Crypto
I’ll admit that I’m kind of late to the crypto party and people have been in it for years. It seems like Bitcoin has been around for ages now, but my knowledge went as far as news headlines whenever it reached a new all-time high (ATH). For years I had been contemplating putting some skin in the game, but the ongoing mainstream media narrative that it was just a fad made me question how risky it was. Buying some Bitcoin used to be more complicated and storing it on a private wallet (offline or online) all seemed daunting and a bit confusing. If I wanted to buy some, I knew I had to do the research and feel comfortable with my investment. I also wanted to be able to explain it to people and not just say “yeah, I own some, but I have no idea how it works.” So, near the end of last year, I decided to take the plunge and I’m still just at the beginning of what feels like a never-ending journey of learning.
I want to write a few posts about cryptocurrency to explain just how vast and exciting this technology is. This is for my own selfish reasons of improving my understanding as I’m sure most people are quite clued up on it after this sudden increase in popularity. There are so many different niches, and I don’t think I will do it credit by just writing one post. This one will be a bit about Bitcoin, but mainly about Ethereum and its competitors (if you can call them that.)
Bitcoin
Bitcoin is the OG, (Original Gangster) it started it all and has continued to surprise everyone since its inception. The more governments start to print money, the more cryptocurrency is starting to look like a real thing. There are two sides to this “coin”, the Bitcoiners and old-school finance and they are struggling to see eye to eye. Bitcoin is said to be a store of value and “the new gold” if you will. It has a limited supply, it’s expensive to mine and it has a community that gives it value. The only difference between gold and Bitcoin is that gold is physical, and Bitcoin is digital. Digital is newer and so it’s harder for some to get their heads around it. People who have witnessed the digital age from the beginning are still nervous about it. They don’t trust it and don’t understand how bitcoin can be scarce and that it isn’t some scam that someone is in control of. People are slowly understanding that this isn’t the case and that Bitcoin can be trusted and secure. Once people get over this then there’s no disputing that Bitcoin is better than gold. It has all the same qualities plus it is easily transferable and divisible to tiny fractions of a bitcoin. I’d recommend taking a look at the eBook by Yan Pritzker on swanbitcoin.com.
Mining
The eBook explains how it all works and it helped me understand the confusing topic of mining. What confused me was my existing understanding of what physical mining is. I struggled to understand how to apply a concept like digging up diamonds to digital currency. This was my mistake, and the two concepts are very different. Ethereum and Bitcoin both use a proof-of-work and mining infrastructure to produce blocks and validate the network. Mining is basically a game of chance; miners compete to produce the correct random number generated by a transaction. Once they win the chance to validate the transaction and produce a block they are rewarded in Bitcoin or Ethereum, whichever network they are validating. The thing is that producing these random numbers takes a lot of computing power and electricity. This cost is incurred by the miner and mining has become excessively expensive and competitive. There is a worldwide shortage of GPUs estimated to last until 2022 and the growing mining market has contributed to this shortage. Bitcoin miners are expected to consume roughly 130 Terawatt-hours of energy (TWh), which is roughly 0.6% of global electricity consumption – similar to Sri Lanka’s electricity consumption. Below is the summary of how mining works from the eBook, all the terms used are explained in the eBook and it is very easy to understand.
1. Anyone in the world who wants to participate, joins the Bitcoin network by connecting their computer and listening for transactions.
2. Alice announces her intent to send some coins to Bob. The computers on the network gossip with each other to spread this transaction to everyone on the network.
3. All the computers who want to participate in the lottery start hashing the transactions they heard about by appending random nonces to the transaction list, and running sha256 hash functions.
4. Roughly every ten minutes on average, some computer finds a hash number derived from those transactions that is less than the current Target Number and wins the lottery.
5. This computer announces the winning number they found, as well as the input (transactions and nonce) that they used to produce it. It might have taken them hours to get there, or afew minutes. This information taken together (transactions, nonce, and the Proof of Work hash) is called a block.
6. Everyone else validates the block by checking that the transactions in the block together with the nonce do indeed hash to what was claimed, that the hash is indeed lower than the Target Number, and that the block does not contain any invalid transactions, and that the history within it does not conflict with prior blocks.
7. Everyone writes the block into their copy of the ledger, appending it into the existing chain of blocks, producing a blockchain.
Ethereum
I’m going to try and simplify Investopedia’s definition of Ethereum –
“Ethereum is an open-source, blockchain-based, decentralized software platform used for its own cryptocurrency, ether. It enables SmartContracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control, or interference from a third party.”
I think of it as a new internet where all transactions are recorded on the blockchain and all fees per transaction that are paid to the miners are paid in Ether. The main difference between companies on the internet and DApps on Ethereum is that most applications are decentralized. This means that the community governs and runs the application rather than a central controlling business. All code for these applications is public and can be copied by anyone. For example, decentralized finance (defi) has become very popular on Ethereum and there are many platforms that offer a variety of financial services. You can store your cryptocurrency on one of the many platforms and earn very high interest depending on which cryptocurrency you own. For example, on the platform Ceclius, you can earn 13.3% APY for storing your Tether (USDT), a stablecoin that matches the US Dollar. A very popular decentralised exchange called Uniswap lets you trade one cryptocurrency for another, and this has given people access to the much smaller projects that weren’t supported on the big exchanges. The way Uniswap works is the community provides liquidity to the exchange and receives a portion of the fees in return. The possibilities of projects are endless, and I plan on exploring some of my favourite projects in future posts.
Competitors
Ethereum has the first mover advantage as it was founded in 2013, but this doesn’t mean that it’s not facing some issues. The main issue is its proof-of-work structure. This is fine for Bitcoin, but Ethereum has grown too big to handle the number of transactions on the network at a reasonable price. As I mentioned, there is a fee (gas fee) paid to the miners for each transaction on Ethereum. If the network is congested the miners are going to pick the transactions with the highest gas fees to record on the blockchain. This has created a problem for small investors. With gas fees as high as $100 dollars per transaction at particular times, it isn’t worth the investment or even taking profit unless you’re working with large sums of money. That’s where the competitors come in. The new way to validate transactions and secure a network is by proof-of-stake as opposed to proof-of-work. Proof of stake gives people with normal computers the ability to validate blocks based on the number of coins they hold. People can stake their coins in a validator node, which means they can pool together their coins to share in the profits of making blocks. The proof-of-stake method has much lower transaction fees, as low as a fraction of a dollar. This has caused people to seek alternatives to Ethereum and incentivise projects to make themselves available on other networks. Ethereum plans on changing to proof-of-stake and says this will happen in November, but some believe that it may take longer than that. Giving its competitors an opportunity to snap up market share while they can. Some projects competing for market share are Binance Smart Chain, Cardano, Polkadot, Solana and a few more. Each network has a unique selling point (USP) and they have had the advantage of looking at what Ethereum is doing wrong and improving on it. Just this year Binance Coin (BNB) has gone from around $40 to $528 now. Each project is innovating and trying to build a committed community.
I hope this made things a little clearer and if they aren’t please let me know. The aim of this post was to simplify and explain what cryptocurrency is about and help me understand all the terms and projects a bit better. If anything didn’t make sense or my understanding is off, please let me know so I can do better at explaining it in the future and learn more about this space. I will happily make any changes to this post if I’m wrong about something. I intend to do a few more posts on particular projects I’m interested in and explain what they’re all about. Thank you for reading and I hope this helped.