As we explained the high level macro overview in the last post, you dear reader should be interested in owning at least a little of cryptocurrencies.
The future is very bright since we have only talked about the most basic use cases: store of value and sending.
What if we could secure an entire network and disintermediate all middlemen across the entirety of the Internet?
Now what if we told you this already exists?
Not only that, what if we told you it already works?
Well it DOES EXIST and it already WORKS.
In the past, you couldn’t really invest in The Internet. Sure, you can buy Facebook stock, but investing in Facebook is investing in something that was built on top of the internet, or a middle man monetizing a community. Facebook is free for me to use, you say. Ah, but as has been proven time and again, if a service is free, you dear reader are the product monetized. Or in Facebook’s case, your profile and platform interactions. But moving on!
Now, with new protocols that are secure and (becoming) scalable, you dear reader can actually invest in the entire internet.
We are not talking about TCP or IP but the flexible blockchain that will secure the entire network.
Think back to 1994: if you could invest in everything being built on the
internet back then, wouldn’t you?
Of course you would!
Now then, with the fun and exciting stuff out of the way, we can jump into each segment in the crypto space and how they are different.
Each of the cryptocurrencies offers a different value proposition and
some will certainly fail (as we said earlier, many are scams).
That being said, having a framework to group each one should help our readers decipher which coins are of most interest.
The section below is a high level overview of several coins. Please note this space changes rapidly, and is by no means exhaustive. If you dear reader are curious as to what cryptos we at Crypto Mouse hold, subscribe to our list. We update our subscribers anytime we see a material impact to our holdings, be it a new crypto team we have researched extensively or changes in market sentiment/outlook.
Store of Value
The one you’re most likely to hear about at family get togethers, on TV, on Facebook, in the media at large. It is owned by pretty much every smart person who got into the
space, it was first after all. Everything else in cryptocurrency came after.
Bitcoin was created in 2008 as a form of digital payment on an unchangeable database, or “ledger” by an unknown person (or persons??) who called himself Satoshi Nakamoto. Who Satoshi is us turning out to be one of the biggest mysteries of a generation.
What made bitcoin special was that it solved the double-spending problem.
Currently, if you have a specialty cookie
store in Virginia and I am in Texas and want to buy your new sugar cookie, how do I send you money? I either send you a check, wire, or give you my credit card information. Once that clears, you ship
me my sugar cookie.
What just happened in this scenario? In the middle was a trusted third-party intermediary (a bank or a credit card company, be it Visa/MasterCard/American Express) that assured you in Virginia I had the money to pay from Texas.
If there was no third party and I sent you a check for $100 (better be one amazing cookie!), how would you know that I
had that money in my account?
It’s appeared as though we have always needed a trusted third-party in the middle.
In the traditional system, the bank and government are our trusted third parties.
But banks fail (see 2008 global financial crisis from 10 years ago).
Governments often print money like there’s no tomorrow, devaluing your money.
The genius of bitcoin was that technology removed the need for a trusted third-party or middleman. To further simplify: everyone involved became a trusted third party.
Bitcoin created a blockchain which stores records of every transaction ever done on the Bitcoin network. We can see the history of every bitcoin and who the owners are (although your name is not attached, the ledger provides a record of bitcoin addresses that are public).
Since everyone with a computer can access a copy of this ledger, we no longer need a third party, or a middleman.
Bitcoin is owned and controlled by you, the owner. The records are kept by everyone.
If all of us have a copy of the entire ledger, and someone tries to falsely input a record, that record will immediately be kicked out.
In normal day to day accounting, people can commit fraud by changing entries on the books. This can’t happen with a blockchain, or a “distributed ledger,” because everyone else on the blockchain
will see the entry that is different and throw it out. Each party to a transaction must validate it.
Imagine not needing a bank or American Express to send money to someone across the nation or world, and being able to do it from your phone or laptop without paying a 20% fee to Western Union or waiting several days for a cross-border payment
Bitcoin is a global currency with fixed supply – the maximum number of bitcoins that can be created is 21million – so governments cannot print away and deflate it.
This is the power of bitcoin.
A lot of wealth is tied up in Bitcoin. And no matter how many times naysayers predict its collapse, it does bounce back. Because if this, many have come to consider it
This is the anonymous creator of the Bitcoin network. Many believe the creator is more likely a group of individuals than a single person due to complexity of the code. As mentioned above, Bitcoin cannot be changed by a single person due to the source code (read: ledger or blockchain) being public. Bitcoin is a digital asset that is backed by mathematics.
A digital and distributed ledger that requires no trust from a single
central entity or authority (intermediary), backed by mathematics.
Transactions of Bitcoin (debits/credits) are not kept within a closed system. Any computer in the world can attain a copy of the bill or ledger. This database is secured by all who partake in the digital asset ecosystem.
The ledger itself is secured through a process called Proof of Work.
Proof of Work
This is how bitcoin protocol ensures all of computers have the same and most updated copy of the ledger.
The computers agree on the groups of transactions that will be added to the most updated copy of it.
These groups of transactions are put into a
block, which once verified, will be added to the blockchain.
There is only one accurate blockchain
displayed to all users.
Think of it within the context of email. Once a block on the blockchain is verified, everyone receives the exact same message of what has been logged (including digital proof of a timestamp). This “email” cannot be sent without every single computer involved receiving it.
Within the context of bitcoin, this is often called the SHA256 algorithm. The
computers that solve these cryptographic calculations are called miners. Miners are
rewarded for updating the blockchain for everyone to view. Miners are rewarded with a block reward and a mining fee.
Litecoin is another cryptocurrency, almost an exact copy of the bitcoin code, yet it has some modified features.
These modified features aim to promote greater merchant or vendor adoption of cryptocurrency.
Our readers may see it called “silver” to bitcoin’s “gold”.
The basic premise is for transaction for lower cost goods. Think of it as Litecoin would be used to buy smaller ticket items (think coffees or clothing), while bitcoin would be used to purchase larger ticket items (such as homes and cars).
There are some notable differences between bitcoin and litecoin, notably:
-Decreasing the block time to 2.5 minutes, or 4 times as fast. With blocks happening four times as fast, Litecoin’s supply is also 4 times the amount of Bitcoin, to the tune
of 84 million.
-More transactions can be processed faster.
-Another modified feature is litecoin’s creator, Charlie Lee, chose to verify transactions and secure the blocks. Instead of the SHA256 algorithm implemented in the bitcoin protocol, litecoin uses a different algorithm called Scrypt. Charlie Lee chose this because he foresaw that if he chose the SHA256 algorithm, he would be competing for hashing power with Bitcoin. AKA he would be fighting for the computer processing power that keeps the bitcoin network up.
At the time we are writing this, bitcoin presented the first use case for cryptos, becoming a digital store of value.
Litecoin in theory may serve the role as a peer-to-peer cash system.
Monero is one of the first coins focused in privacy, aiming to be the first crypto that is untraceable. It introduces ring signatures into all the transactions that take place in the network by the deployment of the hashing algorithm called CryptoNight.
Through ring signatures, the transaction details on the blockchain are
concealed from the public. No one will be able to see which digital wallet was paid or which wallet received crypto. Additionally, no one will be able to see the amount. This is implemented by default in monero, which is not the case for many other coins.
A crypto which spawned as a fork from bitcoin. Decred is a hybrid which introduced and implements a concept called Proof-of-Stake where it gives power to the actual holders of the coin to influence the direction of where the coin wants to go.
Not only can Decred be mined, but this
also allows holders of the cryptocurrency to have a direct say in what new properties should or shouldn’t be applied to the currency.
With a stake in the currency, they believe this will align the incentives more efficiently.
This is an important cryptocurrency because it was the first to introduce what’s know as zero knowledge proofs.
Bitcoin is open, permissionless, but because it is a public ledger, transactions are not anonymous. A history of every bitcoin transaction is displayed for the world to see, and data can be analyzed to see what transactions were used for or to whom it might belong.
Zcash provides the option for transaction to be public or private, as well as allowing the
users to selectively disclose information about their transactions.
The transparency is optional – there might be situations where things can be audited.
A big difference between zcash and monero is that monero transactions are private by default.
Decentralized Smart Contracts
Ethereum is a cryptocurrency with a public blockchain for a powerful use case: smart
Smart contracts are programs/accounts on the Ethereum Blockchain. Thesmart contract can have code stored on it that will perform a set of functions for an action
to be executed.
Since our readers have a solid comprehension of bitcoin after reading the above, you can now create fill functions.
With bitcoin, all we can do is essentially send coins to a new wallet address.
With ethereum, we can create a fill function that is essentially programmable money. This fill function can be as simple or as complex as you would like.
To continue our previous example, a simple contract would be – “If this contract for one sugar cookie is fulfilled to me in Texas, release 10 ether to my friend Bob in Virginia at this digital wallet address”.
In other words, you could fill an order based on certain conditions being met. Transactions can be programmed without any middleman holding money for you.
That being said, there are a some negatives to ethereum.
-Ethereum is based off a coding language called Solidity. Developers who want to make smart contracts must be well versed
in this new language in order to build a smart contract that is secure.
-Poor Solidity code has led to the hacking of many smart contracts including the DAO and the creators of Parity Wallet.
-Scalability is a huge issue ethereum is dealing with right now, in terms of transactions per second.
Ethereum Classic was created due to the l DAO hack. The DAO was an application built on top of the ethereum blockchain
that was hacked.
Poor code led to a large amount of theft and eventual fork.
At the time of this writing, there appears to be an incentive to stay in the Ethereum ecosystem due to its network effect being the biggest, despite there being other projects out there that have already improved on some of ethereum’s weaknessess.
Initially Antshares, the team rebranded to NEO in June 2017. NEO is most similar to Ethereum because it is a direct competitor. It is a currency that employs the dBft (Delegated Byzantine Fault Tolerance)
consensus mechanism which is different from both Proof of Work and Proof of Stake consensus mechanisms.
One of the main strengths of NEO is that the platform contains a compiler (a translator of code) for common coding languages.
Or Initial Coin Offerings. Say you dear reader have an idea. To execute that idea you need funds. In an ICO, you would accept Bitcoin and Ether to fund your idea. This craze took off like a rocket in 2017, raising $5.6 billion. In the first half of 2018 over $7 billion has been raised. Buyer beware however, the US Securities and Exchange Commission is watching ICOs closely, even launching its own fake ICO to educate investors dubbed HoweyCoin, presumably named after the Howey Test, which “touts an all too good to be true investment opportunity.” More on HoweyCoin here. We at Crypto Mouse do not invest in ICOs due to their highly speculative nature.
Continue reading on if you want to learn how to invest if you don’t want to learn anything about the space…