction block incorporates the previous transaction block.

The output string in case of bitcoins has a predefined number of leading zeroes which is a condition that must be met for the mathematical problem to be considered as solved.

Thus, the proof of work is the only unknown here. The miner has to calculate this so as to be able to combine it with the challenge string and thereby produce the output string. Generation of an output string containing 40 zeroes as prefix will have 2^40 possible combinations of proof of work. Thus, you can imagine that a miner’s work is really hard. While, generating this proof of work is rather difficult, verifying it is particularly easy for one has to simply mathematically combine the suggested proof of work with the already existing challenge string and verify whether it produces the condition set for the output string (i.e. 40 leading zeroes).

The really interesting thing to note here is that the effort involved in the proof of work can easily be doubled or halved by increasing or decreasing the number of zeroes required in the output string (since 2^41 is equal to multiplying 2^40 by 2 and 2^39 is dividing it by 2). This concept is used to control the difficulty and pace of bitcoin generation as mentioned in the other post.

Generating this proof of work is akin to verifying the transaction block and thereby all the transactions within it. As each transaction block contains details of the previous block, it effectively forms a chain called as transaction block chain. As soon as a miner constructs this transaction block chain containing proof of work, it will be broadcasted to all nodes in the network. Once the newly broadcast chain is verified to contain valid transactions that are not already spent by the other nodes on the network, they will start using it and try to append their own transaction blocks to this newly verified transaction block chain. In this manner, each and every bitcoin transaction is validated and executed.

Thus, we can see that the transaction block chain contains information of all the transaction blocks and in turn of all the transactions that had ever taken place. In this context, the transaction block chain is the general ledger, the transaction block is a page in this ledger and the transactions within the block are the line items in the ledger.

Questions may arise on the possibility of simultaneous proof of work solutions, fudging of the ledger or double spending by the sender and this is tackled in the other post.

Tutorial # 4.1: Understanding cryptocurrency (Bitcoin) - FAQs

I have been using Bitcoin for quite some time now, but didn’t bother to go deeper in to its mechanics until now. Having done so, I find cryptocurrency to be an absolutely fascinating subject, having gone through it at a high level. I will use bitcoins and cryptocurrency interchangeably throughout this post. My learning was concentrated over a period extending a couple of days, so my understanding may be flawed in some respects, but at the same time, I intend to maintain my notes over here so as to be accessible to me as well as anyone else.

What is a cryptocurrency?
A cryptocurrency is a digital de-centralized (peer-to peer) medium of exchange. The prefix crypto indicates that it employs cryptographic methods at its heart which accounts for the security of the entire system as well, though one may easily misinterpret it as being “cryptic” to understand. It is digital for it deals with the exchange of bits rather than any physical notes and coins. It is de-centralized for it is neither issued nor maintained by any central authority like real world currencies but is in fact controlled and maintained by each and every user. Lastly, like any other currency it carries an intrinsic value that is accepted by all its users.

Why is a cryptocurrency appealing?
A cryptocurrency is appealing chiefly because of its decentralization which brings with itself a certain degree of anonymity and most definitely low transaction costs. The transactions for cryptocurrencies like Bitcoin are completely transparent for they are logged in a public ledger. For merchants, the irreversibility of transactions and for the consumer, not having to identify yourself when making a purchase, unlike credit cards or PayPal accounts, can be considered to be appealing. Also, it quite easy to start off with transacting bitcoins as all you require is a client installed on your machine.
However, if you are buying bitcoins off an exchange that require you to submit KYC, it is quite possible to trace a transaction and its bitcoins to you. At the same time, it is possible to create and use a cryptocurrency that is less transparent and thus untraceable, though its acceptance would be questionable.

Is cryptocurrency fungible?
This is a rather contentious debate. In terms of transacting with bitcoins, each bitcoin can be deemed to be like any other. However, by its open nature, every bitcoin can be traced back to its genesis and this makes each bitcoin different from any other.

Can anyone create a cryptocurrency?
The answer to this is yes. However, it is possible to do so because of the ground breaking work done by the person/people going by the pseudonym Satoshi Nakamoto when he/they invented the bitcoin and released it under the MIT license. For my learning purposes, I had created one using Forknote which is based on Bytecoin. You would only need to setup the seed node and the blockchain (which can be done using a VPS) and you would be good to go. Samacoin anyone?

Is it created out of thin air then?
Any cryptocurrency is created out of solving cryptographic mathematical functions. So, you could say yes, but then you can philosophically question the existence of any real world currency which is backed by the trust in a government rather than any physical asset.

How does it work?
This answer is rather long, so I have split it in to another post. So, buckle your seat belts before you click the link.

What incentive does a miner have to solve the complex proof of work puzzle?
The miner gets to specify a reward transaction within the transaction block which at the time of writing is 25 bitcoins. The reward gets halved every 210,000 blocks. The reward in itself acts as an incentive to “solve the transaction block”. Moreover, each transaction in the block is accompanied by a transaction fee which too goes to the miner and this amount is not too insubstantial as well when you consider the large number of transactions involved. While I speak of miner in singularity, the reality is that with the odds being so high, there is always a pool of miners working together to solve the problem and thereby share the rewards.

Does each miner work towards the same proof-of-work puzzle?
Since the miner adds a different reward transaction to each transaction block, the hash generated for a transaction block containing the same transactions will be different. As the challenge string to the puzzle is different, so will be the proof-of-work.

What happens when there are two different versions of the next transaction block submitted for verification?
The nodes always consider the longest chain to be the valid one. ‘Longest’ refers to the one on which most proof-of-work has been done and has a higher difficulty level. It is quite possible that different nodes may receive different proof-of-work transaction blocks at the same time. In that case the nodes work on one chain while also saving the other branch. Subsequent proof-of-work transaction blocks will make one branch longer than the other and then all nodes will switch to the longer chain. Usually, a transaction is considered to valid after it has been confirmed six times i.e. five additional proof-of-work blocks were added since the particular transaction featured in a block. The possibility of the transaction being invalidated by an alternate block chain in such a case goes down to less than 0.1%.

Can the same bitcoin be spent twice?
Bitcoin was created keeping in mind the problem of double spending and solving it in a decentralized manner by using the peers or nodes in the network. As has been mentioned above, the nodes accept the longest chain as the valid one. To invalidate one transaction and to use the same bitcoin in another transaction would imply that the dishonest node would have to build a parallel block chain that is longer than the one that contains the first transaction.
The dishonest node would be starting at a disadvantage for it has to play catch-up to all the blocks that were mined for the first transaction to be confirmed. Then, it has to beat all the other honest nodes in building a longer chain that will be accepted by all the nodes in the network. This won’t be possible unless the dishonest nodes in the system outweigh the honest ones in terms of computing power. At the same time, the system heavily rewards honesty for the dishonest nodes, if they do have so much computation power at their disposal, would be better off mining legitimately and earning the rewards of proof-of-work for each transaction block rather than trying to overturn a transaction.

Is it really possible to trace right back to the first transaction in a block chain?
Since each new transaction block incorporates the hash of the previous accepted transaction block, it is indeed possible to go back to the first transaction. The first block in the block chain is called the genesis block and in the case of bitcoin, the first transaction was the one paying a reward of 50 bitcoins to its inventor – Satoshi Nakamoto.

Is the supply of bitcoin limited?
There shall only ever be 21 million bitcoins mined. However, the total supply will be less than that because of loss of bitcoins over time because of the loss of private keys. New bitcoins are created whenever a block is validated and appended to the block chain. The rate at which the blocks are validated and appended (known as network difficulty) is adjusted every 2016 blocks with the aim that it should take two weeks for 2016 blocks to be appended to the block chain. This comes out to 10 minutes per block on average. If the addition of the previous 2016 blocks took more than two weeks, then the difficulty is reduced and it is increased if the opposite is true.

I am just starting out and understand that I need to create a wallet to transact. What does it represent?
The wallet is simply a container of a user’s private keys. As we know, the public keys are generated from the private keys and they are in turn hashed further to generate the bitcoin address. The wallet is able to generate a balance corresponding to all your addresses using the transaction history that is contained in the block chain. Thus, the wallet is nothing more than a glorious digital key chain. However, if you lose your wallet, you lose your private keys and with it the ownership of all the bitcoins associated with it.