The world of cryptocurrencies can be confusing for both experts and amateurs. As of 2018, there are thousands of cryptos in circulation, but only a few have the longevity and market value to be considered important.
The two major players are, generally speaking, Bitcoin and Ethereum, but the difference between them can be difficult to understand. Before we get into the nitty gritty, let’s just take a step back in time to the beginnings of cryptocurrency.
What are cryptocurrencies and where did they come from?
Cryptocurrencies are usually described as digital currency in order to distinguish them from physical currency like banknotes and coins. They are also defined as a digital asset – much like music, movies, and pictures – something that is stored in digital form and can be circulated.
In a way, any definition is fairly arbitrary. All assets, currencies, money and investments are systems of exchange, based on rules established by a centralised system or through convention. What sets cryptocurrencies apart is that they are (mostly) decentralised and the way that they are exchanged is completely transparent.
Back in January 2009, Bitcoin was released to the world. It was far from the first cryptocurrency. But this one, created by a person or group calling itself Satoshi Nakamoto, used a distributed network to create “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
The problem that Nakamoto solved was double-spending; if money doesn’t physically exist, how do you stop two people from spending the same dollar at the same time? Or reusing it over and over again? And how do you do that without relying on a third party, a gatekeeper, to make sure that everyone is following the same rules? The answer was a publicly distributed ledger – and lo, the blockchain was born.
The main properties:
- Double-spending is prevented with a peer-to-peer network.
- No mint or other trusted parties.
- Participants can be anonymous.
- New coins are made from Hashcash style proof-of-work.
- The proof-of-work for new coin generation also powers the network to prevent double-spending.
~ from an email sent by Nakamoto to an encryption email group, October 2008.
Just like in the real world, bitcoins are ‘mined’. There is a specific series of algorithms that determines how they can be released and how often. This series of limitations – the maximum number of 21 million bitcoins will be mined by 2140 – is what has led to the emergence of other cryptocurrencies. Litecoin, Namecoin, Dash and countless others followed from 2011.
And then came Ethereum
Bitcoin is far and away the most established of the cryptocurrencies. But like any legacy product, other currencies have emerged to disrupt it, hoping to achieve its goals but in a better way.
In the years following Bitcoin, dozens of cryptocurrencies came through. Right now, the next best contender of these is Ether which comes from the Ethereum project. By March 2017, the project had significant buy-in from major corporate organisations, including Toyota, Samsung, Intel and Deloitte, through its non-profit Enterprise Ethereum Alliance (EEA).
Although it is nowhere near as established as Bitcoin, Ethereum has several significant advantages. The most prominent of these is that it doesn’t have the same strict limitations.
Bitcoin can only be mined every 10 minutes, whereas Ethereum’s block time is just 15 seconds. It also doesn’t have a finite limit on the number of Ether added. It is able to process significantly more transactions per minute than Bitcoin.
Ethereum offers significant enhancements which allow it to be more than a currency – it is also an application platform and language, which means that applications can benefit from blockchain technology.
Bitcoin is essentially just another currency. But the project behind Ether attempts to bring distributed and peer-to-peer contracts to various applications.
Okay, so who’s even using this stuff?
Cryptocurrencies seem so theoretical that it’s difficult to understand how they’re actually used in real life. Can you buy a house with one? Well, yes, but you’d need to find a seller who would agree to it.
The first known Bitcoin transaction involved the purchase of two pizzas, but only through the intervention of someone with a credit card willing to agree to the terms. Like any currency, both buyer and seller have to agree to the terms and then voila – yes, you can buy anything.
Right now, Bitcoin and Ether are being used in perfectly normal settings. The most prominent of these is probably gambling, where bitcoin casinos are starting to take off, as well as other online services like hosting. This makes sense; casinos are an exchange market based on chance, and they’ll accept whatever has value. In the past this might have been cattle, gold or jewellery.
With the advent of more modern venues, this morphed into chips and then online currencies. It’s no surprise to see casinos and gambling at the forefront of accepting this new form of currency.
The growth in bitcoin betting is spurred by the fact that major governments don’t see bitcoin and Ethereum as actual currencies; they consider them as assets or property so they don’t face the same restrictions as online gambling with ‘cash’ (which, let’s face it, is a digital currency anyway).
Cryptocurrencies have been hit by crazy fluctuations over the past two years as people get both excited and scared by the technology. Things are starting to level out now, and more and more retailers and online service providers are accepting them as legitimate forms of payment.
What’s clear is that cryptocurrencies are here to stay. What they’ll look like in a few years time is anyone’s guess. They’ll still be based on many of the same original protocols set out by Nakamoto.
Decentralisation will always be key, but as the sharing economy becomes more widespread, cryptocurrencies and their technologies will be less based in traditional ideas of currency and instead become more about assets, ideas, and other contract based products.