But first, let’s take a brief look at the cryptocurrency market itself.
About the Cryptocurrency Market
In just a few short years cryptocurrencies have grown from an esoteric hobby (and frequent Internet joke) into an increasingly popular investment and area of interest for both developers and corporations. Not only has the market managed to survive some high-profilefailures and crashes, it’s grown at an astounding rate.
To give you a sense of the scale we’re talking about, as of this writing, the entire cryptocurrency market is around $221 billion dollars, which is similar to the size of the global auto insurance market. The website CoinMarketCap currently lists more than 1200 digital currencies, including many, many niche and seemingly satirical currencies with names like Philosopher Stones, CorgiCoin, and Ron Paul Coin. The vast majority of the market, though, is dominated by Bitcoin (56% of the market) and Ethereum (14% of the market). The cryptocurrency exchange Coinbase currently handles around $162 million dollars of trades a day, the vast majority of which takes place in Bitcoin.
Bitcoin Basics
If you’ve heard of cryptocurrencies at all, you already know about Bitcoin. Introduced in 2009 and developed by a pseudonymous programmer (or group of programmers) named Satoshi Nakamoto, Bitcoin has been called the world’s first decentralized digital currency. The idea behind Bitcoin is that it works without a centralized authority–there’s no Central Reserve of Bitcoin that mints new coins or sets the value of Bitcoin relative to other currencies. Instead, Bitcoins are created by bitcoin miners who use powerful processors to solve complex puzzles.
For political and ideological reasons, some people prefer Bitcoin because of its pseudonymous nature. As you might imagine, a hard-to-trace currency can be extremely appealing to people engaged in illicit activities. Note, though, that we said “pseudonymous,” not “anonymous.” Despite a popular misconception, it is actually possible to trace Bitcoin transactions back to specific users, which is how the FBI brought down the online drug kingpin behind Silk Road.
Is Bitcoin All Bubble and Bust?
As of this writing, there are between three and six million unique users with a digital currency wallet, up from around 300,000 in 2013. It’s also accepted by more than 100,000 merchants worldwide, with more being added all the time. At the same time, it’s not a perfect currency. As we’ve pointed out, many of the world’s financial institutions remain skeptical of Bitcoin both as a currency and an investment tool. Because of bitcoin’s association with illicit activity, many financial institutions have been reluctant to do business with merchants that accept bitcoin.
Additionally, it’s dramatic fluctuations in value, while not as bad as they used to be, still make it more popular with speculators than everyday consumers. That said, many Cypriots and Argentinians might dispute the idea that bitcoins are inherently less reliable than state-backed currencies, and studies have found that volatility in the bitcoin market is tied to the number of people actively using it. So in theory, the more people using bitcoin, the more stable its value should become.
An Overview of Ethereum
Before we get into how Bitcoin and Ethereum differ, we need to talk a little about the foundational technology behind both of them: the blockchain. If you already know what you need to know about blockchain (which you do if you’ve read our explainer on the topic), then feel free to skip this section.
The idea behind the blockchain was developed to solve one of the essential problems with a decentralized currency: If there’s no centralized authority, how do you know who actually has bitcoins? The solution to this problem is a publicly distributed ledger called a blockchain. Bitcoin is the first public implementation of the blockchain concept, and the two are often discussed like they’re the same thing, but this isn’t quite right. To understand why, just look at Ethereum.
Building a Blockchain for Business
Like Bitcoin, Ethereum is built on top of blockchain infrastructure. Unlike Bitcoin, however, Ethereum wasn’t designed entirely or even primarily as a digital currency. Instead, Ethereum is meant to act as a platform for distributed apps built to run on blockchain technology.
Ethereum does have its own system of tokens, called Ether, which can be traded for real-world currency on any number of exchanges, but these tokens, unlike bitcoins, are essential to the running of the Ether network itself. That’s because Ether miners aren’t just guessing random numbers in order to score the next token, they’re also validating the next block in the blockchain. Since all the blocks in the chain are linked together, validating one also validates all the previous transactions, thus creating a secure and authoritative record of the entire chain.
It’s this aspect of Ethereum that has a lot of people–from open-source developers to some of the biggest companies in the world to sovereign states–excited about the platform’s future. There are already two consortiums of giant corporations rushing to establish standards for blockchains that will spur more adoption and developmentInsurance Loan sMortgageAttorneyCreditLawyerDonateDegreeHostingClaim
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