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What is a cryptocurrency? And how's the bitcoin?
In a word, yes. Bitcoin was the first cryptocurrency, and it is still the largest, but in the eight years since it was created the pretenders to the throne have arrived.
They all have the same basic foundation: they use a "blockchain", a public shared transaction record, to create and track a new type of digital token, which can only be created and shared according to the agreed network rules, whatever they are. But the thriving ecosystem has provided a huge amount of variation.
Some cryptocurrencies, like Litecoin or Dogecoin, have the same purpose as bitcoin – the creation of a new digital currency – with changes to some details (making transactions faster, for example, or ensuring a basic level of inflation).
Others, like Ethereum or Bat, adopt the same principle but apply it to a specific purpose: cloud computing or digital advertising in the case of these two.
What is exactly a bitcoin? Can I keep one?
A bitcoin does not really exist as a concrete, or even digital, physical object. If I have 0.5 bitcoins in my digital portfolio, this does not mean that there is another matching correspondent sitting somewhere else.
What you really do when you own a bitcoin is the collective agreement of any other computer in the bitcoin network that your bitcoin was legitimately created by a bitcoin "miner" and then transmitted through a series of legitimate transactions. If you want to own some bitcoins, there are exactly two options: either become a miner (which involves investing a lot of money in computers and electricity bills – probably more than the value of the bitcoin you actually do, unless you be "very very smart", or simply buy some bitcoins from someone else using conventional money, typically through a bitcoin exchange like Coinbase or Bitfinex.
Many of the oddities of money are reduced to the collective agreement on what constitutes "legitimacy". For example, since the first bitcoin was created in 2009, the existing total number has grown slowly, at a decreasing rate, ensuring that at some point around 2140, the 21 millionth bitcoin will be mined and will never be created again. .
If you do not agree with that collective agreement, well, there's nothing to stop you from splitting up with the broader network and create your own bitcoin version. This is what is known as "fork", and it has already happened several times in the past (it is what competitors are like Litecoin and Dogecoin). The difficulty is persuading other people to follow you. A currency used by one person is not much of a currency.
What can I do with cryptocurrencies?
In theory, almost anything that can be done with a computer could, in some way, be rebuilt on a cryptocurrency-based platform. Building a cryptocurrency involves transforming a worldwide computer network into a decentralized data storage and processing platform – indeed, a giant PC Hive-Mind (which no longer seems to have to do with currencies "is one of the reasons some instead suggest the name" decentralized apps "to cover this sector).
We have already seen proposals for YouTube clones, trading card games and digital advertising exchanges based on cryptocurrencies: "x but on the blockchain" is the new startup pitch du jour, now "Uber for x" and "x but on l & # 39 iPhone "are passé. There is already Dentacoin (Yelp for dentists but on the blockchain), Matchpool (Tinder but on the blockchain) and even Cryptokitties (Tamagotchis but on the blockchain).
In practice, however, the available uses are rather limited. Bitcoin can be used as a payment system for some online transactions, and even less real ones, while other cryptocurrencies are even younger than that. The excitement for the field focuses more on what it could become than it actually is.
Why is it important that it be decentralized?
In their hearts, cryptocurrencies are basically just imaginative databases. Bitcoin, for example, is a large database of who owns what bitcoins and what transactions have been made between those owners.
In its own way, this is a little different from a conventional bank, which is basically just a big database of who owns what pounds, and what transactions were made between those owners.
But the distinction with bitcoins is that no central authority manages that large fantasy database. Your bank can unilaterally change its database to change the amount of money it thinks it has, and it often does. Sometimes this is to your advantage (if your debit card is stolen and used, for example, your bank will return the money) and sometimes it is not (if your bank thinks you are laundering money, it will block your account, potentially paralyzing your business account).
With bitcoin, no one can do any of these things. The only authority on the network is whatever most of the bitcoin users agree, and in practice this means nothing but the basic rules of the network are never applied.
Is this a crime?
It's … a lot about crime. The downside of cryptocurrencies being decentralized databases is that for most people, most of the time, there is no disadvantage of a centralized database. If you trust the financial system to store your funds, or Dropbox to store your files, or YouTube to host your videos, you do not need to use decentralized decentralized versions of those services.
But if you are planning to commit financial crimes, archive illegal downloads or host pirated videos, a decentralized version of these services becomes much more interesting. This is why bitcoin, for example, has become the currency of choice for online drug dealers and cybercriminals demanding redemptions to restore compromised data.
"Crime" is a generic term, though. In many countries, having a political opinion contrary to that of the dominant regime is widely considered criminal; many more restrict the freedom of their citizens in ways that the citizens of liberal democracies consider unethical and inhumane. If cryptocurrencies allow these limits to be overcome, it can technically promote crime, but not in the way that most cryptocurrency critics mean.
Keep saying "blockchain". What does this mean in reality?
The concept of blockchain is at the center of all cryptocurrencies. It is the decentralized historical record of changes in property ownership, whether it is simply spending a bitcoin or performing a complex "smart contract" in one of the second generation cryptocurrencies like Ethereum. Every time a cryptocurrency transaction occurs, the details are transmitted to the entire network by the expenditure part, ensuring that everyone has an updated ownership record. Periodically, all recent changes are grouped into one "block" and added to the historical record. And so the "blockchain" – a linked list of all the previous blocks – serves as the complete and complete registration of who owns what on the network.
So what do the miners actually do?
They build the blockchain. Their degree of precision varies from cryptocurrency to cryptocurrency, but bitcoin is a good example: every 10 minutes or so, a miner is selected semi-randomly to perform the job of taking all the transactions they have heard about, declaring them confirmed and grouping them into a single block of transactions, which they then add to the chain. In exchange for the work done, the winning miner is also allowed to "print" some new bitcoins to pay off a bitcoin reward, currently worth about $ 140,000.
Anyone can be a miner: all you have to do is run the bitcoin software in mining mode. The hard part is being a profitable miner. The actual work of grouping the transactions together is easy, but the true expense comes from the way the winner is selected. Think of a lottery, where buying a ticket involves using the computer to solve a very complex arithmetic problem, but ultimately useless. To get more chances to get that reward of $ 140,000, you need to solve those problems thousands or millions of times per second to access the lottery with as many tickets as possible, and that means building specialized computers, negotiating cheaper sources of energy, or simply hacking innocent people and using their hardware for nothing instead.
How do people make so much money?
This is the $ 190 billion question – the value of all bitcoins in the world at the time of publishing this article. The short answer is "buy low and sell high": the value of a bitcoin has increased substantially from eight years ago, to $ 1,200 eight months ago, to a maximum of nearly $ 20,000 in December and now stands at $ 11,000. Anyone who has managed to get enough bitcoin soon enough is really very rich, at least on paper.
The real question is why a bitcoin is worth $ 11,000 (and why Ethereum is worth $ 1,040, and why a particular Cryptokitty is worth $ 100,000). There, you can find two answers. The sympathetic is that all these cryptocurrencies are, by their nature, scarce resources – only a certain amount exists in the world. If they are to be widely adopted for use in the real world, then people will have to buy those scarce assets, and therefore their value will necessarily be higher than they are today. The current price in that story simply reflects the probability that a particular cryptocurrency will actually be used extensively.
Are there any problems in the future?
There is if you take the second most hostile response, to be correct: that collective greed has fueled a speculative bubble that will eventually collapse. While people hear stories of others making money with cryptocurrencies, they buy it themselves – which inflates the price, creating more stories of wealth and more investment. The cycle continues until the price of the underlying is no longer in line with reality. In the end, the bubble bursts and many people look around to find that they have lost everything.
What will happen?
Take off
Cryptocurrencies could reach their ambitions and become a widely used aspect of everyday life. Some people will become very rich as a result, but not much more than the first investors in other key technologies such as information technology or the Internet.
Hard landing
Or could this speculative bubble end in such a serious accident that it destroys trust in the entire industry, driving investors away, bankrupting miners who have spent thousands or millions of single-use hardware demanding a high price of bitcoins to get a profit and leave cryptocurrencies as a technological impasse alongside cold fusion and jetpacks.
Cruise altitude
But perhaps things will continue as they have done in the last five years. The actual use of cryptocurrencies remains stable, mostly illegal, largely underground, and completely disconnected from a market price that fluctuates wildly based on the vagaries of a class of financial speculators with little connection to the underlying truth. Instability, it turns out, is a strangely stable and predictable state of affairs.
Further reading
Digital Gold: The Untold Story of Bitcoin by Nathaniel Popper
Attack of the 50-foot Blockchain: Bitcoin, Blockchain, Ethereum and Smart Contracts by David Gerard
Blockchain Revolution: how the technology behind Bitcoin is changing money, business and the world by Dan Tapscott and Alex Tapscott
The Dark Net by Jamie Bartlett
