What is Bitcoin & Cryptocurrency
More and more people are dealing with digital currencies. Bitcoin, Ethereum and Ripple are the three cryptocurrencies with the largest market capitalization. But what exactly is hidden behind the three coins? An overview.
Bitcoin was the first cryptocurrency and is now considered synonymous with the entire segment.
On February 11, 2009, five months after the peak of the financial crisis and the bankruptcy of Lehman Brothers, an anonymous computer scientist who called himself Satoshi Nakamoto published on an IT niche website that he had developed an open source e-cash, which he called Bitcoin.
He states that Bitcoin was completely decentralized, without a central server, and thus did not depend on trusted parties. Everything would be based purely on crypto proof and would not require interpersonal or institutional trust.
The main objective of Bitcoin is to essentially eliminate the control of governments and central banks over the currency. Furthermore, banks and other financial institutions should be removed from the payment process.
The Problems of Fiat Currencies (USD, EUR etc.)
The reason for Nakamoto’s invention was his disappointment with our current monetary system. He criticized the fact that credit money creates “waves of credit bubbles” and that government central banks throughout history have repeatedly devalued this credit money until the currency was at an end. The same is happening today.
Money created by the banks through the granting of loans. This makes it possible to finance investments with new money without having to resort to real money savings. To regulate the economy, interest rates are basically controlled by the central bank, creating boom-bust cycles.
An incomprehensible side effect of this system is that banks regularly incorporate real value investments through their self-created money. For if a borrower can no longer service the loan for his house, the house goes to the bank. The bank then legally owns a house that it has received with money created from nothing.
Furthermore, the state has power over the money of every single citizen. Accounts can be blocked from one day to the next, the citizen can be deprived of access to “his” money. Savings can simply be booked by the state when it needs money, as we have seen in Cyprus.
Opening an account in the first place is not even possible for many people in the world.
Nakamoto wanted to put a counterweight to all this with his decentralized anti-authoritarian Internet money.
The Blockchain System
For this purpose, the network uses the so-called Blockchain technology. This can be simplified as a decentralized cash book. The blockchain is a chain of data blocks. All transactions are stored in this chain. It is therefore not possible to use a Bitcoin twice. Data blocks are clearly marked and cannot be changed later. This makes manipulations impossible. The computer capacities required for the operation of the blockchain are provided by participants who run special software on their computers. This means that a central instance is not required for operation.
Data blocks are attached to the blockchain by so-called miners. To attach a block, complex mathematical problems have to be solved by using computer power.
Miners compete with each other for the appending of blocks, since this is remunerated by the network with newly created Bitcoins.
However, the number of newly scooped Bitcoins per block decreases over time, so that the money supply expansion is declining. Round about every 4 years there is this event called “halving” when the block reward gets halved. The last halving happened in May 2020, when the 12.5 BTC block reward was halved. So currently, 6.25 Bitcoins are distributed per block. In addition, the miners receive the transaction fees.
Owners of Bitcoins can send these to other participants in the network. Transactions can take up to one hour. The reason for this is that every 10 minutes a block is appended to the blockchain and only after about six blocks is it absolutely certain that no more changes can be made. There are fees for transactions: at least 0.00001 BTC. The paying participant of the transaction sets the fee. The higher the fee is set, the faster the payment is confirmed.
Bitcoins are kept in wallets. Wallets are digital keys used to prove ownership of a certain amount of Bitcoins.
Development Of Further Cryptocurrencies
The Bitcoin Whitepaper spread with its post office put the basis for the development of private cryptocurrencies as alternative to our credit money. The first generation of pure “payment tokens”, to which Bitcoin belongs, was followed by further generations of “tokens” up to today’s most advanced “asset tokens”, which open up a new perspective for the generation of money.
Ethereum is the second largest cryptocurrency system after Bitcoin in terms of market capitalization. Ethereum is however far more than a cryptocurrency. The network is a platform for Distributed Apps, which are composed of Smart Contracts.
Ethereum is also a distributed system based on blockchain technology. Like Bitcoin, each transaction is stored on the participating computers. The network’s cryptocurrency is Ether. This cryptocurrency can be used to make payments within the network. However, participants can generate additional currencies (so-called tokens). These can be used in payment applications or traded against ether.
In fact, several participants have developed their own tokens based on Ethereum technology. The network has developed the ERC-20 standard for this in 2015. This standard specifies certain characteristics of the Smart Contracts. Examples of existing ERC 20 tokens include Qtum, Humaniq, Chronobank, Golem and Omisego.
With Smart Contracts, certain actions can be performed automatically once a specified amount has been paid in ether. This eliminates the need to check the receipt of payment and the instruction of the action.
Smart Contracts are already being used in various areas. These include virtual voting systems, crowdfunding and identity management. The contracts are executed via the Ethereum Virtual Machine (EVM).
Other features of the Ethereum network are decentralized apps (dapps) and decentralized organizations (DAOs). Decentralized apps are computer programs that are executed via the Ethereum blockchain and thus decentralized. The decentralized execution, for example, offers much better protection against manipulation by hackers.
Decentralized Autonomous Organizations (DAOs) are companies or organizations based entirely on Smart Contracts. Classical decision-making bodies such as a board of directors or a managing director do not need such organizations. Instead, all rules relevant to the company are laid down in a Smart Contract and executed decentrally.
Ripple is an open source protocol for a payment network that has been in existence since 2012. Currency XRP belongs to this network. This is the third largest cryptocurrency after Bitcoin and Ethereum in terms of market capitalization. The network is operated by Ripple Labs. The network supports not only its own cryptocurrency XRP, but any currency (classic fiat currencies as well as Bitcoin etc.).
Ripple is a publicly viewable database with account balances and documented transactions. In addition to account balances, buy and sell offers for currencies are also stored. Thus Ripple has the character of a trading place. Currencies can be traded without a central instance; the participants of the network accept changes of the public register in a consensus procedure. Such changes are made every 2-5 seconds and thus much faster than in the Bitcoin network.
Ripple is much more focused on use by institutional customers. The operators offer three specific products. xCurrent is software that enables banks to process cross-border payments in real time. xRapid enables real-time payments in emerging markets and reduces the liquidity requirements for such transactions by using the network’s own currency XRP. xVia enables worldwide payments with very large attachments such as invoices.