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Developing a Technique to Identify Valuable Cryptocurrencies

More people are interested in the subject and new investors keep arriving. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency. When implemented with decentralized control, each works through distributed ledger technology, typically a Blockchain, that serves as a public financial transaction database. While it might appear to many as a monolithic technology, there is a great deal of variation between how different Blockchain networks work. Our objective was to present key aspects of these projects to identify valuable Cryptocurrencies.

Credit: BeatingBetting

Cryptocurrencies are not just a market trend, but a reality in our daily lives. People are progressively interested in the subject and new investors keep arriving. Yahoo Finance claims that “there are over 100 million people who own cryptocurrencies and there are over 10,000 different types of digital money”. There are several currencies in the digital asset market that are not always clear to new investors.

Cryptocurrency is a digital asset designed to work as an exchange mechanism wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database. They use strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. It typically does not exist in physical form and is not issued by a central authority. Each cryptocurrency works through distributed ledger technology, typically a Blockchain, that serves as a public financial transaction database.

Blockchain is a network that runs with connected blocks through a hash that guarantees the security and immutability of information. Blockchain systems vary considerably in their design, particularly concerning the consensus mechanisms used to perform the essential task of verifying network data. While it might appear to many as a consistent technology, there is a great deal of variation between how different networks work. Our objective is to present a technique to identify valuable Cryptocurrencies by analyzing key aspects of these projects.

What it is the Goal ?

Every Blockchain is a code written by someone for some reason. Understanding this reason should be one of the first steps when choosing a Cryptocurrency to invest in. In most cases when a new Blockchain is created, developers usually write documentation. A white paper is a research report or guide that helps solve a problem. Those are used to educate readers to bring a new or different perspective.

In the Blockchain industry, the white paper defines your business’s unique selling proposition. It will tell the story of how your business solves the problems of the customer. A white paper is created by the founders and/or developers of crypto to help sell the crypto. They provide facts, diagrams, statistics, and quotes for interested buyers. It helps to define what makes a company stand out from the rest of the crowd.

Credit: EpicTop10

Does it has an Active Community ?

Most of the Blockchains are community-contributed open source projects. Not all open-source projects are created equally. There are plenty of open-source projects that haven’t been touched in years. If you’re going to rely on a Blockchain you’ll want to ensure that the community will continue to support it throughout the lifecycle of your project. Most Cryptocurrency enthusiasts aren’t developers or even know how to read a code of a program. There are several simples, language-agnostic indicators of a healthy open source project:

  • Update Frequency: You don’t want to inherit an old codebase. For every new Blockchain, you should find the source code or the release website to check when was it last updated. The last update isn’t the only thing you should be looking at. The update frequency is also important. For example, if the commits occur on the weekends it suggests that is a hobby. On GitHub, most of these indicators are shown in graphs.
  • Issues: An active support community with heated discussions and an endless list of proposed features in the roadmap means that there are a lot of eyes reviewing the code and driving its development. Open issues are great, closed issues are even better.
  • Forks, stars, downloads — Each distribution platform provides metrics to describe popularity. On GitHub, watchers, stars, and forks are the strongest indicator of a project’s popularity and use. These indicators show how much the project is used.
  • Documentation: Technical assumptions like how to install, requirements, and dependencies often indicate more casually developed software.
  • Organization or user: It is common for open-source projects to have organizations encouraging. The support of a large company validates the value of that project.
  • The number of contributors: Having a long tail of contributors minimizes bus factor and indicates that there’s a community of users who rely on and care about improving the software.

How the Consensus Mechanism Works ?

A Blockchain consists of machines connected in a network and sharing a common history. This data is structured in a decentralized way such that a digital ledger can be shared across a network of computers around the world without a need for a central authority. At the center of this digital ledger is a consensus mechanism that ensures no single party tampers with the records and everyone is kept honest. We have several mechanisms for doing this. Each of them has its positive and negative points.

In the case of Bitcoin, for example, this activity involves leaving supercomputers on 24 hours a day, solving complex mathematical problems to create a block with the last transactions. This mechanism is called Proof-of-Work(PoW). In addition to generating new units for those who contribute to the security and reliability of the network, it validates all transactions made on the Blockchain to keep it fraud-proof. PoW requires extensive energy consumption.

Over the past few years, the rising value of bitcoin boosted the demand for GPU. Some chip companies create custom chips solely for mining. Unlike PoW, Proof-of-Stake(PoS) is based on the participants’ coin stake. The more coins the staker has, the more likely the staker will add a new block of the transaction to the blockchain. There’s no block reward in PoS. The staker’s rewards are only the transaction fee. Because of lower energy-intensive compared to Proof-of-Work, the Proof-of-Stake system is suited for platforms with static coin supply. Most crowdfunding platforms leverage this approach to distributing tokens based on the investment.

Those are the most famous consensus mechanism. Understanding the mechanism that the network uses is important to analyze the project’s long-term viability. It also impacts the financial parameters and security of the operation. Furthermore, evaluating whether the mechanism used is in line with the Blockchain’s goal can help you to separate fake networks. The key to the blockchain operation is the maintenance of the consensus of the information recorded on the blockchain within the network. You can see in the image below different types of consensus mechanisms.

Hash Rate

As stated earlier, mining is the process by which cryptocurrency transactions are verified and recorded in the Blockchain. The work performed by miners is essential for maintaining the integrity of the network and for introducing new bitcoins into the system by solving complex sequential calculations. Hash Rate is an indicator of the computational power used during the mining process. The higher the hash rate of a machine, the greater the chance of mining a block and receiving bitcoins as a reward.

This is the main reason why miners gather in Mining Pools, to pool the computational powers of their machines. The hash rate indicator measures computing power in Proof-of-Work networks. This is measured in units of hash/second, which means the number of calculations that machines can process each second on the Blockchain network. It is essential, as it has a great influence on the safety and sustainability of networks. Since the miners’ gains are related to the hash rate, the higher the hash rate, the more blocks are being mined.

Conclusion

Cryptocurrencies are a reality in our daily lives. There are several currencies in the digital asset market that are not always clear to new investors. Our objective was to present key aspects of these projects to identify valuable cryptocurrencies. We’ve presented 4 important features to look at, but there’s a lot more. It is important to always keep studying the new features and changes in this world of cryptocurrencies.

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Matheus Leal

Matheus Leal

M.Sc at Pontifícia Universidade Católica do Rio de Janeiro & Applying DevOps culture at Globo

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