Should I bother with blockchain and cryptocurrencies?

0
64

In September 2017, I spent three weeks in Indianapolis, USA, for work. I discovered the country in my free time, riding a horse at Grandpa Joe’s ranch, or going to the cinema, where your seat turns into a sofa, and they serve dinner during the movie. I enjoyed watching the latest season of “The Walking Dead” on Netflix that was not yet available in the Netherlands. And I did an online course on cryptocurrencies. This was before most people had ever heard of Bitcoin or Ethereum.

I got interested and decided after the course to buy some cryptocurrencies. It turned out to be the first significant Bitcoin bubble, and I had been part of it! In three months, my money had quadrupled, and in another three months, it had been decimated. What a roller coaster! Since then, I have been trading cryptocurrencies and kept my eyes open about developments in that area. In this article, I would like to give you a little insight into what I learned. Remember, I am just a regular crypto user, not an expert in any way, but I think I may shed some light on the topic for those who don’t know much about it.

First of all, this is not a recommendation to invest in cryptocurrencies. Although you can become a millionaire if you are lucky, you can just as quickly lose all your money. So if you do it, be prepared to forfeit your investment. Since the first 2017 bitcoin bubble, I have seen four periods of predominantly rising markets (bull market), followed by a devastating crash (bear market). Last month, the market rose fast with a 50% gain, but that was lost within one day after some bad economic news. It is a bit like buying a lottery ticket. If you are lucky, you win big. If you are not lucky, you lose everything, or you win the lottery ticket price.

Having warned all of you, let’s discuss what it is first. Often you can hear the word blockchain when people are talking about cryptocurrencies. That’s because cryptocurrencies are built upon blockchain technology. In other words, blockchain technology enables cryptocurrencies. So, let’s talk about blockchain first. The problem with blockchain is that it is pretty complicated, and it is easy to get lost. Without trying to explain all of it, I simplify it into these three essential elements.

Blockchain is decentralized
Blockchain is backed by sound mathematics
Blockchain needs a consensus algorithm

Blockchain is decentralized.

A blockchain is about publishing a chain of blocks containing validated information that cannot be changed after publication. There are always many computers or nodes involved that have to agree on the truth using specific software. Block after block is published and linked to the previous block, leading to a chain of connected blocks, which can tell you the entire history of all the subsequent truths at the point in time it was published. The important thing here is that it is not a central authority telling you the truth, but many independent nodes have determined it and published it for everyone to see forever. It can be used for an infinite number of things. You can agree on who owns what, which contracts you signed, or keep track of transactions. The main thing to remember here is that this happens without any involvement of the government, banks, or other central institutions. It is just a globally based set of computer nodes that run the same software and work together.

Notice the big difference with a bank, which we trust to keep accurate information about who owns what amount of money. We cannot actually see or verify it is true. And, because the bank is the central authority, they become an essential part of the market. That’s why big banks are considered system banks that governments would save from bankruptcy, as we have seen in the financial crisis in 2008.

Blockchain is backed by solid mathematics

The way the blockchain is constructed is by using links between the blocks. Each block has a mathematical code, called a hash, calculated by using the exact content of the entire block and all of its previous blocks. So, if someone would change even a single character in any of the blocks in the chain, this would lead to a different hash. And that’s how it can be verified the block is unchanged. The hash computations are mathematically sound and are proven to be safe for hacking. But, theoretically, there are many other ways to defeat the blockchain. Blockchain developers and scientists study these and find solutions for them. More than two hundred potential weakness types have been documented. You can hear terms like “double spending attack” when someone is trying to spend the same coin twice or “consensus 51% attack” when someone tries to gain control over more than 50% of the nodes. I won’t bother you with all the details, but believe me, it is pretty well thought through. Most of the theoretical attacks stay theoretical because they are very difficult to exploit or have been prevented effectively by the logic in the software. Of course, someone may exploit a vulnerability once in a while, but that is nothing different from the current financial systems.

Blockchain needs a consensus algorithm

As explained, each block is published after most nodes agree and have validated that the block is accurate and valid. To reach such an agreement, each node must prove that they are authorized to join the consensus process. There are several ways to do that. The most well-known algorithm is called Proof of Work, which is the basis for Bitcoin and Ethereum. It requires the node to perform complex cryptographic puzzles, and if they solve it, they get a reward and earn the right to participate in the validation of that block. The problem is that this requires a lot of computer power and energy use. That’s why there are many alternatives nowadays, like Proof of Trust, Proof of Burn, Proof of Stake, Delegated Proof of Stake, Proof of Capacity, or Proof of Elapsed Time. In all cases, you need to provide something of value to participate. As Proof of Work is so wasteful, Ethereum is now planning to move from Proof of Work to Proof of Stake when upgrading to Ethereum 2.0, scheduled for the end of 2021 or the beginning of 2022.

Cryptocurrencies

So what does it mean for cryptocurrencies? There are thousands of cryptocurrencies on the market these days, and each of them has its own set of rules and applications in mind. They can be categorized into many categories, but this is arbitrary, and many people would classify them differently. At the bottom of this article, I made a list of the most important ones. Don’t shoot me if I missed a few or if I miscategorized a token or coin. The fact that different groups develop all these cryptocurrencies also makes them difficult to follow. How do they all interrelate? Which coins are competitors? Which coin builds upon another coin? Which coins are there for the longer term, and which are just short hypes?

There is no single authority to get answers from on all your questions. It is a bit like the “Wild West” all over again. And everybody uses different terms and words, and after a while, you lose sight of all of it. To help better understand it, I have clarified a few buzzwords at the end of this article.

So, where does this all go, and why should you bother?

The market for cryptocurrencies is immense and expanding at an astronomical pace. I think we are still in the beginning, and the coming years and decades will prove to be society-changing because of this. The main factors that will influence where it goes are:

· Government involvement

· The response of financial institutions

· The acceptance by the public

Government involvement

More and more governments are thinking of controlling the cryptocurrency market with legislation. Some governments leap forward and start accepting bitcoin as an official currency, as El Salvador did recently. Other governments will try to stop them entirely like China banned almost all Chinese bitcoin mining farms in June this year.

Most countries are not very far yet in thinking about this, but it can be anticipated that they will do that soon as the amount of money involved in the cryptomarkets increases rapidly. The total amount of money involved has risen this year from around 700 Billion dollars in January to more than 2,000 Billion dollars now. As many prominent investors have joined the cryptomarkets, it is safe to assume more money will flow in this market, and the governments will want to see how they can make sure to tax all of that money.

Another possibility is that some governments will be afraid of the impact on financial markets and their stability and will pass laws limiting cryptomarkets.

Last but not least, governments can feel they need to protect consumers from the risks that come with the volatility of the cryptomarkets and will try to do something about that.

It is very difficult to predict what will happen. Still, governments will find it difficult to control the cryptomarkets as they are global by nature, and it would require international cooperation. It reminds me of the Internet, which is also decentralized. In response to government control, there is now an encrypted dark web that governments can’t control. Maybe something similar would happen with cryptocurrencies.

The response of financial institutions

Another critical factor is the response of banks. They risk losing their position as essential parts of the economy. They can try to lobby governments to reduce the threat, or they can take a leap forward and start providing crypto services themselves or invest in crypto services. Time will tell if they will succeed.

The acceptance by the public

A final factor to consider is the acceptance by the public. If the masses adopt the crypto services and start using them, they can increase enormously and become mainstream. Similarly, the mobile phone market exploded when Apple launched its first iPhone.

I think it is clear by now that there are many uncertainties, and nobody knows how it will unfold. But we know the stakes are high and chances are it will affect your and my life in many ways soon. So, my advice is to keep an eye on it and follow the news on cryptocurrencies.

— — — — — — — — — — — — — — — — — -

TERMINOLOGY

Brokers or exchanges

Several intermediary parties can help you store, send and trade cryptocurrencies. They earn their money via commissions on the transactions. The most well-known brokers are Binance, Bitfinex, Gemini, Kraken, and Coinbase. But there are many more. You don’t need to use them, but they make it very easy, as they make all the connections to the blockchains and handle all the waiting times for a block to get published. It is convenient as they remove the complexity for you.

Tokens

Another word that you frequently hear is “tokens.” Tokens are also cryptocurrencies but run on another crypto platform and are used for specific purposes. Obviously, there are many financial applications, but they can also be used in cloud computing, supply chain, gaming, gambling, social media, and marketing. The number of applications is endless and depends on the developers’ creativity to fulfill a specific need in the market.

Bitcoin mining

The Proof of Work done for validating blocks on a blockchain is called mining. But there is another important activity that is called mining. It is the search for new coins, for example, bitcoins. There is a fixed amount of 21 Million bitcoins, of which until today, around 18 Million have been found. Of those 18 Million bitcoins, about 4 Millon bitcoins are known to have been lost forever. It becomes increasingly difficult to find the last 3 Million bitcoins, and you can only do so by doing a lot of computational work, solving a cryptographic puzzle. That is why there are bitcoin mining farms that do nothing else than find bitcoins. If you find one, you can use it, and as the bitcoin price has gone up a lot, this is still worthwhile. The fact that the total number of bitcoins is limited is one of the reasons the price has gone up so much. It is rare, just like gold, so when demand rises, the prices go up because there is no extra supply. At the time of writing, one bitcoin trades for around $40.000.

Staking

Sometimes tokens are also used to stake into the specific network itself, giving the right to participate in decisions on changes of that network and sometimes even earn interest. This helps to govern the development of a currency, as it will need to change continuously to resolve problems or add extra functionality.

Fungible or non-fungible

Tokens can be fungible or non-fungible. If a token is fungible, it means it can be swapped for something else. Same as a dollar is just as good as any other dollar. A non-fungible token, or NFT, represents a unique asset and cannot be swapped for something similar. Each NFT has its own value, depending on what it represents.

An example is Beeple’s “Everydays: The First 5000 Days.” It is a digital artwork and can be auctioned or sold because a single NFT represents this piece of artwork. It cannot be copied or split. It has been auctioned for $69.3 Million in 2021.

Another example is the first tweet of Jack Dorsey, Twitter’s CEO, who sold the very first tweet on the platform (made on March 21, 2006) for nearly $3 million as an NFT.

There are many more applications for this in the future. Some people will spend fortunes for a beautiful house in a 3D virtual game world. It can all be supported with NFT’s.

— — — — — — — — — — — — — — — — — -

List of cryptocurrencies

· Currencies, like Bitcoin, Bitcoin Cash, Ethereum, Litecoin, or Dash

· Smart Contract Platforms, like Ethereum, Solano, Cardano, Tezos, Avalanche, Algorand, NEO, or EOS

· Connect blockchains to each other, like Cosmos, Polkadot, Polygon, or Quant

· Connect to the real world, providing truth on real-world outcomes, prices, and data, like Blockchain, or Augur

· Cloud utilities, where you can use computing and storage, like Storj or Internet Computing Protocol

· Decentralized Autonomous Organizations, like Maker or Compound

· Decentralized Financial applications (DeFI)

o Stablecoins, like Tether, DAI, or USD coin

o Decentralized exchanges like Uniswap or Airswap

o Borrowing and lending, like Aave or Dharma

o Asset Management, like Metamask or Gnosis Safe

o Compliance, like KYT or Codefi Compliance

o Identity Management, like Civic or uPort

o Insurance, like Etherisc or Nexus Mutual

o Margin trading like Fulcrum or DDEX

o Online marketplaces, like Gitcoin or Ethlance

o Payments, like Ripple, Stellar Lumens, Valora, or Groundhog

· Supply chain, like VeChain, or Walton Chain

· Gambling, like FunFair or Wink

· Gaming, like Enjin, MobileGo, Loom, ION, Decentraland, or TRON

· Content, social media, and marketing, like Steemit, Bitchute, Hive, Brave, or Dtube

· Internet of Things, like IOTA (IOTA uses a Tangle, which is a web of blocks, instead of a chain of blocks).

· Nothing. There are coins created as a joke, like Dogecoin or SHIBA INU. A while ago, Dogecoin raised a lot in value after Elon Musk tweeted about it, although the coin is inherently worthless.

This article would be too long to go through all of them in detail, and if you like, there is more than enough information on the Internet to satisfy your curiosity.

Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing

Also, Read


Should I bother with blockchain and cryptocurrencies? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.