Blockchain and Bitcoin – Answering some basic questions

by Valentijn v/den Hout – @vvdhout | Click here for PDF version

  1. What is a blockhain?
  2. What is blockchain technology?
  3. What is so special about blockchain technology and why is it innovative?
  4. Can you explain in more detail how blockchain technology works; Bitcoin, for example?
  5. What is Ethereum, and what is the difference compared to Bitcoin?
  6. What is Web 3.0?
  7. Could you recap all of this information in a nutshell?
  8. When is blockchain interesting to use over traditional database systems?
  9. Could you explain in more detail why Bitcoin is considered valuable?
  10. That’s cool and all, but how do I make money?
  11. When do I sell my Bitcoin?

1 – What is a blockchain?

A blockchain is a type of database that stores data in chronologically linked blocks. It only allows the addition of data (as well as reading) and does not provide the option to delete or change data. In other words, if you want to “change” data that is stored you will have to add new data that indicates this change. Because we can see which block is the latest addition we can then decide what the most up to date data is.

Blockchain data structure (credits to Udacity)

Coming back to the blocks, data that we want to store on the blockchain is put together in batches (or blocks) and is added to a previous chain of blocks by linking it to the preceding block via its hash. This hash is kind of like the fingerprint of the block; a completely unique code that can be used to identify it. Hence, if we add blocks to this chain in this manner, we end up with a long chain of blocks that each is link to the previous block, allowing us to see the entire history of the database in chronological order.

2 – What is blockchain technology?

Nowadays, when we talk about blockchain technology we actually are talking about the combination of a blockchain type database and a distributed peer-to-peer network that maintains and interacts with this database (this is also called distributed ledger technology, or DLS). It is the combination of a blockchain database and this p2p network that runs on a protocol (code) that enables the new and innovative functionality that powers cryptocurrencies and blockchain-based applications.

3 – What is so special about blockchain technology and why is it innovative?

It enables the trustless storage of data without the need for an intermediary. Being able to store and agree on the validity of data without the need for trust between the actors that are part of the network enables things such as digital currency, transferring ownership of digital assets, identity management, and much more. Not only does it put the control back into the hands of the users, it also means data is no longer stored at a centralized place with a single point of failure or control (e.g. censorship of who can and cannot partake). On top of that, given that trust is no longer an issue, personal data no longer needs to be collected and stored, making data leaks such we have seen more and more frequent lately impossible.

4 – Can you explain in more detail how blockchain technology works; Bitcoin, for example?

Since the inception of the internet we have had to deal with an issue of trust when interacting with other actors on the network. We are quite good at dealing with each other on the internet as long as we are not actually transferring something of value to each other. The moment this happens, we need to be sure that the other party acts in a desired way. To make this a bit less abstract, if you have a digital dollar for example which would basically be a piece of code, and you transfer that to me via the internet, I need to know that you have not copied that dollar before you send me the code. If its organized in a way that all assets on the internet are organized (existing in code), you could just copy and copy and copy, and the digital dollar I receive will deplete in value (there now is a possibility of unlimited supply -> no scarcity). This is called the double spending problem; you could spend the same digital dollar twice. In other words, I need to trust you, something which is quite hard because in many cases you might be anonymous and you know nothing is stopping you from acting maliciously. This (among a few other reasons) is why banks exist. They generate the artificial trust that allows us to transfer value. Just focusing on the currency aspect of things at this moment, banks cooperate to maintain their ledger of account balances. The moment you send money to me via the internet, what really happens is that your bank makes sure your account balance goes down, and my bank makes sure that my balance increases. It is nothing more than an entry in a database. The banks themselves will have sorted out whether they trust you enough to provide you their services. This seems like nothing special, but it makes it possible to “transact” value over vast dimensions of space (i.e. the internet).

However, there still is a need for trust in a third-party, namely the banks, and the banks in their turn need a way to trust the individuals (which often means collecting a lot of personal information). The power to manage this wealth is given to the banks, not the individuals who are the supposed owners, and we have to trust the banks to be a well-intentioned and competent custodian; they have shown in the past they are not (think about the multiple credit bubbles by lending with just fractional reserves). That’s not the only issue with the current monetary system that Bitcoin addresses – devaluation of fiat currency by central bank policies being a major one – but more on that later. Bitcoin is the first big and successful implementation of a blockchain p2p network and it focuses solely on the ownership and transferring of Bitcoin (a digital currency). Instead of having a bank hold a centralized ledger (or database) of who owns what, all the nodes (computers) in the distributed network (all over the world) hold the same ledger. Every time a change has to be made to the network (e.g. I want to send Bitcoin from my address to yours), the protocol verifies my identity of the address to send money from (using my private key), checks whether I am allowed to send the amount of Bitcoin (do I own enough Bitcoin), and then updates the ledger on every single node across the network to represent the new state of the network. This is an incredible new way of transferring value from one party to another, without us needing to trust the other party. The protocol uses some clever game theory mechanisms to make sure that those that maintain the ledger do so in a desirable manner; if they pursue self-interest it is actually good for the network. More details on the inner workings of Bitcoin can be found here:

Satoshi Nakamoto’s Bitcoin Whitepaper: A Walk-Through

This is just a brief example of how blockchain technology enables a digital currency such as Bitcoin. However, it also enables the distributed storage and maintenance of data that represents something other than only digital currency transactions. Ethereum, for example, allows developers to store code on the Ethereum blockchain that enables different type of functionality.

5 – What is Ethereum, and what is the difference compared to Bitcoin?

Where Bitcoin uses set smart contracts in its protocol that only allows the storage of transactional data (namely transactions of BTC from one address to another), Ethereum (and other similar “Turing-complete” blockchain protocols) enables us to write our own smart contracts. These are pieces of code that can create all sort of variables, store these variables on the blockchain, change these variables, and write functions to be executed by the protocol (Ethereum Virtual Machine). This means we can start to store much more data than just transactional data of a specific currency on the blockchain, something which Ethereum also enables just like Bitcoin (the transfer and tracking of Ether, its native digital currency). However, the Ethereum blockchain operates vastly different than the Bitcoin blockchain, and with that brings big difference between the underlying mechanisms of it’s currency. Continuing on the different use cases of these smart contract blockchain protocols, one very popular use case of Ethereum is the tokenization of (digital) assets. We can create a unique token to represent an asset (also called a non-fungible token, or NFT), and transfer this token between addresses to represent ownership. Now we can not only transact value and track ownership in the form of a digital currency, we can also do this for any asset we want to represent with a token, and we can code the logic that a user interacts with to instigate these changes to the blockchain data. Whether an NFT is or is not valuable, is another discussion altogether that warrants its own elaboration:

A framework for understanding NFTs and their value

And this is just a very specific example of how smart contracts can be used. In essence, we can create a great deal of blockchain-based applications that regards the storage of data (often ownership tracking is an ideal segment) in a distributed manner.

6 – What is Web 3.0?

In the early days of the internet, users only requested data from servers and consumed that data. A domain provided a webpage with information and we were not able to do anything more with that than navigate through it. This is Web 1.0. Then, applications started showing up that enabled interaction and the creation of content by the user, making the user and her data the source of value. Sites like Facebook, YouTube, Wikipedia, and Airbnb among others, became more and more prominent, and all the content and data generated by the users allowed them to extract value from it. They could decide to use it themselves or, and this happens all too often, sell it off to other parties. Web 3.0 is the response to this trend of our own data getting away from us. It is an internet that has been envisioned for a while but has only become possible now that blockchain technology has arrived. Instead of having centralized parties that run applications and collect all its data, we can decentralize and run these applications in a distributed manner. Where blockchain-based computation systems such as the Ethereum Virtual Machine allow for decentralized computation of code, distributed file storage systems such as IPFS (Inter Planetary File System) allow us to decentralize file storage. Our own personal data can now be linked to our wallet address and be stored encrypted on the blockchain, allowing us to dictate if, when, and which data is made available to an application. We get to choose how our data is used. Combine this with digital currencies that allow the direct transaction of value over the internet between peers and we have an internet that is owned by its users.

7 – Could you recap all of this information in a nutshell?

In short, blockchain technology allows us to store data in a distributed manner as such that it is not controlled by any centralized party and does not provide a single point of failure, that allows for identity verification using private and public keys, and “changes” to the data stored without the need to trust other peers on the network. Combining identity verification and data storage makes it a great candidate for tracking and transferring ownership of assets, be it a digital currency, tokens representing physical assets or digital assets (NFTs), personal information, and even interacting with code that is computed by the distributed network (e.g. on the Ethereum EVM).

8 – When is blockchain technology interesting to use over traditional database systems?

Anytime you want data stored to not be controlled by a single party (because of data manipulation, censorship, single point of failure, hackability, etc.) and want a great deal of transparency in “changes” to the data (additions, really), blockchain tech is a great solution. This is why we already see many blockchain-based solutions for anything related to ownership. One of the most simple but powerful applications of the technology is Bitcoin, where the data stored simply represents value and transactions of value between entities. It has created a new money system that is sound, cannot be manipulated, controlled, or censored, puts ownership in the hands of individuals, and is completely digital.

9 – Could you explain in more detail why Bitcoin is considered valuable?

There are a lot of great resources that can help you understand the backdrop of the monetary system of the society we currently live in, and if you truly want to grasp the severity of the features I am going to mention next, I recommend you study these topics in more detail (Layered Money by Nik Bhatia is a great start). I hope the previously mentioned benefits of blockchain technology already put some of this into perspective.

Bitcoin is valuable because it is a monetary network that is censorship resistant and controlled by no particular entity, allowing its users to have complete ownership over their own wealth and transact value directly to somebody else via the internet, no matter where the person is located or who the person is, without the need for trust between them. The currency is fully divisible and orders of magnitude easier to transport and transfer, and perhaps most important, it has a set monetary policy that guarantees a certain available supply and scarcity. If we compare this to all the other alternatives – for example fiat money and precious metal – it blows all of them out of the water as a better money system. These features have become more obvious and important every single year but especially in the backdrop to the massive amount of money “printing” and currency devaluation by central banks since the start of the COVID-19 pandemic. And lastly, everybody has access. Everybody with an internet connection can become a part of this new technology and use Bitcoin, and there is no way to stop it. Right now we are in the middle of a mass adoption phase of a new money system, and it’s absolutely wild to be able to experience it in real-time.

10 – That’s cool and all, but how do I make money?

Even though a lot of people have a lot of knowledge and experience in the space, most are not actual financial advisors. It’s important you don’t expect them to be. Nothing in this document is financial advice. The goal is that you have a level of understanding of the space, and in particular the systems or assets you are putting your money into, as such that you feel comfortable seeing the price fluctuate, because it will fluctuate. My own personal opinion is that if you are not willing or able to put in a lot of time researching individual teams, protocols, coins, tokens, what have you, you should probably not invest in them. There are 1000s of different coins out there that all claim a unique value proposition, and even though many will ride the crypto market waves for a while, in the end, a lot are going to fail because they just don’t add actual value. Don’t try to find the next 1000x coin; if you haven’t done the deep research, you are either going to be lucky or wrong. Neither is sustainable. What I do hope is that this document has given you certain insights and intuitions on how the aforementioned most popular protocols work, in particular Bitcoin. As mentioned, Bitcoin is still in an adoption phase with as of this writing around ~2% of the world owning some.

If it is going to be what it suggests it can be, Bitcoin penetration will become as widespread as the internet. The price of Bitcoin, leaving aside its fluctuations around the average trend, represents an adoption curve of a completely new technology. This is different than fluctuations in a mature market with a mature asset; there is so much adoption it needs to go through still. Here are some tips for people that have don’t have the background in the space but are looking to be a part of it:

  1. Expect it to go to 0. It’s not going to happen, but just make this your assumption. Especially for anybody who has not deeply researched or does not fully understand the protocol, you are going to have doubts and fear pop-up as the price dips and jumps, just because there a certain aspects that are uncertain to you. Expect it to go to 0 and invest only the amount of money that if it were to be gone, you are okay. Consider everything higher than 0 upside. This is just so you can keep your hands off when there is a sell-off. The more you learn about the underlying system and the price dynamics, the more lenient you can be here because your faith will be less fragile to price movements.
  2. Break the assumption that your fiat holding is safe and everything else is a risk. Your fiat money (USD, EUR, JPY, etc.) – just like everything else – is an asset (using the term loosely here) that you choose to store value in. All assets perform relative to each other. Having money in fiat should be just as much as a choice as putting it in a house, investing in a company, or buying Bitcoin. If the products you buy become more expensive in USD due to inflation (say, for example, the central bank decides to print double the amount of money into existence out of thin air…), your fiat currency is getting devaluated comparatively. Just understand it as a concept. Break the idea that fiat is per definition safe.
  3. Don’t try to time the market. Look long-term. If you believe in the system, it does not matter if you buy at $50,000 or at $45,000. Chances are you don’t have years of experience in trading combined with years of experience in blockchain technology and specifically Bitcoin. Again, you are either going to be lucky or wrong, and the worst is if you wait to buy on a dip that never comes (this happens to many, many people).

11 – When do I sell my Bitcoin?

See #2 in the previous section.

I hope you’ve found this information helpful. If so, feel free to share it around. I don’t post very often, nor do I post only about blockchain, but for interesting content on topics such as blockchain, happiness, macro-investing, meditation, and more, you can follow me on twitter @vvdhout

Fire at Dawn

I envy those with passion

That fire awakes at dawn

The X is clear, though why you’re here

Night falls and all is gone

Time marches on in unknown pace

Heart’s filled with here and joy

As long as they can do the thing

Why is not a voice

But for those that wake in morning dew

Instead why remains a choice

They might have known, back in summer’s day

But then were girls and boys

The dew will clear and sun may rise

To shine on plates of gold

The shimmers are as beautiful lights

But times gone by, it’s cold

Instead to squint for flickers each day

My soul wishes I wake

By fire at dawn, and I wish to stay

And it never time will take.

Using US treasury yields to forecast recessions

Posted on 1st of July, 2019

Moved on 16th of March, 2020, a week after markets started falling after Corona outbreak. Clearly my understanding of why yield curves moved where sup-par at the time of writing and I have taken some more time to understand this process.

16th of March, 2020

Ever since I got into value investing and realized most stocks seemed to have been overvalued (this was around mid-2017 already) I have been trying to figure out how to gauge a macro-economic trend that might indicate an upcoming recession.

I am now convinced that we will see a global economic downturn around the end of this year, or early 2020.

There are a few reasons why I believe this to be the case. I am not well-informed enough to put my finger on the pulse exactly but these are my thoughts on the matter.

Before moving on to the yield curve, there are some other reasons why I believe it will not last long before we see a downturn. One of the main reasons is that we see a capital saturation of pretty much any type of market. Be it housing, private equity, or public traded stocks, values have skyrocketed over the last decade with vast amounts of capital flowing in. And it makes sense to see this happening, because all in all things are going well. People feel free enough and comfortable enough to spend and allocate capital instead of keeping it in the bank for the low interest rates that are currently being provided. However, it seems we have somewhat reached an upper bound. Looking at the housing market here in my country – The Netherlands – people are buying like never before for prices that are well-above historical prices. The only way for the current valuations to keep going up, or keep constant at the least, is if this pace keeps up. There are very little options above it (e.g. even more spending) but there is a lot of space below (slow-down in buying, rise in selling). What I mean by that is that there is very little place for improvement but a lot of place for a slow-down. The same thing goes for the stock market. For most stocks to justify their current valuation they need to keep showing ridiculous growth, while there is a lot below that that will drive prices down. On top of this, markets seem to be saturated with capital. As the big funds move all the capital of their primary, bigger investors into the market, they realize the only way to continue their own growth in revenue is by going after the smaller fish. Over the last 2 years I have seen a rise in advertisements by funds and exchanges that are aimed at the “common” person, where they are lowering their onboarding fund to a mere €500 with the goal of getting new, smaller clients on which management fees can be earned. I believe this tends to only happen, and be justified, when they have depleted all of the big funds, meaning the big capital is already in the market. Again, there is very little room above this (more capital going into the market) but there is a lot of room below (capital being pulled out). Looking at startups and private equity investing as well, we see incredible valuations for companies that have not even come close to profitability. This is not uncommon in the startup world as you are banking on growth and market position first before monetization but it seems the valuations have risen without a clear indicator as to why. Seed rounds are now the size of what a series A was 10 years ago and multiple companies IPO (and do well) with no clear path to profitability. This is most likely a result of, again, the market being saturated and large amounts of capital getting in over the last few years.

On all these fronts, there is very little margin for error. Either the incredible influx of capital continues and it maintains valuation, or everything else that can and will happen below it sets in, and valuations will start to tumble.

I’ve also heard, but am in no way informed about this, that apparently a similar thing as the 2005-6 derivative mortgage packaging is happening again but this time with loans to companies. Shitty loans to companies that have a very low chance of paying it back are being clumped together into a “diversified” package, which can then be sold again as a derivative with a decent-to-high rating, even though it consists of what Ryan Gosling would call “dog shit”. If that were to be true, and these companies start to default as well (especially when people start to sit on their money more), that’s not going to be pretty.

Yield curve on US treasury bonds

I find this a fascinating resource. Essentially it allows us to have an insight into what the FED thinks will happen with the interest rates in the future (the interest rates which they set, mind you). Normally, you’d want to see a continuous rise in yields on bonds as the term gets longer. Given that you need the hold the bond for a longer period before being able to convert it back, you need to be compensated for this. It makes sense to see a 2-year bond give a 2.5% interest and a 5-year bond a 2.8% interest, for example.

What does not make sense is to see an inversion here, for example a 2-year bond giving a 2.5% interest and a 5-year bond a 2.3% interest. The only reason this happens is because the FED thinks they need to drop interest rates around that time and they want to encourage spending around that time (e.g. there is hardly any reason for anybody to choose a 5-year bond with a lower interest rate over a 2-year bond with a higher rate, except if the interest rates in the last 3 of those 5 years are dropping below that 2.3%). Why would the FED drop interest rates in the future? To encourage spending. When do they need to encourage spending? When people are sitting on their money. When does that happen or what does then happen? A recession.

And this seems to be a consistent pattern. Before every major downturn we have seen in the last 3 decades we see this flipping of the interest rates, consistently. Before the dot-com bust, before the financial crisis of 2007, and now again in the last 4 months after over a decade of not a single interest rate being inversed. And, you see hardly any consistent signs of this when there is no following recession. I have not run any correlation tests on this but that might be an interesting project.

Inverted treasury yield rates 2019

What also is not a great sign is that, in the past, adjusting interest rates to increase population spending was much more impactful. With 1-year bond interest rates around 6% before the dotcom bust, and around 5% before the financial crisis, the FED had a lot of room to adjust these downwards and increase spending. After the busts, you see interest rates having dropped to as low as 1% in 2008 and 0.3% in 2010-11. Right now, however, interest rates are already very low. The FED has kept interest rates incredibly low over the early 10’s and has only started to crank them up again as of 2015-2016. Currently, the 1-year interest rates are hovering around only 2.5%, and they are already being adjusted downwards again.

I fear that when things start to turn downward it is going to come down rather fast and hard with very little control that the FED can have on spending. I hope I am wrong. If shit hits the fan and people start to retract their capital, it is going to go fast and it seems there are very few brakes paddles.

Doing what you love

Posted on 29th of June, 2019

I have been thinking about this topic for quite a while now. Over the last few months, I am finding myself in more and more conversations with people that are trying to figure out what it is that they should be doing. In essence, they are searching for their purpose.

And I have been in the same spot. I still am. Ever since I realized that there is more to life than a 9-to-5 job that you despise – something which when I was in high school was my view of what the future held for me – the overwhelming number of possibilities have made it difficult to determine my path.

I am nowhere near figuring this out, if I ever will, and am way to young and inexperienced to offer proper advice on this matter. Though, maybe this framework that lends from Paul Graham, Justin kan, and Ben Horowitz can help you approach this big question in life from a new direction.

Overwhelming options

A luxury, I am well aware off. To be able to even consider your options is something that is not given to many people in different financial situations, living in different countries, or even different times. We should be highly aware of this privilege as such that we can be motivated to help others achieve this as well. At the same time, it is okay to take our own concern and struggle serious.

My grandmother has told me many times before that when she was young, there was no choice. She always wanted to be a kindergarten teacher but was pulled out of college by her dad only 3-months in. She had to work in her dad’s butcher store, and there was no way around it. Although she has always looked back and regretted the situation she was in, she now sees a younger generation with so many possibilities, struggling to decide what they have to do in life. “I never had to worry about this”, she said to me, “and I see how troublesome it can be to feel you need to figure it out on your own so early in life”. My granddad holds a similar story.

It is an incredibly interesting topic: finding your purpose. I am still not convinced it is something you will necessarily figure out. Most people are looking for an “aha”-moment where everything falls into place but maybe this simply does not exist. Trial and error, and an organic meandering towards a final destination, might be the way it has to go.

Why I am writing this short piece is because, in my quest of finding guidance in this process, I have come across a multitude of resources that can present a framework or some handles that can be used to find at least some direction. They all offer an interesting perspective, and I wanted to create a short, overarching collection with the goal of solidifying each. Furthermore, I thought of an additional frame of mind that might provide some guidance. It does not make it easy but hopefully I can share a new approach to finding your purpose in life.

Produce

Starting off with Paul Graham’s piece on doing what you love. Paul Graham, for those unfamiliar, is most famous for creating Y Combinator, the most successful startup accelerator in the world, funding and seeding incredible companies such as Airbnb, Dropbox, Instacart, and many more. His essays, written on an incredibly simple personal website, are famous among the biggest heads in tech. In this particular piece, he shares his own experience and that of those around him regarding the process of finding something you love to do. He immediately mentions the uncomfortable truth: “Doing what you love is complicated.” There is no way for me to adequately recap his blog post while retaining the same quality, so I highly recommend you read through it first yourself (http://www.paulgraham.com/love.html). As a matter of fact, if you are serious about setting this framework for yourself that might help get some guidance on finding your purpose, I would ask you to check it out before continuing with this piece.

Although many great points are made, what really stands out to me is the part about doing that which you naturally gravitate to and organically sustain over a period of time. As Paul mentions, it is not about what makes you happy this second but about what provides you happiness over an extended period of time.

One excellent test for this is continually producing. Instead of pushing forward a future ideal job, see if the same joy maintains if you already start acting on it right now even without any monetary results. As Paul mentions for example, instead of keeping up a fabricated future of writing children books when you are older or have earned just enough money, start writing content already. It is very confrontational because as you might expect, it could be you actually do not like writing stories for children. And finding that out bursts your bubble, the promise to yourself of a more enjoyable job in the future. But it should be good to figure out that it might be fake, instead of inevitably arriving at that same conclusion much later.

The end product versus the process

A thing I have been thinking about lately as well is the misconception many people might make regarding the difference between how a job is experienced from the outside versus from the inside. To make that less abstract, I am talking about a difference that exists between what is produced by a job versus the actual act and work that the job entails. It is easy to put these two together, although in many cases I believe this is a mistake.

I love to get inspired by videos about space exploration. It really warms my heart and gets me excited about the future. It has led me to believe that maybe this is what I should do because I would love to bring that feeling to others as well. Although that is a great motivation, you soon find out that the actual production of these videos and everything that goes into creating them – which makes up 99% of what you actually end up doing – is completely detached from the experience of the end result. That is a good thing to be aware of. Similarly, I have been pulled into making rap music and producing beats in the past. I love rap music and good beats. Hence, I probably like making them. Not necessarily true. Figuring out melodies, finding chords, working in a production interface, editing, recording, mastering… although they clearly have to do with music it is a very different experience than consuming the end product. I found out because I just tried (a practical experience of the above implementation of PG’s essay, this before I ever came across it).

Being great at something

Follow your passion is an advice that is often given. However, figuring out what your passion is is incredibly hard without having any practical experience but not only that, passions change over time and passions might not provide the financial freedom you desire. A somewhat contrarian speech by Ben Horowitz lays this out quite well (https://www.youtube.com/watch?v=uaSqh4DiQSw). Ben Horowitz is former founder of Loudcloud and a co-founder of Andreesen-Horowitz, one of the most successful venture capital firms in the world, located in California. Other than being quite frankly an excellent listen from a comedic standpoint, the point he attempts to make is quite profound. “Do not follow your passion”. Do not follow your passion because 1) it is hard to prioritize which passion is your biggest, 2) your passion WILL change over time, and 3) it might not provide a good source of income (which up to a certain point is an important segment of having a fulfilling life – more on this later). You might not even be good at it in the first place. Instead, do what you are great at. Follow your contribution to the world. It does not mean throw out your passions altogether. It’s still of great value to be working in a field that is inherently interesting to you on a personal level. It should just not be its primary selling point. Find what you are great at, and go after that.

“Every human-being has genius-level talent. There are no chosen ones. God has given every single person genius-level talent. You just have to find what it is that you are great at, and then tap into it.”

– Jay-Z

This is a very interesting point. Most likely, whether in the past or currently, you have experienced what it is like to be good at something. It’s really, really nice. I remember being in high school and being incredibly good in mathematics. My dad is a math teacher and he always took the time to tutor me. I became so good at math that I ended up finishing my high school with a 9.3/10 average. The reason for this humble bragging is that it was one of the few things I actually enjoyed. Sure, I enjoy math’s purity and simplicity in hindsight but it stands out to me how much I liked being good at it. I liked it when I knew I was one of the best and I could tackle pretty much every problem in front of me. Challenging? Yes. But did I knew I could figure it out? Also, yes. This will lead to the following chapter on “flow”.

But before we move on, what if you do not feel like you are good at anything? I feel that way sometimes. I have an incredibly broad background ranging from liberal arts to strategic management, to web and blockchain development to entrepreneurship. I often feel a jack of all trades, master of none. But looking more thoroughly and honestly, I know I have strengths that I have yet to double down on. Given my experience building products – albeit not many incredibly successful – and being consumed in startups and projects every hour of the day as well as my broad background in development, I know that building products and covering its trajectory is something I have a knack for. Certainly, I am nowhere near an excellent product manager but I do believe the base is there on which to build. I am sure you have specific talents as well, even though they might have been largely underserved up till now.

Flow

Another source that might provide guidance for purpose and happiness in what we do: finding a job that allows you to reach a state of “flow”. This is a term coined by Mihaly Csikszentmihalyi in his similarly named book “Flow” (“Flow” on Amazon), where he discussed what makes an activity truly fulfilling. It is a state of consciousness where one is optimally consumed by the activity at hand and time falls away. Maybe you have experienced this in the past as well where you might be locked into a specific task or activity as such that time flies by and nothing outside of what you are doing matters. It is that state of “flow” that is seen as a prominent driver of happiness and fulfillment in a job. It is evoked by an activity that requires enough skill to be challenging but is not too difficult to be frustrating. Referencing back to my math problems, this is exactly what I was talking about. A good challenge that requires enough cognition to be fully consumed in the task at hand while not being outside of my capabilities.

Flow

Bigger than yourself

What about making a difference? Yes, it is great to be good at something, it is great to reach that state of flow, but does it hold up in the long run? Is that enough? It seems that there is more we desire from the actions in our lives. We want to make a difference. Add something to the world. Help out a cause or people that we think deserve to be helped out. This can be incredibly fulfilling as well. 80,000hours is a platform that focuses primarily on this. Their idea is that you have 80,000 hours in your life that you will spend on your work and that it is worth considering up front how you want to spend these to contribute to something bigger than yourself. They are part of a new movement called “effective altruism” that uses data to help you decide what the best way is to make the most positive impact. Studies have shown that contributing to something bigger plays a major factor in overall satisfaction. You can notice this even at a small scale. Making a donation, lending a hand to somebody in need, offering food at homeless shelters. Independent of whether you are good, whether it is a passion, or whether you enjoy the process, it can be incredibly satisfactory.

Money only goes so far

It would be dishonest to suggest that what you earn does not matter. Evidently, knowing that you are earning enough to pay your rent or mortgage, buy good and healthy food, and provide for financial independence is critical. Being great at and enjoying what you do is amazing but not being able to pay for healthcare makes that a completely different experience. Hence, it is important to take this into consideration; what is the financial situation associated with this career? At the same time, we often falsely paint a picture for ourselves that a lot of money is going to solve all of the above mentioned aspects of what we do. It turns out that the additional happiness from an increase in income flattens out relatively quickly after the basics plus some additional freedom have been met. As a matter of fact, consistently studies have shown that additional happiness per extra income diminishes to negligible amounts after an annual income of $60,000.

Happiness to Average annual salary – https://www.michaelpage.co.uk/minisite/salary-vs-happiness/

And it makes sense. Having a lot of money will still lead you to pursue the above mentioned points. You will want to spend time doing meaningful activities you enjoy, you will want to contribute to something bigger, and you will want to find fitting challenging work. And your options might be even more numerous now, leading to even less guidance.

Relationships and values

Another way people can extract a lot of happiness out of their job is from the people they work with. Having a great team that feels like family can be a major differentiator in how you experience getting fulfillment out of the work you do. A hostile working environment or one that does not match your personal values is a great way to counter the enjoyment gotten from the actual activity you perform or the contribution that you make. It is such a driver for people that specific platforms have been put up that connect you to jobs primarily based on shared values (such as Key:Values). Some people that I spoke to discussing this issue mentioned that, even though they do not really care about the product they were working on, being able to help out their great colleagues was a major source of fulfillment. I am sure you have experienced this before as well, maybe in college or in high-school. Independent of the actual content of a project you might be working on with a group, the peers that you are working with are a major determinator for whether you enjoy the process or not.

Degree of success

Tying this all together, there is a graph that maps the degree of success in a particular job to its associated extracted happiness and fulfillment. The idea is similar to the end product versus process concept, however, this is focused on the degree of success, not the product. Often, and especially some years ago, I would think about possible careers only with the vision of a highly, highly successful version. When I would think about stock market investing I would get excited about the idea of me being a highly successful investor. When thinking about becoming a pro football player when I was younger I would get excited about the idea of me playing on the big stage. When thinking about being a founder, many a times I have only thought about being the one to build one of the most successful companies of the decade. And there is nothing wrong with this. It is great to have that vision and drive for success. However, it might cloud an honest evaluation of whether you will enjoy a particular career. There are chances you will not be that successful, and even in most cases when you will it will take quite some time. How much joy does it provide in that case? How would you enjoy or experience the job when you never get to that point or in the long time before you might get there? Here you will fall back on the factors mentioned above: are you great at it, can you find the flow, does it pay enough to have financial security, are the relationships good, and do you contribute to something bigger? 99% of the time this is what you will actually fall back on, so it is interesting to map this out. How dependent are you on the result? It’s never a great situation if you are heavily dependent on it. Whether being so drives you to push harder and thus makes chances of success greater, I am not convinced by. I believe you have a greater chance of success when you truly enjoy what you do, in comparison to when you do not and only do so when at success. Both can probably be good drivers but it is a good idea to ponder over what you honestly prefer.

Justin Kan makes a similar point. He is co-founder of Twitch, Atrium, as well as another handful of startups, and is seen as one of the most successful founders in the Valley. When he was younger, he mentions, he always had his happiness fully tied in with the success of the company. Over the years he has figured this out for himself and has started to focus on finding the happiness in the now, not based on whether what he is working on is successful in the future (around the 55-60 minute mark: https://www.youtube.com/watch?v=UScClQwJk0U). Meditation and mindfulness are profound methods of finding this but for sure the basics we have mentioned so far make this easier. It is much easier to find this state of contentment when your bills are paid, you extract joy and fulfilment from your daily life, and have a great group of people around you.

Success rate to extracted happiness

What does this look like, mapping out the extracted happiness as a function of the degree of success? Preferably you want to find a career path that starts with a high intercept and continuously rises as the degree of success increases (blue line). Whether a career will match such a trajectory seems dependent on everything we discussed above. What you most likely do not want is a superstar type of graph, where overall satisfaction and happiness extracted is terribly low but only at an incredibly high rate of success shoots up drastically (red line), or a career that you kind of enjoy from the onset but never really increases in happiness extracted (black line). You want to find a blue-line career: one that will provide you a great deal of happiness and fulfillment right from the start which only increases as you become more and more successful.

The framework

This is what I am going to try and use to figure out what I should be doing, what my blue-line career is. I’ll let you know in a few years how it turned out. Answering the following questions properly is most likely something that can give some great guidance.

  1. Do I naturally gravitate to this activity and come back to it long term?
  2. Am I great at this or can I become great at this (natural talent)?
  3. Does it provide access to the “flow”?
  4. Does it allow me to have solid financial security?
  5. Does it allow me to make a bigger, positive impact than just on myself?
  6. Will I (generally) enjoy the type of people I’ll be working with?
  7. How dependent is this all on the degree of success?

Let me know what you think. You can find me on twitter at @vvdhout. Hopefully this can help you out a bit in your search for doing what you love. I wish you all the best.