Welcome to our latest article. We’ll be exploring the different types of cryptocurrencies, and looking at specific cryptos under each category.
“Cryptocurrency” is a common misnomer; not all cryptocurrencies are ‘currencies’: there are utility tokens, privacy coins, and many more. We’ll be going through all of these in the upcoming articles, and by the end of it you’ll be an expert on the different types of digital assets.
Today, we’ll be focusing on cryptocurrencies in their purest form — the currencies themselves.
The first and most widely known cryptocurrency, it is defined in Satoshi Nakamoto’s (unknown individual/group of individuals) whitepaper as “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution (aka a bank)”.
Why is this important?
Born after the Financial Crisis of 2008, Bitcoin was created as a digital currency completely independent from regulation by centralized authorities such as banks and governments. Bitcoin was sent directly from peer to peer, without needing a middleman to process the payment.
This is important for various reasons:
1) Cutting out intermediaries means cutting costs. If you have ever tried to send money overseas or have had to go to a money changer for your holidays, you’ll understand that the fees you incur eventually add up.
Having a worldwide currency solves all of that — sending Bitcoin to anyone around the world or being to use it as a currency at merchants and vendors would drastically cut down the fees you would incur to these middlemen.
It is also much faster to send money around the world. With regular wire transfers, it takes at least 1 working day. Some banks take even longer, which is highly inconvenient if the payment is urgent.
2) Bitcoin is anti-inflationary. Each Government has its own monetary policy, they are able to control the total circulating supply of their fiat currency at any given point in time.
The impact of this is depicted aptly in this visual. As the supply of money increases, the purchasing power of each US Dollar decreases, meaning that the value of your money decreases over time.
Bitcoin solves all of this, as it is coded to cap its supply at a fixed amount of 21 million BTC. In short, this means that it is a deflationary currency. This is significant as it means it’s purchasing power will not decrease in the long run; if anything, it is more likely to increase as the demand would likely increase.
3) Bitcoin is based on a distributed trust model. Instead of relying on a central authority to process payments or to facilitate cross-border payments, transactions are verified via a cryptographic proof, known as the Proof-of-Work consensus algorithm. This spreads the verification process over multiple nodes, and preventing a single entity from gaining too much influence over the network.
Sadly, no technology is infallible, and Bitcoin also has its weaknesses.
1) The growing popularity and adoption of Bitcoin has led to the network being overloaded at times. This problem has led to a lack of viability as a form of currency, as payment can no longer be reliably sent within short time frames. While definitely faster than a wire transfer, it is not nearly fast enough for day to day use. Imagine going to a café and having to wait 15 minutes for the transaction to be verified!
Yes, it can get really jammed up.
However, there have been various developments to the blockchain, notably in the form of the Lightning Network which aims to enable instant transactions to provide some sort of reliability and stability for microtransactions.
2) Bitcoin mining is becoming increasingly centralized. As miners are economically incentivized to lend their computing power in order to secure the network, companies which are able to build and host mining farms or set up mining pools stand to control significant amounts of the total network hash rate, making it possible for them to execute a 51% attack on the network. The Bitcoin network might be distributed, but if someone owns half the network, they have the ability to ‘tamper’ with the transactions.
A perfect example of this would be Bitmain, a China-based corporation that develops and produces ASIC mining rigs which, at the point of writing, has the potential to command up to 42% of the total hash rate being used to secure the Bitcoin network.
How individuals can afford to buy stuff like this…?
As defined by Charlie Lee, the creator of Litecoin, it is the “Silver to Bitcoin’s Gold”.
It is, in essence, a base currency that is intended to be used as a form of peer-to-peer payment (identical to Bitcoin) which is also free from the regulations of financial institutions.
How is Litecoin different from Bitcoin?
Litecoin was one of the first forks of the Bitcoin core client and was created in an attempt to complement Bitcoin as a currency by solving some of the weaknesses that Bitcoin was deemed to have.
1) It has faster block times. While Bitcoin blocks can only be created every 10 minutes, Litecoin’s is 4 times fasetr, and a new block can be craeted every 2.5 minutes. This allows transactions to be faster and makes Litecoin a more viable payment option for merchants. However, as Litecoin’s total supply is capped at 84 million LTC, 4 times more than BTC, the inflation rate is equal.
Yes, its THAT much faster than Bitcoin
2) Litecoin’s hashing algorithm is friendlier for decentralization.
Litecoin uses Scrypt as its hashing algorithm, which is ASIC-resistant. Compared to Bitcoin’s SHA-256 hashing algorithm, Scrypt is much more memory intensive as it involves having to compute tasks serially, or simultaneously, while continuously storing and extracting the computed numbers in the processor’s Random Access Memory (RAM). This algorithm is expectedly highly memory-intensive, but it’s key strength lies in the fact that it makes mining LTC ASIC-resistant.
ASIC mining rigs are suited to provide tremendous amounts of raw hashing power. They are extremely specialized equipment that Bitcoin farms use, and no regular individual can compete fairly without purchasing an expensive ASIC mining rig. This means that companies have a significant advantage, and it skews the playing field heavily in their favour.
On the other hand, ASIC mining rigs are unable to cope with Scrypt’s memory-intensive hashing algorithm. Thus, it provides a fairer mining landscape as no single entity is able to develop specialized computing equipment for a competitive advantage.
3) Although both coins do not have a fixed transaction fee, the average transaction cost of transferring Litecoin is significantly lower than transferring Bitcoin. From a merchant’s standpoint, lower transaction fees coupled with faster block confirmation times increases the commercial viability of Litecoin as a form of payments.
Another popular currency coin is Dash, a portmanteau of ‘Digital Cash’, which is essentially a form of peer-to-peer payment medium. It was created in 2014 by Evan Duffield and Daniel Diaz as another form of digital payment which attempts to provide a solution to the Bitcoin network’s slow transaction speeds.
Key Differences between Dash and Bitcoin?
1) Dash has special nodes called ‘masternodes’. Described briefly, masternodes are similar to the full nodes on the Bitcoin network, but are entitled to a proportionate amount of approximately 45% of all block rewards. In return, they provide additional services to the network such as privacy channels, instantaneous transactions, and ensure that the network is secure and less prone to an attack
Running a masternode requires the user to own at least 1000 Dash. As a result, masternodes tend to create soft price floors as users are incentivized to hold large amounts of Dash in order to maintain their masternode status.
2) Block confirmation on the Dash network are confirmed in 4 seconds, much faster than on Litecoin and Bitcoin networks. This means (as you guys have probably guessed by now) that transactions are verified faster, making it more viable for merchants to accept Dash as a form of payment.
3) Dash has privacy channels. Without delving too deep into technological jargon, Dash masternodes allow for complete privacy by hiding the sender of the transaction through a feature called PrivateSend. Masternodes process these transactions by grouping multiple transactions and ‘mixing’ them together.
If they’re both vodka, you’ve mixed it up: that’s basically a privacy channel
4) Dash has self-sustaining governance. It is well known for being one of the first Decentralized Autonomous Organizations (DAOs). It is funded through it’s block rewards structure, where 10% of all block rewards are allocated for network development and promotion. Masternodes then vote for community-generated network development proposals, and funds are paid out to winners through a smart-contract system for the user to execute his idea.
Although the self-governance structure of Dash has been widely viewed as one if it’s strongest selling points, many have identified it as it’s weakest flaw. At time of writing, a masternode costs USD$ 227,000, wich entitles the user to one vote. As such, the decision making of the Dash network is extremely top-heavy and more plutocratic.
So after learning about these 3 types of Cryptocurrencies, we are presented with a dilemma — why would you want to spendyour cryptocurrencies if the price is only going up? Take the example of Mr Laszlo Hanyecz, who is now famous for spending 10,000BTC on two pizzas back in 2010. It now looks like a foolish transaction, but who knew the price of bitcoin were to skyrocket?
Cryptocurrencies also lack proven valuation models, which makes their speculative value and volatility exceptionally high as compared to traditional assets like stocks. Will a merchant be able to accept popular cryptocurrencies like Bitcoin, Litecoin or Dash as payment if he is vulnerable to large price swings?
These are just two examples of why many people have started to consider cryptocurrencies as a volatile store-of-value asset rather than a currency, as it lacks the price reliability and stability of traditional investment vehicles.
We hope you have enjoyed our coverage on 3 major currency-type cryptos. Do keep an eye out for our future editions where we’ll be looking at the different categories of cryptocurrencies in the market. Also, let us know what you think about the ongoing cryptocurrency dilemma — are they merely speculative assets or a viable medium of payment?
Catch you in the next edition!