Beyond Bitcoin: Why There Will Be More Than One Successful Cryptoasset

It was created in 2009 when its pseudonymous inventor, Satoshi Nakamoto, figured out how to do a seemingly simple thing: send money over the …

People often ask me, “If bitcoin is so great, why do we need all these other coins like ether?”

Or, “Why do 2,000 different cryptoassets even exist? Shouldn’t we all just use the best one?”

It’s a logical question.

Various Hand Tools Hanging On Pegboard In Workshop

Why are there 2,000 different cryptoassets? Because each one is optimized for a different use case.

Getty

We’re taught to think about bitcoin and other cryptoassets as currencies. Viewed that way, having multiples makes no sense. Why do we need multiple digital currencies if there’s only one internet?

The answer is that the term cryptocurrency is misleading.

Traditional currencies like the dollar, the euro and the yen all do essentially the same thing; they are payment tools in different countries or regions. But cryptoassets like bitcoin and ether actually do very different things. Understanding those differences is the key to understanding which ones will be important in the future.

Bitcoin vs. Ether

Bitcoin was the first and is today the most valuable cryptoasset in the world. It was created in 2009 when its pseudonymous inventor, Satoshi Nakamoto, figured out how to do a seemingly simple thing: send money over the internet safely without using a bank.

The software that allows this to happen is called the “Bitcoin blockchain.” As the first blockchain ever created, the software underlying bitcoin is pretty basic. Essentially all you can do with it is send, receive, and store bitcoin.

Ether, by contrast, was created in 2015. The software that underlies ether is called the “Ethereum blockchain.” It’s much more flexible than the Bitcoin blockchain. In fact, the Ethereum blockchain is “Turing-complete,” meaning you can program it to do anything. If Bitcoin is a beeper, Ethereum is a smart phone.

It’s easy to imagine why Ethereum’s flexibility is a big deal. If you can programmoney, you can replace many of the things that the traditional financial services industry charges us huge fees for.

What Could Ethereum Do? Here’s One Example

Before I joined the crypto industry, I was the CEO of a business called ETF.com. We didn’t always have that URL, however; we bought it from a squatter for quite a bit of money.

When we bought it, we didn’t trust the squatter: We weren’t going to wire him money before he sent us the URL. Similarly, the squatter didn’t trust us: He wasn’t going to send us the URL before he got his money.

To facilitate the transaction, we hired a lawyer to sit in the middle and act as an escrow agent. We wired our payment to the lawyer, the squatter sent him the URL, and the lawyer crossed the transaction. For this service, he charged us something like $2,000.

Today, rather than hiring the lawyer, we could write a small program for the Ethereum blockchain. The program would say: When Matt uploads the money (in ether) and the squatter uploads the URL, cross the transaction. We would save $2,000! Multiply that by a hundred different simple financial services and you can see why ether is potentially a big deal.

Does That Mean Ether Is Better Than Bitcoin? No.

Does that mean ether is “better” than bitcoin?

No.

From a software security perspective, Bitcoin’s limited functionality “limits the attack surface” for cyber attacks. As a software that handles money, security is hugely important, and Bitcoin’s simplicity makes it super secure.

Moreover, from an ease of use perspective, having only “send”, “receive”, and “store” as your options makes it easier to avoid human error.

As such, bitcoin’s underlying software is optimized to be extremely secure and easy-to-use: Perfect for bitcoin’s primary use case as a kind of “digital gold.”

By contrast, ether’s underlying software is more flexible, which is why people talk about it disrupting the broader financial industry. It’s not as good as Bitcoin at storing value, but it’s way better at replacing overpaid lawyers and investment bankers.

Other leading cryptoassets are optimized for other use cases. XRP, for instance, is optimized for speed, and is designed to replace traditional international payment systems. Monero is optimized for privacy, and is optimized to complete with private/offshore banking solutions. And so on.

Does this mean we need 2,000 different cryptoassets? Of course not. Most of them are worthless and will trade to zero.

But my guess is that a handful of them will find major addressable markets and become quite valuable in the future.

PS: Crypto experts will undoubtedly point out that people are working to expand bitcoin’s core functionality using off-chain enhancements, such as the Lightning network. It’s true, and that work is very interesting. I’ll address the idea of off-chain enhancements to various blockchains in a later column.

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Cryptocurrency in Focus: Ethereum Aims for ‘Serenity’

… high fees associated with these volumes have been a deterrent to adoption by large businesses, said Ethereum’s founder, Vitalik Buterin, recently.

Leading cryptocurrency project Ethereum (ETHGet Report) garners a lot of attention in the industry, but this is a particularly interesting time for the asset as its ratings have declined over the last two months. Price has also dropped significantly.

As the prominent “smart contract platform” in the space, Ethereum boasts a market cap just over $20 billion at the time of this writing. Ether, ETH, is the native currency and lifeblood of the platform, used as “gas” to pay for network transactions.

Nearing ‘Serenity’

The Ethereum blockchain — or database containing transaction information — currently processes transactions in a similar way to Bitcoin. However, massive development efforts are underway on Ethereum 2.0, also known as “Serenity,” to produce a new type of blockchain capable of greater scale. The need for scalability is key as the number of transactions, and subsequent gas prices, continue to rise on the platform.

This summer, Ethereum ratings have been in decline. Its FCAS (Fundamental Crypto Asset Score) slid 2.43% over the last two months, driven by a 50-point (-5.27%) drop in User Activity. Developer Behavior also fell 1-point (-0.1%), and Market Maturity slipped 18-points (-2.27%). Price is down 41.41% over the same time period.

From a high-level, Ethereum’s slump in User Activity is potentially tied to several trends impacted by scalability concerns. First, existing projects building on top of Ethereum are either launching their own types of blockchains or moving to other platform competitors with better scale and cheaper fees. Second, new projects are simply choosing to build elsewhere, and third, users are engaging with Ethereum’s decentralized applications at a diminishing rate.

Additionally, increasing competition for transaction processing and the high fees associated with these volumes have been a deterrent to adoption by large businesses, said Ethereum’s founder, Vitalik Buterin, recently.

Still, Ethereum’s overall User Activity rating is still very strong, ranking 11th overall.

Our Hot Take

Ethereum has a major head-start in what has been dubbed the “Platform Wars,” where a number of emerging blockchain platforms are vying for supremacy and mass adoption in the industry. These new platforms have benefited from watching Ethereum take the early lead, creating offerings that focus on delivering both greater scalability and a higher level of compatibility with competitor assets and functionality.

While the Ethereum team’s planned move to Ethereum 2.0 is ambitious, a number of projects in the industry are already working concurrently to solve its scalability issues. These projects are known as “Layer 2” solutions and come in a variety of forms.

In all, Buterin and team are highly capable of keeping the Ethereum ship on course to Serenity. The headwinds of scalability and declining use are surmountable challenges as the industry becomes increasingly focused on delivering real use cases through the applications it fosters.

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Ethereum: a big failure? Some might believe so

In reply to Mow’s tweet Vitalik Buterin, the creator of Ethereum said that Ethereum is as “almost full” as bitcoin’s network implying that the platform is not …

According to a Bloomberg report, Ethereum’s network utilization reached 90%. The platform has failed to address the scalability issues leading many to think that this might be it for the Ethereum. Blockstream, Chief Strategic Officer, Samson Mow, supported Bloomberg’s report by saying that Ethereum is a technological dead end and the more it is used faster it will end.

Stablecoin Tether is the primary reason for the network’s almost “full capacity,” and many believe that it may lead to higher transaction fees on the blockchain. And this could potentially cause developers and users to move to other chains.

In reply to Mow’s tweet Vitalik Buterin, the creator of Ethereum said that Ethereum is as “almost full” as bitcoin’s network implying that the platform is not unique to scalability issues as major blockchain networks have also failed to address the same.

Ethereum is a technological dead end. The more it’s used, the faster it dies. Fortunately, USDt is also available on the #LiquidNetwork which is more scalable and later will allow Lightning Networks to be created for assets like Tether. 🌊⚡️ https://t.co/Fn5owRSRk0

— Samson Mow (@Excellion) August 27, 2019

Ethereum 2.0 the last chance

Many developers and users believe that the newer version of the blockchain can solve the current scalability issues, but talks of the Etherum2.0 has been going on for years, and no one knows when it will be implemented. In the recent Hard Fork Istanbul, the blockchain core developers announced some changes that include updating of Six Codes on the network. However, the changes will be available to users from early next year.

If Ethereum fails to take correct technical measures, consequences could be drastic for the network as most developers and users will leave the platform.

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Bitcoin And Cryptocurrencies Are A Hedge For Bad Government

There’s been a lot of news recently, especially with the advent of a news cycle focused on a potential recession, on the role of bitcoin and …

World leaders and delegates depart a family photo session at the Group of 20 (G-20) summit in Osaka, Japan, on Friday, June 28, 2019.

© 2019 Bloomberg Finance LP

There’s been a lot of news recently, especially with the advent of a news cycle focused on a potential recession, on the role of bitcoin and cryptocurrencies from a short-term investment perspective. Some have placed bitcoin and cryptocurrencies in the category of hedges, a form of digital gold or silver that can be used to store value through inflation and the debasement of fiat currency.

Yet that misses the forest for the trees. Bitcoin and cryptocurrencies at scale are not just a hedge for inflation and an ever-expanding monetary supply — they are a fundamental hedge against bad governance and bad governments. In this respect, it may be easier to evaluate them along a longer-term horizon then just a short-term store of value.

Start with the fact that bitcoin and cryptocurrencies are structured to be independent from central authorities and that decentralization is an explicit goal of the system. Bitcoin can be considered the first prototype of something more exciting than digital cash because it focuses explicitly on governance and issuance.

It’s not a central authority, governed by statute or accredited by loyalty or expertise that determines the current amount of bitcoin in circulation but rather individuals contracting together under a set of laws codified in code.

Anybody can start a node — it seldom matters where you live or whether you happen to be a political leader or economic leader in that area. And while mining has grown inevitably into a more centralized affair as it has become more commercial in nature, the egalitarian approach to electrical and computing power being the barrier to make economic returns in the system makes it more open to general access than appointed councils of technocrats.

The miners who issue bitcoin and cryptocurrency are a self-appointed set of individuals. Similarly, those who run a node are not bidding for power, but rather, they want to be in support of a growing ecosystem and community posed against centralized power.

Bitcoin and cryptocurrencies like it have shown that distributed governance can be used to create economic value and trust, and don’t require centralized authorities or governments.

Secondly, used at scale, cryptocurrencies can be used to support dissent and to support a diversity of different views. By enabling transactional pseudonymity and for some chains (such as Zcash and Monero) close to transactional privacy, cryptocurrencies allow individuals to make economic choices while deciding how to selectively reveal oneself to the world. Their global, distributed nature makes it extraordinary hard for a nation-state to enforce norms or censor transactions as seen with Wikileaks.

This makes it harder for governments to censor either through the monopoly of force or through trying to license social norms, behaviors that it might find undesirable or counter to its accumulation of power — seen, for example, in the anti-terrorism statutes or Espionage Act violations in the United States and the state subversion laws in China, both of which have been used in overly broad contexts to imprison individuals without due process.

Third, like any hedge, bitcoin and cryptocurrencies can be used as a way to funnel out of other assets that are depreciating. When governments are under stress and when their currencies are debased as seen in Venezuela and Hong Kong, people normally jump to commodities that have global value (such as the case of silver and gold) outside of the troubles of any domestic currency which they anticipate falling. Many will go to the US dollar, a traditional hedge — still, however, tied to a physical government.

Bitcoin and cryptocurrencies have the extra-special property of not being tied to any analog or physical authority. This means that in times of bad governance, rampant inflation, and economic troubles, cryptocurrencies can hold value and still be a viable medium of exchange regardless of domestic troubles — and it means you may not need other state currencies to be your hedge. Among other things, this is why both China’s state planning agencies and anti-cryptocurrency legislators in the United States want to ban cryptocurrencies: because of their potential potency in undermining the US Dollar or capital controls in Chinese Yuan.

Fourth, their principles help with newer forms of governance. Blockchain, bitcoin and cryptocurrencies have posed a very interesting question: if we can use distributed governance and code-imbued trust to create economic value out of nothing — something that required a government’s tax agency, use of force, and legions of lawyers and bankers beforehand — can we use the idea of distributed, action-meets-access principles to political power itself?

With blockchain principles and the rise of cryptocurrencies has come the rise of concepts like liquid democracy and quadratic voting proposing fundamental shifts in the mechanism design behind voting and delegating political power, giving an expanded citizenry the ability to hearken back to ancient Athenian concepts of direct democracy, while preserving the ability for a populace to handle distributed governance at scale — perhaps eventually removing the need for centralized political governance.

So, as you evaluate bitcoin and cryptocurrencies as a hedge for inflation, consider that it truly strikes at the root of inflationary problems — bad government and bad centralized governance — rather than just the inflationary tip of the iceberg. In a time where political leadership is growing more centralized and has become rather destabilizing, bitcoin and cryptocurrencies can act as the ultimate hedge.

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Ethereum Foundation grants show focus is on scaling

The Ethereum Foundation has handed out another round of grants to help the blockchain platform prepare for its eventual upgrade to Ethereum 2.0.

The Ethereum Foundation has handed out another round of grants to help the blockchain platform prepare for its eventual upgrade to Ethereum 2.0. It awarded $2 million in funding to eight projects within the ecosystem, and has created three bounties offering at least $15,000 in total for various security-related challenges.

The overarching theme appears to be a focus on getting Ethereum ready to scale—one of the core principles of the upcoming Ethereum 2.0 release. This issue was recently highlighted by Ethereum co-founder Vitalik Buterin who said the blockchain was “almost full,” indicating that its development needs to step up a gear—and fast.

The largest chunk of money, some $725,000, went to Prysmatic Labs, led by Raul Jordan, a research partner at Token Daily, and Preston Van Loon, who previously worked at Google. Its goal is to implement proof-of-stake, a way for the blockchain to operate without computationally exhaustive mining, as well as sharding, a method to increase the number of transactions the blockchain can handle. Both are designed to help the blockchain scale.

Similarly, the second biggest grant went to Australia-based Sigma Prime, to help continue its development of Lighthouse, a version of Ethereum 2.0 that’s written in Rust—a popular programming language. This should open Ethereum up to a wider community of developers, not just those who can speak its native programming language, Solidity. It received $485,000 from both the foundation and ConsenSys (which funds Decrypt).

On top of this, crypto wallet provider Status received $500,000 to work on Nimbus, another implementation of Ethereum 2.0, but this time designed to work on resource-limited devices, including mobile phones. The aim is to help make running Ethereum more accessible.

Other grants include $217,500 to Chainsafe, to research a light client called Lodestar and $189,000 to Harmony, to work on the beacon chain—the core of the redesigned blockchain platform.

The three bounty programs on offer are designed to help keep the blockchain network secure in light of the various innovations and developments. The foundation is willing to part with five ether ($940), or 1,000 DAI ($1,000)—whichever is the larger at the time—for substantial bug fixes or improvements to Ethereum 2.0 code.

The other two bounties focus on computational functions, one of which focuses on “an extremely MPC-friendly one bit PRF.” If you have any idea what that means, it might just be worth your time.

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