Bitcoin and Beyond: Other Cryptocurrencies With The Highest Market Capitalisation Part 1.
a. What is Bitcoin? Bitcoin (BTC) is usually described as a virtual, decentralized and (at first glance) anonymous currency that is not government-backed or backed by any other legal entity, and that can not be exchanged into gold or any other commodity.
At the heart of the creation of Bitcoin stands the text “Bitcoin: a Peer-to-Peer Electronic Cash System” of Satoshi Nakamoto, published on the internet in 2008. It was on the basis of this text and the ideas conveyed in it that the development of Bitcoin accelerated. Contributory to the mystic nature of Bitcoin is that until now it remains unclear whether Satoshi Nakamoto is a real person, a pseudonym, or perhaps even a group of hackers.
The virtual character of Bitcoin implies that Bitcoins normally do not take a physical form. Therefore, a good representation of a Bitcoin probably is that of a computer file saved on a personal computer or, via an online service, in a digital wallet.
The mere virtual character of Bitcoins should, however, be qualified. Reputedly, it is possible to print out the combination of characters that constitute the Bitcoin and, subsequently, to transfer such print as a bearer instrument. However, this is supposed to be a marginal phenomenon and, hence, will not further be elaborated here. Bitcoin is based on a PoW consensus mechanism.
The issue of Bitcoins takes place via a process called “mining” (see also above). To reiterate, such process the entire elements of which are publicly available via open-source software — entails that persons voluntarily make their own computers available to the Bitcoin network to solve complex mathematical problems.
Computers that are able to solve such problems (and, as a consequence, are able to create so-called transaction “blocks”) are rewarded with Bitcoins. The aggregate number of Bitcoins that can be created through mining is limited: the Bitcoin system is programmed so that the development of blocks in time will be rewarded with increasingly less Bitcoins and that at no point in time will more than 21 million Bitcoins exist.
The fact that the creation and the increase of Bitcoins are automated and limited by the system itself implies that there is no need for the intervention of a central entity/authority to issue Bitcoins. The limited number of Bitcoins, together with the fact that conversion rates for Bitcoins are determined by supply and demand, without a government body being able to intervene (e.g. by printing additional money), results in high volatility in Bitcoins prices.
b. Bitcoin runs on an open, permissionless blockchain The Bitcoin blockchain is a typical example of an open, permissionless blockchain.
Any person can join or leave the public Bitcoin network at will, without having to be (pre-)approved by any (central) entity. All that is needed to join the Bitcoin network and add transactions to the ledger is a computer on which the relevant software has been installed.
c. Bitcoin is directly convertible into fiat currency Bitcoin can be bought with and directly converted into fiat currency on a wide array of cryptocurrency exchanges (e.g. Coinbase, Kraken, Anycoin Direct, Lunco, …). Out of all cryptocurrencies currently in circulation, Bitcoin is one of the easiest coins to convert into fiat currency.
d. Bitcoin is a medium of exchange Bitcoin (BTC) is being accepted as a legitimate source of funds by a relatively large number of (online) merchants, among which various large companies (e.g. Microsoft, Expedia, Playboy141, Virgin Galactic, LOT Polish Airlines, ….). As a result, it can be qualified as a medium of exchange.
e. Bitcoin is a pseudo-anonymous coin Bitcoin is often characterized as an anonymous currency: although everyone can verify the chain of transactions on the basis of the public ledger, at first glance nothing in the system connects Bitcoins to individuals. However, this anonymous character is far from absolute. It is technically feasible — though very complex and costly — to identify the parties behind a Bitcoin transaction by bringing together factors that accompany such transactions. In other words, Bitcoin is not a fully anonymous currency, but rather a pseudo-anonymous coin.
a. What is Ethereum? Ethereum, launched in July 2015, is a decentralized platform that runs so-called “smart contracts”. Smart contracts are “self-executing” contracts or applications that run exactly as programmed without any possibility of downtime (i.e. the blockchain is never down, it is always running), censorship, fraud or third-party interference.
Ethereum has a capability that goes far beyond that of a pure P2P digital cash equivalent like Bitcoin. In simple terms, it is much like a smartphone operating system on top of which software applications can be built. Technically speaking, the Ethereum platform itself is not a cryptocurrency.
However, like other open, permissioneless blockchains, Ethereum requires a form of on-chain value to incentivise transaction validation within the network (i.e. a form of payment for the network nodes that execute the operations). This is where Ethereum’s native cryptocurrency “ether” (ETH) comes into play. Ether does not only allow smart contracts to be built on the Ethereum platform (i.e. it fuels them), but it also functions as a medium of exchange (specifically in the context of ITOs, as many tokens are bought with ether).
Like Bitcoin, Ethereum currently utilises a PoW consensus mechanism, but it is slowly moving towards the adoption of a PoS consensus mechanism, better known as the Casper Protocol. Ethereum’s development is promoted and supported by the “Ethereum Foundation”, a Swiss nonprofit organization, founded by Ethereum’s inventors.
A large bulk of ether was “pre-mined” (i.e. mined/created before the coin was officially launched to the public) by its inventors and sold in a crowdsale to pay for development costs and fund the Ethereum Foundation.
b. Ethereum runs on an open, permissionless blockchain Just like Bitcoin, Ethereum is a prominent example of an open, permissionless blockchain. Anyone can join or leave the Ethereum network at will, without having to be pre-approved by any entity.
c. Ether (ETH) is directly convertible into fiat currency Ether (ETH) can be bought with and converted into fiat currency on various cryptocurrency exchanges (e.g. Coinbase, Kraken, …).
d. Ether (ETH) is a medium of exchange Like Bitcoin, ether (ETH) is being accepted as a means of payment by a growing number of merchants (e.g. TapJets, Overstock, …). It is therefore also a medium of exchange.
e. Ether (ETH) is a pseudo-anonymous coin Just like Bitcoin, ether (ETH) can be categorised as a pseudo-anonymous or pseudonymous coin.
Bitcoin Cash (BCH)
a. What is Bitcoin Cash? Bitcoin Cash (BCH) is decentralized P2P digital cash. It was created on the 1st of August 2017 and is based on Bitcoin’s original SHA-256 PoW algorithm, yet with some changes to its underlying code.
Bitcoin Cash is what is known in the crypto-community as a “hard fork” of the Bitcoin blockchain. It is the result of two very different visions on the future of Bitcoin and the Bitcoin blockchain, whereby the Bitcoin blockchain diverged into two potential paths forward.
In short, some Bitcoin developers wanted to raise the block size limit from 1MB to 8MB, to reduce transaction fees and improve confirmation times, whilst others had different plans.
Because the community could not reach a consensus, the new cryptocurrency Bitcoin Cash was created. Like Bitcoin, Bitcoin Cash makes use of the PoW mechanism, which means that it can be mined. What is particular about Bitcoin Cash, however, and is a direct result of the hard fork, is that anyone who held Bitcoin at the time Bitcoin Cash was created (i.e. 1st of August 2017–13:16 UTC) also became owner of the same amount of Bitcoin Cash.
Any Bitcoin acquired after that specific time follows the original path and does not include Bitcoin Cash.
b. Bitcoin Cash runs on an open, permissionless blockchain In principle, a “hard fork” does not change the nature of a coin’s blockchain. In other words, Bitcoin Cash also runs on an open permissionless blockchain, just like Bitcoin.
c. Bitcoin Cash is directly convertible into fiat currency Like Bitcoin, Bitcoin Cash can be easily converted into fiat currency and vice versa through a number of cryptocurrency exchanges (e.g. Coinbase, Kraken, LiteBit, …).
d. Bitcoin Cash is a medium of exchange Bitcoin Cash can be used to pay for a growing array of goods and services (e.g. jewelry, food, gaming, telecom, …) on a number of online market places and platforms (e.g. OpenBazaar, the accept Bitcoin Cash initiative). As a result, Bitcoin Cash can be qualified as a medium of exchange.
e. Bitcoin Cash is a pseudo-anonymous coin Although Bitcoin Cash is a hard fork of Bitcoin, it does not differ that much from its original form. It is thus also a pseudo-anonymous coin.
a. What is Litecoin? Like Bitcoin, Litecoin (LTC) is an open-source decentralized P2P cryptocurrency. It was launched in October 2011 and is based on what is known as the Scrypt PoW algorithm, which utilises Bitcoin’s original SHA-256 PoW algorithm.195 Litecoin is often described as the ‘silver’ to Bitcoin’s gold.
Apart from the fact that it uses a different algorithm, it is different from Bitcoin in two ways. Firstly, and this results from the use of the Scrypt PoW algorithm, Litecoin offers a much faster transaction speed than Bitcoin. The time needed to generate a block on the Bitcoin BC is about ten minutes, while the average block creation time on the Litecoin blockchain is approximately 2.5 minutes.
Secondly, the total supply limit of Litecoin is with 84 million coins, much higher than the 21 million supply limit of Bitcoin.
b. Litecoin runs on an open, permissionless blockchain Just like Bitcoin, Litecoin runons on an open, permissionless blockchain. All that is needed to join the network is a download of the open-source software code.
c. Litecoin is directly convertible into fiat currency Litecoin can be bought with fiat currency on a number of cryptocurrency exchanges (e.g. BTCDirect200, LiteBit, Coinbase, Anycoin Direct, …) and can, on those exchanges, just as easily be exchanged for fiat currency.
d. Litecoin is a medium of exchange Litecoin is accepted as a means of payment by a gradually growing number of online merchants. Like Bitcoin, it thus also constitutes a medium of exchange.
e. Litecoin is a pseudo-anonymous coin Just like Bitcoin, Litecoin is a pseudo-anonymous coin. Everyone can verify the chain of LTC transactions on the basis of the public ledger, which would make it technically possible to identify the coins sender and/or receiver.
f. Litecoin and the case of “Atomic Swaps” It should be noted that the Litecoin community recently introduced a new technology into the crypto-world that is being referred to as the “atomic swap”. Simply put, an atomic swap enables a P2P cross-chain exchange or trade of one cryptocurrency for another cryptocurrency, without the need of a third-party.
For example, if Anna has one Bitcoin and she wants 100 Litecoins in return, she would normally have to go through an exchange (i.e. a third-party) and pay certain fees to get this trade done. Suppose that Jeff owns 100 Litecoins and he instead wants one Bitcoin, then with an atomic swap, Anna and Jeff could simply trade their Coins with one another.
Now, in practice, an atomic swap is of course not so easy. First of all, since it is presently still in its infancy, the implementation of the atomic swap technology requires a lot of IT-knowledge. For example, a link has to be made between the two cryptocurrency blockchains, which requires the implementation of an IT-protocol known in the crypto-community as the “Lightning Protocol”. In addition, both blockchains have to share the same cryptographic function (for example the SHA-256 function) in order for the atomic swap to be possible.