Cryptocurrency, the dawn of a new economy.

What is cryptocurrency: 21st-century unicorn – or the
money of the future?
This introduction explains the most important thing about
cryptocurrencies. After you‘ve read it, you‘ll know more
about it than most other humans.
Today cryptocurrencies ( Buy Crypto ) have become a global
phenomenon known to most people. While still somehow
geeky and not understood by most people, banks,
governments and many companies are aware of its
importance.
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.
“Virtual currencies, perhaps most notably Bitcoin, have
captured the imagination of some, struck fear among others,
and confused the heck out of the rest of us.” – Thomas
Carper, US-Senator
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?
What is cryptocurrency and how
cryptocurrencies emerged as a side product
of digital cash
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.
Announcing the first release of Bitcoin, 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. – Satoshi Nakamoto, 09
January 2009, announcing Bitcoin on
SourceForge.
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 more than a decade of failed Trusted
Third Party based systems (Digicash, etc),
they see it as a lost cause. I hope they can
make the distinction, that this is the first time
I know of that we’re trying a non-trust based
system. – Satoshi Nakamoto in an E-Mail to
Dustin Trammell
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.
This decision became the birth of cryptocurrency. They are
the missing piece Satoshi found to realize digital cash. The
reason why is a bit technical and complex, but if you get it,
you‘ll know more about cryptocurrencies than most people
do. So, let‘s try to make it as easy as possible:
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 this
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.
What are cryptocurrencies really?
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.
How miners create coins and confirm transactions
Let‘s have a look at 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.
“In the next few years, we are going to see national
governments take large steps towards instituting a cashless
society where people transact using centralized digital
currencies. Simultaneously, the decentralized cryptocurrencies
– that some even view as harder money – will see increased
use from all sectors.” – Caleb Chen London Trust Media
What are miners doing?
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.
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 .
You don‘t need to understand details about SHA 256. It‘s
only important you know that it can be the basis of a
cryptologic puzzle the miners compete to solve. After
finding a solution, a miner can build a block and add it to
the blockchain. As an incentive, he has the right to add a
so-called coinbase transaction that gives him a specific
number of Bitcoins. This is the only way to create valid
Bitcoins.
Bitcoins can only be created if miners solve a cryptographic
puzzle. Since the difficulty of this puzzle increases the
amount of computer power the whole miner’s invest, there
is only a specific amount of cryptocurrency token that can
be created in a given amount of time. This is part of the
consensus no peer in the network can break.
Revolutionary properties
If you really think about it, Bitcoin, as a decentralized
network of peers which keep a consensus about accounts
and balances, is more a currency than the numbers you see
in your bank account. What are these numbers more than
entries in a database – a database which can be changed
by people you don‘t see and by rules you don‘t know?
“It is that narrative of human development under which we
now have other fights to fight, and I would say in the realm of
Bitcoin it is mainly the separation of money and state.”
– Erik Voorhees, cryptocurrency entrepreneur
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.
Transactional properties:
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 makes 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.
Monetary properties:
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.
“While it’s still fairly new and unstable relative to the gold
standard, cryptocurrency is definitely gaining traction and
will most certainly have more normalized uses in the next
few years. Right now, in particular, it’s increasing in
popularity with the post-election market uncertainty. The key
will be in making it easy for large-scale adoption (as with
anything involving crypto) including developing safeguards
and protections for buyers/investors. I expect that within
two years, we’ll be in a place where people can shove their
money under the virtual mattress through cryptocurrency,
and they’ll know that wherever they go, that money will be
there.” – Sarah Granger, Author, and Speaker.
Cryptocurrencies: Dawn of a 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.
Source: coinmarketcap
Bitcoin
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.
Ethereum
The brainchild of young crypto-genius Vitalik Buterin has
ascended to the second place in the hierarchy of
cryptocurrencies. Other than Bitcoin its blockchain does not
only validate a set of accounts and balances but of so-
called states. This means that Ethereum can not only
process transactions but complex contracts and programs.
This flexibility makes Ethereum the perfect instrument for
blockchain -application. But it comes at a cost. After the
Hack of the DAO – an Ethereum based smart contract – the
developers decided to do a hard fork without consensus,
which resulted in the emerge of Ethereum Classic . Besides
this, there are several clones of Ethereum, and Ethereum
itself is a host of several Tokens like DigixDAO and Augur.
This makes Ethereum more a family of cryptocurrencies
than a single currency.
Ripple
Maybe the less popular – or most hated – project in the
cryptocurrency community is Ripple. While Ripple has a
native cryptocurrency – XRP – it is more about a network to
process IOUs than the cryptocurrency itself. XRP, the
currency, doesn‘t serve as a medium to store and exchange
value, but more as a token to protect the network against
spam.
Ripple Labs created every XRP-token, the company running
the Ripple network, and is distributed by them on will. For
this reason, Ripple is often called pre-mined in the
community and dissed as no real cryptocurrency, and XRP
is not considered as a good store of value.
Banks, however, seem to like Ripple. At least they adopt the
system with an increasing pace.
Litecoin
Litecoin was one of the first cryptocurrencies after Bitcoin
and tagged as the silver to the digital gold bitcoin. Faster
than bitcoin, with a larger amount of token and a new
mining algorithm, Litecoin was a real innovation, perfectly
tailored to be the smaller brother of bitcoin. “It facilitated
the emerge of several other cryptocurrencies which used its
codebase but made it, even more, lighter“. Examples are
Dogecoin or Feathercoin.
While Litecoin failed to find a real use case and lost its
second place after bitcoin, it is still actively developed and
traded and is hoarded as a backup if Bitcoin fails.
Monero
Monero is the most prominent example of the cryptonite
algorithm. This algorithm was invented to add the privacy
features Bitcoin is missing. If you use Bitcoin, every
transaction is documented in the blockchain and the trail of
transactions can be followed. With the introduction of a
concept called ring-signatures, the cryptonite algorithm was
able to cut through that trail.
The first implementation of cryptonite, Bytecoin, was heavily
premined and thus rejected by the community. Monero was
the first non-premined clone of bytecoin and raised a lot of
awareness. There are several other incarnations of
cryptonote with their own little improvements, but none of it
did ever achieve the same popularity as Monero.
Monero‘s popularity peaked in summer 2016 when some
darknetmarkets decided to accept it as a currency. This
resulted in a steady increase in the price, while the actual
usage of Monero seems to remain disappointingly small.
Besides those, there are hundreds of cryptocurrencies of
several families. Most of them are nothing more than
attempts to reach investors and quickly make money, but a
lot of them promise playgrounds to test innovations in
cryptocurrency-technology.
What is the future of Cryptocurrency?
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.
cody-littlewood-and-im-the-fo
“In 2 years from now, I believe cryptocurrencies will be
gaining legitimacy as a protocol for business transactions,
micropayments, and overtakingWestern Union as the
preferred remittance tool. Regarding business transactions –
you’ll see two paths: There will be financial businesses which
use it for it’s no fee, nearly-instant ability to move any
amount of money around, and there will be those that utilize
it for its blockchain technology. Blockchain technology
provides the largest benefit with trustless auditing, single
source of truth, smart contracts, and color coins.”
– Cody Littlewood, and I’m the founder and CEO of Codelitt
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 either stand beside and observe – or you can
become part of history in the making.
“If the trend continues, the average person will not be able
to afford to purchase one whole bitcoin in 2 years. As global
economies inflate and markets exhibit signs of recession,
the world will turn to Bitcoin as a hedge against fiat turmoil
and an escape against capital controls. Bitcoin is the way
out, and cryptocurrency as a whole is never going away, it’s
going to grow in use and acceptance as it matures.”
– Brad Mills: Serial Tech Entrepreneur.