Cryptocurrencies… Bitcoin, Internet money, Ethereum, cryptocurrency exchanges, XRP, hard forks, proof of work… you’ve heard vague terms in the news and social media about cryptocurrency. But what is cryptocurrency?
Is it obscure internet money for tech-gurus, cypherpunks and criminals? Or is it something bigger?
Cryptocurrency is the future of finance, much like the Internet was/is the future of information, and AI is the future of data processing. Gain an edge, read on to learn all about cryptocurrency, and the future of value. In this page and its related posts you will learn the answer to the question “what is cryptocurrency?”
Read through the various sections below to learn all there is to know about cryptocurrency.
- What is Cryptocurrency?
- The Origin of Cryptocurrency
- How Cryptocurrency Works
- What can you use cryptocurrency for?
- Why Use Cryptocurrency?
- Technology Behind Cryptocurrency
- Top Cryptocurrencies (2019)
- Factors for Cryptocurrency Success
- How to Buy Cryptocurrencies
- What is the Token Economy
- What are Security Token Offerings? (STOs)
- Digital Assets vs. Cryptocurrency
- Leaders in the Cryptocurrency Industry
What is Cryptocurrency?
Cryptocurrency is digital coins/tokens that serve as a peer-to-peer medium of exchange/value that relies on encryption for secure, borderless, censorship-resistant, permissionless, transactions.
In broad terms, cryptocurrency is a digital, worldwide, distributed, time-stamped ledger (blockchain) that accounts for digitally scarce tokens in a value network. At its bare basics, cryptocurrency is a database of account entries that can only be changed within the network’s protocol, which is similar to how banks/accounts work today. Typically used as a value transfer system or payment network.
However, banks are private, closed systems that are inefficient and take much too long to communicate their ledgers with other bank ledgers for transactions/money transfer, especially for those of larger value.
Importantly, cryptocurrencies are bearer assets, meaning that ownership is not assigned like on a property deed. If someone takes your physical property deed, it’s ok because your municipality has your name on record that you own said property. However, if someone steals the cash in your wallet, then it is gone. The same principle applies to cryptocurrency. It is a bearer asset that a user holds (private keys) and if lost or stolen, then it is no longer yours.
The original cryptocurrency Bitcoin, was developed as a peer-to-peer electronic cash system. However, this is only the first application of cryptocurrency.
Although, cryptocurrency is a broad term used to encompass the technology surrounding digital tokens used today to transfer value. The most popular and highest market capitalization cryptocurrencies (at the time of writing) are Bitcoin, Ethereum, XRP, Bitcoin Cash, EOS, Litecoin and Binance Coin.
The reason that these cryptocurrencies have value in the first place is multifaceted. It is the first time in history that we have the technological innovation to create digital scarcity.
Cryptocurrency is a technology that combines digital scarcity with digital ownership, decentralization, network security and programmability. This all may sound vague and confusing at first, but once we get into the details it will all clear up.
There are many cryptocurrencies in existence, some of great value, and others are simply scams. Still others are being created by private institutions such as governments and banks. I delineate the qualities of truly open, real cryptocurrencies in my post on the five pillars of cryptocurrency.
What makes up cryptocurrency is a set of technologies that together are greater than the sum of their parts. In short, cryptocurrencies, generally speaking, are a technology used to generate digital scarcity – something that has never existed before. There are many different types, or applications, of cryptocurrencies, the first and most well known to be money.
The Origin of Cryptocurrency
The very first cryptocurrency to come into existence was Bitcoin. All other attempts until this point in time to create digital cash had failed (PayPal, Digicash, etc) for various reasons. Although, the common element to their failures were their centralized nature, susceptibility to attack, reliance on centralized third parties, and regulatory constraints. All prior attempts were eventually shut down by governments.
The Bitcoin payment system was originally developed as a way to negate the need for “trusted” third parties such as banks and clearing houses, as the bitcoin white paper title suggests “peer-to-peer electronic cash”. It was quickly developed organically into a pseudo-Internet money-value system that exists and works outside of the traditional financial infrastructure.
In October 2008 an anonymous [cypherpunk(s)] person(s) by the name of Satoshi Nakamoto published the Bitcoin White Paper, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”. In this paper, Satoshi Nakamoto outlined the general protocol and system behind the Bitcoin network.
This paper was a breakthrough moment. A zero-to-one moment. From this publication, anyone, anywhere in the world could replicate the protocol for any other cryptocurrency they decide to create. Forever changing the world of finance.
On January 3rd 2009, the very first Bitcoin block was mined with the first 50 bitcoins. The original network was very small, consisting only of Satoshi and Hal Finney, a fellow cypherpunk.
Over the next decade (2009 to 2019), Bitcoin spread over the Internet, and thus throughout the world. Originally as a speculative Internet money, then as a real means to hold value in unstable fiat times (Greek Debt Crisis, Venezuelan hyper-inflation, and others), to move value from one political arena to another (Chinese citizens moving money out of China via Bitcoin due to communist restrictions on fiat withdrawals out of the country).
Alongside Bitcoin, literally, thousands of other cryptocurrencies have come on the scene, collectively known as “alt-coins” since they are alternative cryptocurrencies to Bitcoin. While Bitcoin is the original cryptocurrency.
Some of the more prominent alt coins are Ethereum, XRP, Litecoin, Monero, ZCash, Bitcoin Cash, EOS, Cardano, TRON, DASH, etc. Many have come and gone, fading into oblivion. Others have stuck around for years. Some of the oldest cryptocurrencies include Litecoin (2013), XRP (2013), Ethereum (2015), and some others that are no longer in the top 10 or 20.
In 2017 there was an “ICO frenzy” (initial coin offering) that lead to an explosion in alt coin development, with thousands of frauds stealing the average person’s money.
Today, in 2019, Bitcoin is viewed as a more serious investment with real potential to become a worldwide currency and store of value. It is still used to transact online, as well as an alternative currency/store of value for terribly managed fiat currencies. Many institutional investors are getting into the cryptocurrency space, typically beginning with Bitcoin investments.
Continue to visit Markshirecrypto.com for updates as the world of cryptocurrency continues!
How Cryptocurrency Works
Cryptocurrencies, in general, rely on a distributed timestamped ledger consisting of a series of transactions/entries (known as a blockchain) that has a mechanism for confirmation of transactions (proof of work or stake or consensus). Cryptocurrency also relies on encryption (public-private key pairs) that allow for a level of anonymity. Users have their digital tokens (cryptocurrency) attached to accounts (“wallets”) in the blockchain ledger.
You can send digital tokens to any wallet (account) anywhere in the world, at any time, without the permission of a bank, government or other organization. You simply send however many tokens (or fractions of a token) to the specified wallet address (much like an email/web address, just an alpha-numeric string at this point in time).
In the traditional financial world, most fiat money exists solely as numbers entered in computer accounting software. There isn’t a dollar of cash stashed away for every dollar in your online bank account. So how do we know exactly how much money is in your account? Sounds like a silly question, just check your online bank account statement, right?
Yes… but how do we know that that number is legitimate? That, someone, didn’t work the system to give you more money (maybe accidentally entered an additional zero at the end of your paycheque) or take money out of your account? Or that you didn’t send the same $100 to two different people? This is known as the double spend problem.
The double spend problem is the idea that in a digital world, what prevents someone from spending the same money twice? In our old financial system, banks and credit card companies are regulated to surveil and prevent this double spending. But this system is riddled with inefficiencies and trust issues.
Cryptocurrency technology solves the double-spend problem because it consists of a distributed globally transparent ledger known as the blockchain.
Everyone in the world with Internet access and a high school education can read the blockchain ledger. If someone tries to double spend, the network identifies this and does not allow the second transaction to occur. Additionally, in order to publish blocks to the blockchain requires either a large amount of computing power, or a stake in the system, which makes it practically impossible to cheat the blockchain and reorganize old entries to allow yourself to double spend or to steal funds. This is all elaborated on later.
The point is that you cannot double spend with the blockchain and consensus mechanisms without needing a bank or legal system telling you that you cannot. Hence trustless, you do not need to trust anyone but the computer algorithm.
The premise behind cryptocurrency is that each token represents a unit of value. At first thought, people usually associate value with money – monetary value. And that was the first application of cryptocurrency, Bitcoin, as a currency/store of value. However, there are many other applications of tokens of value, as elaborated on below.
What Can You Use Cryptocurrency For?
This category is VERY BROAD and you’ll have to use your imagination as I’m sure that you will be able to think of more things than I can list!
Since the technology behind cryptocurrency creates digital scarcity and prevents double spending you can literally use cryptocurrency for tens of thousands of applications, most of which we haven’t even thought of yet.
Think of cryptocurrency as a digital token of value. Once this is understood you can easily understand the myriad of applications cryptocurrency has.
Money is valuable in our society. And the first application of cryptocurrency is as a replacement for fiat money. In fact, it serves as a better form of money, as Bitcoin is sound money. You can use Bitcoin and other cryptocurrencies purely as money (Bitcoin, XRP, Ethereum, Litecoin, etc).
However, there are things other than money that have value in our society. Things such as a university/college degree, identification proof (i.e. birth certificate, passport, driver’s license), property deed, stocks of a company, etc. These other valuable items can be digitized into tokens on blockchain networks.
Other financial asset applications of cryptocurrency are already underway and being developed. Examples include:
- Stable Coin – The digitization of fiat money as stable coins.
- Store of value (like gold).
- Stocks – digital token representation of stocks, known today as Security Tokens (i.e. STOs, Security Token Offering).
- Bonds – digital token representation of debt obligation.
- Real Estate – the digitization of real estate deeds, which may make the real estate market significantly more liquid as you could buy/sell very small fragments of your property.
Think about your smartphones. If you are less than 35-40 years old you probably never leave home without it. It stores so much of your personal data (from communications to pictures to account passwords and access to your social media). People also store their debit/credit card information on their phones.
I foresee a future where our phones will also hold digital tokens representing our identification. Why not? Its better than having to carry around a drivers license, passport, SSN, health insurance card, etc. The digitization of identification includes:
- Driver’s license
- Birth Certificate
- Citizenship card
- Travel Visa
- Social Security Number (SSN)/Social Insurance Number (SIN)
- Health Insurance ID
There are so many other things that can be tokenized, the possibilities are nearly endless. Some more examples include:
- Doctor’s license, Nurse’s license, Lawyer’s license, Accounting license, Realtor license, etc.
- High school diploma, College/university diploma/degree.
- Tradesman licenses (i.e. electrician, plumbers, mechanics)
- Plane/train/boat tickets that cannot be duplicated/forged.
- Medical prescriptions (may help to curb drug seekers who hop from clinic to clinic to obtain narcotic prescriptions)
- Insurance policies
- Marriage certificates
- Voting (votes can be encrypted for privacy and ensure people do not double vote, and gets an accurate, instant/live count on the number of voters).
- Copyrighted/patented multimedia (prevent pirating of artists’ work such as songs, movies etc).
You may be wondering why we need to tokenize all of the above things… to a beginner in the cryptocurrency space it may seem excessive or needless. After all, we have ‘perfectly good’ plastic driver’s licenses and passports etc.
I’ll explain more below in the next section, but briefly, the technology behind cryptocurrency and digital tokens make it so that the identification/credential can virtually immediately be verified and is extremely difficult if not impossible to fake/replicate. This refers to the double spend problem that is explained in more detail below. This solution extends to so many areas of our world and has the potential to reduce fraud, identity theft and make formal verification orders of magnitude simpler.
The main point is that anything that requires scarcity or verifiability can be used on a blockchain/with digital token/cryptocurrency technology.
However, today, the primary use case of cryptocurrencies is that of a store of value and monetary systems.
Why Use Cryptocurrency?
Why even bother to use cryptocurrency? To be fair, the user interface today is not great. Many cryptocurrencies are not recognized by federal governments and even for the ones that are, there are either no concrete rules or you’d have to pay tax every time you spend cryptocurrency.
Fortunately, that is within the context of the legacy system. You do not need anyone’s permission to use cryptocurrency. It exists and functions outside of the traditional legacy system.
Did you understand that? You can exchange cryptocurrency for goods, services or fiat with anyone who is willing to make that trade. All you need are two agreeable parties. Much like cash, except better because a government usually sanctions cash as legal tender. No one needs to sanction Bitcoin or any other cryptocurrency other than the users on the network.
That being said, for widespread adoption the crypto world and legacy world are coming together to develop crypto-regulation so that they can integrate and crypto can make the legacy world more efficient.
Moving on… one of the main reasons why to use cryptocurrency – one of the biggest problems that it solves – the double spend problem.
Cryptocurrency solves the double spend problem. The double spend problem occurs when you send someone digital money, how does that person know that you haven’t already spent that digital money on something/someone else? Sounds like a silly question, but in the traditional financial system a “trusted third party” such as a bank verifies that you have not spent that money already.
That might sound really insignificant or silly because it is not something that we think about on a day-to-day basis, or perhaps something that no one has ever really thought about. But in the age where the majority money is just numbers in your bank account and not physical cash or gold coins, verifying that you “actually” have the money allocated in your account is a real problem, one that banks serve to solve today.
That being said, the user interface/experience today for cryptocurrency is still quite poor; however, it improves with every passing year. Despite the faults and inadequacies of the UX, the value of cryptocurrency (such as Bitcoin and Ethereum) is so high that hundreds (or even thousands) of companies and people are working on solving this problem.
Moreover, people desperate enough or keen enough are using cryptocurrency with today’s user interface, and it still works really well.
In countries that are in economic collapse, such as Greece in 2014, and Venezuela more recently (2018/2019), Bitcoin offers financial security and freedom from their rapidly depreciating fiat.
People in China and other communist regimes have been using cryptocurrency to move their fiat outside of their country and purchase other investments in more stable, democratic nations.
Technology Behind Cryptocurrency
As I said earlier, cryptocurrency as a whole is the crossroads of a series of technology or application of technology that allows it to function. Cryptocurrency is greater than the sum of its parts.
What is Blockchain?
Blockchain. It was a huge buzz word in 2017 and 2018. Companies would mention that they were exploring blockchain research and their stock prices would soar within a day. The most infamous being “Long Island Iced Tea” changing their name to “LongIsland Blockchain” – their stock price exploded over 200% within a day.
But what is blockchain?
Blockchain is not complicated to understand. In its simplest explanation, it consists of a database of timestamped data grouped into blocks arranged in consecutive order. Over a pre-determined time period a new block is “processed”/”published” to the database.
A blockchain acts as a ledger that records all the different transactions occurring on it. Most importantly, it records them in order. It is one of the key elements in what makes cryptocurrency transparent. Anyone (who knows how) can read the blockchain and follow the path of a certain cryptocurrency.
The incentive for multitudes of people/entities to maintain a blockchain ledger is the block reward of cryptocurrency that is released with every new block and contributes to the flow/”inflation” of cryptocurrency. Although it astronomically lower rates of inflation than fiat currency. Additionally, some cryptocurrencies have a zero percent inflation rate, while others have a negative inflation rate.
The general public/multimedia sometimes misconstrues blockchain as synonymous with cryptocurrency and many companies and regulators were touting “blockchain not bitcoin” sentiment in late 2017 and early 2018 as Bitcoin prices began falling.
That is a mistake. Blockchain is a highly inefficient database that makes no sense to use without the adjunct technological aspects that exist in cryptocurrencies, such as decentralization, public-private key pairs, and consensus algorithm(s) (i.e. proof of work).
What is Decentralization
Decentralization is one of the other key elements of what democratizes cryptocurrency and makes it transparent.
There has been a lot of discussion on decentralization within the cryptocurrency industry. Many projects claim to be “more decentralized” than other projects. You may hear claims that Bitcoin is centralized in China, or that XRP is centralized by Ripple. But what do these claims really mean?
So what is decentralization?
Decentralization is simple enough to understand, but when you get into the details it becomes clear that it is not easy to define.
At its basics, and within the cryptocurrency industry, decentralization is a spectrum that refers to how many entities have control or input/contribution towards “decision” making as well as access to usage of a cryptocurrency.
With respect to cryptocurrency, the decentralized nature typically refers to the number of entities who contribute to the “next block” in the blockchain via a consensus mechanism (proof of work, proof of stake, proof of consensus or proof of authority).
The theory is that the more decentralized a cryptocurrency, then the more fair/equitable/democratic it may be. A cryptocurrency by the people, for the people, so to speak.
As well as the fact that the more decentralized it is, then the less able any one person/entity is to take a controlling stake.
Although there are many other different aspects to decentralization outside of producing blocks in a blockchain.
However, not everyone using a cryptocurrency will necessarily contribute to its decentralization or to the generation of the next block in the blockchain. Most people will likely simply want to use the cryptocurrency to transact and go about their day.
What is Proof of Work
Proof of work is the mechanism of the Bitcoin protocol that helps to keep all the nodes/block-producers honest, as well as what produces more Bitcoin with every block.
There are many other cryptocurrencies that also engage in proof of work mining, including but not limited to: Ethereum (transitioning to proof of stake), Litecoin, Bitcoin Cash, Monero, Ethereum Classic, Zcash, Dogecoin, DigiByte, Verge, and many others.
But what is proof of work mining?
Proof of work is a protocol that is designed with the premise that a piece of data (a block) requires a significant amount of processing power (work) to produce, but which is easily verified by other users of the protocol.
Typically computers will solve an arbitrarily difficulty random number where the probability of finding it is low, requiring a lot of processing power to guess it, on average, per block.
The work that is put into producing a block of data for the blockchain is in the form of computer processing power (measured in hash-rate), energy, time, and money. Worldwide, many computers are competing to solve the next Bitcoin block. The computer/node that solves the number first, wins the block reward of Bitcoin. That is to say, approximately every 10-minutes, a new Bitcoin block is added to the blockchain and more Bitcoin are produced.
This whole process is referred to as “mining” since a Bitcoin node of computers inputs work (energy, computer power [hash-rate], money) and receives a Bitcoin block reward. The first block reward was 50 Bitcoin, however, every 4 years it halves. Today in 2019, the block reward is 12.5 Bitcoin. In 2020 it will reduce to 6.25 BTC per block mined.
The purpose of this is to prevent spam and denial of service (DoS) attacks to protect the network. It provides security to the network because, in order for someone to try to change the order and content of transactions in the blockchain, they would have to input TONS of computer processing (and energy/money), just to change one block, let alone trying to change hundreds or thousands of blocks.
As the amount of computing power within the Bitcoin network increases, so does the difficulty to mine each block. This makes it more difficult for a bad actor/spammer to try to create fake/alternate blocks of data.
Many argue that the intense amount of power/energy that goes into mining Bitcoin is wasteful and bad for the environment. Contrarily, many Bitcoin advocates argue that the energy used to produce the blocks and Bitcoin rewards are part of what give Bitcoin its true value.
Furthermore, many governments are mandating that Bitcoin mining companies only access renewable energy (primarily hydroelectric damns in colder climates).
What is Proof of Stake
Proof of stake is similar to proof of work in that it serves to verify blocks and secure the cryptocurrency network. It differs from proof of work because, comparatively, there is next to no energy expended for a block to be published and verified to the blockchain.
In proof of stake, entities are referred to as verifiers instead of miners, since there is no mining. Instead of expending large amounts of computing power (energy) and time, verifiers in a network will “stake” a certain amount of cryptocurrency.
In the proof of stake algorithm, the creator of a new block is chosen in a deterministic way. Typically this is a balance of random selection along with the influence of the size of their stake (wealth) or age (length of time as a verifier).
Therefore, the more coins that you stake, and the longer you leave them tied up in the verifier pool/network, the higher the chance that your coins will be “staked” to mint the next block in the blockchain. Proof of stake usually does not have a block reward, but rather collects transaction fees as a reward.
Moreover, the proof of stake mechanism works to prevent fraud and secure the network, because if a validator tries to change the transactions in a given block (aka commit fraud), the other nodes who confirm the block you create will deny it and potentially lead to a hard-fork or devaluation of the cryptocurrency.
Since a validator by nature would have to have a large number of coins at stake it is in their best interest not to devalue the cryptocurrency by defrauding it, which is how proof of stake works to keep the network honest.
There are other consensus algorithms that will be discussed elsewhere.
What are Public-Private Keys?
Public-private keys are paired numbers that are the crux of digital ownership. Owning your own keys is pivotal to custody your own cryptocurrency.
But what are public-private keys?
A public-private key pair is two sets of alphanumeric strings.
The public key is visible to the entire cryptocurrency network (whether it is Bitcoin, Ethereum, XRP, etc). It does not need to be kept confidential, hence the term “public” key.
The private key on the other hand, must be kept confidential/private. It is what grants you access to your cryptocurrency on your crypto wallets (hot or cold). In order to send cryptocurrency without permission to anyone in the world, in any country, you must have your private keys.
It is critically important that you never share your private keys with anyone.
There is an expression, “not your keys, not your crypto” – meaning that if you do not hold your own private keys, then it is not truly your cryptocurrency.
Immutability of Cryptocurrency
There is the concept that the blockchain is immutable. That once a block is published, it is officially on a secure database held by thousands of nodes worldwide and that it will forever be indisputable.
In principle this is true. However, it is only true if the cryptocurrency network in question is secure.
As mentioned above in the proof of work section, a significant amount of computing power/energy/money goes into mining each new Bitcoin block. This would make it exceedingly difficult to conduct a 51% attack since one would need to have 51% of the computing power of the Bitcoin network, which today in mid-2019 is astronomical.
Therefore, once a handful of blocks have been added to the Bitcoin blockchain, it becomes practically immutable. And with a ~10 min block-time that would mean each block is secure ~1 hour after it is published.
The most secure, and thus the most immutable blockchains are: Bitcoin, Ethereum, XRP. The smaller the cryptocurrency network the more susceptible to attack or collusion it is, regardless of whether it operates with Proof of Work, Proof of stake or some other consensus mechanism.
Private blockchains will be notoriously susceptible to hacks since they depend on the cooperation of a relatively small select group of people, which invariably, over time, will lead to conflict, hacks or changes. This is basically what JPM coin is – a private blockchain.
Therefore, the immutability of cryptocurrency boils down to the size of the network. Metcalfe’s Law (slightly modified) – the strength of a network is proportional to the number of users (nodes) squared.
What is a 51% Attack
You may have heard about these in the news, and it is really the biggest threat to any cryptocurrency that utilizes either Proof of Work or Proof of Stake consensus protocols.
Essentially, as the name implies, if a miner (or validator) gains control of 51% (or more) of the hash-rate (or wealth) of a cryptocurrency network, then that entity is potentially capable of changing the blockchain history.
This is a weakness that exists in any proof of work or proof of stake cryptocurrency and is not only a weakness of Bitcoin.
While this is detrimental to any cryptocurrency, there are a few networks that have suffered such an attack an survived (Ethereum Classic).
The best defence to such an attack is to have as large of a network as possible with as many miners and computers for proof of work. The higher the hash-rate the less likely or capable someone/entity is of gaining control of 51% of it.
As for proof of stake, the more valuable the cryptocurrency the more expensive it becomes to accumulate 51% of the staked cryptocurrency and lead a 51% attack.
Divisibility of Cryptocurrency
Cryptocurrency thus far by definition is highly divisible. One Bitcoin can be broken down into 100 million parts (one satoshi is 100 millionth of a Bitcoin).
XRP is divisible into 1 million parts, called drops. One drop is 1 millionth of 1 XRP.
Ethereum is the most divisible, with one Ether being able to be divided down to 18 decimal points, denominated as 1 wei, which I won’t fathom to guess what it is as a fraction… if 6 decimals is a millionth, 9 decimals is a billionth, 12 decimals would be a trillionth, 15 decimals would be a quadrillionth? And 18 decimals should be a quintillionth?? I think… Either way (Ether Wei – pun intended), its super small/divisible.
The divisibility of crypto allows for micropayments to occur. You could theoretically stream payments. Also, imagine if your house was worth $500,000, and one Bitcoin is also worth $500,000, you could literally sell 1/100 millionth of your house (since ownership would also be on the blockchain so that person would own 1/100 millionth of a house).
What is a Smart Contract?
A smart contract is essentially an automated, self executing contract.
Smart contracts are protocols designed to self execute under specific conditions, without the need for a third party (i.e. bank, lawyer, realtor, insurance broker, rental agreements, etc). They facilitate, verify and enforce clauses that are coded into the contract.
Not many people are aware, but Bitcoin has smart contract capabilities, on layered solutions above the base Bitcoin Core blockchain layer. However, Ethereum was designed to be a smart contract platform (among other things).
The primary use for smart contracts is that you trust they will execute when a given set of conditions are satisfied. The simplest of these would be a straightforward transaction where the delivery of payment results in the delivery of a good/service.
Other more complicated smart contracts include limiting the use of cryptocurrency spending to certain limits or to certain goods (i.e. a budget that is only to be spent on groceries or on rent/mortgage payments).
More examples include the transfer of ownership of a vehicle or property after certain payments or >50% percentage ownership bought with continued payments.
What is Fungibility?
Fungibility is the concept that units of a good/asset or commodity are totally interchangeable.
For example, the USD is fungible. One USD is the same as any other USD. You cannot discriminate against a dollar if it was used previously to purchase drugs, or support a political campaign that you disagree with. There is also next to no way of knowing which dollar came from where.
Many digital tokens have unique codes to them (public/private key pairs) that are technically traceable. This makes fungibility an issue for many cryptocurrencies, Bitcoin included.
There are many efforts underway to make Bitcoin and other cryptocurrencies more fungible. This is a desireable trait for assets such as currency, certain stocks/bonds, etc.
However, there are instances in which you would want a digital token to be non-fungible. For example, you would not want a degree on the blockchain to be fungible. You want a specific degree to be assigned to a specific person. The same applies to insurance policies, property deeds, rare collectable digital cards (i.e. digital baseball, hockey or football cards).
Learn more on cryptocurrency and fungibility here.
What is a Hard Fork and a Soft Fork?
Forks, as they are known in the cryptocurrency community, are essentially updates to the crypto network protocol. Fork = update.
Now, the way that crypto blockchain networks work is that it is a protocol that is run by a network. Every node in the network runs the same protocol, and agrees on the creation of each new block.
By their nature these cryptocurrency projects/networks/protocols are said to be decentralized. Which means that anyone can run the node and have input into how the protocol works. If all node entities are content then the network proceeds and continues to produce blocks.
However, occasionally a network needs to be upgraded. Technically, a change in the protocol “changes” the network. There would be a “split” or a “fork” in the blockchain.
If everyone agrees with the new protocol and all of the nodes in the network update to the same protocol, then it is called a “soft fork”.
A Hard Fork is an update that not everyone agrees with. Since most (legit) blockchains are permissionless, open and decentralized anyone can run nodes on a specific protocol. Hence, if a certain percentage of nodes do not agree with an update, they can have a blockchain split – a “fork” in the chain. Known as a hard fork.
One fork of the chain runs the original (old) protocol, while the other fork of the chain runs the new (updated) protocol. It is commonly said that the chain with the most miners/users is the successful chain.
Top Cryptocurrencies (2019)
Below I have briefly described some of the top cryptocurrencies of 2019. There are well over 2000 cryptocurrencies, most of which are nonsense. I only take the time to discuss large cap cryptocurrencies (only within the top 20 on CoinMarketCap).
What is Bitcoin (BTC)
A new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority. Bitcoin has existed since January 2009, has never been hacked, has the highest market capitalization and the highest security via its high proof of work hash rate.
Bitcoin is open, borderless, censorship-resistant, unstoppable, permissionless, distributed, immutable transaction network secured by a proof of work consensus algorithm.
Bitcoin was the very first cryptocurrency with all subsequent cryptocurrencies known as “alt coins”, which is short for “alternative coins”.
Click to learn more on “What is Bitcoin“.
What is Ethereum (ETH)
Ethereum is the worlds second largest cryptocurrency by market capitalization (May 2019). It came into existence in 2015 by a team of developers, the most famous and outspoken of who is Vitalik Buterin.
Ethereum is quite different from Bitcoin in that it aims to be a decentralized “World Computer”. Its autonomous smart contract platform is its main “selling point”.
Ethereum began with proof of work, and still uses it today; however, it is in the midst of a multi-part protocol upgrade to shift over to proof of stake as well as a scaling solution. The Ethereum development team estimates a mix of proof of work and stake by end of 2019 followed by full proof of stake by ~2021.
What is XRP
XRP is one of the world’s oldest cryptocurrencies that is still around today. Created in 2013 by the company Ripple, with the primary goal of being an international settlement cryptocurrency. Although there are numerous other use cases for XRP.
Today (May 2019) it is the world’s third-largest cryptocurrency by market capitalization. Ripple, the company and maker of XRP claims that XRP is the world’s fastest and most scalable digital asset that enables real-time global payments anywhere in the world.
Ripple the company has developed a platform alongside XRP that integrates with banks, payment providers and potentially retailers that allows immediate on-demand liquidity and payment settlement across borders. The platform is called RippleNet.
The XRP cryptocurrency ledger is stable, distributed, has block times in the 4-second range and costs being negligible, XRP allows near instantaneous payment and settlement. It is able to process over 1,500 TPS (transactions per second) and able to scale up to 50,000 TPS.
What is Litecoin (LTC)
Litecoin is an open source, peer-to-peer cryptocurrency that was created as a hard fork off of the Bitcoin blockchain, lead by founder Charlie Lee. It went live in October 2011 and has a few specific changes to its protocol.
Since Litecoin is a hard fork off of the Bitcoin blockchain, it is quite similar to Bitcoin; however, there are some key differences. In Litecoin the block generation time is 2.5 minutes (10min for Bitcoin), there is a hard cap on the number of Litecoin at 84,000,000 (84 million) Litecoin, which is 4 times the size of Bitcoin. Litecoin uses “scrypt” instead of “SHA-256” hashing algorithm.
Litecoin is fast and easy to use. It appears that many of the newer features of Bitcoin are tested on Litecoin first (i.e. Segregated Witness, the Lightning Network). While Litecoin is not officially a testing ground for Bitcoin, it appears as though that is one of its functions.
What is EOS
EOS is its own blockchain cryptocurrency that aims to become a decentralized computer protocol for smart contracts and decentralized applications much like Ethereum.
It has hailed itself as an “Ethereum killer” (as have many other cryptocurrencies).
The cryptocurrency itself underwent a year-long ICO from mid-2017 ending mid-2018, raising over $4 billion USD in support of the EOS development team. It was founded by a man named Dan Larrimer (he also founded Steem and BitShares), and is owned by the block.one organization.
The cryptocurrency itself runs on a “constitution” set of rules that all EOS actors agree upon, and these rules are linked to every block mined. There were 1 billion tokens released during the ICO with an annual inflation rate of 5%.
EOS uses delegated proof of stake, and a “role-based permissions concept”, which is designated to only a small subset of stakeholders. This is somewhat a contentious point amongst the cryptocurrency community as it really is not truly decentralized with its limited designated stakeholders.
In order to build and run dApps on EOS a developer much hold EOS tokens. The number of tokens held is analogous to a “bandwidth” for programs on the EOS blockchain.
What is Cardano (ADA)
ADA is the native cryptocurrency of the Cardano platform. ADA is used to send and receive digital funds. Much like other cryptocurrencies, it claims to be used for the transfer of funds for fast, secure payments as well as for financial applications.
Like EOS, Cardano claims to be an “Ethereum killer” in that it is to be used as a decentralized smart contract platform that is flexible, secure and scalable. Cardano claims to be different from Ethereum and EOS in their approach that utilizes scientific philosophy and peer-reviewed academic research.
Founded by Charles Hoskinson, who happens to be one of the co-founders of Ethereum, the ADA blockchain went live in September 2017. The ICO raised ~$62 million USD. There is set to be a maximum of 45 billion ADA tokens ever created.
Cardano is taking a layered approach to developing their cryptocurrency network in phases. These phases are to be interoperable and scalable to allow for future applications to be built and be backwards compatible with existing dApps/infrastructure.
Utilizing a proof of stake approach, network users can stake their coins to participate in building blocks for the blockchain. The more coins that you stake the higher chance your coins have of creating the next block.
Cardano is using a new technological approach called RINA – Recursive Inter-Network Architecture – to create a heterogenous network to give privacy, transparency and scalability. It also aims to be interoperable with today’s Internet.
What is Binance Coin (BNB)
Binance Coin, BNB, was created in October 2017 by the highly celebrated global Cryptocurrency Exchange called Binance. The Binance Exchange is one of the world’s largest cryptocurrency exchanges and has over 300 cryptocurrencies traded with some of the highest daily volumes worldwide.
Binance Coin is a cryptocurrency native to the Binance Exchange. It began as an ERC20 token built on Ethereum, with a total supply limit of 200 million BNB tokens. However, it has since migrated to its own independent blockchain.
There is a monthly burn of BNB tokens that steadily decreases the supply of the BNB coin, thereby stabilizing and even increasing its value. The Binance Exchange uses 20% of its monthly profits to buy back BNB coins to a maximum of 50% (100 million BNB tokens). Some speculate as to whether BNB can be considered pseudo-equity or if it may transition to be some sort of STO for the Binance Exchange. I do not think this is likely as I think they would not STO/IPO so early.
Owning it has many use cases directly applicable to the Binance Exchange. Owners of the BNB token can use it for discounted trading fees, exchange fees, listing fees on Binance Exchange as well as for investing in Initial Exchange Offering (IEO) tokens from the Binance LaunchPad. BNB can also be directly used to buy into Bitcoin, Ethereum, XRP and up to 70 other Alt coins traded on Binance Exchange.
Binance is releasing a DEX – decentralized exchange – on which BNB will be the native token.
The BNB coin has done considerably well for itself since its release in late 2017 having made it into the top 10 cryptocurrencies by market cap in mid 2019.
Factors for Cryptocurrency Success
With over 2000 cryptocurrencies that came into existence from the 2017 bull run and ICO frenzy, it is impossible to tell which select few cryptocurrencies among the thousands will succeed. But what are the common factors for cryptocurrency success?
There are a number of characteristics that lead to the success of a cryptocurrency that I have outlined below:
- The Lindy Effect
- Metcalfe’s Law
- Multipurpose (not niche)
Essentially the Lindy Effect has been shown to be a sham, but it is an interesting heuristic. It states that the longer something has been around, the longer you can expect it to exist for. However, this is next to impossible to test and is almost a self fulfilling prophecy.
Metcalfe’s Law however, is quite well studied and states that the larger a network becomes the greater its utility and power. The “network effect” is proportional to the square of the number of connected users.
Adaptability refers to a cryptocurrency project being adaptable to advances and changes. No cryptocurrency is born perfect, including Bitcoin. For example Bitcoin (Core) has undergone a number of changes, including some hard forks, but also SegWit, and the Bitcoin Lightning Network. There are other changes being proposed for Bitcoin as well. Ethereum is undergoing a transition to proof of stake over a few years. Both Bitcoin and Ethereum are adaptable.
Multipurpose, not niche. This refers to the fact that in order to be adopted and used widely, a cryptocurrency must have many uses. It makes less sense to have a different cryptocurrency to pay for tax, to buy groceries with, to buy gas with or pay your internet/phone bills with. The same cryptocurrency should do all of that and more, including smart contracts, and Security Tokens as well.
Each of these topics is elaborated on in my detailed post on Factors for Cryptocurrency Success.
How To Buy Cryptocurrencies
All this talk about cryptocurrencies – but how do you go about buying/investing in cryptocurrency? Great question.
First of all, only invest money that you can afford to lose. The cryptocurrency industry is very new and nascent. It requires a lot of technical and legal/regulatory development. It is an international market that is subject to incalculable inputs from different countries, companies, hackers and public sentiment. It is liable to change drastically in a short period of time, for better or for worse.
That being said, if you are still interested in allotting a small amount of your hard earned money into cryptocurrencies, then you should check out my posts on
Cryptocurrency Exchanges – learn how to evaluate a cryptocurrency exchange and choose the best one that fits your needs in your legal jurisdiction.
Cryptocurrency Security – cryptocurrency is a bearer asset and once stolen, it is gone. Forever. Learn how to keep your cryptocurrency safe and secure for your peace of mind and for the generational wealth that you may be trying to create and keep safe.
What is the Token Economy
The Token Economy is the intersection of the economic market with information technology that allows us to convert and organize traditional markets into distributed markets based on tokens.
Moreover, the token economy allows the market to define value for intangible things such as social and cultural capital, that previously we were unable to accurately or effectively quantify (i.e. YouTube views, Facebook comments, Instagram likes or Twitter retweets etc).
A token is a defined unit of value that is interchangeable for hard goods, tangible services as well as less tangible goods and services. Tokens are also programmable to specify certain conditions for which value may be (or not be) exchanged.
This expansion of what society can quantifiably value as well as more flexibly spend against/on quite literally expands the world economy to many times its current size. It also allows users to be socially conscientious if they choose to be.
Learn more on the Token Economy.
What are Security Token Offerings? (STOs)
Security Token Offerings are analogous to IPOs in the legacy financial system.
An IPO is an “initial public offering”, which is essentially when a private company becomes a publicly listed corporation with stocks traded on a stock exchange.
Traditional stocks have all of the inefficiencies of the traditional system. Delayed settlement, difficult and expensive movement of stocks, inefficient corporate participation stockholders are legally entitled to, delayed dividend payouts etc.
Security tokens serve to digitize traditional stocks as tokens in a token economy. A digital stock would sit on top of a cryptocurrency such as Ethereum, Bitcoin or XRP and be a digital token that you can move as easily as you move BTC, ETH or XRP.
Through smart contracts you would be able to easily participate in corporate voting, receive corporate news, receive dividend payouts, stock splits, etc. All without the need for a trusted third party.
Learn more on Security Token Offerings (STOs).
Digital Asset vs. Cryptocurrency
There has been a lot of discussions recently on the difference between a digital asset vs. cryptocurrency.
Personally I believe that it is all semantics. A US dollar is an asset, but it is also a currency. As is a Canadian dollar, the Euro, the British Pound etc.
Although, the premise behind this is two fold. The word “cryptocurrency” may be associated with the wild west of crypto such as libertarians, anti-establishment, silk road, money laundering, large exchange hacks and ICO scams, etc. Where as Digital Assets is more palatable to the Big Wall Streeters.
Second, the term Digital Asset may be considered more encompassing and broader since that can include stable coins, security tokens, digitized assets of bonds, index funds, real estate, art, jewelry etc.
To learn more about digital assets vs. cryptocurrency, check out my post on it.
Leaders in the Cryptocurrency Industry
Cryptocurrency is a new burgeoning space. Obviously, it started out with a very small group of people back in 2008/2009 known as cypherpunks. An elusive group of highly technical individuals who value privacy, individual sovereignty, and are typically anti-government.
The famous and elusive Satoshi Nakamoto, the creator of Bitcoin, was/is a cypherpunk.
Today, however, there are millions of people worldwide into cryptocurrency. This includes many cypherpunks, but also more dominantly young people into computer technology and finance.
The cryptocurrency industry has garnered interest from traditional finance/Wall Street, government and enthusiastic investors.
Check out my directory of important, noteworthy or influential individuals in the cryptocurrency industry!