Advances in Cryptocurrencies

January 24, 2018
blockchain cryptocurrency intro bitcoin

Over the past year we’ve seen the market capitalisation of crypto currencies rise from a mere 50 billion to a staggering 850 billion at it’s peak. Most people are aware of this astronomical rise through Bitcoin’s climb from $1,000 to it’s all time high of $20,000.

“You can’t connect the dots looking forward; you can only connect them looking backwards.” — Steve Jobs

Generation One — Bitcoin (Store of Value)

In 2009, when Bitcoin was launched, it was meant to be a fast, secure and decentralised way of making payments in addition to being a political movement against banks. Although as things unfold we’ve seen it create a brand which has almost been synonymous with the term “cryptocurrency” to mainstream media. While Bitcoin has been consistently rising, it does come with it’s own limitations:

Scaling issues - transactions take hours to go through and are very expensive Limited applications - it can only be used to transfer money Slow to innovate - due to it’s massive size and global interest any proposed changes have economical and political conflicts of interest Many people believe these limitations will cause Bitcoin to fade away into obscurity, however what we’re eventually seeing is it morph into a digital store of value aka “digital gold”. Gold isn’t really used to make purchases, instead it’s able to symbolise value through it’s scarcity, just like Bitcoin might eventually.

The lightning network hopes to solve scaling/cost issues although it’s still in development and has it’s own challenges to overcome.

Generation Two — Ethereum (Platforms)

On 30th July 2015, a Russian-Canadian programmer by the name Vitalik Buterin created a new type of crypto currency called Ethereum. The crowdsale raised ~ $2M at a price of ~$0.30 per ether (ETH).

Ethereum’s strength came from its ability for anyone to write and execute smart contracts via the blockchain. What’s the value in this? Glad you asked.

Let’s say a local business needs to buy goods from an off-shore company and neither party fully trusts each other. The traditional method would be to hire a trusted 3rd party that would create an escrow account and ensure the transaction is fulfilled through trusting the 3rd party to release the payment to the supplier ships the goods to the destination port. In the future, there’ll be smart contracts that will release money only, and once a certain condition are met. If sensor.location == ‘sydney’ { releasePayment() }. There’s no way to get tamper/hack/modify/shutdown this contract. Code is the law.

In addition to writing “smart contracts”, developers can use the platform to create their own tokens which can be traded on public exchanges. These tokens are typically, but not always, called ERC20 tokens and adhere to particular technical protocols (think ISO but for the blockchain world).

The reason why I’m bringing up Ethereum is because it signifies the second generation of cryptocurrencies (platforms) and shows its potential for developers to build decentralised apps rather than creating their own blockchains from scratch.

Ethereum is facing it’s own scalability problems although plans to solve it by the end of 2018 through Proof of Stake.

Generation Three — Nano/IOTA (micropayments)

One problem that continues to plague blockchains is the scalability in order to facilitate micro-transactions suitable for everyday use. Currencies such as Nano (formerly RaiBlocks) and IOTA use different underlying tech (block-lattice and directed acyclic graphs respectively) instead of the blockchain.

For this article I’m going to focus on Nano as it has the most promising chance of being used for ecommerce (in my opinion).

Nano uses a block-lattice structure where every user has their own blockchain that contains transactions only relevant to them rather than every transaction on the network (Bitcoin). Through this, Nano is able to achieve a 7,000 transaction/second throughput.

In addition to it’s scaling capability, making transactions using Nano is free unlike other cryptocurrencies which have some kind of cost associated to make a transaction (gas for Ethereum).

Even though Nano isn’t battle tested, it’s one of the best bets we have on digital cash for the future. What makes this exciting is that we’re effectively going to be entering a world where we have access to programmable money.

The potential that these three generations of crypto currencies have is immense to say the least. Granted that they’re still in their infancies, it’s certain that the innovation that’s going to stem from these is truly going to change the world.

In my next article I’m going to explore some amazing use cases that have already been identified and the next generation of emerging decentralised economies.

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