Introduction to crypto currencies
What is a ‘Cryptocurrency’?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Breaking down ‘Cryptocurrency’
The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.
What is Blockchain Technology?
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tapscott, authors Blockchain Revolution (2016).
The idea of decentralization
By design, the blockchain is a decentralized technology.
Anything that happens on it is a function of the network as a whole. Some important implications stem from this. By creating a new way to verify transactions aspects of traditional commerce could become unnecessary. Stock market trades become almost simultaneous on the blockchain, for instance — or it could make types of record keeping, like a land registry, fully public. And decentralization is already a reality.
A global network of computers uses blockchain technology to jointly manage the database that records Bitcoin transactions. That is, Bitcoin is managed by its network, and not any one central authority. Decentralization means the network operates on a user-to-user (or peer-to-peer) basis. The forms of mass collaboration this makes possible are just beginning to be investigated.
The Blockchain a New Web 3.0?
The blockchain gives internet users the ability to create value and authenticates digital information. What will new business applications result?
- Smart contracts
Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met.
- The sharing economy
By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties – a truly decentralized sharing economy results.
- Crowd funding
Blockchains take this interest to the next level, potentially creating crowd-sourced venture capital funds.
By making the results fully transparent and publically accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking.
- Supply chain auditing
Distributed ledgers provide an easy way to certify that the backstories of the things we buy are genuine. Transparency comes with blockchain-based timestamping of a date and location – on ethical diamonds, for instance – that corresponds to a product number.
- File storage
Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost.
- Prediction markets
Prediction markets that pay out according to event outcomes are already active. Blockchains are a “wisdom of the crowd” technology that will no doubt find other applications in the years to come.
- Protection of intellectual property
Smart contracts can protect copyright and automate the sale of creative works online, eliminating the risk of files copying and redistribution.
- Internet of Things
Smart contracts make the automation of remote systems management possible. A combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms.
Blockchain technology enables the buying and selling of the renewable energy generated by neighbourhoodmicrogrids.
- Identity management
Distributed ledgers offer enhanced methods for providing who you are, along with the possibility to digitize personal documents. Having a secure identify will also be important for online interactions – for instance, in the sharing economy.
- AML and KYC
Anti-money laundering (AML) and know your customers (KYC) practices have a strong potential for being adapted to the blockchain. Currently, financial institutions must perform a labour intensive multi-step process for each new customer. KYC costs could be reduced through cross-institution client verification, and at the same time increase monitoring and analysis effectiveness.
- Data management
In the future, users will have the ability to manage and sell the data their online activity generates. Because it can be easily distributed in small fractional amounts, Bitcoin – or something like it.
- Land title registration
As publicly-accessible ledgers, blockchains can make all kinds of records-keeping more efficient. Property titles are a case in point. They tend to be susceptible to fraud, as well as costly and labour intensive to administer.
- Stock trading
When executed peer-to-peer, trade confirmations become almost instantaneous. This means intermediaries – such as the clearing house, auditors and custodians – get removed from the process.
Definition of ‘Initial Coin Offering (ICO)’
An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.