Cryptocurrency – The Money of The Future – Bitcoin, Ethereum, Ripple (XRP)
We take a good look at digital currencies like Bitcoin to aid in giving an explanation of what cryptocurrency is, how it works and its implications.
What is cryptocurrency: 21st-century unicorn or the money of the future?
Cryptocurrency is a digital currency that uses encryption (cryptography) to generate money and to verify transactions. Transactions are added to a public ledger also known as a Transaction Block Chain and the new coins are created through a process referred to as mining.
This simple introduction explains the most important thing about cryptocurrencies. After you have read it, you will know more about it than most other people.
In the year 2016, you had a hard time finding a major bank, a big accounting firm, a well-known software company or a government that did not properly research cryptocurrencies, publish a paper about it or start a so-called blockchain-project.
But beyond the various noise and the series of press releases, the overwhelming majority of people, even bankers, consultants, scientists, and developers have a very little knowledge about cryptocurrencies. They often fail to even have a better understanding of the basic concepts.
About a years ago, in the year 2017 to be precise, cryptocurrency has been used as a decentralized substitute to traditional fiat currencies (which are usually supported by some central government) such as the United States dollar (USD).
Today, cryptocurrencies have turned out to be a phenomenon known to some people globally. While still somehow geeky and not understood by most individuals, corporate organisations like banks and numerous companies are now aware of its importance.
Within few weeks of November 2017, bitcoin surged from a fringe investment to a world sensation. In the middle of November, the price was around the neighbourhood of $3,000 for a single bitcoin; on the 6th of December, 2017, it surpassed $19,000. At the time of publication, the value was hovering around $15,000.
This cryptocurrency, Bitcoin, is having a moment really, it is had a year. Even if you believe it is a bubble about to burst, or hope your investments will pay back big in the long run, there is one key fact: Cryptocurrency is changing the future of finance. What is not yet obvious is how the technology behind bitcoin, and other cryptocurrencies like it, will alter our national as well as global financial systems.
Back on The Blockchain
Bitcoin, like other cryptocurrencies, uses a technology called blockchain that makes its transactions extremely secured that experts consider them to be virtually unhackable. Mainly because the transactions are assured, the cost of verifying transactions is fairly less than in a central bank though, admittedly, the cost of verifying bitcoin transactions has become justly expensive.
The Cryptocurrency transactions happen directly between individuals instead of via a bank. Each time a person makes a transaction through a cryptocurrency, for instance, using funds stored in his or her crypto wallet to send bitcoin to another person, the transaction is recorded on a digital ledger known as a blockchain. Each cryptocurrency has its own blockchain as well as a computers doing complex math in a large network maintain it.
The moment users make a specific number of transactions using a cryptocurrency, the computers group these transactions into a “block.” To send a block, adding transactions to the blockchain as well as winning a monetary reward, a computer has to solve a complex math problem known as a cryptographic function.
Basically, the cryptographic equation is throwing a pumpkin (the block) off a building and telling you what the splatter pattern looked like. The only way users can match the splatter pattern and send the block is to hurl a bunch of pumpkins off a building themselves. So people who “mine” cryptocurrency are actually just using their computers to smash billions of pumpkins in order to find the winning pumpkin with the right splatter, which validates their block.
In other words, the first computer that can solve a complex math problem gets to add its block of transactions to the blockchain and receive a monetary reward for doing so (this is what people mean by “mining” crypto). Each computer in the network adds the new block to its copy of the digital ledger, and the process continues.
Although bitcoin was created to avoid centralized banking as well as government money, the technology can be used as a national, centrally banked currency. In fact, the blockchain is so secured to the extent that it reduces the cost of verifying transactions, so banks are already looking into it, says David Yermack, chairman of the finance department at New York University’s Stern School of Business. In 50 years, Yermack says, cryptocurrencies could be used as national currencies.
Cryptocurrencies: Emergence of a new economy
Mostly due to its revolutionary properties cryptocurrencies have become a success, an inventor, Satoshi Nakamoto, did not dare to dream of it. While every other attempt to create a digital cash system did not 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 global 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 often used for payment, it is used as a means of speculation as well as a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators. Exchangers 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 life 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 (10%) a day, sometimes 100 percent (100%) 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 provide the most popular cryptocurrencies of today.
The one and only, the first as well as the most popular cryptocurrency. Bitcoin serves as a digital gold standard in the whole cryptocurrency-industry. It is used as a global means of payment and is the de-facto currency of cyber-crime like darknet markets or ransomware. After seven (7) years in existence, Bitcoin’s price has increased from zero to more than 650 USDollar and its transaction volume reached more than 200,000 daily transactions.
There is not much more to explain: Bitcoin is here today and it is expected to stay.
The brainchild of young crypto-genius Vitalik Buterin has ascended to the second position 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 as well as programs.
Its flexibility makes Ethereum the perfect instrument for blockchain-application. But it comes at a particular 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 emergence of Ethereum Classic. Besides, there are several clones of Ethereum, and Ethereum itself is a host of several Tokens like DigixDAO as well as Augur. This makes Ethereum more a family of cryptocurrencies than a single currency.
It may be the less popular or most hated project in the cryptocurrency community. While Ripple has a native cryptocurrency ‘XRP’ it is more about a network to process IOUs than the cryptocurrency itself. XRP, which is the currency, does not 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. As a result of this, Ripple is often referred to as 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 at an increasing pace.
It was one of the first cryptocurrencies after Bitcoin and referred to as the silver to the digital gold bitcoin. Faster than bitcoin, with a larger amount of token and a new mining algorithm. It was a real innovation, perfectly tailored to be the younger brother of bitcoin. “It facilitated the emergence of several other cryptocurrencies which used its codebase but made it, even more, lighter“. Good examples are Feathercoin and Dogecoin.
While Litecoin refused to find a real use case and lost its second position after bitcoin, it is still actively developed and traded. Litecoin is hoarded as a backup if Bitcoin fails.
It is the most popular example of the cryptonite algorithm. This is an algorithm that was invented to add the privacy characteristics Bitcoin is missing. If you use Bitcoin, each transaction is documented in the blockchain and the trail of transactions can be followed. With the introduction of a concept known as ring-signatures, the cryptonite algorithm was able to cut through that trail.
Bytecoin, the first implementation of cryptonite, 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 attain the same popularity as Monero.
Monero’s popularity peaked about 2 years ago, in summer 2016, when some darknet markets decided to accept it as a currency. This resulted in a steady increase in its 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.
Will Our Future Be In Bitcoin?
Bitcoin was created to work outside national currencies, which is a draw to people who do not trust central banks, says Yermack.
Those who are hopeful about the rise of bitcoin may have noticed its popularity in countries like Zimbabwe and Venezuela, where it is being used as a major means of exchange when government-issued currencies have failed because of hyperinflation. Bitcoin, as well as other means of exchange, have become popular in these countries because transactions can be conveniently performed on cell phones, and their value is more stable than the hyper-inflated national currency.
But others believe that bitcoin is too riddled with problems to be the cryptocurrency upon which the future is built. First, it likely cannot be used on a national scale because of how few transactions per minute bitcoin supports. Bitcoin’s framework can only make seven (7) transactions per second, says Ari Juels, computer science professor at Cornell University who studies cryptography and computer security. VISA’s credit card network, for comparison, can handle 65,000 transactions per second.
Issues of privacy also stop it from becoming the future of money, says Phillipa Ryan, commercial equity lawyer and lecturer at the University of Technology Sydney. “Bitcoin is problematic in the sense that it provides too much privacy and not enough privacy,” says Juels. “Too much privacy in the sense that it provides enough to give criminals the opportunity to perpetrate a lot of mischiefs, from ransomware to the Silk Road. Not enough in the sense that transactions are actually traceable by a pseudonym.”
Its value also fluctuates too much to provide a stable, functional currency. Unlike traditional currencies, which have a value that is set by the central banking system, the value of bitcoin is driven by speculation about its worth like a stock, says Yermack. So it does not make the cut as a currency. “Traditionally, we think of money as a kind of means of exchange and a store of value,” says Harold James, an economic historian at Princeton. “(Bitcoin) is very good at the means of exchange, but not very good at the store of value.”
If you have a dollar bill, it is pretty safe to assume it is worth about a candy bar from day to day. One bitcoin, on the other hand, could be worth a candy bar one day, a car the day after, then next to nothing the day after that. It is more like a stock than a stable national currency. James says that, based on the historical precedents he studies, bitcoin looks like the highly unstable private currencies created in Eastern Europe after the First World War. When speculation about the value of bitcoin is substantially more than its worth in the real world, bitcoin will burst, like the stock market crashed.
Economists studying cryptocurrency and computer security experts agree: The future likely will not be based on bitcoin. Of course, that is not to say that the future will not be based on other cryptocurrencies.
In the meantime, bitcoin will remain as a grand test of the blockchain technology, says Ryan. Its value will continue to fluctuate, but Ryan is convinced that it is already a bubble. “I think that bubble will burst. It is fun to watch though, it’s been a great ride,” says Ryan. “When bitcoin eventually fails, I think we will look back on it as a really important, valuable experiment in which more lessons will be learned than there will be loss.”
Cryptocurrency: A Change In The Financial System
Bitcoin offers something pioneering, and an increasing number of national banks, including the Federal Reserve, are interested in making use of blockchain technology to power a centralized national currency. Majority of the experts agree that, in the nearest future, countries will turn to cryptocurrency, as money is already going from the physical to the digital realm. So a method that secures digital transactions is a necessary investment, and the concept of blockchain technology used in cryptocurrencies is a top contender.
“I think the whole idea is probably horrifying to the bitcoin people, but it’s the ultimate harbinger of success when the person you’re trying to defeat co-opts your own plans and turns them against you,” says Yermack. “The ultimate victory is where the central bank co-opts their technology and makes it the basis of their own operation. And I can see it very clearly play out that way,” Yermack says. “Monetary policy and financial stability – I think those problems will be exactly the same in 50 years.” But in 50 years, a nationally backed cryptocurrency could replace the paper dollar, he says.
When it comes to the future of the money, cryptocurrency’s influence will be noteworthy in its improved ability to avoid technological challenges like hacking, Ryan says. Based on the matters of cybersecurity looming ahead, Ryan thinks that the blockchain will in no doubt be the technology to transform the money of the future.
Blockchain could make its way into the mainstream in two (2) major different ways. The first way is to switch from physical to digital currency. One dollar would still be one dollar, but transactions would use blockchain to make them be more secure. The second way would be to move your bank account from something like CitiBank and transform it into an account in the Federal Reserve itself. If all of a nation’s money were centralized, it would make the Federal Reserve more efficient at its job of stabilizing as well as regulating the economy, says Christian Catalini, assistant professor at MIT’s Sloan School of Management who studies the economics of cryptocurrency.
Some institutions are beginning to try it. Estonia is working to create an e-Residency program, and part of their plan includes launching the estcoin, the world’s first national cryptocurrency. The Bank of England is working to create its own cryptocurrency and has created an experimental cryptocurrency framework called RSCoin that would use a centralized system. To go crypto, the Bank of England would create digital money as if it was printing physical notes. For example, in 2017, there were 73.2 billion British pounds in circulation. A British economy using only cryptocurrency would have the same fixed number of pounds, just represented by a digital “coin” instead of a physical note. Since the value of the British pound is based on how many are in circulation, exchanging a physical note for a digital one has no economic significance. That is, a pound is still a pound, says Yermack. Like bitcoin, RSCoin would use a public ledger and the cryptographic system to distribute money.
In their paper on the RSCoin model, the authors write that a cryptocurrency backed by a national bank should help make cryptocurrency usable on a larger scale since the central bank could employ other institutions to do the computations to verify transactions. In a model with one central bank and only 30 commercial banks, RSCoin could make 2,000 transactions per second – not quite up to VISA’s speed (65,000 per second), but certainly fast enough for British citizens to move about their financial lives quickly and securely.
For a consumer, a centralized cryptocurrency will not change much, says Catalini. “(Consumers) will just see cheaper prices in the denomination they are familiar with, and blockchain technology may be used in the background to offer new or better types of financial and payment services.” So with a national cryptocurrency, bank fees would likely drop, and money transfers would happen faster.
And with national cryptocurrencies, it will be more difficult to conduct illegal activity. Even with the anonymous ledgers used today, governments can track users and financial information, says Aniket Kate, a computer scientist at Purdue University. Since all transactions on the blockchain are recorded on every connected computer, it would be difficult to hide financial indiscretions from the government, Kate says.
Over the next fifty (50) years, Yermack thinks that law-abiding citizens, banks, and governments alike could benefit from moving to some form of digital currency. “There is a huge opportunity cost in not making the central bank more efficient,” says Yermack. “I think what you are really going to need in the long run is a re-organization of the branches of government and probably more levels of political control over the central bank.”
As countries creep closer to creating their own cryptocurrency, they will have to decide just how private they want transactions to be. Bitcoin’s famous openness might not be so appealing to all transactions. You might not like it if your neighbour could see that you are buying vibrators and cat food in bulk (of course, you could also find all their weird purchases). However, cryptocurrencies can protect user privacy in varying degrees, Kate says; a future system could inhibit your neighbour’s prying eyes.
But the issue of privacy is potentially more of a social problem than a technical one. In Norway, all tax records are public knowledge. In other parts of Scandinavia, electronic banking is also on the public record, says James. Citizens of Denmark, Sweden, Norway, Greenland, and Iceland rarely use their physical currencies, James says, making those countries a microcosm for a possible future of digital-only currency.
“The only question that seems to be opened is: would it be the kind of Scandinavian system we talked about, where every transaction can be monitored and that lends itself to a surveillance state?” James asks. “Or will it be a kind of Bitcoin-like system, where there is an anonymity built in?” As countries start to make the switch to digital currencies, their societies, along with the governments themselves and the economies upon which all rely, will have to figure out how to adapt.
Disclosure: A number of members of the Futurism team, including the editors of this write-up, are personal investors in a number of cryptocurrency markets globally. Their personal investment perspectives have no impact on editorial content. This post does not represent an assurance or guarantee against any loss in Cryptocurrency investment and/or transaction.