The Flippening —  What it is and why it matters?

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The Flippening — What it is and why it matters?

Ether supplanting bitcoin matter of when not if

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The Flippening refers to the hypothetical moment ether overtakes bitcoin as the most valuable cryptocurrency in terms of market capitalization. Market Capitalisation is the total number of tokens in circulation multiplied by the value of one token

This website tracks and compares the two cryptocurrencies across 9 indicators.

Why exactly does it matter if one cryptocurrency overtakes another?

Before we get into this, let’s do a quick recap of some of the key concepts.

Bitcoin

While there have been many attempts at creating a digital currency, bitcoin is by far the most successful. It is also the inspiration for every cryptocurrency that came after it.

Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
Photo by Aleksi Räisä on Unsplash

There are a number of properties that make bitcoin a truly novel idea —

  • Decentralization — There is no central server and the transactions are stored on a tamper-proof and publicly distributed peer to peer ledger known as the Blockchain. This is in contrast to most other systems we interact with in our daily lives as they involve some sort of central entity that create, govern and control the system. Such systems are vulnerable to attacks as they have a single point of failure.
  • It is permissionless — Anyone, without seeking permission can join and interact with the network, either by transacting with bitcoins, or helping to secure the network by validating transactions.
  • It is open — Although the actual identities behind transactions are hidden, the blockchain’s transaction history is public, and anyone may view it.
  • Trustless — Traditional centralized systems are built on trust. The system works as long as the participants trust the central authority. When a person sends money to another person, a bank guarantees person B will receive value. Such systems have a central point of failure and are subject to hacks. They are known to act maliciously and contrary to the interests of the general public. Bitcoin achieves trustlessness by incentivising good behaviour by participants, and is governed by computer code. Trust isn’t completely eliminated, but rather, is minimised and only placed in the abstract concept.

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The Blockchain

In traditional finance, banks are a necessary intermediary, and are trusted to maintain a ledger which keeps a list of transactions.

Bitcoin’s blockchain is a distributed ledger of transactions bundled into blocks that are chained together chronologically.

As there is no central authority to update the blockchain, it is instead up to the participants of the network to validate transactions through a consensus mechanism that is open to everyone.

A distributed ledger does not have a single point of failure. Every node owns a copy of the blockchain, and changing the records in one node does not change the information stored on others.

For an attack to succeed, a majority of the copies of the blockchain would need to be amended simultaneously. This completely removes the need for a third-party to guarantee trust.

Ethereum

Ethereum is the second most popular cryptocurrency. Much like Bitcoin, The Ethereum blockchain is also an open-source distributed ledger for validating and recording transactions. Ethereum has its own digital currency knows as Ether or ETH that facilitates transactions on the network.

Photo by Jievani Weerasinghe on Unsplash

Ethereum utilizes the blockchain for more than payments as it also enables the deployment of smart contracts and decentralized applications.

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Decentralized Applications (dApps)

dApps are digital applications deployed on a blockchain or a peer-to-peer network of computers as opposed to a central server. This ensures that the applications are not controlled by a single entity or authority and instead, are community-driven.

Smart Contracts

A smart contract is a set of instructions written in computer code that runs automatically all parts of an agreement and may be used to automate the agreement between parties. This completely removes the need for an intermediary since the outcome is pre-determined.

Since information on the blockchain is immutable, a deployed smart-contract can not be amended.

We notice the exclusion of middlemen and intermediaries is a running theme when it comes to the blockchain. Bitcoin’s whitepaper was first released towards the end of 2008. This was right after the 2008 global financial crisis that came about as a result of excessive risk-taking by the banking institutions entrusted with safeguarding funds. The result of this was fortunes lost and lives ruined with very little repercussion for the perpetrators.

The problem with middle-men isn’t only about malicious behaviour, but also inefficiencies that come with having humans in the loop due to bureaucracy, incompetence or conflicts of interest.

Let’s look at some innovative applications —

Voting

In my country Nigeria, two common reasons people don’t vote are 1. Lack of belief in the electoral system and fairness of elections. and 2. fear of election violence. It is widely believed that the violence is a strategy to suppress voter turnout as it ensures many of the individuals out on the streets are people paid to cause chaos in opposition areas, and to vote a certain way.

The transparency of the blockchain addresses both problems as it allows for real-time updates on vote count, while eliminating the need for expensive recounts. With the click of a button, anyone can populate and view the results of the election.

With individuals able to vote from the comfort of their homes, there is no fear of being victims of physical violence. This could lead to increased participation, and increased participation can only be a good thing.

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Governance

DAOs are entities run by a community of people with shared goals without a centralized leadership or hierarchy.

Unlike in traditional organizations, the bylaws of a DAO are hard-coded in smart contracts and is absolute law. Once deployed, no changes may be made except by consensus. Members’ votes are tallied, and changes are implemented automatically without the need for an intermediary.

All activities including spending must be voted on and approved by the community. All members can propose ideas and vote. This allows for strangers to efficiently, openly and transparently collaborate in a manner that is truly unprecedented.

Think of them like an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organisation has a voice.
There’s no CEO who can authorise spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code.

In traditional organizations, starting a business with other people is trust-based, and is sometimes, fraught with problems and risks especially when money is involved. With DAOs, there’s no need to trust another individual. Trust needs only be placed in the abstract concept.

Its governance, operations, and activities are completely open and transparent for all to see. DAOs are able to operate efficiently by eliminating a lot of bloat that comes with traditional organizations.

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Decentralized Finance (DeFi)

DeFi is perhaps one of the most interesting and fastest growing trends in the space. The general idea behind DeFi is the development of non-custodial financial products and services written in code and deployed on the blockchain.

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This would make those offerings open, transparent and accessible to all without the need for middlemen. Examples of financial products include lending services, exchanges, derivatives and insurance.

Bitcoin may be considered the first DeFi protocol for payments.

Smart contracts are used to automate the agreement terms between the participants of the protocol thereby eliminating the need for trust, as well as intermediaries.

Let us look at two examples of DeFi projects —

Aave

Aave is an open source and non-custodial liquidity protocol for earning interest on deposits and borrowing assets.

Users may participate as either borrowers or depositors by —

  • Depositing tokens to provide liquidity and earn interests.
  • Borrowing tokens by providing other tokens as collateral.

Aave currently supports over 20 different cryptocurrencies and as of the end of June 2021, has over $16B in total value locked (TVL), a common metric to measure the amount of assets locked in a protocol.

Uniswap

Uniswap is a decentralized finance protocol that is used to exchange cryptocurrencies and tokens. Uniswap is non-custodial, open and permissionless which is in contrast to (and more in line with the spirit of the blockchain than) centralized exchanges like Binance and Coinbase.

In uniswap, liquidity providers provide liquidity and earn fees by depositing tokens which are then used by traders to facilitate exchanges from one token to another.

The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts.

As of the end of June 2021, Uniswap has a total value locked of about $5b.

DeFi Composability

Because DeFi protocols are open-source and permissionless, this allows for the development of innovative and creative financial products for end-users that leverage existing protocols freely and without seeking permission.

Pooltogether, a no-loss DeFi lottery, built a fun savings product that pools deposits and gives the interest accrued on the pool to a lucky winner every week. Pooltogether didn’t need to build much; it relied heavily on Compound and Dai — and didn’t need their permission.

The total value locked in DeFi smart contracts has grown from around $1B in June 2020, to around $50B a year later.

The DeFi movement has the potential to transform the world as it offers alternative financial solutions on a global scale, and allows users to do more with their tokens than simply as a store of value.

Final Thoughts

Bitcoin is without a doubt, one of the most innovative and transformative technologies ever created. This explains why it’s even now the most valuable and popular cryptocurrency.

As at the time of writing this article, Bitcoin has a total market capitalization of $625B and accounts for over 47% of the total crypto market cap.

There can never be more than 21M bitcoins of which over 19M have already been minted. Its limited supply, in addition to its simplicity and acceptance makes it increasingly attractive to institutional investors.

Ethereum is largely inspired by Bitcoin, and is currently the second most valuable cryptocurrency with a market capitalization over $216B.

Bitcoin was created to bypass the intermediaries and middlemen upon which the world’s financial system had to come rely. Ethereum’s purpose, on the other hand, is to create a network on top of which applications may be built unrestricted to finance.

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system, but rather to facilitate and monetize the operation of the Ethereum smart contract and decentralized application (dapp) platform.

Most cryptocurrencies and dApps in existence today are built on the Ethereum Network, as well as other innovative use cases like NFTs (Non-Fungible Tokens).

It is possible to imagine a future self-driving car company that is a DAO, where a smart contract defines the way the car behaves, individuals are picked up and dropped off when a ride is requested and payment made electronically, the vehicle heads to the service station when a fault is detected, and to a filling station for gas.

Participation in the owning and running of the company is open to all.

A future where smart contracts define many of the interactions between individuals. In such a future, the ability to implement and participate in such contracts facilitated by owning ether is an added utility in addition to its use as a form of digital payments.

It is not at all controversial to suggest that maybe the platform that supports a wider range, and variety of use cases will eventually become the dominant one.

References

The Shrimpy Team 2021 What Is DeFi Composability? An Introduction To Money Legos https://academy.shrimpy.io/post/what-is-defi-composability-an-introduction-to-money-legos

Chris Powers 2020 The Composability of DeFi Users https://doseofdefi.substack.com/p/the-composability-of-defi-users

Monolith 2021 Understanding DeFi: stablecoins explained https://medium.com/monolith/understanding-defi-stablecoins-explained-cab82d1d3cb2

Finematics 2021 Decentralized finance (DeFi) https://ethereum.org/en/defi/

Andrés Engler 2020 Why Argentines Are Turning From Dollars to Stablecoins Like DAI https://www.coindesk.com/why-argentines-are-turning-from-dollars-to-stablecoins-like-dai

NATHAN REIFF 2020 Bitcoin vs. Ethereum: What’s the Difference? https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp

Olowojolu Olakunle , Rasak Bamidele , Ake Modupe1 Ogundele Oluwaseun Afolayan Magdalene 2019 TRENDS IN ELECTORAL VIOLENCE IN NIGERIA https://core.ac.uk/download/pdf/195394498.pdf

John Divine 2021 Bitcoin vs. Ethereum: Which Is a Better Buy? https://money.usnews.com/investing/cryptocurrency/articles/bitcoin-vs-ethereum-which-is-a-better-buy

Sean Stein Smith 2021 Bitcoin, Ether, The Flippening, And Future Trends For Crypto Development https://www.forbes.com/sites/seansteinsmith/2021/05/04/bitcoin-ether-the-flippening-and-future-trends-for-crypto-development/?sh=472f01f241bb

Abderahman Rejeb Karim Rejeb John G. Keogh 2021 Centralized vs. decentralized ledgers in the money supply process: a SWOT analysis https://www.researchgate.net/publication/348579421_Centralized_vs_decentralized_ledgers_in_the_money_supply_process_a_SWOT_analysis

0xjim 2021 DAOs Are The Next Big Thing https://medium.com/coinmonks/daos-are-better-than-companies-2ab3e6e50a14

Sankarshan Damle and Sujit Gujar 2021 FASTEN: FAIR AND SECURE DISTRIBUTED VOTING USING SMART CONTRACTS https://arxiv.org/pdf/2102.10594.pdf

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