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Preface
Decentralized finance, or DeFi, is just about finance without banks. It’s one of the core use cases for blockchain, which is really an innovation in accounting. DeFi will eventually be a key part of finance for people, and one of the primary ways people earn returns on their assets, whether fiat or cryptocurrency. Banks need competitors, and so do DeFi protocols. Together, they will allow people to get the highest and best returns on their assets for the lowest cost and risk.
This book is not about promoting specific DeFi protocols, or even about promoting the current state of DeFi. It is about understanding the entirety of the space—where it fits into blockchain, its core elements, how to operate in the space, and the future of DeFi.
People who enter blockchain—and even those who have been in it for years —tend to have a sort of “Swiss cheese” knowledge: very deep and detailed in some areas but almost nonexistent in others. Accordingly, this book has significant background information, explaining the history and technology of blockchain and the key concepts of finance. This is to ensure that readers have a more complete understanding of how these fields merge in the DeFi industry, and what the potential and limitations truly are.
How Is This Book Organized?
This book starts by laying down the foundation for the reader to understand the basic principles and history of both blockchain and DeFi. It moves from there to the tools of DeFi and how to build in DeFi. It then covers the current state of DeFi, and how protocol users make money on various types of protocols. Finally, it concludes with a look at the future of DeFi, and potential areas of growth and benefit.
Who
Is This Book for, and What Will You Learn?
This book is for anyone, whether from a business or technical background, who needs a grounding in the blockchain and DeFi space and wants to build compliantly and productively. It is also for anyone who wants to learn how to operate protocols or invest money in the DeFi space. Finally, it is for anyone who wants a great explanation of how things work in blockchain and/or finance, without getting bogged down in acronyms and jargon. You don’t need to have any prior knowledge to use this book.
The book is not intended to be a detailed, language-specific, step-by-step analysis and implementation guide for building DeFi protocols for a specific set of requirements. After reading this book, you should have the understanding and knowledge to help design, build, and operate successfully within the DeFi arena, however it progresses.
After reading this book, you should also have ideas of what works in DeFi and what doesn’t, where risks lie, and where you are comfortable operating and even innovating. Users need to know what questions to ask developers when considering new protocols, and many need the knowledge contained in this book to understand what to ask—or if the protocols even make sense or are just failures that haven’t operated long enough to fail.
Tutorials are great for working through specific needs, but a fundamental understanding of these core concepts is needed to allow teams to build correctly and compliantly—two things sorely missing in the current and already failed protocols in DeFi.
Conventions Used in This Book
The following typographical conventions are used in this book: Italic
Indicates new terms, URLs, email addresses, filenames, and file extensions.
This element signifies a tip or suggestion.
NOTE
This element signifies a general note. WARNING
This element indicates a warning or caution.
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Acknowledgments
I’d like to thank everyone who provided support, understanding, and kindness to me in the process of writing this book. I’d particularly like to thank the following people:
Thanks to Shira Evans, my development editor, and Michelle Smith, senior acquisitions editor, for being so incredibly helpful, patient, supportive, and
wise during this entire process. Thanks to the many editors at O’Reilly for their help and assistance in making this book a reality.
Thank you to Patrick O’Connor-Read for his valuable and insightful review and suggestions to improve the quality of the book.
Special thanks to my husband, Keith, and daughters, Kira and Juliet, and puppy, Scooby. They have been exceptionally patient in letting me write; (mostly) tolerated my frustration at the industry, the process, and other things over which I had no power to change; and only occasionally resorted to pelting me with chocolate to make me stop complaining.
(To be fair, Scooby didn’t really do anything during this process but demand tummy scratches, which, it turns out, is significantly less productive than it sounds. Still, he’s an exceptional puppy, so I am officially acknowledging he is a Very Good Boy.)
They’re an excellent family.
Chapter 1. Introduction to DeFi
DeFi is shorthand for decentralized finance. That’s generally what you hear when you ask about DeFi, as if that clears up all the confusion. But for most people, that definition doesn’t do a thing to clarify what DeFi is, what it does, and why anyone would want to use or build a DeFi application. So let’s fix that. After all, the most important characteristic about any decision is that it’s an informed one. And you can’t make an informed decision in DeFi unless you know what you’re working with.
DeFi runs on blockchain platforms or decentralized applications (called DApps). Understanding the basics of blockchain is the core of understanding how DeFi works and why, so we’re going to cover that first, so you can follow along with the specifics of DeFi. After all, it would be pretty hard to explain the benefits of a Bryant pivot versus an Iverson step back if you have no working knowledge of the rules of basketball. You need to understand the boundaries of the game before you take on the advanced plays, so we have to help you understand what blockchain is and how it works before we get into one type of blockchain application. In this chapter, you’ll learn what blockchain is and how it evolved, what decentralization is, what traditional finance and decentralized finance are, and the differences between them.
GENERAL WARNING TO READERS
For those reading this and thinking they don’t need a lawyer, or a CPA, or any other paid advisors:
1 This book is to give you a strong general grounding in DeFi and the issues surrounding the field.
2. This book isn’t your lawyer. Your lawyer is your lawyer.
3 This isn’t a book designed to detail these regulations for specific situations, so your particular issue is likely not covered in depth.
4. I strongly encourage everyone developing, investing in, contributing to, or using applications in DeFi to find an attorney who specializes in this area to determine whether they are subject to Know Your Customer (KYC)/anti–money laundering (AML) or other regulations.
5 Read 1–4 again.
What Is Blockchain, Anyway?
Has anyone ever lied to you before? Has someone ever promised you they would do something and then not done it? Most of us have had some experience being on the receiving end of a lie, from the Tooth Fairy to a ghosted Tinder date. People promise to pay for drinks “as soon as I get my check” and then disappear off the face of the earth—or pretend there was no obligation to pay, or they didn’t even get the drinks in the first place. Checks get bounced, accounts get overdrawn, families invest in companies and stop speaking when they fail. People lie. But, unfortunately, they aren’t kind enough to tell you when they’re lying. Decisions stall in various efforts to check facts and complete due diligence, and people get screwed. But people still need to work together. We need to buy and sell stuff. We need to collaborate and join resources to innovate. So what do you do when you need to work with people but can’t trust them? You need a trustless system. You need something that doesn’t require trust—something that assumes that people are lying—and still operates effectively, transferring rights without conflict. You need blockchain.
Blockchain can be an intimidating topic. It’s a field full of people throwing around obscure words and technical theories, designed more to keep earlier adopters feeling like members of a special club than educating people on the technology.
But even with the best of intentions, it’s a pretty complex topic. It combines philosophy, theories of economic and monetary policy, microeconomic modeling, and a sizable chunk of behavioral psychology. With the “crypto bro” culture and meme-heavy jargon, it’s hard to find a solid foothold to build your knowledge on. Discussions of blockchain and DeFi can make anyone feel like they’re back in middle school, afraid to ask questions or even comment.
But it’s important to remember that blockchain is just a technology. When we think about technology, what is the first thing we think about? Usually some form of hardware (computers, smartphones, weird old switchboards with dozens of wires and women bound to relentless patriarchy). But what is technology really? The best definition is probably one like this: it solves problems people have, using scientific knowledge. That’s it. It has no real ulterior motive. When you pair a scientific understanding of the world (how things work by principle, not observation) with a specific context (calculate this faster, use fewer people, do work humans can’t, extend the ability of humans, etc.), you get technology. Cars, sneakers, airplanes, hair dryers, toothbrushes—all types of technology. It feels threatening only when you are in the generation above the generation of mass adoption.
At its heart, blockchain is a technological implementation of Yuri Ijiri’s seminal accounting innovation, momentum accounting (also known as triple-entry bookkeeping).1
A Brief History of Accounting
I hear you thinking: “Wait, what? I thought we were talking about blockchain. I would never buy a book on accounting. Ever.” Before you start hunting for the receipt (and stop doing that!), I know. I agree.
Accounting can be incredibly boring—except that it inspired the greatest of all innovations: writing.
Ancient Sumerian tablets, containing some of the oldest writing, are actually simple receipts: “I gave you this for that.” Merchants tallied their accounts at the end of the day, to derive a view of cash flow. And when you think about it, it makes sense. I mean, what’s the thing you want to keep track of the most (aside from any kids or pets)? Your money.
Turns out we’ve been trying to track value—money we have, debts we’re owed, debts we owe—since humans started to understand what “my stuff” meant. Let’s look at what we’ve come up with over the millennia, starting with single-entry bookkeeping.
Single-Entry Bookkeeping
IOUs are the oldest form of accounting, known as single-entry bookkeeping. This allowed people to begin to trade without having to carry items with them. An IOU in some form is an incredible innovation. Farmers, for example, had few options before this: either wait at the farm and hope buyers stop by (limited market opportunity) or cart around giant bales of harvested grain to a marketplace to access more and higher-volume buyers (high cost of opportunity). Being able to access marketplaces without dragging around bales of grain provided much greater opportunity for sale. In addition, marketplaces could be attended off-season, so farmers could buy things all year, not just for the short period in the fall when grain was harvested and ready for sale. This opened up the world of off-season purchasing with an early form of credit.
All this resulted in extra income, which could be used to improve farm efficiency, hire more labor, and improve the ability to support more children. More children meant more money, either by providing free labor to the farm or becoming employees to outside entities, bringing in salaries. In addition, the more frequent market exposure allowed more opportunity for culture and knowledge exchange, which is the basis for human innovation.
Payment in advance, whether by seasons or days, allowed people to buy things before they actually had the money. In effect, the IOUs were the first credit cards—physical proof that the debt existed and could be collected. This is the core of provable transfer of resources, and how humans were able to expand to nearly every inch of habitable land on Earth. The ability to keep records and learn vicariously is the foundation for all technology— and all human knowledge.
However, as transactions spread beyond the people in one’s town or village, the limitations of single-entry bookkeeping began to reveal themselves. A simple receipt didn’t show that anything was received in exchange, nor did it protect against fraud or theft.
In addition, businesses had become large ventures. People started to realize that when expenses are investments, they should look different from expenses that are simply repeat spends of consumable goods. (For example, $10,000 spent on pencils should look different to a company’s financial picture than $10,000 spent on equipment to manufacture the product sold, and both are different from $10,000 as a one-time payment to set up an overseas subsidiary.) We needed a better system to keep up. Enter doubleentry bookkeeping.
Double-Entry Bookkeeping
In the 11th century, bankers of the medieval Middle East created doubleentry bookkeeping, likely culled from a version of the Indian Jama-Nama system. This was revolutionary because it required both parties to enter both sides of a transaction, assuring greater accuracy and reliability, as well as account for expenses and revenue as they actually impacted the total company, rather than simple cash flow. This is the move from recording “I owe you one bale of grain” to “You gave me three goats, so I owe you one bale of grain.”
Now parties could trade not just existing goods, but future goods, with a way to account for goods and services owed and paid. Transactions could be carried forward and still remain in each day’s records, so that revenue
and debt accrued but not paid could still be kept current. This took off in the 1300s with the Genoese empire, and by the 1600s it had become the common method of recordkeeping among the major trading empires. Massive movements of goods, services, and capital across borders resulted, in large part because the method of accounting for these flows between strangers did not require trust—only proper records and proper receipt. This was the true beginning of globalization.
Then...we kind of got stuck. Remember, there were tens of thousands of years between the first humans hanging out by the magic fire and the creation of single-entry bookkeeping, and a few more millennia to the leap to double-entry bookkeeping. Accounting isn’t exactly a field that drives innovation. When something works, we tend to keep to the status quo until that status quo simply doesn’t work any longer.
Massive Fraud, or the Status Quo Officially Doesn’t Work Any Longer
But then, in 1997, the Asian banking crisis happened. What were previously considered stalwart banks making conservative investment and capital management decisions turned out to be an intertwined mess of favoritism and personal enrichment at the expense of shareholders and deposit holders. This was later termed “crony capitalism”: expensive short-term capital and development funds went to inside parties and/or inefficient, poorly managed companies, rather than to those offering the best or most profitable business propositions.
Quickly on its heels came the accounting scandals of the 2000s. Enron, WorldCom, HealthSouth, Tyco, AIG—the early 2000s are a ghostly graveyard of blue-chip companies that were cheating shareholders with “creative” accounting techniques, often backed by the most widely respected independent accounting companies in the world. Respected “Big 6” accounting firms like Arthur Andersen and KPMG were suddenly connected to shady inside business practices.
As the world stared into a gaping hole where millions in revenue should have been, a flaw of the double-entry system was brutally exposed. With the double-entry system, everything is accounted for in arrear, and anything can change or be changed from the moment of entry up until the accounts are audited by an impartial third party. Unaudited accounts were subject to any sort of editing with any sort of rationale, by accident or intention, which did nothing to help people making current and future decisions based on those entries. People started to realize that the mere act of keeping books wasn’t sufficient. Third-party auditing was mandatory to maintain any sense of reliability or trust.
HOW ACCOUNTING CAN BE LIKE BUILDING AN IKEA TABLE—IN A BAD WAY
Accounting in arrear means that your records reflect events that happened in the past, not current or future events. For example, say you’re a landlord. You get paid on the first of every month, but you do your books on the last day of each month. At the end of the month, you sort through the cash you’ve received and the expenses you’ve paid, and you try to match them up.
Sometimes (if sometimes means a lot), you don’t have an exact match. You end up with something I think of as the bookkeeping version of “extra parts” when you get something from Ikea. You think you’re done building, but then you see these handful of screws and bolts and think, “Crap. Did I need those?” You can keep them or toss them, but when those leftover screws and bolts represent actual cash, you don’t usually feel like just tossing that in the trash (and doing so might be illegal).
You have to figure out where to put these bits of extra revenue or expense, calling it something like “extra rent” or “fixture purchase” to account for it. It might not seem like a big deal, but these bits add up quickly and can result in major crimes like tax fraud or debt default. You see how the opportunity (and temptation) for accidental or intentional fraud is both very high and very easy. A number of companies figured this out, too. It did not end well. (Thanks, Enron.)
Triple-Entry Bookkeeping
In 1988, Dr. Yuji Ijiri, professor at Carnegie Mellon University and president of the American Accounting Association, wrote a monograph discussing a new accounting revolution: momentum accounting, or tripleentry bookkeeping. 2 This was less of a sea change in the accounting and business communities than you might expect. More like a puddle change. This was likely because almost no one read it.
Momentum accounting is a method of accounting that helps forecasting; it tells you how fast or slow a company is growing. But it required something double-entry bookkeeping doesn’t have: facts. As you saw earlier, doubleentry bookkeeping provides a reason for a debit (money you owe) or credit (money someone else owes you).
As Dr. Ijiri describes:
[Accounting moved from] single entry [bookkeeping], which just records what happened, to double entry, where what happened has to be explained by reasoning by another account—if you don’t have [an] explanation, you can’t have an entry
But it still leaves open the risk of mistake or fraud. If you want to be able to use bookkeeping for prediction, you need something solid to base your prediction on, not guesses or something that may be misremembered or, worse, something both parties colluded on. Something that can’t be altered or edited or “revised creatively.” And from this, we get the idea of a permanent ledger that records in real time—a system in which both parties keep a record of the transaction, but so does the system itself.
Do you see the sea change here? Triple-entry bookkeeping moves to the logical third dimension of accounting, which is not just a record and a reason, but also an auditable trail. Many have discounted the impact of this methodology, or the relationship of triple-entry bookkeeping to blockchain. However, this revolution is the heart of the functionality of blockchain.
But one person did read the monograph, eventually. And it turns out that one person recognized the genius of this innovation. On June 26, 2005, Ian Grigg, a financial cryptographer and later member of the Satoshi Nakamoto Institute, posted this:
It was widely recognised since David Chaum’s designs first appeared that the new “digital certificate” model of money was not aligned or symmetrical with accounting techniques such as double entry bookkeeping. Many people expected the two to compete, and indeed many money systems avoided combining them; this is I believe one of the few efforts to integrate the two and show them as better in combination than apart.
ARREAR VERSUS ARREARS
In arrear means after the fact—e.g., payment after the service has been rendered. This is like hiring a cleaning service to clean for the month of August, and the company bills you on August 31. You are paying in arrear.
In arrears means behind—e.g., payment that is late. If you hired that cleaning service for August, and payment is due August 31, but you don’t pay until October 1, your payment was made in arrears.
Triple-Entry Accounting
The digitally signed receipt, an innovation from financial cryptography, presents a challenge to classical double-entry bookkeeping. Rather than compete, the two melded together form a stronger system. Expanding the usage of accounting into the wider domain of digital cash gives three local entries for each of three roles, the result of which we call triple-entry accounting:
This system creates bulletproof accounting systems for aggressive uses and users. It not only lowers costs by delivering reliable and supported accounting; it makes much stronger governance possible in a way that positively impacts on the future needs of corporate and public accounting.3
This is the core thesis of what later became blockchain technology. As digital cash was maturing (through online banking, ATM machines, etc.), Grigg noticed the failure of double-entry bookkeeping to account for potential fraud and mistakes in the system. More importantly, however, he
created a solution. By pairing the digital certificate of digital cash with a triple accounting system, capital movement could be more reliable and secure, and less subject to fraud. Eventually, this method of recordkeeping wasn’t just about recording financial transactions. The recordkeeping became the financial transactions.
Confused? Let’s clarify by seeing it in action. Welcome to the emergence of Bitcoin.
The Bitcoin Revolution: The First Blockchain Use Case
In October 2008, an unknown individual or entity going by the name of Satoshi Nakamoto published a paper titled “"Bitcoin: A Peer-to-Peer Electronic Cash System” to the Cryptography and Cryptography Policy mailing list.4 Nakamoto described creating tokens, called bitcoin, which represented individual digital certificates moving through a chain of transactions. Nakamoto advocated creation of encrypted blocks to track these transactions through time, as they were happening.
While many count this as the genesis of blockchain, it is really the origin of a single practical application method of an auditable trail transfer system. This application is what we generally term blockchain (named for the chain of encrypted block transactions). It is this application, the Bitcoin blockchain, that is the model for all currently developed blockchain technology, but it is important to remember that this is just one part of the true innovation—an auditable trail transfer system.
The Bitcoin blockchain was based on a compilation of the token-based interbank transfer accounting system of the 1960s and 1970s (still in use), a digital cash innovation from the 1980s known as Hashcash (the encryption method is actually called hashing), and this basic concept of using tokens as the substitute digital certificate.
DOES BLOCKCHAIN HAVE TO LOOK LIKE THE BITCOIN BLOCKCHAIN?
Remember that the current structure of blockchain, including the Bitcoin blockchain and all the other tokenized blockchain, isn’t the only way to create this system of verified, immutable, auditable trail accounting. Nakamoto was offering only an example, not a definitive methodology, of auditable trail transfer technology.
It’s probably not even the best way to do this—more efficient methods of immutable digital signature recordkeeping are out there and will likely emerge in the next two to three years. Blockchain platforms could also be done without being peer to peer, or listing all transactions since genesis, or without using tokens, or many other ways. The token-based system of the Bitcoin blockchain is just the one we came up with first, and now it’s our default method for the moment.
We have a bit of time to see alternatives and determine if we like them better or if they have major advantages over the token structure we have now. Not much time, though— we’re at the point in technology development that looks like a race between innovation and standardization.
When the internet had enough users that people started thinking about commercializing and generating revenue, the focus moved from creating new types of networks and protocols to standardizing the ones that existed (the Transmission Control Protocol/Internet Protocol, or TCP/IP, eventually in combination with the Hypertext Transfer Protocol, also known as HTTP—that thing you don’t even notice anymore at the start of your web address: http://), and requiring all new additions to conform to these standards. It became more important for all the networks to communicate with one another than find newer, better protocols. The same occurred with VHS, CD formats, etc. A certain standard format or rule structure has to win so developers can focus more on things to do with the technology instead of how to create the technology. Users then move from early adopters, who are willing
to learn new ways to access and use every type of technology and play around to figure out hidden potential, to the mass group of users who are willing to learn only one type of access and are generally less focused on exploring the technology’s potential (what it could do with more help) and more focused on gaining value from the technology (applications that do stuff for users). This point is called mass adoption, and we’re reaching it now in blockchain.
To summarize, blockchain technology is an application pairing triple-entry bookkeeping with digital certificates. Its primary use case is to prevent fraud or mistakes in double-spending digital money or assets. It isn’t the socalled peer-to-peer transfer (without a bank) that is revolutionary, though excluding banks from transactions is always a positive development, according to me. It’s the new instant auditability that is revolutionary. The ability to have real-time transfers of value between parties that is based on verifiable facts that we can audit, or track, at any given time is incredible. We aren’t relying on someone’s word or opinion that a transaction happened between parties and someone was or wasn’t paid. We aren’t hoping someone didn’t end up with bookkeeping “extra parts” they’re trying to shove somewhere illegally.
With blockchain, we know that each party (1) agreed to enter into a transaction with the other (both used private keys or passwords to sign off on the transaction), (2) agreed to exchange a specific amount of value with each other (an amount of the underlying token, coin, or asset represented by a token), and then (3) actually exchanged that value. How do we know this? Because the transaction closed. It is listed as a transaction between the parties on the blockchain. If those three conditions didn’t exist, the transaction wouldn’t exist on the blockchain. So no more guessing, missing numbers, or extra parts.
This is particularly important because, in United States law, legal contracts require meeting of the minds (agreement to enter into a transaction that is mutually understood by both parties) and consideration (an exchange of
value) reflecting both quantity and price. As you can see, all these elements may be met by having a closed blockchain transaction between parties.
People call blockchain a “trustless system.” It is an entirely trustworthy system.
Ethereum and the Smart Contract Revelation
The Bitcoin blockchain is the primary use case and application of auditable trail accounting for digital cash or currency. Bitcoin is nothing more than a coin representing a value, and each bitcoin can be broken into 100 million subcoins called satoshis, or sats. 5 Bitcoin (or sats) is the coin that gets transferred from wallet to wallet, and it represents a cash value. You can see what the value of bitcoin is on any of the marketplaces on which it trades, converted into various fiat currencies or other cryptocurrencies. People buy it from other people or from crypto exchanges (trading for fiat currency) or in exchange for goods or services.
IS BITCOIN A CURRENCY?
Many people believe bitcoin could be a substitute for fiat (governmentissued currency, such as the US dollar). But it is fundamentally impossible for bitcoin to be a currency.
First, bitcoin is deflationary, meaning it is in limited supply, with the intention that the limitation will drive up the value of each individual bitcoin. There will be only 21 million bitcoin minted—ever. Regardless of need or demand, if some are accidentally lost or burned, that’s it. No more. And that’s as much a problem as something that’s inflationary, or in limitless supply. Currencies need to have a supply that can expand and contract as needed, so supply and demand meet as perfectly as possible. Why? Because the purpose is to keep a currency as stable in value as possible, not have it rise or drop. Currencies have to be stable and predictable, which means they need to be adjustable and nonvolatile. Having 21 million, no more, no less, means it is not adjustable.
Which leads us to the next problem: volatility, or wild fluctuations in value. Price volatility is a hallmark of assets, and it can be great—it’s what makes your tiny investment in a stock shoot up in value...or plummet, and you lose everything. Price fluctuations are not great for currency. You don’t want to have to add a level of guesswork onto every transaction regarding something called asset risk.
For example, let’s say you pay for a new iMac with cash. You are worried about whether you need that computer, if it works well for your needs, if you are paying too much for it. The store is worried only that you might run off without paying. All the concerns are transactional risk—related to the exchange that is the reason for the transaction.
But what if you decide to pay for that iMac with Apple stock instead? Now you’re still worried about whether the computer is what you need, you’re not being overcharged, etc. But you also have a new level of concerns—what if that Apple stock goes way up tomorrow? Then you
lost out on all that upside and paid way too much for that computer. The store is worried that Apple goes way down tomorrow, and it will lose money on the sale. Those issues with the Apple stock are asset risk. You have a second set of issues when you use assets to conduct transactions that you don’t have when you conduct transactions with currency.
People hoard bitcoin for just this reason, and are concerned about facing loss or losing potential upside when exchanging bitcoin for goods or services. Why? Because it has potential upside and loss—it’s volatile, and you can’t fix that volatility without supply adjustability.
So—it’s an asset.
But then people started stretching this concept of auditability of transactions. What else could you transfer between wallets? Does it have to be bitcoin? Could it be something else or represent something else? Absolutely. Here are some things you could transfer:
Coins representing value on other chains
Tokens representing a promise, ownership, or interest in something digital or physical
Tokens representing a patent or other intellectual property
Tokens representing digital or physical art
Tokens representing anything digital, such as music, AI code, or a novel
Tokens representing a “skin” for your avatar in a game
Tokens representing an equity interest in a project or company
Tokens representing the right to sublet your apartment or house
But could you do it on the Bitcoin blockchain? The first step was to figure out if the Bitcoin blockchain could handle smart contracts.
Smart Contracts
Smart contracts were originally created by Nick Szabo, an American cryptographer and computer scientist, in 1994. These didn’t start off as what we currently think of as smart contracts: self-executing programmable logic that initiates whenever an agreed state exists, can stop on set conditions, and can automatically start over countless times.
Szabo was initially focused on the idea of a transaction protocol that automatically executes or documents a set of actions based on the terms of a previously agreed set of terms. Several attempts to create functional smart contracts and a smart contract platform on the Bitcoin blockchain failed. An early NFT (nonfungible token, see “Nonfungible tokens”) platform was even created, called Counterparty. However, none of these made any inroads in adoption or gained significant traction.
HOW DOES A SMART CONTRACT WORK?
A smart contract works like a vending machine. Modern vending machines date back to the 1880s and are basically a simple smart contract. Prices are associated with particular snacks, for example, which are all identified with a basic letter and/or number code. When a person puts in money and enters their selection, they are agreeing to the terms of the machine (if you want item E5, you must pay $1.00) and simultaneously triggering a set of mechanized actions, currently aided with software. This triggered execution checks the value of the money deposited and then releases one of the requested items. After releasing it, the machine stops automatically, and resets to wait for another event. This ability to start automatically on being triggered, execute according to agreed terms, and then stop automatically requires a Turing complete device or language. Turing complete systems are able to solve any problem, given enough time, processing power, and proper instructions. They can also communicate with any other Turing complete system.
So, why would you ever want to make a Turing incomplete system? Because Turing complete systems are hard to create, are far more complicated, and, like all complex things, a lot can go wrong. So it’s understandable that when the original developers were building the complicated blockchain, they wanted to keep the already new and complicated blockchain process as simple and predictable as possible. They left the Bitcoin blockchain Turing incomplete, and they made sure it did the one task it was assigned constantly and consistently. And it does. It mines bitcoin, processes transactions, and transfers one asset (bitcoin) from wallet to wallet quite well. But that is all it does. And to add in more possibilities, they needed a new blockchain—one that was designed for more complex actions. A Turing complete system. And that’s how we got Ethereum.
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Again he raised his impassioned voice. Lepraylya, however, turned upon him fiercely.
"Peace!" she cried. "I bid you, peace—yes, even you, O Brendaldoombro, High Priest of Drome though you are!
"What! You would still make of this room a shambles, stain the very throne of your queen with human blood!"
"They are not human!" he shrieked. "They are demons that have assumed the bodies of men!"
A murmur of superstitious horror arose.
"Ho, guard!" cried the queen. "Guard, ho!"
It is my belief that some cool-headed gentleman had bethought himself of the guard before ever the queen, for it was only a few moments before a score or so of armed men had entered the room and taken a position, in the form of a semicircle, before the throne.
The eyes of Lathendra Lepraylya were blazing like that great jewel on her brow. Those eyes were fixed upon Brendaldoombro, and I actually thought that the old raptor quailed a little under that look of outraged majesty. If this was indeed so, it was for an instant or two only. His look, one of baffled fury, then became fixed and defiant.
"So!" said Lathendra Lepraylya. "What madness is this that I see? What blood-howl is this that I hear? No woman or man in Drome may be deprived of liberty or life without a fair trial; and yet you, yes, even you, O Brendaldoombro, are here striving to make a shambles of the very throne itself."
She raised her hand and pointed toward us.
"If these men are indeed—"
"They are not men!" the old villain shouted. "They are demons who have taken the human shape, to attain here in Drome some fell purpose. Death, I say! Death to these masqueraded devils! Let death be swift and—"
"Peace, I say!" exclaimed Lepraylya, stamping her sandaled foot. "And, if these men from the World Above are indeed but devils
counterfeit, could we kill them, O Brendaldoombro? Since when can mere man kill a devil?"
"When they are in the human shape, he can! Death! Death to these fiends who—"
"One can kill their bodies only," interrupted the queen, "and it may be that he can not do even that much."
"Their bodies only? What more," demanded Brendaldoombro, "can one do to any woman or man? Death! Death to these demons!"
"Their spirits would be but loosed from the body, O Brendaldoombro, to move unseen in the air about us, and they could then—if, that is, they really are devils—the more easily achieve their nefarious designs."
"They would be harmless then!" came the ready answer. "They are helpless save when they are in the human form."
"Since when?" queried Lepraylya, her eyes widening in surprise. "Since when did the minions of the Evil One become helpless unless in human shape?"
"You misapprehend, O Lathendra Lepraylya. These belong to a most peculiar order, to a most rare species of bad angel. And," cried Brendaldoombro, "they are the worst devils of all! Death to them before it is too late! Let us—"
"Have justice," said Lepraylya, "as we hope for mercy and justice in that dread day when every human soul—even yours, O Brendaldoombro—must stand and be judged for the sins it has done in the flesh. No human being may be condemned in Drome without trial; and I believe that Lord Milton and Lord Bill are true men, O Brendaldoombro, and no demons. And you would slay them, murder them, these the first men from the World Above, as you would slay a gogrugron—if you did not fear it, O Brendaldoombro. Who knows what message they bring to us? Now they stand silent; but, when they will have learned our language, then we shall learn that which is now so dark and so mysterious."
"Dark and mysterious indeed!" cried the high priest. "Signs and portents have been given us, warning us of what is to follow if we harbor these demons amongst us. And I tell you, O Lathendra Lepraylya, you and all Drome shall rue this day if you heed not the dread warnings of the wrath Divine. Darkness I see! Yes, I see, darkness! And earth-shocks! The roof of our world crashing down! Calamities that will overwhelm all Drome and—" "Silence!" Lepraylya commanded. "Silence, croaker of evil! One would almost think, O Brendaldoombro, that you know more about the angels of the Evil One than you do about God's own. Hear now my word:
"When Lord Bill and Lord Milton can answer the charge that they are demons masquerading in the shapes of men, then, O Brendaldoombro, and not before, shall they be brought to trial—if, indeed, you will prefer that charge against them then.
"Such is my word to you, O Brendaldoombro, and to you, ladies and lords all, and on the majesty of the Droman law and of the dread law of God it stands."
Chapter 43
DRORATHUSA
And so it was that we reached, there in the palace of the Droman queen, our journey's and—certainly a stranger journey than any I ever have heard of and one that ought to prove of even greater interest to scientists than to the world in general.
If, however, what they tell of the region is true, an expedition to the mysterious land that the Dromans call Grawngrograr would make our journey to Drome look like a promenade to fairyland.
But our journey ended there in the palace, and now it is that my story rapidly draws to a close.
Probably you will think that, there under the aegis of Lathendra Lepraylya, we found ourselves in clover. And, in a way, this was undoubtedly so. We were given each a splendid suite of rooms in the palace itself, and our lives were as the lives of princes, save that the close protective guard always kept over us was a reminder that there was such a personage in the world as one Brendaldoombro.
If it had not been for that vulture-shadow, how wonderful those days would have been!
But that shadow was there, and it never lifted. And the worst of it was that everything was involved in the deepest gloom and mystery, what with our ignorance of the Droman language. Forsooth, however, had we been masters of that language, we could not have known the plots that were hatching in the dark skull of Brendaldoombro.
As for the language, we were studying it with diligence, and we really had cause to be astonished at the rapidity of our progress.
As to the high priest, crafty and consummate villain though he was, that worthy found that Lathendra Lepraylya was quite his match and more than his match, as, indeed, was Drorathusa. Against the queen he was, of course, powerless to take any repressive measure; but the case was very different with regard to Drorathusa. He could act in this way, and he did.
She was sent to a distant, lonely, forsaken place on the very outskirts of the kingdom, or, to be precise, queendom. According to all accounts, that spot is really a terrible one. Drorathusa was, in fact, in exile, though Brendaldoombro did not like to hear any one call it that. But almost everybody did or regarded it as such, and there were murmurs, not only amongst the Droman people, but even amongst those priestesses and priests whom the old villain had counted upon to applaud his every word and act.
Nor did time still those murmurs. On the contrary, they grew louder, more persistent. Brendaldoombro was learning that it is one thing to send a person into exile and quite another to banish that person from the popular esteem. Nor did he stop at banishment; he had recourse to the assassin's dagger and the arts of the poisoner But, in all these attempts upon the life of Drorathusa, he was thwarted by the agents of the queen. Lepraylya knew her opponent, and had at once taken measures to safeguard the life of the exiled priestess, who held as high a place in the esteem of her sovereign as she did in the hearts of the people.
How strange it seems to be writing of things like these in this the Twentieth Century, the Golden Age of Science! But, as I believe I have already remarked, Science hasn't discovered everything yet. This is a stranger, a more wonderful, a more mysterious old globe than even Science herself dreams it to be.
When our acquisition of the language became a real one, we began to learn something of the science of Drome and to impart a knowledge of the wonderful science of our own world. Never shall I forget the amazement of the queen and those learned men of Drome when Rhodes brought his mathematics into play. Problems that only a Droman Archimedes could solve and that only after much labor
(what with their awful notation) Rhodes solved, presto—just like that! So unwieldly was the system of notation employed by these Hypogeans that even their greatest mathematicians had been able to do no more than roughly approximate pi.
When Rhodes proceed to the solution of trigonometrical problems, their amazement knew no bounds. And, when he explained to them that all they had to do to become masters of such problems was to discard their cumbersome notation and adopt the simple numerals used by ourselves—well, I do actually believe that that was the straw that broke the back of Brendaldoombro's power! For (strange though it may seem to a world that is more interested in any kind of abracahokum, and especially any kind of political jiggumbob, than it is in science) that brought over to our side virtually every learned man in Drome and a majority of the people themselves. Nor should I forget the priestesses and the priests. Your average Droman is much interested in all things of a scientific nature, and no one more so than the true priestess or priest, though there are, of course, some lamentable exceptions.
Yes, clearly we were men and not demons, else never would we have brought such wonders as these to offer them as gifts to the Dromans.
But old Brendaldoombro had his answer ready. "Instead," said he, "that proves that they are not men; only devils could be such wizards!"
I have often wondered what dark thoughts would have passed through that dark brain of his had he been there the day that Milton Rhodes showed Lathendra Lepraylya, all those learned men and all those grand lords and ladies (ladies and lords, a Droman would say) the marvels of a steam-engine. Yes, there the little thing was, only two feet or so high but perfect in all its parts, puffing away merrily, and puffing and puffing, and all those Dromans looking on in wonder and delight.
Even as we sat there, came word that Brendaldoombro was dead. He had died suddenly and painlessly just after placing his hand in
blessing on the head of a little child.
Well, they gave him a magnificent funeral.
Peace to his soul.
On the death of the Droman high priest (or priestess) a successor is chosen, in the great temple in the Golden City, by a synod composed of exactly five hundred, the majority of whom are usually priestesses. On the very first ballot, Drorathusa (who was already on her way back from her lonely place of exile) was chosen.
Priestesses and priests, I should perhaps remark, are free to marry, unless they have taken the vow of celibacy. This (voluntarily, of course) many of them do. Drorathusa, by the way, had not done so.
Came, at last, the day when Milton Rhodes told me that he was going to be married—to Lathendra Lepraylya herself. The news, however, was not wholly unexpected.
Well, every man of us can't marry a queen—though of queans there are plenty.
I take the following from my journal:
"They were married today, about ten o'clock, in the great temple; and a very grand wedding it was, too. Drorathusa herself spoke the words that made them man and wife, for the sovereign of Drome can be married by the high priestess or priest only.
"Now, as she proceeded with the ceremony, which was a very long one, I thought that that pale face of Drorathusa's grew paler still and that a distraught look was coming into her eyes. Then I told myself that it was only a fancy. But it was not fancy. For of a sudden her lip began to tremble, her voice faltered, the look in her eyes suddenly became wild and helpless—and she broke down.
"A moment or two, however, and that extraordinary woman had got control over herself again.
"She motioned the attendant priestesses and priests aside; a wan smile touched her lips as she pressed a hand to her side and said:
"'It was just my heart—but I am better now.'
"She at once proceeded with the ceremony, voice and features under absolute control. Again she was Drorathusa the Sibylline.
"And so they were married And may they live happy and very happily ever after!"
And then, after the great nuptial banquet in the palace, off went the happy pair in the queen's barge for Lella Nuramanistherom, a lovely royal seat some thirty miles down the river; whilst I betook myself to the solitude of my rooms, there to ponder on the glad-sad lot of man, to hear over and over, and over again, those low tragic words:
"It was just my heart—but I am better now."
"Amor," says Saint Jerome, "ordinem nescit."
Beautiful, Sibylline, noble, poor Drorathusa!
Chapter 44
WE SEE THE STARS
When facing the dangers, mysteries, horrors (and other things) of our descent to this strange and wonderful subterranean land of Drome, how often did I say to myself:
"If ever I get out of this, never anything like it again!"
And I truly believed it at the time, though I should have known better I should have known—I did know that adventure and mystery have inexplicable and most dreadful charms. Indeed, the more fearful the Unknown, the more eager a man (one who has heard the Siren song which adventure and mystery sing) is to penetrate to its secret places—unless, indeed, the charms of some Lepraylya or Drorathusa entwine themselves about the heart. In my case—well, Amor ordinem nescit.
Here was I in the Golden City; here was everything, it would seem to another, that could conduce to contentment, to that peace of mind which is dearer that all. And yet I was restless and very unhappy.
And the Unknown was calling, calling and calling for me to come. To what? Perhaps to wonders the like of which Science never has dreamed. Perhaps to horrors and mysteries from which the imagination of even a Dante or a Doré would shrink, would flee in mad terror—things nameless, worse than any seen in a horrible dream.
But I wanted to go. Yes, I would go. I would go into that fearful land of Grawngrograr—discover its mysteries or perish in the attempt.
And I am going, too. That journey has not been abandoned, only delayed. It was like this.
I was drawing up, in my mind, tentative plans (my purpose was yet a secret) when one day Milton Rhodes came in, and, after smiling in somewhat enigmatic fashion for some moments, he suddenly asked:
"I say, Bill, how would you like to see the stars, the sun again?"
"The sun? Milton, what do you mean?"
"That I am going back to the surface, out onto the snow and ice of Rainier, back to Seattle. I thought that you would want to go along."
"What in the world," I exclaimed, "are you going back for?"
"There are many things that we ought to have here in Drome; a book of logarithms, the best that I can get, is one of them. We'll get those things, or as many as we can, for it would, of course, be impossible to bring them all. We'll wind up our sublunary affairs, and, hurrah, then back to Drome! What do you say to that, old tillicum?"
"What does Lepraylya say?"
"That I may go; otherwise, of course, there would be no going. At first she wouldn't even hear of it. She feared that it might be impossible for us to maintain secrecy—that some of our precious politicians might get down into Drome. I am sure she believes that the kingdom would have more to fear from half a dozen of those sons of Proteus than from an army of sixty thousand men. And, bless her heart, when I think of some of their blunders, asininity, hypocrisy, lying, stupidity, coat-turning and sheer insanity, I am of opinion that there is not much exaggeration, if any, in that idea of hers.
"But I have at last gained her consent. With our large party, there can not be any danger."
I was not sure of that, but I kept those thoughts to myself.
"Of course, I want to go," I told him. "But I want to come back to Drome."
"Most assuredly, Bill, we'll come back to Drome."
"But," said I, "there is something that I don't understand."
"Which is what?"
"We can't keep our great discovery a secret. And, as soon as our world has it, adventurers, spoilers, crooks, thieves and worse will come swarming down that passage. We'll loose upon our poor Dromans a horde of Pizarros."
"Did I think for one single moment that what you say, or anything like it, would follow, never one step would I take towards the sun. You say that we can not keep the discovery of Drome a secret; we can, and we will—until such time as it will not matter. We will come out onto the glacier in the nighttime. Our ways of egress—I suppose we'll have to tunnel our way out through the ice, that there will not be any accommodating crevasse—will be most carefully concealed. No one will see us come out. No one will know of our journeys to and from the Tamahnowis Rocks, for they will be made under cover of darkness. No one will know
"Fortunately, by the way, as it now turns out," he added, "when we adopted the Droman dress, we did not throw away our pants et cetera, and so, though those clothes are somewhat the worse for wear, our appearance up there on Mount Rainier will cause no remark."
"But our showing up at home," I said, "after so long an absence will cause plenty of remarks and more than remarks. How will we answer all the questions that they will surely ask us?"
"Tut, tut!" smiled Milton. "If all our difficulties could be so easily resolved as that!"
"But how will we do it?"
"We won't answer them, Bill; we'll keep them guessing."
"But suppose we find that Scranton has let out something that will give them a pretty good idea as to what has happened?"
"That might be bad," answered Rhodes. "But I have every confidence in Scranton's discretion. He will, I feel sure, maintain that utter silence which I requested, until the period designated expires. Possibly he may never tell what he knows.
"I believe, however," he went on, "that we ought to leave the world, our world, a record of the discovery. I will set down to the extent that time permits those things which, in my opinion, will interest the scientific world. As for the discovery itself, the journey and our adventures, yours, Bill, is the hand to record that."
"A record?" I exclaimed. "Then why all this secrecy, this moving under cover of darkness and pussy-footing around if you are going to broadcast the discovery of Drome to the whole world?"
"Because we will then have left that world and the way to this will have been blasted up and otherwise closed."
"That," I told him, "will never keep them out."
"I believe that it will. And, if any one ever does find his way down, he'll never return to the surface; he'll spend the rest of his days here in Drome, even if he lives to be as old as Methuselah. Be sure that you put that into the record! The Dromans are human, and so they are not quite saints. But their land is never going to be infested with plunderers or any of our sons of Proteus if I can prevent it, and I feel confident that I can.
"This closing of the way will not mean complete isolation. At any rate, I hope that it will not. For I feel confident that ere very long the two worlds will
communicate with each other by radio. There is a possibility, too, though that possibility is indeed a very remote one, that each will even see, by means of television, the inhabitants and the marvels of the other."
One or two weird things befell us during our return journey, but time presses and I can not pause to record them here.
The party was composed of picked men, one of whom was Ondonarkus. We had one ape-bat.
This going up was a more difficult business, I want to tell you, than our going down had been. There was one consolation: we did not get lost.
Onward and upward we toiled, and at last, on the 28th of June, we reached the Tamahnowis Rocks. Thanks to Rhodes' chronometer-watch and the very careful record which he had kept, we knew the very hour.
This was about ten o'clock in the morning. The way out was completely blocked by the ice. Cool air, however, was flowing in through fissures and clefts in the walls and the roof of the tunnel.
We waited until along towards midnight, for fear some one might be about, that some sound might reveal the secret of the rock.
It was about ten o'clock when we began to dig our way out through the ice. The tunnel was not driven out into the glacier but up alongside the rock wall, through the edge of the ice-stream.
Hurrah! At last our passage was through!
And, as old Dante has it,
"Thence issuing we again beheld the stars."
[1] Zandara by John Martin Leahy, Fantasy Publishing Company, Inc., 1953.
[2] This surmise of Mr. Carter's is correct. The above quotation is taken from a modernized Anatomy of Melancholy. Burton, though from what Latin writer he took the words I can not say, wrote:
"Animis haec scribo, non auribus." Darwin Frontenac.
[3] Sick Moon: Old Moon in the Chinook jargon. Darwin Frontenac.
[4] "At this time (November, 1843) two of the great snowy cones, Mount Regnier and St Helens, were in action On the 23rd of the preceding November, St. Helens had scattered its ashes, like a white fall of snow,
over the Dalles of the Columbia, 50 miles distant A specimen of these ashes was given to me by Mr Brewer, one of the clergymen at the Dalles " Fremont
[5] "When the bridge at Colebrook Dale (the first iron bridge in the world) was building, a fiddler came along and said to the workmen that he could fiddle their bridge down The builders thought this boast a fiddle-de-dee, and invited the itinerant musician to fiddle away to his heart's content. One note after another was struck upon the strings until one was found with which the bridge was in sympathy. When the bridge began to shake violently, the incredulous workmen were alarmed at the unexpected result, and ordered the fiddler to stop." Prof. J. Lovering.
[6] "It has been calculated that at the depth of 35 miles, air, subjected to the pressure of a column of matter of the mean density of that at the surface of the earth, would acquire the density of water; that at the depth of 173 miles, water itself, which is eminently incompressible, would acquire the density of marble; and at the centre, marble would have a density 119 times greater than at the surface But the comparatively small mean density of the mass [of the earth] proves that none of these effects take place " Brande
[7] "The cases are certainly not numerous where marine currents are known to pour continuously into cavities beneath the surface of the earth, but there is at least one well-authenticated instance of this sort that of the mill streams at Argostoli in the island of Cephalonia It has been long observed that the sea water flowed into several rifts and cavities in the limestone rocks of the coast, but the phenomenon has excited little attention until very recently. In 1833, three of the entrances were closed, and a regular channel, sixteen feet long and three feet wide, with a fall of three feet, was cut into the mouth of a larger cavity. The sea water flowed into this canal, and could be followed eighteen or twenty feet beyond its inner terminus, when it disappeared in holes and clefts in the rock."
George P. Marsh: Man and Nature.
[8] "Considering that the mean density of the whole earth is only about five and a half times that of water, and that the materials of which the crust of the earth is composed are all compressible in a greater or less degree, so that even at no very great depth the density of the different substances must be greatly increased by the mere pressure of the superincumbent materials, some philosophers have supposed that the effects of pressure must be counterbalanced by the expansive force of a great heat subsisting in the interior of the earth; and others that the earth is not solid, but merely a hollow shell of inconsiderable thickness " Brande
[9] "One dark night, about the beginning of December, while passing along the streets of the Villa de Natividada, I observed some boys amusing themselves with some luminous object, which I at first supposed to be a kind of large fire-fly; but on making inquiry, I found it to be a
beautiful phosphorescent Fungus, belonging to the genus Agaricus The whole plant gives out at night a bright phosphorescent light, of a pale greenish hue, similar to that emitted by the larger fire-flies, or by those curious soft-bodied marine animals, the Pyrosomae From this circumstance, and from growing on a palm, it is called by the inhabitants 'Flor de Coco.' The light given out by a few of these Fungi in a dark room was sufficient to read by."—George Gardner.
[10] "The Chevalier d'Angos, a learned astronomer, carefully observed, for several days, a lizard with two heads, and assured himself that this lizard had two wills independent of each other, and possessing nearly equal power over the body, which was in one. When a piece of bread was presented to the animal, in such a manner that it could see it with one head only, that head wished to go towards the bread, while the other head wished the body to remain still " Voltaire
[11] See In Amundsen's Tent, by John Martin Leahy, in August Derleth's anthology called The Sleeping and the Dead, page 386. Darwin Frontenac
[12] "A very decided luminosity has been observed to proceed from dissecting-room subjects, the light thus evolved being sufficient to render the forms of the parts (which are peculiarly bright), almost as distinct as in the daylight Three cases are recorded by Sir H Marsh, in which an evolution of light took place from the living body The light in each case is described as playing around the face, but not as directly proceeding from the surface; and in one of these instances, which was recorded by Dr D Donovan, not only was the luminous appearance perceptible over the head of the patient's bed, but luminous vapours passed in streams through the apartment." Dr. Carpenter.
[13] "The very children, it is said, pointed to their foreheads as he passed, being taught to regard him as a kind of madman " Irving
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