Don’t know your Bitcoin from your Ether? Not up to scratch on the latest blockchain tech? Don’t fear. We’ll hold your hand on the new way to spend, because cash is so 90’s.
There’s been a lot of talk in the news lately about cryptocurrencies, particularly as Bitcoin has just split into two – more on that to come. At times it feels as if one needs a computer science degree and a lot of alone time to make any sense of it, but really a few underlying facts demystify the whole digital money buzz.
What is a cryptocurrency and how does it work? (In English)
Put simply (as simply as possible) cryptocurrencies are universal decentralized digital assets used in a virtual marketplace to buy goods and services. There are no regulating bodies, it is anonymous and it all started with Bitcoin in 2009, although the first mumblings of it can be traced back to 1998 but no need to over-complicate the already complicated.
Let’s simplify it even further. Traditionally, a bank acts as a central body that regulates money being spent. It makes sure nobody spends your money, you don’t spend anyone else’s and in this way prevents the same money being spent twice. What if you could do this without a bank? Cryptocurrencies work because they are self-regulating, they do the work of the bank themselves – built-into the code are rules about everything having to be in balance, and no single coin (digital asset) being used twice
It all comes down to blockchain technology; which essentially sets in stone that a transaction has taken place and adds it to the network of all previous transactions. The most recent of which is a block, added to a chain – it helps to visualise it (see below) and it can’t be amended once approved. Once the transaction has taken place the entire balance is changed and communicated across the whole currency. It’s a self-communicating, self-regulating exchange system that exists purely in a digital sphere and holds no intrinsic value (eg. unlike a block of gold that holds some value in itself).
How do digital coins get into circulation?
There are currently over 900 cryptocurrencies in circulation, and they all follow slightly different rules in terms of how they are created and how they are added into circulation.
Mining is a process by which new currency is added to the system. It is very expensive to do as it requires a lot of electricity and some serious computer power – more than you think. In terms of Bitcoin, mining is the process of adding transactions to the public ledger (the blockchain), this is done harnessing the processing power of a miner’s computer system. In return for their services to the blockchain, miners are rewarded in coins. Due to the recent rise in popularity, and hence price, of major cryptocurrencies like Bitcoin and Ether, serious miners are taking extreme measures to out-mine their competitors. Graphics processors are the shovels of today and they can’t be delivered fast enough, Marco Streng (Chief Executive of Genesis Mining) – has gone as far as renting an entire Boeing 747 in order to secure delivery of processors needed to cash in on the (digital) gold mine.
Ether, released far later than Bitcoin in 2015, is a more complex beast and is striving to be far more than just a cryptocurrency; the umbrella term Ethereum encapsulates the entire platform which provides a decentralised and secure method of contract exchange. Ether didn’t begin through mining, the currency had an initial coin offering to early investors of 60 million ether which translated into $18.5 million. Well done Ether. Further coins are released into the system through the mining process (miners process transactions and are rewarded with coins). In comparison to Bitcoin, Ether’s rewards are 5 ether per block approved, where Bitcoin is 25, and Ether is constant in its amount of reward where Bitcoin halves every 210,000 blocks.
What’s this Bitcoin split about?
It’s worth noting another major difference between Bitcoin and Ether is the time taken for a block to be approved (confirmation of transaction). With Bitcoin this is around 10 minutes, and with Ether it’s about 12 seconds. Enter the reason behind the recent Bitcoin split. Bitcoin has continued to rise in popularity, and with an approval time of 10 minutes for transactions the system was struggling. This approval time can be sped up by increasing the size of each block. When Bitcoin was created a 1Mb maximum Capacity was set and remains to this day. In comparison, Ether’s block size is determined on a situational basis but they end up being far larger.
There’s been a major argument going on in the Bitcoin community for about two years over how to deal with the slow and overloaded system, and whether or not to increase the block size; It’s been deemed a civil war. The result is the ‘hard fork’ that occurred on Tuesday 1st July leading to the creation of a new cryptocurrency, Bitcoin Cash, that shares a history with Bitcoin but not a future. The blocks of Bitcoin cash have a larger storage capacity, with the first official block mined being 1.9Mb in size compared to 1Mb the maximum size of a Bitcoin block.
There’s a whole other thing called Segregated Witness, which actually also solves the issue of the small blocks on Bitcoin needing to get bigger. It’s basically an update that frees up space in existing blocks without increasing the actual size. It happened at the same time as the ‘hard fork’ but wasn’t as sexy to mainstream media although it’s a major win for traditional Bitcoin users.
Real World Applications
For those of us not swept in the world of server farms and blockchains what does all this really mean?
Earlier this year Lush, the vegan cosmetics retailer, announced it will accept Bitcoin as payment. It’s a smart move as it allows customers from all corners of the earth to pay for products at the exact same price regardless of foreign currency fluctuation; just one advantage of Bitcoin’s decentralised nature. As well as a global sales opportunity, cryptocurrency also offers a global supply, trade and even charitable opportunity – Lush has been outspoken about expanding their use of Bitcoin to other areas of the business for instance, reaching charities in rural regions.For many Bitcoin is associated with the ‘dark web’, which is not an unfair association. Recently sites such as AlphaBay and Hansa have been taken down by an International Police operation. They were infamous sites on the dark web, with over $450 million being spent between May 2015 and February 2017 on weapons, chemicals, drugs and other illegal goods. This is one of the major downsides (or upsides depending on who you talk to) of the anonymous decentralised nature of cryptocurrencies, they can’t be traced – although it’s not as anonymous as people think and as evidence by the latest major takedowns from the dark web it is no longer safe to hide behind the digital currency.
What does the future hold?
The list of brands accepting Bitcoin continues to grow opening up a new playing field for competition. As well as drugs, weapons and vegan cosmetics – Bitcoin is also accepted on Expedia, Microsoft, Steam and a growing list of other major and minor retailers including Helen’s Pizza in New Jersey where you can you can get a slice of pizza for 0.00339 bitcoin by pointing your phone at a sign next to the till. Due to associations with the dark web brands have stayed away from Bitcoin engagement in the past, but with a cleaner reputation now there is an opportunity for new ground to be tread. Who will be brave and jump into the future first with a Bitcoin themed ad campaign or an Ethereum contract competition?
Blockchain technology will transform the global economy starting with Gibraltar’s ambition to fully integrate blockchain into its exchange to be the worlds first blockchain regulated economy. Smart contracts such as those offered by the Ethereum network are already transforming the world of financial services, IBM is building a digital trade platform, Denmark is considering an e-Krone and Barclay’s have opened discussions with UK institutions about adopting digital currencies.
The mainstream media are paying more attention to cryptocurrencies, the Bitcoin Hard Fork was widely reported on, an. As the world turns crypto, we should expect to see globalisation on a whole new level and knock-on effects such as a massive rise in the demand of computer processors, servers and cryptocurrency subject matter experts.