21st-century unicorn – or the future?
[lo_drop_caps style=”square” tag=””]Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.[/lo_drop_caps]
So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA 256 Hash algorithm. Basically, cryptocurrencies are entries about token in decentralized consensus-databases. They are called CRYPTOcurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math. It is more probable that an asteroid falls on your house than that a bitcoin address is compromised.
Describing the properties of cryptocurrencies we need to separate between transactional and monetary properties. While most cryptocurrencies share a common set of properties, they are not carved in stone.
1.) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
2.) Pseudonymous: Neither transactions nor accounts are connected to real-world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
3.) Fast and global: Transaction are propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbour or to someone on the other side of the world.
4.) Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers make it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.
5.) Permissionless: You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.
1.) Controlled supply: Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number somewhere in around 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can roughly be calculated today. There is no surprise.
2.) No debt but bearer: The Fiat-money on your bank account is created by debt, and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts. They just represent themselves. They are money as hard as coins of gold.
To understand the revolutionary impact of cryptocurrencies you need to consider both properties. Bitcoin as a permissionless, irreversible and pseudonymous means of payment is an attack on the control of banks and governments over the monetary transactions of their citizens. You can‘t hinder someone to use Bitcoin, you can‘t prohibit someone to accept a payment, you can‘t undo a transaction. As money with a limited, controlled supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of the monetary policy. They take away the control central banks take on inflation or deflation by manipulating the monetary supply.
After understanding the transactional and monetary properties cryptocurrencies is seemingly dawn of new economy. Mostly due to its revolutionary properties cryptocurrencies have become a success their inventor, Satoshi Nakamoto, didn‘t dare to dream of it. While every other attempt to create a digital cash system didn‘t attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology. Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.
But, while cryptocurrencies are more used for payment, its use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators. Exchanges like Okcoin, poloniex or shapeshift enables the trade of hundreds of cryptocurrencies. Their daily trade volume exceeds that of major European stock exchanges. At the same time, the praxis of Initial Coin Distribution (ICO), mostly facilitated by Ethereum‘s smart contracts, gave live to incredibly successful crowdfunding projects, in which often an idea is enough to collect millions of dollars. In the case of “The DAO” it has been more than 150 million dollars.
In this rich ecosystem of coins and token, you experience extreme volatility. It‘s common that a coin gains 10 percent a day – sometimes 100 percent – just to lose the same at the next day. If you are lucky, your coin‘s value grows up to 1000 percent in one or two weeks. While Bitcoin remains by far the most famous cryptocurrency and most other cryptocurrencies have zero non-speculative impact, investors and users should keep an eye on several cryptocurrencies. Here we present the most popular cryptocurrencies of today.
The one and only, the first and most famous cryptocurrency. Bitcoin serves as a digital gold standard in the whole cryptocurrency-industry, is used as a global means of payment and is the de-facto currency of cyber-crime like darknet markets or ransomware. After seven years in existence, Bitcoin‘s price has increased from zero to more than 650 Dollar, and its transaction volume reached more than 200.000 daily transactions. There is not much more to say: Bitcoin is here to stay.
The market of cryptocurrencies is fast and wild. Nearly every day new cryptocurrencies emerge, old die, early adopters get wealthy and investors lose money. Every cryptocurrency comes with a promise, mostly a big story to turn the world around. Few survive the first months, and most are pumped and dumped by speculators and live on as zombie coins until the last bagholder loses hope ever to see a return on his investment.
Markets are dirty. But this doesn‘t change the fact that cryptocurrencies are here to stay – and here to change the world. This is already happening. People all over the world buy Bitcoin to protect themselves against the devaluation of their national currency. Mostly in Asia, a vivid market for Bitcoin remittance has emerged, and the Bitcoin using darknets of cybercrime are flourishing. More and more companies discover the power of Smart Contracts or token on Ethereum, the first real-world application of blockchain technologies emerge.
The revolution is already happening. Institutional investors start to buy cryptocurrencies. Banks and governments realize that this invention has the potential to draw their control away. Cryptocurrencies change the world. Step by step. You can both stand beside and observe or you can become part of history in the making.
On January 18, 2018
[lo_drop_caps style=”square-dark” tag=””]Bitcoin hit news headlinesthis week as the price of one unit of the cryptocurrency passed $11,500 for the first time. This introduction explains the most important thing about crypto currencies. After you‘ve read it, you‘ll know more about it than most other humans. Today cryptocurrencies have become a global phenomenon known to most people. While still somehow geeky and not understood by even more people, banks, governments and companies.[/lo_drop_caps]
In 2016, you‘ll have a hard time finding a major bank, a big accounting firm, a prominent software company or a government that did not research cryptocurrencies, publish a paper about it or start a so-called blockchain-project. Although it’s often referred to as new, Bitcoin has existed since 2009 and the technology it is built on has roots going back even further. In fact if you had invested just $1,000 in Bitcoin the year it was first publicly available, you would now be richer to the tune of £36.7 million. Those who don’t learn from history are doomed to repeat its mistakes – so here is a brief history of Bitcoin and cryptocurrency.
1998 – 2009 the pre-Bitcoin years: Although Bitcoin was the first established cryptocurrency, there had been previous attempts at creating online currencies with ledgers secured by encryption. Two examples of these were B-Money and Bit Gold, which were formulated but never fully developed.
2008 – the Mmysterious Mr Nakamoto: A paper called Bitcoin – A Peer to Peer Electronic Cash System was posted to a mailing list discussion on cryptography. It was posted by someone calling themselves Satoshi Nakamoto, whose real identity remains a mystery to this day.
2009 – Bitcoin begins: The Bitcoin software is made available to the public for the first time and mining – the process through which new Bitcoins are created and transactions are recorded and verified on the blockchain – begins.
But beyond the noise and the press releases the overwhelming majority of people – even bankers, consultants, scientists, and developers – have a very limited knowledge about cryptocurrencies. They often fail to even understand the basic concepts. So let‘s walk through the whole story. What are cryptocurrencies? Where did cryptocurrency originate? Why should you learn about cryptocurrency? And what do you need to know about cryptocurrency?
Few people know, but cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin, the first and still most important cryptocurrency, never intended to invent a currency .In his announcement of Bitcoin in late 2008, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“ His goal was to invent something; many people failed to create before digital cash. The single most important part of Satoshi‘s invention was that he found a way to build a decentralized digital cash system. In the nineties, there have been many attempts to create digital money, but they all failed. After seeing all the centralized attempts fail, Satoshi tried to build a digital cash system without a central entity. Like a Peer-to-Peer network for file sharing.
To realize digital cash you need a payment network with accounts, balances, and transaction. That‘s easy to understand. One major problem every payment network has to solve is to prevent the so-called double spending: to prevent that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances.
In a decentralized network, you don‘t have this server. So you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend. But how can these entities keep a consensus about these records? If the peers of the network disagree about only one single, minor balance, everything is broken. They need an absolute consensus. Usually, you take, again, a central authority to declare the correct state of balances. But how can you achieve consensus without a central authority? Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible. Satoshi proved it was. His major innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution – the part that made the solution thrilling, fascinating and helped it to roll over the world.
If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions. This may seem ordinary, but, believe it or not: this is exactly how you can define a currency. Take the money on your bank account: What is it more than entries in a database that can only be changed under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.
Let‘s discuss the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account. A transaction is a file that says, “Bob gives X Bitcoin to Alice“ and is signed by Bob‘s private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.
The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed. Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation. As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can‘t be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain. Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. Since the miner‘s activity is the single most important part of cryptocurrency-system we should stay for a moment and take a deeper look on it.