Cryptocurrency: Buy Now, Learn Later
Over history, one thing has fueled human’s innovation; grouping together of people in towns and cities allowed for economies where no one person or family had to constantly hunt and gather to survive. Through a network of specialized jobs, work was divided up for the maximum efficiency. Goods and services were exchanged and shared as every job was being done with the intention of being sold in bulk. This allowed for people to become more knowledgeable about their job as well as have a lot more free time to talk to other people within their grouping and learn.
For example, not everyone had to grow and tend to wheat yet day after day they were able to eat bread.
But as the communities grew larger and larger, more security was needed when indulging in exchanges because people knew a smaller percentage of their community.
Also, the economy was becoming a complex web of barterers who wanted different things. Exchanging your good or service for that of someone else became a lot harder of a task. From then on, gold was used as a medium of exchange to simplify the situation.
However as time went on, a banking system was formed to protect and store the gold and replace it with less valuable but more easily transactable paper that could be used in the same way as the original medium of exchange. More recently, this paper money has been used alongside digital currency that’s kept track of by large banking companies.
What is cryptocurrency?
Now, a new technology is emerging. Cryptocurrency is a digital asset that is used as a medium of exchange. The catch? Unlike current digital currency that merely acts as a representation of existing fiat currency, it’s not here to share the economy with another form of currency.
Cryptocurrency is a decentralized system that stores transactions on a public ledger. By using blockchain technology, cryptocurrency completely skips the modern banking system and cuts out any middle men. This creates a fully peer to peer transaction system that puts monetary power back into the hands of the common person.
The word “cryptocurrency” stems from the combination of cryptography and currency. Cryptography is the practice of writing or cracking encoded messages.
For example, during the Cold War, many messages needed to be sent long distances between generals.
However, these messages could easily be intercepted or destroyed along the way. To prevent this from happening, the messages were encoded in a way that only the generals or their teams knew how to translate, or decode. If I were to want to send a secret message, I could use a system of my own that only I and the receiver know, for example the Caesar Cipher which shifts every letter of the alphabet over a certain amount of times, and send the encrypted message.
Cryptocurrency uses Public Key cryptography, or Asymmetric cryptography, to protect each user’s funds and validate transactions. Up until its invention all cryptography was done using symmetric keys where a user encrypts a message with a key and sends it. Then, the receiver would decrypt the cipher text using an identical key.
This posed the issue of having to establish this key without it being intercepted which would be practically impossible without being able to meet physically. Also, if a user wanted to exchange information with multiple people, they would need a different key for each interaction in order to protect individual interactions.
In 1970, James Ellis, a British engineer discovered a new and easier cryptography system that did not need any physical interaction or multiple keys. The proposal involved a sender unlocking a message, sending it to the receiver who would then write on the message, lock it, and send it back. This way, no keys are exchanged and the user’s lock could be publicly viewed and used by anyone to send the user a message.
Although Ellis never actually came up with a mathematical solution, his idea was strong. It revolved around having both an encryption and decryption key. The encryption key would be publicly published for anyone to use. By using that key, a receiver could encrypt their message and send it back to the original user. Then, the user would use their decryption key to decrypt the message.
In cryptocurrency, the encryption and decryption keys are referred to as public and private keys respectively.
The public and private keys are inverse of each other so when a message is encrypted, it can always be reversed by the decryption key. However, no eavesdroppers know the inverse of the public key nor could they figure it out without guessing as they use unique hash functions for every user.
Clifford Cox eventually discovered the one-way trapdoor function that allowed Ellis’ theoretical idea to become a reality. This trapdoor function makes encryption extremely easy while decryption is near impossible without external information.
The message is converted into a number which is then raised to the “x” power and then divided by a random number “y”. Then, the remainder of the solution is used to encrypt a message. Since only the solution, “x”, and “y” are public, the equation is extremely hard to reverse without knowing the number associated with the original message.
To undo the encrypted message, a specific number is needed. To do this, Cox used the prime factorization of numbers as the private key. He chose prime factorization because multiplying the prime factorization of large numbers is extremely easy to do and can be computed on virtually any modern computational device.
However, reverting this function and figuring out the prime factorization of a large number is extremely difficult as it requires a great deal of trial and error. With only a three hundred digit number, the best computers take years to find the prime factorization. The perfect system for public key encryption had been discovered.
That being said, this is not a permanent solution. With the introduction of quantum computers, public key encryption will no longer be able to rely on the prime factorization of numbers.
Quantum computers are an upcoming exponential technology that allows for certain computations to be completed extremely quickly. Quantum computers’ fundamentals rely on what are called “qubits”. Qubits are the basic units of information of quantum computers that can act in multiple states at once. This allows qubits to massively outperform classical bits in specific computations such as integer factorization which underlies traditional RSA encryption as well as Public Key encryption.
Peter Shor famously discovered Shor’s algorithm which allows quantum computers to evaluate and essentially guess at multiple solutions to prime factorization of large numbers at once. This drastically decreases the amount of time it takes to find out the factorization and can take ETAs from thousands of years to just seconds.
However, there is still a ton of time to adapt to such powerful machines. Currently, the most powerful quantum computer is IBMs 65 qubit system and in order for Shor’s algorithm to truly work, millions of qubits would be needed.
This is no secret to the cryptography field. In fact, a new field called “post quantum cryptography” has actually been extremely promising. There are alternative public key systems that are unable to be broken by quantum computers that exist today. In fact, there is a major push to migrate the entire internet into a post quantum cryptographic network that would be based off of new SSLs to protect web pages. Overall, the cryptocurrency community is ready for the arrival of quantum computers.
A new age of currency is upon us. With its extremely secure nature and peer to peer ways, cryptocurrency is sure to be extremely impactful in our financial and social lives in the future. For centuries, monetary power has been one of the most influential in communities whether it be from a king or a government. Now, the power is being put back into the hands of the people with air tight, future proof security.
What’s a blockchain?
Behind every cryptocurrency is a revolutionary new technology called a blockchain. Throughout the years, any transaction or form of communication over the internet had an underlying tone of trust. You needed to trust that a company would send you a package when you paid and you needed to trust that the Nigerian prince in your emails was telling the truth. However what blockchain technology did was create a system where verification killed this aspect of trust.
Blockchain originally started in 1991 as an online method to securely store documents that could not be tampered with or altered in any way. In 1992, the introduction of Merkle Trees allowed for each block on the blockchain to hold more data.
However, in 2008 with the introduction of Bitcoin, blockchain technology really started to kick off as more people saw its potential.
Since blockchain is an open source technology, anyone who wishes to take part in a certain blockchain also has the option to view the blockchain’s contents.
Physically, a blockchain is just a page of code that uses important cryptographic algorithms to fully secure it from any exterior tampering/loopholes.
Blockchain technology allows for users to publicly display verified information to a wide network of nodes. Whether it is data that corresponds to a certain amount of cryptocurrency or if it’s an encrypted message, blockchain technology has the power to verify its place within a system or network. It does so by creating an immutable chain of information in the form of “blocks”.
The blocks within a blockchain are only added in the scenario where they are confirmed by a special set of nodes called miners. Each block is set up in a way that conveys the data that the block is holding, the block’s hash, the corresponding nonce, and the hash of the previous block.
The data within a block is tacked directly to a database that can be within the blockchain or external. You can think of the data within these blocks as writing that confirms a given transaction such as:
“Alice pays Bob 1 Bitcoin”
Some blockchains have specific sizes for each of these blocks. For example, in Bitcoin, the maximum block size is 1 megabyte. However, other blockchains like that of Ethereum do not have block size caps but rather they operate based on the number of transactions or based on “gas prices”.
Hashing is the process in which a string (or series of words) of any length is converted into an output of a fixed length. It is a form of cryptography where, in the case of cryptocurrencies, the transaction data is hidden and secured. Bitcoin uses the SHA-256 algorithm which hashes data into an ambiguous 256 bit phrase. The “hash” of a certain block can be thought of like its identification or Block Header. That being said, two blocks having the same hash code is not impossible and it’s possible that two completely different sets of data could end up with identical hashes.
Also, because the hash of a block is just its data encrypted, no data can be altered, as then the block header for the block would no longer match the previous hash of the next block.
Every block has attached the hash of the previous block in order to identify the order and confirm its place and identity on the blockchain.
What is mining?
Miners are needed to identify valid blocks in order for them to be added in the first place.
Miners are simply a node in a blockchain network that prioritize computation over transacting. Without miners, there would be no verification aspect of blockchain making the entire system similar to that which we have today on the internet.
Miners are incentivized by certain rewards called block rewards. All the miners on a network are competing in order to verify blocks in order to gain these blocks rewards.
In order to mine a block, all miners are constantly looking to find the nonce of the block. Nonce stands for “number-used-once” and every block has a unique nonce. When hashed, the nonce of a block will correspond to the difficulty of a certain blockchain.
The difficulty is a number which describes the amount of computational power needed in order to solve these problems to get to the nonce. This difficulty can be changed overtime via algorithms built into a blockchain. The nonce starts with the difficulty number of zeros.
For example, a nonce in a blockchain with the difficulty “3” may look like this: 0003453.
Once a miner guesses the value of a nonce or any number lower than it, they are given the block reward and the block is added to the chain. Some things that the miners are doing when searching for the nonce is looking for double spending and checking if, for example, Alice has the amount of Bitcoins to sell to Bob.
Mining nodes need special equipment in order to solve the problems to validate transactions. It happens that a lot of the equations that are needed to most efficiently guess the nonce are best utilized using GPUs or graphics processing units.
These are the same components that power your fancy video game graphics as well as the output to your screen. Large mining rigs equipped with hundreds and sometimes even thousands of GPUs are constantly solving equations, validating transactions, and outputting hashing power.
There are also machines called ASICs that are designed specifically for mining certain cryptocurrencies. Since some different blockchains have different equations that must be solved, ASICs sometimes do not work as efficiently on different chains.
ASICs like AntMiner are extremely powerful and often are the best bang for your buck in terms of hashing power.
All cryptocurrencies can also be mined on a computer’s CPU and sometimes, cryptocurrencies emerge that can be mined via a phone or other cellular device. That being said, mining cryptocurrencies is a very popular yet unprofitable market for the little guys.
The cost of the machinery and electricity to run mining rigs often exceeds the profits and in a game all about “Who can have the most hashing power”, those with more expensive rigs usually come out on top.
Giant warehouses full of thousands of ASICs and GPUs often mine cryptocurrencies like Bitcoin and are able to make a profit because of their immense hashing power.
You can think of hashing power like a lottery ticket.
The little guys with one GPU have a way less chance of winning the block reward and often take months or even years to see any real value. In order to fight this, some of those smaller rigs can come together in a “mining pool” where they combine their hashing power and distribute the earnings amongst each other in the case of gaining the block reward.
Blockchain is an extremely applicable technology. As an open source technology, millions of developers around the world have access to a variety of example projects. A lot of blockchain applications come from the concept of forking.
Forking a cryptocurrency is when you duplicate its software, make any edits if necessary, and relaunch to the public. Since blockchain has no centralized figure dictating its rules or mining nodes, the entire network of nodes has the ability to just switch to a different blockchain if they want.
If someone really liked the code of Bitcoin, yet found a bug in the system, they could simply duplicate the blockchain code, fix the error, and then convince the other users to switch over.
However, you could also duplicate the blockchain and connect it to front end code and use it as the backbone of your website or ledger. This can allow for millions of different projects. As of 2021, blockchain is where the internet was in the 1990s. The platform is out to the public and all that’s left is for the applications to roll in.
How do I get cryptocurrencies?
Cryptocurrencies are gaining more traction by the day and it seems like only the really nerdy tech guys and big companies can get their hands on them. However, that’s actually the biggest misconception. Cryptocurrencies are extremely available and easy to obtain for the normal person. But it wasn’t always easy.
In the early forum days of Bitcoin, there were two realistic ways to add Bitcoin to your wallet. You could learn the software and hardware behind Bitcoin mining, and solve some problems in return for block rewards filled with Bitcoin, or you could exchange paper money and take the risk of sending it over in an envelope to the distributor by mail. Back then, hundreds and even thousands of Bitcoins were being transacted regularly.
Now the process is much simpler. There are many trusted exchanges that buy and sell various cryptocurrencies as well as track their market value. On these sites, you can purchase cryptocurrencies just like you would anything on Amazon, Ebay, or any other e-commerce store.
Sites like CoinBase and Binance have the user create an account on their website that is attached to a public and private key. Those keys are stored on large and well protected databases by the owners of the sites.
For most people, this method of private key storage is sufficient as it means that a huge data breach of a well protected and informed company would have to occur to lose their funds.
Also, storing your wallet on a centralized exchange makes it easier to access your funds as all that’s needed is a login to the website to see your real time balance priced in any currency that they offer.
That being said, the first major cryptocurrency exchange, Mt. Gox. was breached in February of 2014. Everyone who had been storing their currencies on the site lost everything and there was no legal obligation for Mt.Gox to pay them back.
Even if there had been, it would have been more than likely that they would not be able to as almost one million Bitcoins were lost. There were also many horror stories before the breach of customers accidentally leaking the passwords to their accounts and losing everything.
With any centralized exchange, history has the possibility of repeating itself. The exchanges allow you to transfer funds to external wallets. It’s much safer to ditch the bank style of these exchanges and create a vault of your own.
Cryptocurrency wallets operate under public-private key encryption. You can think of these keys being like the username and password to your “crypto-vault” respectively.
Since the public key is visible to anyone, the private key is really important to keep safe and unknown to anyone but yourself.
With the private key, anyone has the power to digitally sign off on any transactions from your account essentially deeming that “vault” compromised.
There are many ways to protect your private key yet some are safer than others.
The most ideal way to protect your private key would be to simply memorize it however if you get hit in the head, die, or just forget the key, there’s no way to ever recover the funds you held. Some people like to write their private key on a piece of paper or inscribe it in a metal that can’t be lost to a house fire however those options allow for anyone who accidentally or intentionally sees it to have full access.
Some people actually sell these “paper wallets’’ that have a QR code printed directly on them or sometimes just have the private key printed in letters. In 2013, Bloomberg accidentally premiered Matt Miller’s paper wallet on their show and the guy lost all of his funds.
There are also various hardware wallets that take a ton of precaution towards keeping your coins safe. These wallets are physical hardware devices that act almost like hard drives to store only cryptocurrencies.
For example, a Trezor is a small pod shaped device that requires a password, pass phrase, and a list of twelve to twenty four words in order to access the private key.
Without any software updates or physical access to the device along with knowledge of all three of the “passwords”, there is no way for hackers to breach the funds. Hardware wallets like Trezor and Ledger are the most secure ways to store cryptocurrencies.
They have great manuals and tutorials for anyone who is looking to get started and a strong community. That being said, cryptocurrency is a constantly targeted area for hackers and scammers. It’s always important not to buy any sort of wallets used and too also check the packaging for any breaches. When going through the storage process, it is important to only trust direct sources from the company and to not get any external help from a stranger.
Online security is a major aspect when it comes to buying cryptocurrency. For years, scammers have called in order to phish bank information from people but now, it is easier than ever to get vital information due to our increasing social lives on the internet.
Spyware is very common and hard to detect within our devices.
By constantly monitoring our screens, spyware can detect when someone is on an exchange via their device and build up a database of compromised private keys. It is important to never use public devices like library computers or even your own smartphone if you have a lot of sketchy apps or have visited sketchy websites. When going through the cryptocurrency buying process, it is always safe to assume that someone who wants your money is looking at your screen.
There are also many offline security procedures to take when indulging in cryptocurrency. Although it’s up to the individual, it’s a good idea to keep your balance a secret just as it is to not share how much money you have.
As of 2021, cryptocurrency is still a very new technology and it’s very likely that we will see it develop even further. Bitcoin is already one of the world’s largest currencies yet it is still in its early stages of adoption. When entering this early on in its history, it’s best to keep to yourself and educate yourself on crypto security as well as the technology behind it.
What is Bitcoin?
In 1992, a mailing list forum was created by multiple highly skilled computer scientists to discuss mathematics, philosophy, and cryptography. The group called themselves the Cypherpunks and were crucial to the spread of modern cryptography.
Before the introduction of asymmetric cryptography, the field had been used mostly by military officers so it was highly regulated. However, as the internet came into existence and there was more need for network security, those regulations were lifted. Being composed of mostly civil libertarians, the Cypherpunks were leading forces in helping win the proclaimed “Crypto Wars”.
In 1997, Adam Back created HashCash, a digital system which tacked fees onto emails in order to combat email spam. HashCash improved on the already existing Digicash as it didn’t require an account and also had some of the first anti-“double spending” mechanisms built in.
In 2004, PGP Corporations developer Hal Finney introduced a system that was built off of Back’s HashCash. The system also introduced reusable proof of work which fortified the anti-“double spending” but still required a centralized system to operate.
However only a year later, cryptographer and computer scientist Nick Szabo prosed bit-gold which turned Finney’s reusable proof of work into digital collectables with specified values.
However, it wasn’t until 2008 when an anonymous user using the pseudonym Satoshi Nakamoto published his Bitcoin whitepaper that cryptocurrency was born.
Bitcoin is the first and most popular cryptocurrency.
Its foundational technologies had been in the working for years and it’s important to understand that Bitcoin is the result of many thought out cryptography and computer science projects ‘Frankensteined’ together.
In the early years of Bitcoin’s creation, most communication was done through the BitcoinTalk forums. The website was designed as a place where newcomers to the technology could ask questions, discuss economics, and talk about everything Bitcoin related.
Satoshi Nakamoto was very knowledgeable about his creation and was active in this community. Many early adopters were able to interact with and ask questions to Satoshi via the forums. It seemed as if everything had been thought out. There were few mistakes with his project. However in 2011, Satoshi disappeared, not leaving a single trace.
This is one of the biggest differences between Bitcoin and other cryptocurrencies. Satoshi knew in order for his project to truly be decentralized and to truly be a product for the people, the creator had to be unknown. Every other cryptocurrency or defi project has a team behind it that can make executive decisions for the people or that governments could target.
The mystery of Satoshi Nakamoto is something that people have been trying to solve since the popularization of Bitcoin.
There are many speculations as to who Satoshi could be. Nick Szabo, Hal Finney, and Adam Back are all prime suspects as they have been pioneers in the space for the longest. In fact, the first ever recorded Bitcoin transaction was between Hal Finney and Satoshi Nakamoto.
Finney reported having close communications with Satoshi until he disappeared although it was strictly over the internet. Sadly in 2014, Hal Finney passed away due to complications of ALS.
Nick Szabo has been linked to the Bitcoin whitepaper as his style of writing is extremely similar. During his time as a full time cryptographer, Szabo wrote many articles on his work.
Another possibility is Dorian Prentice Satoshi Nakamoto, a Japanese American man living in California, very close to Hal Finney’s house. In a 2014 article of Newsweek, many facts pointed to Dorian being Satoshi. Other than his name, Dorian was a computer engineer and worked for financial information services companies.
After being laid off of his job, Dorian turned libertarian and was encouraged to start a company of his own. Dorian also replied to a question about Bitcoin that he was “No longer involved in that and [he] can’t discuss it”. However later, Dorian exclaimed that he had misinterpreted the question.
Later that same day, Satoshi Nakamoto’s BitcoinTalk account created a post saying simply, “I am not Dorian Nakamoto”. Which was then deleted and followed by a claim that he had been hacked in the following couple of days.
On top of its decentralized principles, Bitcoin was put together extremely well. The introduction of the whitepaper discusses the state of the monetary system before Bitcoin’s proposal.
All online and offline commerce had come to rely on large financial institutions who extracted large fees from transactions and could operate on trust. Bitcoin introduced a fully proof of work based system that was regulated only by logical mathematics.
The Bitcoin protocol is built off of blockchain technology.
Digital transactions are included as the data in a block. Just like every blockchain, the data is hashed and used as a blockheader in order to validate transactions. In Bitcoin, each block has a maximum amount of data until it needs to move onto another block with multiple transactions being able to be recorded in the same block.
Each block has a maximum size of roughly one megabyte. Once the block is verified, it is added to the Bitcoin blockchain. Blocks are validated via Hal Finney’s proof of work system which allows various mining nodes to confirm or deny transactions as well as check them for double spending.
In order to reverse the proof of work, a single mining node would need to exceed all of the computational power of the other nodes combined. When achieving this ~51% of power, the node would have to catch up to the work of the honest nodes.
All transactions currently recorded on the blockchain are validated and cannot be double spent. The most popular Bitcoin protocol known as Bitcoin Core can only process about seven transactions every second. This is a built in feature that can be scaled as shown with forks such as BitcoinSV and BitcoinCash that introduce larger blocksizes.
The size of the Bitcoin blockchain is constantly growing and is extremely large as it is. To reclaim disk space on nodes who need to download this blockchain, Bitcoin uses Merkle trees.
These Merkle trees allow for all transactions within a certain block to be combined together within a singular hash. This allows block header sizes to decrease drastically. Now, block headers only take up eighty bytes of data within each block meaning that they contribute only four and one fifth megabytes to the blockchain every year.
Merkle trees do not break the hash of individual transactions as they hash transaction pairs until there is only one output left.
The amount of Bitcoins is fixed. Before Bitcoin, gold had been the most practical store of value as its limited supply caused its value to be a great hedge against inflation. With a fixed amount of anything, higher demand will cause an increase in price hence rewarding long time investors or holders.
With an ever increasing supply, that asset will be constantly devalued over time. There can only ever be a little bit less than twenty one million Bitcoins in existence. As of 2021, around nineteen million have been mined and are in circulation.
The last Bitcoin is scheduled to be mined in 2140.
The reason for the uneven distribution of mining rewards is because of a built in feature called the halvening.
The block reward for the first block that was ever validated was fifty Bitcoins. That means that every block that was mined (which happens approximately once every ten minutes) spawned fifty new Bitcoins.
However, every four years from then, the block reward was cut in half meaning less and less Bitcoins are to be added to the pool every four years. Currently, the block reward is six and one quarter of a Bitcoin.
Many people are scared that the price of Bitcoin is too high to afford or that they will never be able to own any because there are seven billion people in the world and only twenty one million Bitcoins.
However, like a United States dollar, Bitcoin is divisible into smaller parts called Satoshi. In one Bitcoin, there are one hundred million Satoshis. If need be in the future, Satoshis can be further divided and even shared amongst participants in the network.
Many Bitcoin activists are pushing people to speak in terms of Satoshis rather than Bitcoins as the high price of Bitcoin is a big turn off for those who do not know it is divisible. Also, it is a lot more likely that in the future, regular transactions will deal in Satoshis.
In 2021, many people who do not fully understand the fundamentals and technologies of Bitcoin see it as an investment opportunity. For most people, they see that the price is rising and it is becoming more and more trendy with large companies. However in the early days of Bitcoin, most serious Bitcoiners jumped in under the purpose of using it as a just currency or store of value in the future.
To them, the United States dollar or any other fiat currency is just a piece of a much larger banking system that is built to oppress. Transitioning over to Bitcoin is not meant to be something that is ever exited.
With more and more companies accepting Bitcoin as digital payment for their products, there seems to be no point to ever convert the Bitcoin back into fiat.
What is HODLing?
In 2013, a BitcoinTalk post created by user GameKyuubi rambled on about his experience with Bitcoin. In the post, he describes how he is not very financially or economically literate but that he trusts the Bitcoin process.
Within the article, a spelling mistake was made and it accidentally read “HODL” rather than “HOLD”. The community took the term under their belts and within hours, it was being said all around the forums.
The term represents the resilience of the Bitcoin community and their ability to hold their funds in Bitcoin without selling even through dips.
Throughout its history, the price of Bitcoin in terms of United States dollars has been extremely volatile. It is common to see days of five percent increases or decreases and some days there can even be a fifty percent change. This is because cryptocurrency is an extremely new technology and it is currently growing.
The potential market for Bitcoin is huge and as of 2021, it has only gained around one percent of it. The market capitalization, or the total amount of value of the market, of gold is currently ten trillion dollars. Bitcoin is set to replace gold as a store of value and even replace the United States dollar as the global reserve currency.
This means that overtime, it’s likely that Bitcoin will gain the market cap of both gold and the United States dollar as it gains more global acceptance. The global reserve currency is the currency in which global trade is done under.
Since the United States controls the supply of dollars, many countries request that they are paid a percentage of the dollars that are printed so that they don’t get behind with their reserves.
With Bitcoin, this is not an issue as the amount of Bitcoins are never changed.
What are all of those other cryptocurrencies?
With the surge in price of BTC in 2015 and 2017, a ton of new cryptocurrencies were created. Although each of them had different purposes, most were simply attempting to become what Bitcoin was.
These other cryptocurrencies are called altcoins, or non-Bitcoin cryptocurrencies.
Some of these altcoins became relatively popular yet none have reached the scale of Bitcoin. A lot of these altcoins had poor fundamentals or bad-intentioned inventors or both.
Exchanges were flooded with hundreds and even thousands of these altcoins that would appear and disappear from relevance in months, weeks, or even days. These wannabe Bitcoin tokens were deemed shitcoins by the community as they held no real value and buyers usually lost their entire investments.
A lot of altcoins were used as ICOs or initial coin offerings which are just the cryptocurrency alternative to IPOs. New cryptocurrencies were made as fundraisers for their new coin, company, or service. In return, buyers could be given equity in the company, a special coupon or usage, or they could be completely useless in the case of a fundraiser.
Unfortunately, SEC regulations and the ineffectiveness of the offerings have made the field pretty obsolete.
Altcoins have generally been a gray area for people who are new to cryptocurrency. There are a ton of people that day trade altcoins, looking at graphs and patterns all day, who make a profit, yet it takes a certain skill set and some luck.
Also, altcoins generally fail so when playing the long term, it’s much safer to put your money into Bitcoin.
That being said, there are some really cool projects that are being done with the technology behind cryptocurrency and it’s worth keeping an eye on them as decentralization becomes the new norm.
What is Ethereum?
In 2013, a programmer and writer for the Bitcoin Magazine by the name of Vitalik Buterin described his vision for a fully decentralized blockchain platform as well as a new cryptocurrency.
The platform would serve primarily as a way for blockchain to be developed and used for non-monetary uses. Although only nineteen years old at the time, Buterin knew the potential applications for the future of blockchain technology. So he began to collect funds for this new project and put out a whitepaper in order to inform his investors of his intentions, and the technology and brilliance behind his idea.
In the summer of 2014, his idea was fully crowd funded and he and some co-founders began to work on their non profit.
On July 30th, 2015, Ethereum was officially launched. It’s ability to create decentralized platforms quickly caught on and the cryptocurrency attached to the platform, called Ether, began to skyrocket, quickly becoming the number two cryptocurrency in terms of market cap.
However there were some questions and concerns in terms of its future scalability (or potential to grow to fit the needs of a bigger network), and its security.
Now, the platform was officially launched and all the Ethereum core team needed to do from there was to wait for users to build their products. And they did. By utilizing Ethereum’s new concept of smart contracts, people were able to dictate their websites, apps, and balance sheets through the decentralized blockchain, essentially removing the aspect of trust from their companies and replacing it with verification.
Put simply, a smart contract is a digital set of rules and their enforcers that dictates anything that it is applied to.
I want money to be taken out of the wallet of a buyer and put into the wallet of the seller, I could code it to do so in my contract.
Smart contracts were a concept long before Ethereum was proposed. It was initially thought of by Nick Szabo in 1994. It is thought that Szabo may be Satoshi Nakamoto as he has been active in the idea of cryptocurrency long before the creation of Bitcoin however he has denied these claims on multiple occasions.
Smart contracts act as transaction protocols that may be deployed on a blockchain. When doing so, the transaction is recorded on the blockchain. However before the block holding the transaction is added to the chain, it is run through the smart contract and assigned a special receiver address in the case that it meets the guidelines of the contract.
Through this process, smart contract writers are able to create fully decentralized rules for their products. These rules cannot be changed and once deployed, are unable to be updated in any way.
However, smart contracts do have many security issues just as Ethereum in its early days. Since it is a completely public contract, all users and hackers are able to identify bugs or loopholes within the contract which are unable to be changed as smart contracts are unable to be updated.
One organization called The DAO had a problem similar to this where $50,000,000 worth of Ether was stolen via issues with their smart contract and the Ethereum network. In order to fight this, Ethereum agreed on a hard fork, leaving what we know now as Ethereum Classic (ETC) behind.
Another concern in terms of security comes with Ethereum’s coding language, Solidity. Solidity was originally built by a few Ethereum core contributors as well as Christian Reitwiessner and Alex Beregszaszi. It was created for the purpose of writing smart contracts of various blockchain platforms like Ethereum.
Since it is a very young language, there come many issues with coding with it. First of all, let me establish this: you cannot create a smart contract with a language other than Solidity.
So all of the flaws of Solidity are here for the foreseeable future. As mentioned, smart contracts made with Solidity are fully immutable so any bugs or “too late” errors are unable to be changed. There are also reentrancy attacks where attackers will call the call.value() function to steal Ether stored on the contract that is waiting to be deposited or claimed.
This problem only occurs with Ethereum Tokens. Solidity is also very prone to phishing, further proving that it is not fully ready as a programming language.
What can you do with Ethereum Tokens?
Currently, Ethereum’s platform is being used by the majority of blockchain developers and hosts the largest community of like minded individuals.
There are also many promising projects being built in the defi space as well as the Ethereum blockchain being very active with billions of dollars worth of Ether being transacted every day.
These applications are built as Ethereum tokens, which are just edited forks of Ethereum’s blueprint: ERC-20. These blockchains are then connected to various smart contracts and sometimes made into defi applications or Dapps for short.
Defi stands for decentralized finance which is just anything that has to do with transacting or handling funds within a decentralized platform like Ethereum.
There are hundreds of defi projects that have integrated well with many large companies however generally, they fit into a couple of categories.
Insurance
Defi insurance is very similar to cefi (centralized finance) insurance in the sense that it reimburses users for unlikely and expensive events in return for a time incremented fee. However most decentralized insurance is used as protection against smart contract failure.
With defi insurance, users in need of guarantees are directly connected with funds, completely skipping the middleman/bank that would be taking fees for handling your money as it gets transferred from one wallet to the other. Nexus Mutual is a promising example in the smart contract insurance field as they cover things such as bug recognition or “The DAO” similar events.
Stable Coins
Stable coins are tokens that are pegged to the value of a currency. For example, DAI is a stable coin that does not change price from one United States dollar.
Wrapped Bitcoin is a stable coin that mimics the price of Bitcoin. Stable coins use certain incentives to manipulate the price for stability. Algorithmic stable coins are fully decentralized and use certain algorithms in order to dictate this stability while non-algorithmic stable coins such as Tether have a centralized authority manually changing the price making it not fully decentralized.
Derivatives
Derivatives are tokens, like stable coins, that derive their value from underlying assets. For example, a derivative token could track the price of your house or an ounce of gold. Synthetic is a derivatives liquidity protocol that allows its users to gain on-chain exposure to certain assets.
For example, you could tie the value of a certain asset to Synthetix’s blockchain where it would be protected. You could also supply your assets on-chain as collateral, where you would earn rewards for doing so. Collateral is when you stake an asset as a guarantee or loan for the blockchain or company providing the option to do so.
Decentralized Exchanges
Decentralized exchanges are a branch of defi where you can swap certain cryptocurrencies without the need of a centralized position to take fees or hold funds. Kind of like decentralized insurance, a wide network of demanders and suppliers are connected via complex algorithms in order to have a working, permissionless exchange that is fully decentralized.
Order book based decentralized exchanges like Idex connect these buyers and sellers directly while liquidity pool based decentralized exchanges like Uniswap are pools of tokens that are secured via smart contracts.
Historically, these liquidity pool based DEXs (DEcentralized eXchange) are more efficient and can support more users as there doesn’t have to be someone at the other end of the planet who wants to make a trade similar to yours at any given moment.
Decentralized exchanges are limited in the fact that they can only trade between a given blockchain so you won’t be able to exchange for example Bitcoins for Ether. However, there are some ways to work around this. For example, you can trade Wrapped BTC (wBTC) as it is a ERC-20 token and is on the same blockchain as Ether.
There are also a ton of centralized cryptocurrency exchanges like CoinBase and Binance and although they are better intentioned than many global exchanges that are established today, they are still prone to the same corruption as well as being able to use their exchanges for profits through unfair fees.
Lending and Borrowing
Lending and borrowing defi options are similar to liquidity pool based DEXs in that they lock assets into their smart contract protocols from lenders and supply them to borrowers when need be. Currently, there are some massive companies in this field such as Compound and AAVE that carry billions of United States dollars worth of assets in their protocols.
Assets include various cryptocurrencies such as Ether and Tether and reward lenders with interest just like traditional lending and borrowing. However, with this method, all interest goes directly to the lender and doesn’t have to pass through a middle man.
These options are completely autonomous and algorithmic, so no one can interfere. Similarly to Synthetics, AAVE forced assets to act as collateral that will be given a higher return to the lender once they extract their funds.
Oracles
A very important part of decentralized finance is reliable information. By using given truths built and proven on the blockchain, many of these applications are able to work effectively. However, when outside information is needed within a smart contract or for proof of some sort, oracles can be very handy.
Oracles work on delivering reliable data to smart contracts. One very exciting company in this space is ChainLink, which creates a tamper-proof system in order to derive trustworthy inputs. Custom smart contracts may be connected to APIs and can help provide useful information to decentralized insurance companies to avoid fraud or any other sort of scams.
Defi is built on new, reliable technologies such as blockchain and Ethereum making it the prime candidate to take down traditional finance. Right now, millions of dollars are being lost to human error or stealing within financial companies every day.
These same companies have strong ties to centralized government authorities and are constantly bailed out from market stupid risks that they would not have taken without the backing. With decentralized finance, the corrupt financial system can be taken down and replaced.
How does Ethereum mining work?
Like any blockchain network, Ethereum has a variety of nodes that must compute a series of problems in order to add and confirm blocks to the chain.
Miners are simply a node that prioritizes computing these problems in proof of work or in the case of Ethereum 2.0, staking Ether in order to keep the blockchain safe and verified. However, this takes a lot of computational power and the miners must be incentivised, just like on any blockchain, to keep mining.
Ethereum implemented what they call “gas prices” as this incentive. This is derived from the Ethereum term gas units which are just the smallest form of computation like checking a balance or adding to a balance.
The Ethereum network can only process a certain amount of these gas units at a time forcing miners to pace themselves as well as split the work between each other.
By scaling the blockchain to a larger size and allowing for more transactions per second, the fees that the miners would be paid would be much lower as there would be less competition for them.
The gas price is then charged by certain users technically bribing these miners to include them in the block that will be completed the soonest. This way, their transaction will be moved up the line of all of the other transactions because you are paying the miners more.
With more users requesting transactions, the gas prices increase dramatically and already we are seeing a huge issue in terms of this scalability with Ethereum. However there is a gas limit compared to the size of the transaction.
This means that compared to all of the other transactions of equal gas units, no two transactions can essentially bid to infinity against each other in order for the transaction to process.
Ethereum 2.0 is a new Ethereum protocol that has been in development by many people close to Vitalik Buterin himself up until 2021. It is set to fix many of the scalability issues as well as bugs within the solidity language, and issues of security.
There are a lot of great minds working on the Ethereum project and its future is looking extremely bright. As more and more applications of the software are developed, the world will begin to listen and move towards a more decentralized version of finance and banking.
What makes people want a new currency?
The United States economy is operating on a faulty banking system. For years, the United States dollar has been manipulated and used against the people who live underneath it.
To better understand how this is happening and how cryptocurrency can potentially solve the unjust economy, we must look into the basics of banking and the fundamentals of money. Banks operate such that they take in money and hold on to it from those who want to deposit it as well as give out money in the form of loans to those who want to spend it for whatever reason.
Not everyone is rich and across the board, more people are interested in receiving loans than depositing their money. The reserves that are loaned out come from those deposits however, when they eventually run out of reserves to loan, they simply call the Federal Reserve.
The Federal Reserve, or Fed for short, is a centralized bank which controls the money supply in the United States. When banks across the country want more to loan out, the Fed is able to supply them with it. However, just like the people who want money from the banks, the banks are not getting this money for free.
They are simply loaned out the money that they must pay back to the Fed with interest. For both banks and the Fed, their incentive for giving out these loans is just that.
The debt that people owe on the loans come with interest which leads to more money. So with this incentive, banks will loan out money to anyone who they are guaranteed to get paid back from regardless if the person actually needs the loan or not.
For example, if you own a $500,000 house, a $50,000 car, and $500,000 in cash but want a bigger, $1,000,000 house, the bank will gladly loan you the $500,000 extra as long as you agree to put your car and house up as collateral for the loan.
In the case that you are unable to pay the loan back in the time you agree to, the bank has the right to confiscate your house and car. You see, the banks actually don’t value the dollars as much as they do the assets people own as they know the system in which the dollars are given value.
If banks run out of cash to loan, they have other options of giving you the money. In the United States, any bank has the right to issue out credit in the digital form.
That means that if you want to buy that million dollar house, the bank could give you the loan in digital credits that are spawned from thin air on a spreadsheet.
They don’t actually have to have the dollars to give them to you.
They can also use credit cards that essentially give people infinite purchasing power as long as they pay the bank back at the end of the month. Spreadsheet numbers are changed, loaned out via credit, and returned to the bank in the form of real money or assets in the case that people are unable to pay their bills.
But if these banks can create digital credit yet have to ask for dollars from the Fed, where does the Fed get its money?
The Federal Reserve actually owns the rights to the printing press in the United States. If they are ever to run out of money from their reserves, which are essentially stockpiled from the interest that banks pay from their schemes changing digital numbers into money, they could simply print more.
Just like the banks, they can print it out of thin air. However, to actually see these reserves and the system in place, you must be an extremely connected individual as no government official or citizen, not even the CIA or FBI or Supreme Court, is allowed inside of the Federal Reserve.
This may surprise you as there is no logical reason for the government to not be allowed inside their own building however, the Federal Reserve is actually a private bank supplied by the United States mint.
In fact, the government is in the same position as banks. They take out money in the form of loans from the Federal Reserve and pay interest back in the form of tax dollars.
The money that powers our economy is simply a medium of exchange. Hundreds of years ago, when people wanted a certain item they needed to trade what they had until they had something that the seller of said item wanted.
This bartering system was extremely problematic as everyone had a different sense of value and everyone wanted something different. However one day, someone proposed that everything be traded for gold as it was unanimously valued around the world. From then on, buying and selling things was a lot easier as there was no bartering network to navigate through to get what you needed.
That being said, gold was not perfect. It was a heavy metal, it couldn’t easily be divided up into smaller and less valuable pieces, and it was constantly stolen by thieves.
This is where the first banks would open up, offering to keep people’s gold safe in their vaults for a small fee. In order to keep track of who owns who within these banks, slips of paper with signatures and numbers on them were given out as IOUs.
These IOUs were a lot lighter, could easily be divided up mathematically, and were used as the new medium of exchange. Whenever someone wanted their gold back, they simply went to their banks with their IOUs and traded them for their precious metals.
This newfound invention of paper money brought with it more power to bankers than ever before. They could now turn worthless paper into gold.
By creating more IOUs than they had gold reserves, banks became rich and could loan out as much as they pleased. However, as more IOUs were being pumped into the market, prices began to rise.
People began to notice what the bankers were doing, printing IOUs without having the gold to back it up. They then started to see their IOUs losing value and they demanded their gold back from the banks. But it was too late and there was no gold left in the vault for everyone to get what they were owed.
The only thing that crumbled the plans of the bankers was the knowledge of the masses of their plan. Today, people are kept ignorant about the banking system and the Federal Reserve continues its plan.
They know that controlling a nation’s wealth is much more important than creating its laws.
The first centralized banks in the United States started out with Alexander Hamilton. Strong populist ideals took over and those banks were taken down by Andrew Jackson not too long after. From then on, the paper money system held strong as the gold reserves never exceeded the IOUs, or in this case Federal Reserve notes, and no printing took place.
The economy boomed and over the next decades, the United States established one of the world’s greatest economies. But in 1910, a meeting so secret that its members used codenames took place between some of the country’s most wealthy people.
They decided they would back the presidential campaign of Woodrow Wilson on the account that he approved what we know now as the Federal Reserve. It was called that to portray the false sense that it was run by the people’s government but it was the farthest thing from it. Rapid printing began devaluing every dollar printed before the next.
Soon, the ratio of gold reserves to IOUs became too risky and the government made the decision to take the dollar off of the gold standard.
That meant that they made it a law that they no longer needed to give you gold for your IOUs.
In fact, they went as far as to make it illegal to own gold, then confiscating it from the people only to make it legal again soon after. This means that the modern dollar is backed by absolutely nothing. It is an IOU without anything to owe.
Today, we call this a fiat currency which is just a piece of paper or a number on a spreadsheet that cannot be redeemed for something of value.
With fiat currency, the owners of the printing press have the permission to create as much money as they want without consequences.
In places like Venezuela and Zimbabwe, streets are littered with billion, trillion, and even quadrillion dollar bills as the value they hold is still less than the paper it’s printed on. In the United States, that sad ending is not out of possibility with forty percent of all dollars in existence being printed in the last six months.
Through a process called quantitative easing, dollars are printed and pushed into the economy from the top down. They invest in large, too-big-to-fail, companies which get the privilege of dealing with the newly created money before making its way into the general population hence inflating prices.
Cryptocurrencies are run by no one. There is no centralized authority to control the money supply or take purchasing power away from people. Supply is either set or scheduled allowing for people to create their own agendas and rely on their money.
Cryptocurrencies do not need a bank to operate. No longer is there a necessity to keep your funds safe as complex cryptographic systems can stop any thievery. No longer is there a necessity to use divisible IOUs as certain protocols allow for infinite divisibility so long as people agree.
Its digital and up to date nature allow for cryptocurrencies to be as physically light and as convenient as the internet device you have at home or carry in your pocket. We’re entering a new economic age. Cryptocurrency technology has proven to be a reliable and just medium of exchange. It’s time to separate money and state.
