We talk to startups and investors, you get the value.
Dogecoin, mining, crypto farms, tokens, NFT, bitcoin, Ethereum — have you noticed how these concepts are now common everyday words? When did something that used to be a narrow tech field, enter our everyday vocabulary? How did cryptocurrency begin to define traditional financial areas while we kept being ironic about it?
We say cryptocurrency and mean blockchain, we say blockchain and remember cryptocurrencies. At the same time, not all cryptocurrencies work on blockchain technology, and the use of the latter is not limited to the circulation of digital currencies. In this article, we wanted to at least conduct our own investigation of the issue, and share what you need to know to understand the technological news agenda. As a maximum, help you fit into the future, which is approaching.
We talk to startups and investors, you get the value.
As they say, “life is a game”. So, we invite you to play the game called “Crypto” today. To do so, we will present the blockchain, cryptocurrencies and all the key terms of the last 13 years in the form of a classic board game.
To begin with, let’s see what’s on the playing field. Until the fall of 2008, which is when cryptocurrency appeared, two parallel processes took place. Traditional market players with clear operating tools dominated in the field of transactions and non-cash payments. Basically, these were and still are banks that act as intermediaries for such transactions. However, their presence between the two parties to the transaction entails a number of unpleasant consequences, like the percentage that the intermediary retains, or having to disclose confidential information to potentially prevent fraud.
David Chaum at the Department of Computer Science at the University of California, Santa Barbara, understood this and started looking for a way to ensure the anonymity of participants and full transparency of the transaction in the early 1980s. The protocols of “electronic cash” that he developed will then become the basis for creating a mechanism for transactions of the first cryptocurrency.
In the late 90s, Briton Adam Back offered the world his Hashcash anti-spam system, the principle of which will become part of the data analysis algorithm in cryptocurrency. Around the same time, researcher Nick Szabo will begin and never finish his development of a decentralized monetary system. The goals were great: to save users from the threat of counterfeiting and theft of electronic currency. Yet, he could not ensure the launch of the system, unlike our last hero — or heroine, or a group of heroes.
In the same fall of 2008, someone who called themselves Satoshi Nakamoto, released a technical description and the first version of the code of the new electronic currency, combining all previous developments to ensure completely anonymous transactions. The quasi-money instrument was called Bitcoin.
This is the starting point of our playing field. If we look at it even more broadly, we will see that the new system was able to solve the indicated problem at this point: provide an opportunity to transfer property rights directly, without intermediaries, via the Internet. At the same time, transactions for each of the parties are free, both of them remain anonymous, and the underlying technology makes it possible to provide trust where there can’t be trust. Check out the rules of the game below to find out what technology this is.
Let’s first look at the example of bitcoin and then complicate the task. There are two types of players in the game that give life to Bitcoin — users and miners. While the former make transactions, the function of the latter is to process them using special software.
Transactions are based on blockchain that is a way of transferring and subsequently storing data. It differs from all the others in that it’s decentralized, and the way information is distributed. That is, the chain of encrypted blocks, in the form of which information is presented, is stored by all network participants. Moreover, each subsequent block contains information about the previous one. If you set yourself the goal of making changes to one, you will need to hack all the previous ones from all other participants in the entire network. This ensures its independence from a certain number of stakeholders, allowing the system to exist autonomously and independently.
The principle of blockchain operation allows the system to be used to ensure cybersecurity, transparency of any document flow and related processes, such as, for example, elections. Document authentication, an incorruptible and automated institution of reputation that allows you to fight corruption — there are a lot of ways to use the blockchain, and cryptocurrencies are just one of them, although the most widespread.
Let’s go back to the rules of the game, using bitcoin as an example. When one user makes his move and transfers a certain amount of bitcoins to another, the transaction becomes visible to the miners, and they enter the game field since, without them, it will not be considered complete. To “complete” it, the transaction must be included in the block that we talked about above and which is an integral part of the ever-increasing chain.
Each block is information about thousands of processed transactions. It is considered finally formed when the miner calculates the hash function. In turn, the hash function is an incoming data array, which is converted into an alphanumeric string, which contains information, in fact, about all transactions since the inception of bitcoin.
So we’ve talked about Bitcoin. This is the first and currently the main digital “coin” in circulation. It is losing in value at the time of this writing but is still leading in terms of market share.
However, this blockchain technology does not belong to anyone, which, as expected, gave rise to many more alternative cryptocurrencies — “altcoins”. The second most important coin on the market is Ethereum. It appeared in 2013 thanks to Vitalik Buterin and was launched in 2015 together with the blockchain platform of the same name. Its smart contracts provide a decentralized process for fulfilling contractual conditions, and Ethereum guarantees their fulfilment.
There are many more cryptocurrencies besides Ethereum, some of which are better known, and others not so well. You may be familiar with Dogecoin, which gained its fame, among other things, thanks to the mascot — the Internet meme of Doge — and Elon Musk’s tweets. Enjin, which allows you to embed an NFT token into any video game, is also worth mentioning, as well as Cardano, which uses the POS system that we will talk about below.
As you can see, cryptocurrencies are pretty difficult, and it took a while before the market recognized their value. A programmer Laszlo Hanesh paid 10 000 bitcoins for a pizza in 2010. (Today’s Cryptocurrency Prices by Market Cap).
There are three main ways for participants to earn money in this game.
We mentioned that miners spend their time and money to calculate hash functions. They do not do this out of altruism and love of mathematics, especially since each step of the chain of calculations requires more and more power of technology. If we look again at the example of bitcoin, after the block takes its place in the chain, the miner receives a certain amount of bitcoins, that is, they are issued. Secondly, miners receive a commission on every transaction. For bitcoin, the amount of emission after a certain number of blocks is halved. In the ecosystems of other cryptocurrencies, there is a fixed reward, and the emission is not limited.
By the way, it used to be that a home computer and a powerful video card were enough for mining, but now they are being replaced by full-fledged “farms” and ASIC chips, whose main task is to calculate hash functions.
However, mining, where players-miners generate computing power and thereby maintain the operation of the network, is gradually being replaced by staking. In this case, the game is turned upside down and the blockchain is provided by the players-holders of digital coins, for which they receive a reward. This is basically the transition from the Proof-of-Work (POW) algorithm to the Proof-of-Stake (POS) algorithm. Now such cryptocurrencies as EOS, Tezos, TRON and Cosmos are already working on it, and Ethereum has also announced the transition. Stacking works more efficiently in terms of energy consumption and is generally more environmentally friendly.
Moreover, the owners of “coins” do not need to have deep technical knowledge and support the operation of an entire “farm”: the threshold for entering the process is much lower, which means that it’s easier to start making money this way.
It works just like with any other assets: you need to calculate, manage risks and conduct market research. Cryptocurrencies are no longer a closed community. This is a new normal with its own trends that influence the market. Just remember to turn on your Twitter notifications to follow the new tweets by Elon Musk :)
Since Startup.jedi is a startup media platform, let’s talk a little about cryptocurrency crowdfunding. This is basically what ICO is, named by analogy with the IPO. During the ICO, an initial placement takes place, but with tokens — the internal currency of the project — instead of shares. Later, the investors will be able to exchange purchased tokens for services or startup goods, depending on the ICO terms. In case the project goes public, investors can exchange their tokens for dividends or profit from selling them. Most often, but not always, this way of developing the project is used by startups associated with (guess what?!) blockchain.
Once you’ve earned your first “crypto coins”, then, as in any game, you start wondering what to spend them on. After all, you need them for a reason, right?
More and more companies are accepting payments in cryptocurrencies every year. However, each country has its own difficulties associated with local legislation, which still has not come to a consensus on how to evaluate a cryptocurrency asset. We suggest that you check out the map with the organizations that work with certain cryptocurrencies.
Also, digital currency is often used in charity, where, thanks to its transparency, it allows you to track transactions from the moment of receiving a donation to spending it.
But the main way to spend crypto, which is also a traditional way of earning money, is of course exchanging them for conventional currencies, electronic money and other cryptocurrencies. This happens with the help of cryptocurrency exchanges or specialized exchanges. The crypto does not have a fixed rate when converting to “traditional” currencies, and the cost will depend on the chosen platform, but each of them will charge its own fee for the transaction.
The difficulty in predicting the future of cryptocurrency lies in the fact that all the currencies that we have encountered before have been backed by something in the physical world. That is, by the equivalent of things that could be touched and used.
This is not the case with cryptocurrencies that are speculative. Not all countries accept them for payments, nowhere is there even an approximate similarity in the regulation of this market, but there is a daily risk of legislative prohibition due to the basic anonymity of the participants in transactions, which does not always play on the good side.
But people keep playing this game regardless of strong exchange rate volatility, low transaction speed compared to traditional payment systems and lack of intrinsic value. Cryptocurrency is mined, funds are withdrawn, investors and traders invest their money and time.
Will the cryptocurrency crash, or has the joke gone too far? Will traditional finance learn something from the new player or will a hybrid currency appear over time? There’s clearly more than one round on this playing field, and the ending is unpredictable.