What are Altcoins?
Altcoins are the alternative cryptocurrencies launched after the success of Bitcoin. Generally, they project themselves as better substitutes to Bitcoin. The success of Bitcoin as the first peer-to-peer digital currency paved the way for many to follow. Many altcoins are trying to target any perceived limitations that Bitcoin has and come up with newer versions with competitive advantages. There is a great variety of altcoins.
“Altcoin” is a combination of two words: “alt” and “coin”; alt is short for alternative and coin signifies currency. Thus together they imply a category of cryptocurrency that is alternative to the digital currency Bitcoin. After the success story of Bitcoin, many other peer-to-peer digital currencies have emerged in an attempt to imitate that success. Many of the altcoins are built up on the basic framework provided by Bitcoins.
Thus most altcoins are peer-to-peer, involve a mining process and offer efficient and cheap ways to carry out transactions on the web. But even with many overlapping features, altcoins vary widely from each other. Even with many close competitors, Bitcoin is still leading the virtual currency pack. Newer and more innovative versions are getting launched that offer modifications in areas like transaction speed, privacy, proof-of-stake, DNS resolution and more. A few of them have gained popularity; the rest are lesser-known. Examples of altcoin include Litecoin, Dogecoin, Peercoin, Feathercoin, Zetacoin, Novacoin, etc. Litecoin is seen as the closest competitor to Bitcoin.
What is Bitcoin?
Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Today’s market cap for all bitcoin (abbreviated BTC or, less frequently, XBT) in circulation exceeds $7 billion. There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins. Bitcoin is a type of cryptocurrency: Balances are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize Bitcoin transmissions. Style notes: According to the official Bitcoin Foundation, the word “Bitcoin” is capitalized in the context of referring to the entity or concept, whereas “bitcoin” is written in the lower case when referring to a quantity of the currency (e.g. “I traded 20 bitcoin”) or the units themselves. The plural form can be either “bitcoin” or “bitcoins.”
How Bitcoin Works
Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as “miners,” are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places. Bitcoin mining is the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins. The block reward was 50 new bitcoins in 2009; it decreases every four years. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases. The mining difficulty began at 1.0 with Bitcoin’s debut back in 2009; at the end of the year, it was only 1.18. As of April 2017, the mining difficulty is over 4.24 billion. Once, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use faster hardware like Application-Specific Integrated Circuits (ASIC), more advanced processing units like Graphic Processing Units (GPUs), etc.
What is the Blockchain?
Blockchain is a technology that allows for fast, secure and transparent peer-to-peer transfer of digital goods including money and intellectual property. So what, exactly, is blockchain?
Blockchain: A Brief Primer
One of the most talked about yet misunderstood topics in recent times, blockchain is completely overhauling the way digital transactions are conducted and could eventually change the way several industries conduct their daily business. Two words that have rapidly become part of the mainstream vernacular are bitcoin and blockchain, which are often used interchangeably even though they shouldn’t be. While they are related in a sense, these terms refer to two very different things. Bitcoin is a form of virtual currency, more commonly known as cryptocurrency, which is decentralized and allows users to exchange money without the need for a third-party. All bitcoin transactions are logged and made available in a public ledger, helping ensure their authenticity and preventing fraud. The underlying technology that facilitates these transactions and eliminates the need for an intermediary is the blockchain. One of blockchain’s main benefits lies in its transparency, as the aforementioned ledger functions as a living, breathing chronicle of all peer-to-peer transactions that occur.
Each time a transaction takes place, such as one party sending bitcoin directly to another, the details of that deal – including its source, destination and date/timestamp – are added to what is referred to as a block. This block contains the transaction in this example along with other similar types of transactions that have been recently submitted, usually within the past ten minutes or so when you’re dealing with bitcoin in particular. Intervals may vary depending on the specific blockchain and its configuration. The validity of the transactions within the cryptographically-protected block is then checked and confirmed by the collective computing power of miners within the network in question.
On an individual basis, these miners are computers which are configured to utilize their GPU and/or CPU cycles to solve complex mathematical problems, passing the block’s data through a hashing algorithm until a solution is found. Once solved, the block and all of its respective transactions have been verified as legitimate. Rewards (bitcoin, in this example) are then divvied up among the computer or computers that contributed to the successful hash. Now that the transactions within a block are deemed valid it is attached to the most recently verified block in the chain, creating a sequential ledger which is viewable by all who desire.
This process continues in perpetuity, expanding upon the blockchain’s contents and providing a public record that can be trusted.In addition to being constantly updated, the chain and all of its blocks are distributed across the network to a large number of machines. This ensures that the latest version of this decentralized ledger exists virtually everywhere, making it almost impossible to forge
Why Blockchain is Needed
Peer-to-peer connectivity over the internet has existed for quite some time in a number of different formats, allowing for the distribution of digital assets directly from one person or business to another. Since we can already send these bits and bytes to each other, what’s the point of using a blockchain?
The behavior of the Bitcoin blockchain is the perfect example to answer this question. Pretend for a moment that there was no blockchain in place, and that you had one bitcoin token in your possession with its own unique identifier assigned to it. Now say you wanted to buy a new television from a business that accepts cryptocurrency, and that shiny new TV happens to cost one bitcoin.
Unfortunately, you also need to pay back your friend for the bitcoin which you borrowed from him last month. In theory, without the blockchain in place, what’s to stop you from transferring that same digital token to both your buddy and to the electronics store?
This dishonest practice is called double-spending, and it’s one of the main reasons why peer-to-peer digital transactions have never really caught on until now. With blockchain, which not only distributes a public record of all transactions but confirms a block before each of its individual transactions can be finalized, the possibility of this fraudulent activity is essentially wiped out. While in the past we had no choice but to rely on intermediaries such as banks and payment processors to validate these transactions and make sure that everything was on the up and up, for a nominal fee of course, blockchain technology lets us truly transfer our digital assets from point A to point B taking comfort in the fact that there are reliable checks and balances in place.
Exploring the Blockchain
As we’ve already discussed, the ability for anyone to view a public blockchain such as the one associated with virtual currencies like Bitcoin is a key factor in why it works as well as it does. The easiest way to peruse this distributed database is through a block explorer, typically hosted on a free-to-use website such as Blockchain.info. Most blockchain explorers are heavily indexed and easily searchable, allowing you to locate transactions in a number of different ways including by IP address, block hash or other relevant data points.
Other Uses for Blockchain
Blockchain has come to the forefront of many discussions because of its role in the distribution of cryptocurrencies like Bitcoin. In the long run, however, these digital cash transactions may end up being a very small part of blockchain technology’s overall footprint on the world as a whole and the way we transfer assets online. The possibilities for blockchain implementation seem endless, as its underlying technology can be leveraged in virtually any field to perform a number of important tasks such as the following.
- Executing contracts
- Safely buying and selling intellectual property
- Distributing important medical information
- Ensuring that voting in elections is incorruptible
We as a people have just begun to scratch the surface here, as new potential uses for blockchain are being discovered on a regular basis. Private blockchains will allow companies to revolutionize their own internal processes while public, open-source variations will continue to change the way we handle business in our daily lives.
What is Ethereum?
Ethereum is a platform for creation of decentralized applications running on blockchain, through the use of smart contracts.
Since its launch on June 30, 2015, it has been steadily gaining popularity. Starting from late January 2016, it has experienced a surge. In March 2016, within less than a year of its existence, that growth culminated in Ethereum achieving a record-breaking market capitalization of over $1B. Since then, the passions have subsided and Ethereum has declined a bit. However, the coin is now second only to Bitcoin on the cryptocurrency market capitalization list.
Bitcoin has undergone a similar explosion of growth in the late 2013 – early 2014, when its price has reached its all-time high. Launches of several hundreds, if not thousands of different kinds of alternative cryptocurrencies followed. Some of those altcoins have managed to reach a certain degree of success, but none of them have achieved the heights of Ethereal. The platform has even enjoyed Microsoft’s attention, when it announced the launch of Ethereum Blockchain as a Service (EBaaS) based on the Microsoft Azure platform back in November 2015.
Why is Ethereum so hot?
Well here’s the short version: Ethereum is decentralized, like Bitcoin, but is capable of much, much more.
The way Bitcoin’s peer-to-peer network is decentralized and distributed, where every participant is a client and a server at the same time, allows for unprecedented increase in that network’s security and resilience. In legacy systems, where the entire network is handled by a single server entity, it becomes a weak point, which may be exploited by potential attackers.
On the other hand, decentralized networks are:
- Very resistant towards hacker attacks;
- Have zero downtime, even if some of their parts go down;
- Are not run by specific, limited number of people (having people in charge can cause additional problems, both intentionally and unintentionally, due to the notorious human factor).
In addition to all those characteristics, one of the most important features of blockchain and, by extension, Bitcoin is the integrity of data. Records of every transaction ever made in the Bitcoin network can be accessed by anyone, are easily traceable to the pseudonyms of the sender and receiver (but not to their real-life identities), and are virtually unalterable. Thus, nobody can trick each other, by, for example, spending the coins which they don’t actually have.
These advantages are very important for a payment protocol, but some developers have quickly realized that that utility doesn’t end with one simple use case.
Basically, any area, where you need to keep a registry of some data, can be made more secure and efficient with the blockchain:
- Domain names;
- Ownership records;
- Business contracts, etc.
So far, the developers tried to produce new apps based on the blockchain in two distinct ways, both of which have been ultimately ineffective. The first option was to build an app on top of Bitcoin. However, Bitcoin’s script is not Turing complete, i.e. it cannot solve the problems that are easily solvable by some known programming languages, such as C++, for example. That is associated with technical complications and requires a developer to introduce all kinds of “crutches” to make it work. Other option was to develop, launch and promote you own alternative blockchain, thus depriving yourself of the opportunity to use the immense power of the whole Bitcoin’s network. Instead, you will have to run your own blockchain, which is associated with high costs, that can not be justified for every app.
Ethereum has solved this discrepancy for the first time ever, by integrating a proper, all-purpose programming language with its own blockchain. With it, anybody can think of any possible application, easily code it and offer the ETH network to execute it. Quite simply put, Ethereum is a worldwide distributed decentralized computer with a theoretically unlimited power. A developer codes a solution and deploys it in the network. Then the network executes it by itself, verifies the outputs by itself and distributes value between the participants by itself. The applications run in an absolutely transparent manner, without any input from central authorities, achieved with the help of smart contracts. The cherry on the cake is that the network’s power is only limited by the number and power of the computers, which are connected to it, i.e. it isn’t: keep in mind, that there are no barriers to entry.
The World Computer
The potential uses of such a system are truly unlimited.
One of the more obvious options is creating a new cryptocurrency in just a couple dozen lines of code, and immediately launching it on Ethereum’s blockchain; For that matter, any possible asset, such as a car, or a house, can be represented, and consequently traded on a blockchain in the form of a token. More complex solutions include disintermediating (and eliminating the middleman fees in the process) some of the existing marketplaces, such as Facebook Advertising and Google AdWords. That could be achieved by creating the smart contract counterparts of all the business processes which comprise those companies, and – you guessed it – running them on the blockchain.
Another potential use for Ethereum is coding solutions for complex scientific tasks, such as distributed astrophysical computations or protein folding for pharmaceutical companies. Such applications would enjoy the theoretically unlimited computational power of the network, unattainable by even the most advanced supercomputers.
Even completely revolutionary, never before thought about projects, are made possible, one such example being Augur.
It is a “Decentralized Prediction Market”, theoretically capable of delivering predictions with a higher degree of accuracy, than that of the best experts in any particular field (achieved through the use of the “wisdom of the crowd” principle).
The future of Ethereum
Considering everything that was mentioned so far, the reasons for Ethereum to be in the spotlight right now should be quite obvious. And although at this point it’s highly unlikely for the coin to ever fade into obscurity, the speed and scope of its future growth will depend on many factors.
Yes, Ethereum gives the promise of unlimited opportunities. But whether that promise is going to be fulfilled, and to what extent, depends on how powerful the network will become, and how talented and creative will the developers of particular solutions be.
What is Ether?
Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources). https://youtu.be/eutvZ_e2lS0
How ethers are created
The total supply of ether and its rate of issuance was decided by the donations gathered on the 2014 presale. The results were roughly:
- 60 million ether created to contributors of the presale
- 12 Million (20% of the above) were created to the development fund, most of it going to early contributors and developers and the remaining to the Ethereum Foundation
- 5 ethers are created every block (roughly 15 seconds) to the miner of the block
- 2-3 ethers are sometimes sent to another miner if they were also able to find a solution but his block wasn’t included (called uncle/aunt reward)
Note that after the Byzantium update is implemented, the mining and uncle reward is reduced to 3 ethers and 0.625-2.625 ethers, respectively. According to the terms agreed by all parties on the 2014 presale, issuance of ether is capped at 18 million ether per year (this number equals 25% of the initial supply). This means that while the absolute issuance is fixed, the relative inflation is decreased every year. In theory if this issuance was kept indefinitely then at some point the rate of new tokens created every year would reach the average amount lost yearly (by misuse, accidental key lost, death of holders etc) and there would reach an equilibrium. But the rate is not expected to be kept: sometime in 2017 Ethereum will be switched from Proof of Work to a new consensus algorithm under development, called Casper that is expected to be more efficient and require less mining subsidy. The exact method of issuance and which function it will serve is an area of active research, but what can be guaranteed now is that (1) the current maximum is considered a ceiling and the new issuance under casper will not exceed it (and is expected to be much less) and (2) whatever method is ultimately picked to issue, it will be a decentralized smart contract that will not give preferential treatment to any particular group of people and whose purpose is to benefit the overall health and security of the network.
Who needs Ether?
Developers who intend to build apps that will use the ethereum blockchain. Users who want to access and interact with smart contracts on the ethereum blockchain.
What’s the relationship between bitcoin and ether?
Ethereum would never be possible without bitcoin—both the technology and the currency—and we see ourselves not as a competing currency but as complementary within the digital ecosystem. Ether is to be treated as “crypto-fuel”, a token whose purpose is to pay for computation, and is not intended to be used as or considered a currency, asset, share or anything else. There are many ways in which you can use Bitcoins within the Ethereum ecosystem:
- Trade BTC for ETH: multiple third party companies are working to make the exchanging of ether and bitcoins as easy and seamless as possible. If so desired one could trade bitcoins for ether with the purpose of executing contracts and trade it back immediately in order to keep their value pegged and secured by the bitcoin network. The latest version of the wallet includes an automatic conversion between ether and bitcoin.
- Use a pegged derivative: Ethereum is a great tool for creating complex trading between multiple parties. If you have a source for the price of Bitcoin that all parties trust, then it’s possible to create an ethereum based currency whose value is pegged to the market value of Bitcoin. This means that you could trade bitcoins to a token that is guaranteed to always trade back to the same amount of bitcoins while still being fully compatible with other ethereum contracts.
- Use a Bitcoin relay to convert a 2 way peg: the bitcoin relay is a piece of code that allows you to sidechain a bitcoin into ethereum. This means that you can use Bitcoin’s native limited scripting capability to lock a bitcoin into a contract that is directly connected to an ethereum contract, which can then issue an ethereum based token that is guaranteed to be backed by bitcoin. The relay is under development and as implementations are tested and proved to be secure, we will list them here.
What are Smart Contracts?
In the context of blockchains and cryptocurrencies, smart contracts are:
– pre-written logic (computer code),
– stored and replicated on a distributed storage platform (eg a blockchain),
– executed/run by a network of computers (usually the same ones running the blockchain),
– and can result in ledger updates (cryptocurrency payments, etc).
… In other words, they are little programs that execute “if this happens then do that”, run and verified by many computers to ensure trustworthiness.
If blockchains give us distributed trustworthy storage, then smart contracts give us distributed trustworthy calculations.
Smart contracts are one of the functionalities that sets Ethereum apart from other blockchains.
What Makes Smart Contracts “Smart”?
Blockchain is an intricate concept that often gets bogged down in technological complexity. During the main “Platforms, Applications and Innovation” panel of the symposium, moderator Eric Piscini, Global FSI Blockchain Leader at Deloitte, asked the panelists to describe smart contracts as if they were explaining them to a teenager.
“Think about getting carded at a bar,” said Jerry Cuomo, Vice President of Blockchain Technologies at IBM. “From an identity perspective, I can imagine a blockchain managing verification of a citizen’s identity. A smart contract could ensure something like my daughter going out for her 21st birthday and the bouncer only being able to see her age, not her address. Blockchain could set up a centralized identity verification system that could make the world safer for dads like myself.”
Cuomo said there’s an opportunity for smart contracts to really re-imagine business processes. IBM and Microsoft are two of the major tech players in the so-called Blockchain-as-a-Service (BaaS) space, using their public cloud platforms and developer tools to help enterprise organizations build out blockchain infrastructure. Marley Gray, Director of Business Development, Blockchain at Microsoft, described smart contracts as a mechanism for creating a more collaborative economy. Smart contracts can execute complicated multi-party agreements beyond the capability of any singular organization.
“Take it back to basics,” said Gray. “What does exchanging value mean? Go back to simple bartering: I’ll give you that chicken for this piece of wood. Blockchain and smart contracts can facilitate that exchange of value across organizational boundaries with a lot of moving parts. You have to rethink your individual business-to-business [B2B] relationships, business-to-customer [B2C]—fundamentals way above the technology of how we interact on a day-to-day basis.”
Smart Contracts: 12 Game-Changing Uses
1. Digital Identity
On an individual level, smart contracts can let users own and control their own digital identity across factors such as reputation, data, and the digital assets associated with them. Smart contracts can also play a role in designating what personal data is and isn’t shared with businesses. It’s what the report calls a “user-centered internet for individuals.”
Benefits: Personal data control; companies don’t need to hold data.
Automating compliance around rules such as “required destruction of records by a certain date” is a no-brainer use case for smart contracts. According to the white paper, smart contracts can digitize Uniform Commercial Code(UCC) filing and automate record renewal and release, while “atomically perfecting a lender’s security interest at the moment of a loan creation” for factors such as collateral. The smart contract needs to be capable of storing data on a distributed ledger without slowing performance or compromising data privacy.
Benefits: Reduced legal bills; automated loan tracking; automatic record disposal.
Getting deeper into fintech, smart contracts for capitalization “cap table” management can simplify things such as automatic dividend payments, stock splits, and liability management for private companies. The white paper projects we’ll see this in private securities markets faster than in public ones. Though in the state of Delaware, smart securities company Symbiont is already facilitating a shift to cryptographic blockchain signatures on stock certificates as part of the Delaware Blockchain Initiative.
Benefits: Manual, paper-based process to replace; intermediaries increase cost and risk.
4. Trade Finance
On a global scale, the white paper states that smart contracts can facilitate streamlined international goods transfers with higher asset liquidity. Automation around Letter of Credit and trade payment initiation can create a more efficient, less risky process between buyers, suppliers, and financial institutions.
Benefits: Faster payment approval; more efficient trade, transport, and contract agreements.
There’s a reason the fintech industry is arguably the biggest driver of blockchain innovation. Smart contracts can enforce a standard transactional rule set for derivatives (a security with an asset-dependent price) to streamline Over-The-Counter (OTC) financial agreements. Symbiont CEO and Smart Contracts Alliance co-chair Mark Smith called OTC financial agreements out as one of the most immediate smart contract use cases.
Benefits: Automated settlement and external trade event processing; real-time position valuation.
6. Financial Data Recording
Smart contracts can serve as an enterprise-grade accounting ledger to accurately and transparently record financial data. Once blockchain-based standards, interoperability with legacy systems, and a streamlined transaction portal and marketplace develop, the use case could improve everything from financial reporting to auditing.
Benefits: Transactional data integrity and transparency; reduces accounting data management costs.
Getting a mortgage is often a manual and confusing process. Smart contracts can automate every aspect of the transaction, including payment processing and property liens to make closing on a property and signing a mortgage agreement a faster and more efficient process. It doesn’t work without blockchain-based digital identity, though.
Benefits: Automated lien release; reduced errors and cost; increased property data visibility; verification.
8. Land Title Recording
Property transfers and land title ownership can be rife with fraud and disputes. Smart contracts can facilitate property transfers to improve transaction integrity, efficiency, and transparency. Countries around the world, including Georgia, Ghana, and Honduras, are already implementing blockchain for land title recording.
Benefits: Eliminates shotgun mortgage fraud.
9. Supply Chain
Smart contracts can provide greater visibility at every step of a supply chain, coordinated with Internet of Things (IoT) devices tracking managed assetsand products from factories to the point-of-sale (POS). Companies such as Everledger and IBM are already using the blockchain for supply chain visibility to track everything from diamonds to Chinese pork.
Benefits: Simplifies complex multi-party systems; granular inventory tracking; reduced risk of fraud and theft.
10. Auto Insurance
In the auto industry, smart contracts can automate insurance claims to provide near-instantaneous processing, verification, and payment. In a nutshell: if two parties get into an accident, then they can resolve the claim through insurance in hours or days rather than in weeks or months. The car insurance claim process is frustratingly disjointed and smart contracts can clean it up.
Benefits: Vehicle “self-awareness” and damage assessment using sensors; policyholder data repositories.
11. Clinical Trials
Clinical trials, or medical research studies involving people, are always sensitive agreements when it comes to participants’ data privacy and monitoring the experiments involved. Smart contracts can be a mechanism for cross-institutional visibility and build in privacy-focused rules that improve data sharing between institutions, while automating and tracking patient consent. The white paper calls it a potential force for “positive disruption” in the clinical trials community.
Benefits: Increased trial visibility; data sharing; automated patient consent; patient privacy.
12. Cancer Research
Finally, the white paper states that smart contracts can “unleash the power of data” to facilitate the sharing of cancer research. Similar to clinical trials, smart contracts can automate patient data consent management and incentivize data sharing while maintaining patient privacy.
Benefits: Data sharing; patient privacy.
Distributed Ledger Technology (DLT)
What is a Distributed Ledger?
Ledgers, the foundation of accounting, are as ancient as writing and money.
Their medium has been clay, wooden tally sticks (that were a fire hazard), stone, papyrus and paper. Once computers became normalized in the 1980s and ’90s, paper records were digitized, often by manual data entry.
These early digital ledgers mimicked the cataloguing and accounting of the paper-based world, and it could be said that digitization has been applied more to the logistics of paper documents rather than their creation. Paper-based institutions remain the backbone of our society: money, seals, written signatures, bills, certificates and the use of double-entry bookkeeping.
Computing power and breakthroughs in cryptography, along with the discovery and use of some new and interesting algorithms, have allowed the creation of distributed ledgers.
In its simplest form, a distributed ledger is a database held and updated independently by each participant (or node) in a large network. The distribution is unique: records are not communicated to various nodes by a central authority, but are instead independently constructed and held by every node. That is, every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to make certain the majority agree with the conclusions.
Once there is this consensus, the distributed ledger has been updated, and all nodes maintain their own identical copy of the ledger. This architecture allows for a new dexterity as a system of record that goes beyond being a simple database.
Distributed Ledgers are a dynamic form of media and have properties and capabilities that go far beyond static paper-based ledgers. For more on this, please read our guide “What Can a Blockchain Do?” For now, the short version is they enable us to formalize and secure new kinds of relationships in the digital world.
The gist of these new kinds of relationships is that the cost of trust (heretofore provided by notaries, lawyers, banks, regulatory compliance officers, governments, etc…) is avoided by the architecture and qualities of distributed ledgers.
Our Wikipedia analogy in our guide “What is Blockchain Technology?” hints at the power of these new kinds of relationships.
The invention of distributed ledgers represents a revolution in how information is gathered and communicated. It applies to both static data (a registry), and dynamic data (transactions). Distributed ledgers allow users to move beyond the simple custodianship of a database and divert energy to how we use, manipulate and extract value from databases — less about maintaining a database, more about managing a system of record.
Authored by Nolan Bauerle; images by Maria Kuznetsov
What is the “Gas” in Ethereum?
Gas is the internal pricing for running a transaction or contract in Ethereum. At the time of writing before the launch of Frontier it is fixed to 10 Szabo, which is about 1/100,000 of an Ether. It’s to decouple the unit of Ether (ETH) and its market value from the unit to measure computational use (gas). Thus, a miner can decide to increase or decrease the use of gas according to its needs, while if need be, the price of gas can be increased or decreased accordingly, avoiding a situation in which an increase in the price of ETH would cause the need to change all gas prices. This is also a response to the discussion in bitcoin about fees structure.
The gas system is not very different from the use of Kw for measuring electricity home use. One difference from actual energy market is that the originator of the transaction sets the price of gas, to which the miner can or not accept, this causes an emergence of a market around gas. You can see the evolution of the price of gas here: https://etherscan.io/charts/gasprice
With Bitcoin miners prioritise transaction with the highest mining fees. The same is true of Ethereum where miners are free to ignore transactions whose gas price limit is too low.
The gas price per transaction or contract is set up to deal with the Turing Complete nature of Ethereum and its EVM (Ethereum Virtual Machine Code) – the idea being to limit infinite loops. So for example 10 Szabo, or 0.00001 Ether or 1 Gas can execute a line of code or some command. If there is not enough Ether in the account to perform the transaction or message then it is considered invalid. The idea is to stop denial of service attacks from infinite loops, encourage efficiency in the code – and to make an attacker pay for the resources they use, from bandwidth through to CPU calculations through to storage.
The more complex the commands you wish to execute, the more gas (and Ether) you have to pay. For example if A wants to send B 1 Ether unit – there would be a total cost of 1.00001 Ether to be paid by A. However if A wanted to form a contract with B depending on the future price of Ether, there would be more lines of code executable and more of an onus or energy consumption placed on the distributed Ether network – and therefore A would have to pay more than the 1 Gas done in the transaction.
Some computational steps cost more than others as well either because they are computationally expensive or because they increase the amount of data that has to be stored in the state. Here are a list of operations in the Ethereum Virtual Code and their costs in gas (which is Ethers!).
Operation name Gas Cost Function
|step||1||Default amount of gas to pay for an execution cycle.|
|stop||0||Nothing paid for the SUICIDE operation.|
|sha3||20||Paid for a SHA3 operation.|
|sload||20||Paid for a SLOAD operation.|
|sstore||100||Paid for a normal SSTORE operation (doubled or waived sometimes).|
|balance||20||Paid for a BALANCE operation|
|create||100||Paid for a CREATE operation|
|call||20||Paid for a CALL operation.|
|memory||1||Paid for every additional word when expanding memory|
|txdata||5||Paid for every byte of data or code for a transaction|
|transaction||500||Paid for every transaction|
The gas price limit is fixed at present to provide for a stable launch of Ethereum but will be allowed to free float according to the demand and the amount of total gas per block will be increased gradually to encourage the stability of the Ethereum network.
What is a token and what is it for?
After bitcoin and blockchain, it is now time to get acquainted with another novel concept brought about by the digital economy: The ‘token’. What is this concept that is leading some people to speak about new discipline, ‘tokenomics’?
In the digital world, minting currencies is an activity that doesn’t seem to be restricted to central banks anymore. Bitcoin is the best example of how, from a private environment, a blockchain-based virtual currency can be rolled out in the market, albeit subject to many limitations due to the lack of a legal framework to regulate it. But bitcoin was just the beginning of a fully-fledged revolution, the second step of which might very well be the tokens.
A token is actually nothing more than a new term to make reference to a unit of value issued by a private entity. Although tokens bear many similarities with bitcoins (they have a value attached to them which is accepted by a community and are blockchain-based), they serve a much broader purpose. Tokens are more than a currency because they can be used in a broader range of applications. Also, virtually all tokens rely on Ethereum’s blockchain protocol, which, according to experts, is more complete than bitcoin’s blockchain.
According to William Mougayar, author of ‘The business blockchain’, a token is “a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.”
This is indeed a revolutionary concept. But, what are tokens good for?
Within a private network, a token can be used to grant a right, to pay for a job or to transfer data, as an incentive, as a gateway to extra services or a better user experience … In the words of Cristina Carrascosa, a lawyer specializing in blockchain, “a token can be used in whichever way the person or organization designing and developing it decides. Tokens admit several layers of value inside it, so it is the token’s designer who decides what a specific token has inside.”
Carrascosa notes that tokenization is still at an early stage. And this is not exclusively due to the lack of international regulations. Moreover, “converting rights into purely digital assets implies a higher level of complexity for non-technological users.” But these are downsides that can be overcome over time. That is why, according to Carrascosa, “those service provisions based on intermediation will need to provide an added value to compete with this technology.” If they fail to do so, they will be left behind in the digital economy.
An example of this potential ‘replacement effect’ are the so-called ICOs, or Initial Coin Offerings. ICOs are a new business fund-raising alternative: Instead of a traditional fund-raising round, or even an IPO, companies offer tokens – not shares – to the market, and investors use digital currencies like bitcoin to pay for these tokens. Everything through blockchain. As a financing tool, ICOs are already accounting for some remarkable figures: Between March 2016 and March 2017 a number of startups raised over $300 million in combined funding through ICOs.
The risks of investing on these ICOs are obvious. In an article, William Mougayar insists on the lack of transparency: The ICOs that companies are currently pursuing (which are now are eagerly awaited by the market) are not being valued based on traditional financial metrics (PER, ebitda, net income. ..), but on a future promise: “Although all projects have visions of being the next Bitcoin or Ethereum (just as regular startups dream of being the next Google or Facebook), we are seeing many ICOs looking just like applications, marketplace products, or technology solutions. Eventually, they will need to show real revenues or viable business models in order to strengthen and support the public valuations they will be receiving,” says Mougayar.
Tokens are a new blockchain-based investment tool, and are as risk-laden as they are alluring. It is the market that has to learn how to use it wisely.
Initial Coin Offering (ICO)
What is a Initial Coin Offerinf (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.
Also called an Initial Public Coin Offering (IPCO).
BREAKING DOWN ‘Initial Coin Offering (ICO)’
When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
Early investors in the operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches which could translate to a higher cryptocoin value than what they purchased it for before the project was initiated. An example of a successful ICO project that was profitable to early investors is the smart contracts platform called Ethereum which has Ethers as its coin tokens. In 2014, the Ethereum project was announced and its ICO raised $18 million in Bitcoins or $0.40 per Ether. The project went live in 2015 and in 2016 had an ether value that went up as high as $14 with a market capitalization of over $1 billion.
ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return in their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowdsales.
Although there are successful ICO transactions on record and ICOs are poised to be disruptive innovative tools in the digital era, investors are cautioned to be wary as some ICO or crowdsale campaigns are actually fraudulent. Because these fund-raising operatives are not regulated by financial authorities such as the Securities Exchange Commission (SEC), funds that are lost due to fraudulent initiatives may never be recovered.
In early September, 2017, the People’s Bank of China officially banned ICOs, citing it as disruptive to economic and financial stability. The central bank said tokens cannot be used as currency on the market and banks cannot offer services relating to ICOs. As a result, both bitcoin and ethereum tumbled, and it was viewed as a sign that regulations of cryptocurrencies are coming. The ban also penalizes offerings already completed.
Token Generation Event (TGE)
What is a Token Generating Event, Token Sales or Token Launch?
In this process you are selling cryptographically generated tokens. These are digital objects that represent something in your business. You can use tokens to represent almost anything — free shirts on a t-shirt site or beers from a brewery. But what you can’t do without a great deal of legal cover — at least in the United States — is use tokens to sell equity. And that is where most token sales efforts stop: the SEC doesn’t want you horning in on its territory. Outside of that, for the most part, everything else is fair game.
We’re going to go into this piece with a few basic truths for Americans. These are not always applicable outside of the U.S., and many founders simply run their sales outside of the country to avoid dealing with the SEC and other parties. I’m not going to discourage or encourage this. It’s your call. The legality of these sales around the world is still up in the air, and there is a fine line between tokens and penny stocks, a fact few want to admit.
Further, token sales are not a funding vehicle. While many companies treat them as such — and crow over multi-million-dollar raises that explode in minutes — what they are really doing is floating a cryptocurrency on the open market. With a lot of planning and a lot of luck, these cryptocurrencies can rise in value and, if the token sale is structured correctly, this gives companies a little bit more funding than they had before they started. Without planning, you get a mess.
Tokens are supposed to be part of the life-blood of your company. Just as Disney Dollars once gave you access to Disney merchandise, Uber Bux should in some way give you access to some software made by Uber and Krablr Koins should give you access to an aspect of your new crab-fishing system. Companies have gone through all sorts of acrobatics to get their coins to work for their business, including pegging a token to a gram of synthetic rhino horn. Again, no judgement. This is a safe space. If you want to sell a massage token or popcorn token or a token associated with robotic speech generation, nobody can stop you. Once your Krablr Koin is minted, the little crab-dedicated economy you’ve built should be self-sustaining. That’s where you “make” your money — on speculation on your own success.
Token sales are set to replace traditional angel and seed rounds, this is clear, and can even completely disrupt VC. But how — and when — they do this is also unclear. So, ultimately, should you do a token sale?
Inside a token sale
Eyal Hertzog is the co-founder of Bancor, a fintech company that had the recent — some would say dubious — honor of “raising” $153 million in three hours to create a product that will render cryptocurrency exchanges obsolete.
First, a bit of explanation. What Bancor did in this case was well over 76 million tokens. The tokens went out to early investors for a far lower than their current price $2 and rose immediately upon launch. The price has stabilized and current Bancor token owners can buy and sell these tokens as they please, thereby creating a real market for what is essentially a cryptocurrency.
Owners of the token do not own a part of Bancor but instead own a token that will be used in its product. As a notable New York Times article explained, imagine Bancor is a casino and raises cash by selling chips to early investors. Casino-goers will eventually use these chips at the gaming tables, but until that moment the chips hold a potential value based on the expected popularity of the casino. If enough people will pay $5 for a blue chip that once cost someone $1, you’re going to have a lot of happy investors. Bancor, however, did something even more interesting.
In short, this is a building block for a future product and may not even be used in the product itself.
Difference between ICO & TGE
What is the difference between and ICO and a TGE?
The cryptocurrency space had been plagued with confusion about the difference between currency and tokens. While those definitions have achieved some clarity, there is now a new debate about how to distinguish between different types tokens. Terms like “initial coin offering” (ICO) and “token generation event” (TGE) have been thrown around almost interchangeably by the media, but few people realize there is a vital and significant distinction between them. One has come under scrutiny by the SEC, and one has not. If you’re an individual token investor, or a company considering getting into the cryptocurrency space for the first time, it’s important to know the difference.
First of all, it’s helpful to understand the main difference between Bitcoin and Ethereum. While Bitcoin is mostly suited to be a digital store of value, Ethereum is more of a platform to build decentralized applications. Digital money (like Bitcoin) can be represented on the Ethereum blockchain, but that is certainly not Ethereum’s primary function.
Tokens built on the Ethereum blockchain operate best when they represent a specific utility, unlike coins that generally just represent value. SingularDTV’s CEO Zach LeBeau popularized this idea in his article “What’s the Difference Between an ‘ICO’ and a ‘Token Launch’?:”
Bitcoin produces “coins.” Ethereum generates “tokens.” A “Token Launch” is an Ethereum thing. An “ICO” is a Bitcoin/altcoin thing. Coins really only have one utility — to act as simple stores of value with limited-to-no other functionality.
Put simply, a coin does one thing, store value, while tokens can do many things. For this reason, coins have come under scrutiny by the SEC because they can easily slip into the security category, even if the issuing company never intended them to operate that way.
It is probably best if the cryptocurrency community began to phase out the term “ICO.” Our goal is not, and should not, be to issue securities like a private company going public with an IPO. Therefore, if we are moving away from calling them ICOs then, we need to have a clear definition of a Token Generation Event. What does a good TGE look like?
There are many ways to define TGE in a way that avoids security terminology, and it will look different from company to company based upon what they are trying to accomplish. However, Reuben Bramanathan, Blockchain Lawyer and Product Counsel for Coinbase sums the issue up well in his article “The perfect token sale structure:”
A properly designed token sale doesn’t promise ‘investment returns,’ ‘dividends’ or ‘profits.’ Instead, it focuses on selling a digital asset that will have a clear use case in a decentralized application, as a means of both incentivizing development and solving the chicken-and-egg problem for the network. A properly designed token actually serves a purpose: it is required in order to participate in the network, rather than just being a funding mechanism.
Ironically, the popularity of Ethereum’s early ICO definition was a significant part of the SEC’s quick intervention. Once companies realized they only had to create a nice looking website, throw together a shoddy whitepaper, issue an ERC20 token, and raise millions of dollars in mere minutes, scam ICOs abounded. And why not? Arguably, it has never been easier to raise money in all of history. It is a small wonder the SEC intervened. Abuse of the system quickly became the norm.
The innovation of cryptocurrencies may very well be the greatest of the past 200 years. I would highly encourage you to consider participating in the movement, as a company or as an individual. But before you begin, you must understand the difference between an ICO and TGE. Make sure you’re investing in utility tokens! Don’t unnecessarily create issues between you and the SEC.
Strategic Coin exists because of problems like these. We’re here to help. Terminology can be difficult, and we understand that an “initial coin offering” may not actually be a security offering but a utility token generation event. Until the cryptocurrency community comes together to clearly define what terms actually mean, we are here for your benefit and to be your guide.
Strategic Coin is committed to providing you with trustworthy information about launching and participating in the world of cryptocurrency. Whether you are a start-up or existing business that desires to enlist the help of a professional utility token Token Generation Event (TGE) advisor or a token buyer who needs help navigating the blockchain space, Strategic Coin will provide you with the resources you need to take advantage of market opportunities within the crypto marketplace.
What is a crypto-exchange or decentralized exchange?
A decentralized exchange is an exchange market that does not rely on a third party service to hold the customer’s funds. Instead, trades occur directly between users (peer to peer) through an automated process. This system can be achieved by creating proxy tokens (crypto assets that represent a certain fiat or crypto currency) or assets (that can represent shares in a company for example) or through a decentralized multi-signature escrow system, among other solutions that are currently being developed.
This system contrasts with the current centralized model in which users deposit their funds and the exchange issues an IOU that can be freely traded on the platform. When a user asks to withdraw his funds, these are converted back into the cryptocurrency they represent and sent to their owner.
The most obvious benefit to using a decentralized exchange over a centralized one is their “trustless” nature. You are not required to trust the security or honesty of the exchange since the funds are held by you in your personal wallet and not by a third party.
Another advantage to the decentralized model is the privacy it provides. Users are not required to disclose their personal details to anyone, except if the exchange method involves bank transfers, in which case your identity is revealed only to the person that is selling or buying from you.
Furthermore, the hosting of decentralized exchanges is distributed through nodes meaning that there is no risk of server downtime.
Of course, there is always a downside and this case is no exception. Centralized exchanges are extremely popular for many reasons.
Some decentralized exchanges like Bitsquare require users to be online in order for an order to be listed and for the trade to take place, requiring users to perform certain actions like signaling that a payment was received.
Trading features like margin trading, lending and stop loss are currently not available in the decentralized model as they only allow the basic exchange of currency for a predetermined value.
While there is still a long way to go in order to build fully functional and convenient decentralized exchanges, there are several projects that have brought us the basic functions and an alternative way to trade currencies while keeping our funds safe from hacks, inside thefts and faulty business models.
Bitsquare: Bitsquare is a decentralized open-source exchange that allows users to buy and sell Bitcoin for cryptocurrencies and national currencies without the need to entrust funds to third-party or middleman, meaning that the transactions occur directly between the buyer and seller. Bitsquare relies on a decentralized multi-signature escrow system to ensure that all trades are carried out honestly.
Click here to see Bitsquare reviews and features on CryptoCompare. We are also preparing a “How to use Bitsquare” guide that will be released soon!
Bitshares & Openledger: Bitshares is a crypto platform with its own native currency, Bitshares (BTS). Using the Bitshares platform, users can trade BTS, Market Pegged Assets (a crypto asset pegged to another currency or commodity that always has 100% or more of its value backed by the BitShares core currency, to which they can be converted at any time) and User Issued Assets (assets that can be issued by anyone to represent shares, commodities, currencies and so on). Openledger is the Web-based version of Bitshares, running on the same underlying blockchain.
NXT: Nxt is a crypto platform (one of the first crypto 2.0 projects) that allows users to issue and trade assets. These assets, however, can only be exchanged for the coin NXT and not for other cryptocurrencies. Asset-to-asset exchange is also not possible.
CounterParty DEX: CounterParty (XCP) is a meta-coin smart contract layer that embeds data into regular Bitcoin transactions. It allows anyone to issue assets or tokens inside of the Bitcoin blockchain. When trading assets for other assets, the Counterparty protocol acts as a decentralized escrow service that holds the funds until the orders are matched. When trading an asset for Bitcoin, the asset is held in escrow and the other user must make a manual bitcoin payment using the Counterparty wallet.
New decentralized exchanges are currently being developed to provide us with the advanced features and ease of use that we so desire. Among these are the Waves Asset Exchange, one that will allow users to trade assets (including asset-to-asset exchange), fiat tokens, and cryptocurrencies. The EasyDEX exchange will allow users to trade cryptocurrencies directly without resorting to proxy tokens, while the PAX (Pegged Asset Exchange), also being developed by the SuperNET and Komodo teams, allows users to exchange national currency assets with the privacy that zero-knowledge proofs provide.
Through the efforts made in the past and the ones being made now, we can see the overwhelming need for decentralized services that allow users to be in charge of their money.
What’s a hash function?
In the abstract, a hash function is a mathematical process that takes input data of any size, performs an operation on it, and returns output data of a fixed size.
In a more concrete example, this can be used to take a sequence of letters of any length as input – what we call a string – and return a sequence of letters of a fixed length. Whether the input string is a single letter, a word, a sentence, or an entire novel, the output – called the digest – will always be the same length.
A common use of this kind of hash function is to store passwords.
When you create a user account with any web service which requires a password, the password is run through a hash function, and the hash digest of the message is stored. When you type in your password to log in, the same hash function is run on the word you’ve entered, and the server checks whether the result matches the stored digest.
This means that if a hacker is able to access the database containing the stored hashes, they will not be able to immediately compromise all user accounts because there is no easy way to find the password which produced any given hash.
Simple hash functions in Python
You can experiment with hash values using Python, a programming language installed on Mac and Linux operating systems by default. (This tutorial will assume you’re using some version of either OS X or Linux, as using Python on Windows is more complicated.)
First, open a terminal, type
python and hit ENTER.
This will put you into the Python REPL, an environment where you can try out Python commands directly as opposed to writing a programme in a separate file.
Then, type the following, pressing ENTER after each line, and TAB where marked:
import hashlib def hash(mystring): [TAB] hash_object = hashlib.md5(mystring.encode()) [TAB] print(hash_object.hexdigest()) [ENTER]
You have now created a function,
hash(), which will calculate and print out the hash value for a given string using the MD5 hashing algorithm. To run it, put a string in between the parentheses in quotation marks, eg:
And press ENTER to see the hash digest of that string.
You will see that calling the hash function on the same string will always generate the same hash, but adding or changing one character will generate a completely different hash value:
hash("CoinDesk rocks") => 7ae26e64679abd1e66cfe1e9b93a9e85 hash("CoinDesk rocks!") => 6b1f6fde5ae60b2fe1bfe50677434c88
Hash functions in bitcoin
In the bitcoin protocol, hash functions are part of the block hashing algorithm which is used to write new transactions into the blockchain through the mining process.
In bitcoin mining, the inputs for the function are all of the most recent, not-yet-confirmed transactions (along with some additional inputs relating to the timestamp and a reference to the previous block).
In the code example above, we’ve already seen that changing a small part of the input for a hash function results in a completely different output. This property is crucial to the ‘proof of work’ algorithm involved in mining: to successfully ‘solve’ a block, miners try to combine all of the inputs with their own arbitrary piece of input data in such a way that the resulting hash starts with a certain number of zeroes.
As a basic demonstration, we could try ‘mining’ with our Python hash function by manually adding exclamation points after “CoinDesk rocks!” until we find a hash that starts with a single zero.
>>> hash("CoinDesk rocks!!") 66925f1da83c54354da73d81e013974d >>> hash("CoinDesk rocks!!!") c8de96b4cf781a6373766c668ceac0f0 >>> hash("CoinDesk rocks!!!!") 9ea367cea6a2cc4a6f5a1d9a334d0d9e >>> hash("CoinDesk rocks!!!!!") b8d43387d98f035e2f0ac49740a5af38 >>> hash("CoinDesk rocks!!!!!!") 0fe46518541f4739613b9ce29ecea6b6 => SOLVED!
Of course, solving the hash for a bitcoin block – which at the time of writing must start with 18 zeros – requires an extremely large amount of computation (and so the combined processing power of all the computers in the network still takes approximately 10 minutes to solve a block).
It’s the need for this large amount of processing power that means new bitcoins get mined over a long period of time, not all at once.
In order to earn bitcoins through mining, you need to put in the huge amount of work necessary to solve a block – and by earning that reward, you’re locking in all of the new transactions into a block, which is added to the permanent record of all previous transactions: the blockchain.
What is a Merkle Tree & Merkle Root In Blockchain?
We all know that people who are familiar with cryptography and cryptocurrency will have heard of Merkle trees before. Every non-leaf node has a label with the hash of the names of child nodes. In plain English, this means Merkle trees provide for efficient and secure verification of large amounts of data. It is a very intriguing piece of technology that will be beneficial to cryptocurrency in the long run as well.
Exploring The Potential of A Merkle Tree
When it comes to storing data efficiently and securely, Merkle trees certainly have their role to play. A hash tree is the alternative name of a Merkle tree. It is often meant for verifying any data stored and transmitted in and between different computers on a network. The technology has become an integral part of peer-to-peer protocols as of late, including in the cryptocurrency sector.
To be more precise, a Merkle tree is designed to ensure blocks of data can receive from other peers in a peer to peer network. More specifically, this information needs to be in its original state, without alterations or corrupted information.
In most cases, a Merkle tree comprises of two child nodes under each node on the network. This binary approach reinstated, although it still leaves a lot of room for future improvements. In fact, there does not appear to be a limit as to how many child nodes can be used per node to establish a more secure Merkle tree.
What is the Merkle root?
Every transaction has a hash associated with it. In a block, all of the transaction hashes in the block are themselves hashed (sometimes several times — the exact process is complex), and the result is the Merkle root. In other words, the Merkle root is the hash of all the hashes of all the transactions in the block. The Merkle root is a part of the block header. With this scheme, it is possible to securely verify that a transaction has been accepted by the network (and get the number of confirmations) by downloading just the small block headers and Merkle tree – downloading the entire block chain is unnecessary. This feature is currently not used in Bitcoin, but it will be in the future.
The idea (as I understand it) is that the Merkle tree allows for you to verify transactions as needed and not include the body of every transaction in the block header, while still providing a way to test the entire blockchain (and therefore proof of work) on every transaction.
To understand this, first, understand the concept of a tree. Consider an eight trade block. Imagine each of those eight transactions at the base of a pyramid: these are leaves. Put four “branches” on the second tier of the pyramid and draw two lines from each of them to the leaves so that each branch has two blades attached to it.
What is Mining?
Mining refers to the distributed computational review process performed on each “block” of data in a “block-chain”. This allows for achievement of consensus in an environment where neither party knows or trusts eachother.
Bitcoin Blockchain Mining – How Bitcoin Mining Works
The Bitcoin Mining process is the underlying answer to what makes Bitcoin virtually unhackable. The mining process takes an ingenious approach to a successfuly achieve a previously unnachieved feat: Distributed Trust. Bitcoin mining controls the security and validity of the Bitcoin network, release of new coins into circulation, and releases reliance on centralized networks.
Bitcoin Mining Definition
The process of adding and verifying new transaction records to the bitcoin blockchain (distributed public ledger), which includes all past transactions. During this process, new bitcoins are released from the remaining unmined pool of 21 million total bitcoins.
Bitcoin Mining Explained
Blockchain Mining Hardware
Behind every peice of software, is a correlating peice of hardware. As the blockchain mining process is simply software, blockchain mining hardware is the supporting peice to this puzzle. Mining hardware has drastically adapted to the ever-changing changing protocols. In the early days of bitcoin mining, anyone could “mine” with a personal computer (PCs) at home. Since then, mining hardware has progressed to specialized ASIC (Application-Specific Integrated Circuit) mining chips.
Blockchain Embedded Mining
Embedded mining is a relatively new concept where mining chips are embedded into internet connected devices. In comparison to industrial grade mining hardware (e.g. servers in a data center), embedded mining chips can operate inside everyday devices such as a cellphone. Embedded mining is speculated to be a solution to previously uneconomical efforts, such as micropayments and monetizing the internet-of-things.
Blockchain Transaction Processing
Several blockchain “mining” companies have rebranded themselves as “Blockchain Transaction Processing” providers. This move comes as blockchain mining providers are scaling up into new service industries beyond just financial services, such as Internet-of-Things. This level of service provider requires datacenters and provides a greater business “commodity-provider” approach, as opposed to the high-risk opportunistic bitcoin mining business model.
Decentralized Application (Daap)
What is a Decentralized Application?
Internet users don’t have sole control over the data they share on today’s websites.Ethereum is unique in that it attempts to wield the blockchain as a way to correct what its designers believe is a problematic part of the internet’s design.
It’s like a “decentralized appstore” where anyone can publish their unstoppable apps (dapps), which unlike today’s apps (think Gmail or Uber) don’t require a middleman to function or to manage a user’s information.
Dapps connect users and providers directly.
One example is to use this design for a decentralized Twitter that’s resistant to censorship. Once you publish a message to the blockchain, it can’t be erased, not even by the company that created the microblogging system.
There isn’t one definition of a dapp, though, as it’s a newer concept.
A couple of main characteristics are that they’re open source and don’t have a central point of failure.
With this new technology out in the wild, ethereum advocates might feel electrified by the thought of decentralizing “all the things.” But the types of applications that users can build with the computing platform might be somewhat narrow.
The ethereum white paper splits dapps into three types: apps that manage money, apps where money is involved (but also requires another piece), and apps in the “other” category, which includes voting and governance systems.
In the first type of app, a user may need to exchange ether as a way to settle a contract with another user, using the network’s distributed computer nodes as a way to facilitate the distribution of this data.
The second type of app mixes money with information from outside the blockchain.
For example, a crop insurance application that’s dependent on an outside weather feed. (Say a farmer buys a derivative that automatically pays out if there’s a drought that impacts his work.)
To execute, these smart contracts rely on so-called “oracles” that relay up-to-date information about the outside world. (Though, it’s worth noting that some developers are skeptical that this use case can be done in a decentralized way.)
If bitcoin can do away with financial authorities, is it possible to do the same for companies and other types of organizations?
Decentralized autonomous organizations are one particularly ambitious breed of dapp (this is explained further in ‘What is a DAO?‘).
The goal is form a leaderless company, program rules at the beginning about how members can vote and how to release company funds and then… let it go.
Source: coin desk, authored by Alyssa Hertig; images by Maria Kuznetsov
What is Forex – FX?
Forex (FX) is the market in which currencies are traded. The forex market is the largest, most liquid market in the world, with average traded values that can be trillions of dollars per day. It includes all of the currencies in the world.
There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week, except for holidays, and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market.
BREAKING DOWN ‘Forex – FX’
Forex transactions take place on either a spot or a forward basis.
A spot deal is for immediate delivery, which is defined as two business days for most currency pairs. The major exception is the purchase or sale of U.S. dollars vs. Canadian dollars, which is settled in one business day. The business day calculation excludes Saturdays, Sundays and legal holidays in either currency of the traded pair. During the Christmas and Easter season, some spot trades can take as long as six days to settle. Funds are exchanged on the settlement date, not the transaction date.
Any forex transaction that settles for a date later than spot is considered a “forward.” The price is calculated by adjusting the spot rate to account for the difference in interest rates between the two currencies. The amount of the adjustment is called “forward points.” The forward points reflect only the interest rate differential between two markets. They are not a forecast of how the spot market will trade at a date in the future.
A forward is a tailor-made contract: it can be for any amount of money and can settle on any date that’s not a weekend or holiday. Transactions with maturities longer than a year are relatively unusual, but are possible. As in a spot transaction, funds are exchanged on the settlement date.
A “future” is similar to a forward in that it’s for a date longer than spot, and the price has the same basis. Unlike a forward, it’s traded on an exchange, and can only be executed for specified amounts and dates. With a futures contract, the buyer pays a portion of the value of the contract up front. That value is marked-to-market daily, and the buyer either pays or receives money based on the change in value. Futures are most commonly used by speculators, and the contracts are usually closed out before maturity.
What are Futures?
Futures are a popular day trading market. Futures contracts are how many different commodities, currencies and indexes are traded, offering traders a wide array of products to trade. Futures don’t have day trading restrictions like the stock market–another popular day trading market. Traders can buy, sell or short sell a futures contract anytime the market is open. Futures traders also aren’t require to have $25,000 in their account for day trading–the capital requirement for day trading stocks in the U.S..
Here’s what futures contracts are, how they work, and what you need to start trading them.
Futures markets trade futures contracts. A futures contract is an agreement between a buyer and seller of the contract that some asset–such as a commodity, currency or index–will bought/sold for a specific price, on a specific day, in the future (expiration date). For example, if someone buys a July crude oil futures contract (CL), they are saying they will buy 1,000 barrels of oil from the seller at the price they pay for the futures contract, come the July expiry. The seller is agreeing to sell the buyer the 1,000 barrels of oil at the agreed upon price.
Day traders don’t trade futures contracts with the intent of actually taking possession of (if buying) or distributing (if selling) the physical barrels of oil. Rather, day traders make money on the price fluctuations that occur after taking a trade.
For example, if a day trader buys a natural gas futures contract (NG) at 2.065, and sells it later in the day for 2.105, they made a profit. The price of a futures contract is constantly moving as new buy and sell transactions occur.
Futures contracts are traded by both day traders and longer-term traders, as well as by non-traders with an interest in the underlying commodity.
For example, a grain farmer might sell a futures contract to guarantee that he receives a certain price for his grain, or a livestock farmer might buy a futures contract to guarantee that she can buy her winter feed supply at a certain price. Either way, both the buyer and the seller of a futures contract are obligated to fulfill the contract requirements at the end of the contract term. Day traders are not so concerned about these obligations because they do not hold the futures contract position until it expires. All they have to do to realize a profit or loss on their position is make an offsetting trade. For example, if they buy 5 futures contracts, they need to sell those 5 futures contracts before expiry.
Popular Futures Markets and Symbols
Popular index futures contracts include:
- The Emini S&P 500 index future traded on the CME. Its symbol is ES.
- The Emini Dow Jones Industrial Average future traded on the CME. The symbol for this futures contract is YM.
Here are some popular currency futures for day traders.
- The Euro to US Dollar future on the CME. Its symbol is 6E.
- The British Pound to US Dollar future on the CME. Symbol is 6B.
Here are some of the popular commodity-related day trading futures contracts.
- The 100 troy ounce Gold future on CME has a symbol of GC.
- The 5000 ounce Silver future on CME has a symbol of SI.
- The 1,000 barrel crude oil futures on CME has a symbol of CL.
Also see Best Futures Contracts for Day Trading.
The symbol is followed by another letter and another number. The letter represents the month the futures contract expires, and the number represents the year of expiry. For example, ES contracts expire in March, June, September and December. The futures months codes for those months are H, M, U and Z. So an ES contract that expires in December of 2019 has a symbol of ESZ9 (with some brokers and chart platforms you need to enter the last two digits for the year: ESZ19).
Ticks and Tick Value – How Futures Contracts Move
A tick is the minimum price fluctuation a futures contract can make. The tick sizevaries by the futures contract being traded. For example, crude oil (CL) moves in 0.01 increments (tick size), while the Emini S&P 500 (ES) moves in 0.25 increments. Each tick of movement represents a monetary gain or loss to the trader holding a position. How much each tick is worth is called the tick value. Tick values also vary by futures contract. For example, a tick in a crude oil contract (CL) is $10, while a tick of movement in the Emini S&P 500 (ES) is worth $12.50, per contract. To find out the tick size and the tick value of a futures contract, read the Contract Specifications for the contract, as published on the exchange the futures contract trades on.
Capital Required, and Fees, for Day Trading Futures
To trade a futures contracts require the use of a broker. The broker will charge a fee for the trade, called a commission. Day traders want a broker that provides them with low commissions, since they may only be tying to make a several ticks on each trade.
Unlike stocks, futures day traders aren’t required to have $25,000 in their trading account. Rather, they are only required to have adequate day trading margin for the contract they are trading (some brokers demand a minimum account balance greater than the required margin). Margin is how much a trader must have in their account to initiate a trade. Margins vary by futures contract, and also by broker. Check with your broker to see how much capital they require to open a futures account ($1,000 or more is usually required). Then check what their margin requirements are for the futures contract you want to trade. This will let you know the bare minimum of capital you need. You will want to trade with more than the bare minimum though, since you need to accommodate for losing trades and the price fluctuations that occur while holding a futures position. For guidance on how much capital you need to day trade various futures contracts, see Minimum Capital Required to Day Trade Futures.
The Final Word on Futures
Futures are a popular day trading market because traders can access indexes, commodities and/or currencies. Futures move in ticks, with an associated tick value. This tells you how much you stand to make or lose for each increment the price moves. Futures contracts expire, but day traders buy and sell before expiry, never taking actual possession (or having to distribute) the underlying asset. Futures traders pay a commission on each trade they make. Each contract requires a certain amount of margin, which affects the minimum balance required to trade. Brokers may set their own margin requirements or trading account minimums.
What is the Bitcoin Genesis Block?
The Bitcoin Genesis block is the first block in the blockchain ever.
All crypto currencies have a genesis block but Bitcoin’s is that little bit more special as it was the first of the first.
Every block created since the genesis block can automatically trace it as its ancestor by the linkages to previous blocks in the block header.
The following is the block header hash for the first block!
The Genesis block contains a hidden message in the coinbase transaction – it says “”The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”. This is clearly a note from the eponymous Satoshi Nakomoto performing two functions – firstly marking the time of the first block and secondly economically pointing out the problems with the present Government bailouts of too big to fail banks and the moral hazard problem.
What is a Hard Fork?
As it relates to blockchain technology, a hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions valid (or vice-versa), and as such requires all nodes or users to upgrade to the latest version of the protocol software. Put differently, a hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous versions will no longer be accepted by the newest version. This essentially creates a fork in the blockchain, one path which follows the new, upgraded blockchain, and one path which continues along the old path. Generally, after a short period of time, those on the old chain will realize that their version of the blockchain is outdated or irrelevant and quickly upgrade to the latest version.
BREAKING DOWN ‘Hard Fork’
A hard fork can be implemented to correct important security risks found in older versions of the software, to add new functionality, or to reverse transactions (as in the case with the hard fork to reverse the hack on the DAO (decentralized autonomous organization) in the Ethereumblockchain).
A hard fork involves splitting the path of a blockchain by invalidating transactions confirmed by nodes that have not been upgraded to the new version of the protocol software. Following the hack on the DAO, the Ethereum community almost unanimously voted in favor of a hard fork in order to roll back transactions that siphoned off tens of millions of dollars worth of digital currency by an anonymous hacker. The hard fork also allowed DAO token holders to get their ether funds returned to them.
The proposal did not exactly unwind the network’s transaction history. Rather, it relocated the funds tied to The DAO to a newly created smart contract with the single purpose of letting the original owners withdraw them. DAO token holders will be able to withdraw ETH at a rate of approximately 1 ETH to 100 DAO. The extra balance and any ether that remains as a result of the re-entrancy exploit and the splitting mechanism will be withdrawn and distributed by the DAO curators, or individuals selected prior to the collapse of the DAO to provide “failsafe protection” for the organization.
Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing and Technology.
Why Create Hyperledger?
Not since the Web itself has a technology promised broader and more fundamental revolution than blockchain technology. A blockchain is a peer-to-peer distributed ledger forged by consensus, combined with a system for “smart contracts” and other assistive technologies. Together these can be used to build a new generation of transactional applications that establishes trust, accountability and transparency at their core, while streamlining business processes and legal constraints.
Think of it as an operating system for marketplaces, data-sharing networks, micro-currencies, and decentralized digital communities. It has the potential to vastly reduce the cost and complexity of getting things done in the real world.
Only an Open Source, collaborative software development approach can ensure the transparency, longevity, interoperability and support required to bring blockchain technologies forward to mainstream commercial adoption. That is what Hyperledger is about – communities of software developers building blockchain frameworks and platforms.
Shared Ledger Database
Blockchain allows multiple different parties to securely interact with the same universal source of truth
Streamlined settlement, improved liquidity, increased transparency and new products/markets
Unite disparate processes, increase data flow and liquidity, reduce costs and improve patient experience and outcomes
Track parts and service provenance, ensure authenticity of goods, block counterfeits, reduce conflicts
- ￼Create enterprise grade, open source, distributed ledger frameworks and code bases to support business transactions.
- Provide neutral, open, and community-driven infrastructure supported by technical and business governance
- Build technical communities to develop blockchain and shared ledger POCs, use cases, field trails and deployments
- Educate the public about the market opportunity for blockchain technology
- Promote our community of communities taking a toolkit approach with many platforms and frameworks
What is Proof of Stake (PoS)?
Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins he or she holds. This means that the more Bitcoin or altcoin owned by a miner, the more mining power he or she has.
BREAKING DOWN ‘Proof of Stake (PoS)’
The proof of stake was created as an alternative to the proof of work (PoW), to tackle inherent issues in the latter. When a transaction is initiated, the transaction data is fitted into a block with a maximum capacity of 1 megabyte, and then duplicated across multiple computers or nodes on the network. The nodes are the administrative body of the blockchain and verify the legitimacy of the transactions in each block. To carry out the verification step, the nodes or miners would need to solve a computational puzzle, known as the proof of work problem. The first miner to decrypt each block transaction problem gets rewarded with coin. Once a block of transactions has been verified, it is added to the blockchain, a public transparent ledger.
Mining requires a great deal of computing power to run different cryptographic calculations to unlock the computational challenges. The computing power translates into a high amount of electricity and power needed for the proof of work. In 2015, it was estimated that one Bitcoin transaction required the amount of electricity needed to power up 1.57 American households per day. To foot the electricity bill, miners would usually sell their awarded coins for fiat money, which would lead to a downward movement in the price of the cryptocurrency.
The proof of stake (PoS) seeks to address this issue by attributing mining power to the proportion of coins held by a miner. This way, instead of utilizing energy to answer PoW puzzles, a PoS miner is limited to mining a percentage of transactions that is reflective of his or her ownership stake. For instance, a miner who owns 3% of the Bitcoin available can theoretically mine only 3% of the blocks.
Bitcoin uses a PoW system and as such is susceptible to a potential Tragedy of Commons. The Tragedy of Commons refers to a future point in time when there will be fewer bitcoin miners available due to little to no block reward from mining. The only fees that will be earned will come from transaction fees which will also diminish over time as users opt to pay lower fees for their transactions. With fewer miners than required mining for coins, the network becomes more vulnerable to a 51% attack. A 51% attack is when a miner or mining pool controls 51% of the computational power of the network and creates fraudulent blocks of transactions for himself, while invalidating the transactions of others in the network.
With a PoS, the attacker would need to obtain 51% of the cryptocurrency to carry out a 51% attack. The proof of stake avoids this ‘tragedy’ by making it disadvantageous for a miner with a 51% stake in a cryptocurrency to attack the network. Although it would be difficult and expensive to accumulate 51% of a reputable digital coin, a miner with 51% stake in the coin would not have it in his best interest to attack a network which he holds a majority share. If the value of the cryptocurrency falls, this means that the value of his holdings would also fall, and so the majority stake owner would be more incentivized to maintain a secure network.
In addition to Bitcoin, Litecoin (LTC) also uses the PoW method. Nxt (NXT) is an example of a cryptocoin that uses the PoS method. Some coins like Peercoin (PPC) use a mixed system where both methods are incorporated. As of May 2017, Ethereum (ETH) is in the process of completely switching from a PoW to a PoS system.
What is Proof of Work?
Proof of work describes a system that requires a not-insignificant but feasible amount of effort in order to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks. The concept was adapted to money by Hal Finney in 2004 through the idea of “reusable proof of work.” Following its introduction in 2009, bitcoin became the first widely adopted application of Finney’s idea (Finney was also the recipient of the first bitcoin transaction). Proof of work forms the basis of most, though not all, other cryptocurrencies as well.
BREAKING DOWN ‘Proof of Work’
This explanation will focus on proof of work as it functions in the bitcoin network. Bitcoin is a digital currency that is underpinned by a distributed ledger or “blockchain.” This ledger contains a record of all bitcoin transactions, arranged in sequential “blocks,” so that no user is allowed to spend any of their holdings twice. In order to prevent tampering, the ledger is public, or “distributed”; an altered version would quickly be rejected by other users.
They way that users detect tampering in practice is through hashes, long strings of numbers that serve as proof of work. Put a given set of data through a hash function (bitcoin uses SHA-256), and it will only ever generate one hash. Due to the “avalanche effect,” however, even a tiny change to any portion of the original data will result in a totally unrecognizable hash. Whatever the size of the original data set, the hash generated by a given function will be the same length. The hash is a one-way function: it cannot be used to obtain the original data, only to check that the data that generated the hash matches the original data.
Generating just any hash for a set of bitcoin transactions would be trivial for a modern computer, so in order to turn the process into “work,” the bitcoin network sets a certain level of “difficulty.” This setting is adjusted so that a new block is “mined” – added to the blockchain by generating a valid hash – approximately every 10 minutes. Setting difficulty is accomplished by establishing a “target” for the hash: the lower the target, the smaller the set of valid hashes, and the harder it is to generate one. In practice, this means a hash that starts with a long string of zeros: the hash for block #429818, for example, is 000000000000000004dd3426129639082239efd583b5273b1bd75e8d78ff2e8d. That block contains 2,012 transactions involving just over 1,000 bitcoin (around $610,000), as well as the header of the previous block. If a user changed one transaction amount by 0.0001 bitcoin, the resultant hash would be unrecognizable, and the network would reject the fraud.
Since a given set of data can only generate one hash, how do miners make sure they generate a hash below the target? They alter the input by adding an integer, called a nonce (“number used once”). Once a valid hash is found, it is broadcast to the network, and the block is added to the blockchain.
Mining is a competitive process, but it is more of a lottery than a race. On average, someone will generate acceptable proof of work every ten minutes, but who it will be is anyone’s guess. Miners pool together to increase their chances of mining blocks, which generates transaction fees and, for a limited time, a reward of newly-created bitcoins.
Proof of work makes it extremely difficult to alter any aspect of the blockchain, since such an alteration would require re-mining all subsequent blocks. It also makes it difficult for a user or pool of users to monopolize the network’s computing power, since the machinery and power required to complete the hash functions are expensive.
What is Solidity?
This typed programming languages will help and do the checking at run-time as opposed to Compile-time. This platform also supports inheritance in object-oriented programming, inheritance enables new objects to take on the properties of existing objects. A class that is used as the basis for inheritance is called a superclass or base class. A class that inherits from a superclass is called a subclass or derived class. As you will see, it is possible to create contracts for voting, crowd funding, blind auctions, multi-signature wallets and more.
The first line of code pragma solidity contract does not suddenly behave differently with a new compiler version. According to the docs, the keyword pragma is called that way because, in general, pragmas are instructions for the compiler about how to treat the source code. Pragma once is a preprocessor directive that tells the compiler to include the source code once in a single compilation.
The line unit stored data declares a state variable called stored data of type unit. The functions set and can be used to modify or retrieve the value of the variable. Believe it or not, this is an Ethereum contract, albeit a rather simple deal. The functions of this contract allow you or anyone to store a single number that is accessible by anyone in the world without a feasible way to prevent you from publishing this figure. Anyone could just call set again with a different value and overwrite your number, but the number will still be stored in the history of the blockchain. The line unit stored data declares a state variable called stored data of type unit.
The example above is the simplest form of an Ethereum contract. Like learning mathematics, this contract is equivalent to adding and subtracting. Obviously, mathematics is more complicated than just adding and subtracting, but at the fundamental level, all of the mathematics can be broken down into addition/subtraction operations. For example, 5×5 is the same as adding 5 five times. A similar thought process can be used in programming to build programs of higher complexity.
What is an Equity Tokens
Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as debt or company stock. By employing blockchain technology and smart contracts, a startup could forgo a traditional initial public offering (IPO) and instead issue shares and voting rights over the blockchain. Additionally, a lender could create tokens that represent debt owned by the company, enabling loans to be bought and sold in a high-liquidity environment.
Many people believe that equity tokens will eventually become the predominant type of ICO token. However, the U.S. Securities and Exchange Commission (SEC) has indicated that equity tokens are subject to federal securities regulations, and as of the time of writing, few startups are equipped with the resources to issue equity tokens that comply with all applicable regulations. Consequently, investors should not contribute to an equity token ICO without obtaining guidance from a legal professional who specializes in federal securities law.
What is a Utility Token?
Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. Through utility token ICOs, startups can raise capital to fund the development of their blockchain projects, and users can purchase future access to that service, sometimes at a discount off the finished product’s sticker price.
An example of a utility token is the Basic Attention Token (BAT). As Strategic Coin explains in its BAT token launch research report, the BAT token functions as a medium exchange between users, advertisers, and publishers who participate in the Brave browser ecosystem. Advertisers purchase ads using BAT tokens, which are then distributed among both publishers and browser users as compensation for hosting the ads and viewing them, respectively.
Utility tokens are not designed as investments; however, many people contribute to utility token ICOs with the hope that the value of the tokens will increase as demand for the company’s product or service increases. Utility token price fluctuations can be compared to those of sporting event tickets. The value of a ticket to a future sporting event may increase if one or both of the teams wins a significant number of games and becomes a contender for the championship. On the other hand, that same ticket may decrease in value if a star player suffers an injury or a team goes on a prolonged losing streak.
Simply put, while both equity and utility token prices may fluctuate, the key difference is that equity tokens entitle the holder to ownership rights, while utility tokens function as coupons and do not provide holders with an ownership stake in a company’s platform or another asset.
Strategic Coin is your go-to source for information about launching and participating in utility token ICOs. Whether you are a start-up or existing business that desires to enlist the help of a professional utility token ICO advisor or a token buyer who needs help navigating the blockchain space, Strategic Coin will provide you with the resources you need to take advantage of market opportunities within the crypto marketplace.
What is ZCash?
ZCash is a cryptocurrency with a decentralized blockchain that provides anonymity for its users and their transactions. As a digital currency, ZCash is similar to Bitcoin in a lot of ways including the open-source feature, but their major differences lie in the level of privacy and fungibility that each provides.
The currency code for ZCash is ZEC.
BREAKING DOWN ‘ZCash’
The success of Bitcoin which was launched in 2009 has paved the way for hundreds of alternative cryptocurrencies (altcoins), some of which have thrived, others which have fall short along the digital track. As the demand for privacy increased as big data became easily accessible, cryptocurrency users began seeking other digital currencies that could fill the privacy hole that Bitcoin couldn’t. Digital currencies like Dash and Monero provide complex anonymization techniques that obscure transactions and the parties involved in those transactions. Another digital currency, ZCash, seems to provide an even greater level of fungibility by allowing its users to remain completely anonymous.
ZCash was founded by Zooko Wilcox-O’Hearn in October 2016 in an effort to address an open financial system with the privacy feature that internet users wanted. Bitcoin is a pioneer in the open financial system, and ZCash seeks to maintain the same structure but with privacy and fungibility included. Fungibility is the ease at which a commodity can be substituted for another, which is important in the crypto world as it ensures that one user’s coin is as good as another. So while Bitcoin is an open ledger system, ZCash is an encrypted open ledger. This means that even though all transactions are recorded on a blockchain, the transactions are encrypted and can only be viewed by users that have been given access to them.
Most digital currencies that provide anonymity such as Monero, rely on private keys that are built with alphanumeric characters. Users in the crypto world are also given a unique public address which acts as their identity, just like an IP address. The public address is required to receive funds from another user which means that the sender has to be given the address in order to facilitate the transfer. The user’s private key gives him access to his funds and the key is attached to certain transactions that he makes. However, with enough transactions made over time, his public address can be linked to these transactions, making it easier for inquirers to identify the public address holder. This is also where the level of fungibility comes into play. If a seller of a product is able to track a buyer’s previous transactions based on the public address given to the seller by the buyer, the seller may feel morally inclined to reject payment from the buyer if the revealed purchase history of the buyer does not align with the seller’s beliefs or moral stance.
ZCash employs a cryptographic tool called Zero-Knowledge Proof which allows two users to engage in transactions without either party revealing their addresses to the other. Zero-knowledge proof makes ZCash transactions untraceable on its blockchain by obfuscating the addresses of both parties, as well as the amount involved in each transaction. Because the addresses recorded on the blockchain are shields and not the actual user’s payment address, it’s close to impossible to trace the path of any given funds to its sender or receiver. This is unlike Bitcoin and many other blockchains which show the amount transferred from one’s actual public address to another. Zero-knowledge proof provides a high level of fungibility given that a party involved in a transaction is not privy to the other party’s identity and hence, payment history and so cannot reject his coin payment.
The use of ZCash is not just for cybercriminals who engage in illegal transactions in the dark web. There are a number of legitimate reasons why a user would opt for anonymous cryptocurrencies such as ZCash. An individual with a chronic medical condition who would like to purchase his pills online anonymously; a company who would like to protect its trade secrets or supply chain information from competitors; an entity who would like legal services for a private matter like bankruptcy; a couple who are into eye-brow raising bedroom toys; etc. are all examples of individuals seeking anonymity for privacy reasons.
As of April 2017, ZEC (currency symbol for ZCash) was trading for $68.87 and had a market capitalization of $80.2 million landing it on the top ten list of digital currencies alongside Bitcoin (BTC), Ethereum (ETH), Monero (XMR), Litecoin (LTC), Dash (DASH), and Ripple (XRP).
AML - Anti-Money-Laundering
What is Anti Money Laundering – AML?
Anti money laundering (AML) refers to a set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions. Though anti-money-laundering laws cover a relatively limited number of transactions and criminal behaviors, their implications are far-reaching. For example, AML regulations require institutions issuing credit or allowing customers to open accounts to complete due-diligence procedures to ensure they are not aiding in money-laundering activities. The onus to perform these procedures is on the institutions, not on the criminals or the government.
BREAKING DOWN ‘Anti Money Laundering – AML’
Anti-money-laundering laws and regulations target activities that include market manipulation, trade of illegal goods, corruption of public funds and tax evasion, as well as the activities that aim to conceal these deeds.
Money that’s obtained illegally through actions such as drug trafficking needs to be cleaned. To do so, the money launder runs it through a series of steps to make it appear like it was earned legally. Once there’s a record to show how the money was earned, the criminals hope it will not arouse suspicion.
One of the most common ways to launder money is to run it through a legitimate cash-based business owned by the criminal organization. Money launderers may also sneak cash into foreign countries for deposit, deposit it in smaller increments or buy other cash instruments. Launderers often want to invest, and brokers will occasionally break rules to earn larger commissions.
It’s up to financial institutions that issue credit or allow customers to open accounts to investigate customers to ensure they are not taking part in a money-laundering scheme. They must verify where large sums of money originated, monitor suspicious activities and report cash transactions exceeding $10,000. In addition to complying with AML laws, financial institutions are expected to make sure clients are aware of these laws and guide people with them without prior active government orders.
AML rules and regulations rose to global recognition when the Financial Action Task Force (FATF) was formed in 1989, setting international standards for fighting money laundering. The aim of enforcement groups like the FATF is to maintain and promote the ethical and economic advantages of a legally credible and stable financial market.
Since money is a limited resource, money accumulated illegally and with no regulation prevents capital from flowing into socioeconomically productive industries. The imbalance in money flow also inevitably leads to further printing of money, harming the purchasing power of a country’s currency. If not controlled, this inflation can cripple and erode an economy.
How Anti-Money-Laundering Action Helps Reduce Overall Crime
Money-laundering investigations center on parsing financial records for inconsistencies or suspicious activity, and these financial records often tie perpetrators to criminal activity. In today’s regulatory environment, extensive records are kept on just about every significant financial transaction. Therefore, when trying to uncover the identity of a criminal, few methods are more effective than locating records of financial transactions in which he or she was involved.
Terrorists, organized criminals and drug smugglers rely extensively on money laundering to maintain cash flow for their illegal activities. Taking away a criminal’s ability to launder money hampers the criminal operation by shutting off cash flow. Therefore, fighting money laundering is a highly effective way to reduce overall crime.
In cases of robbery, embezzlement or larceny, the funds or property uncovered during money-laundering investigations frequently are able to be returned to the victims of the crime. For example, when money that was laundered to cover up embezzlement is discovered, it can usually be traced back to the source of the embezzlement. While this does not nullify the original crime, it can put the money in question back in the proper hands and part it from the perpetrator.
Anti-Money-Laundering Enforcement Groups
The Financial Action Task Force sets the international standard for combating money laundering. Formed in 1989 by leaders of countries and organizations around the world, the FATF is an international body of governments that sets standards for stopping money laundering and promotes the implementation of these standards. Because laundering money is one way in which terrorists finance their activities, money laundering and terrorism go hand in hand. The FATF is, therefore, also dedicated to the setting and implementation of standards for fighting terrorist financing and other threats to the international financial system.
The FATF developed a series of recommendations that were adopted in February 2012 to give its 35 member countries and two regional organizations a comprehensive set of measures to implement in the fight against money laundering, terrorist financing and financing of the proliferation of weapons of mass destruction. The FATF promotes the implementation of these measures, but the leaders of each member country carry out the measures on a national level. Each country must adapt the measures to make them appropriate for its own circumstances. To assist members in implementing the recommended anti-money-laundering measures, the FATF provides them with guidance and best practices.
In 2000, the FATF began using a name-and-shame system that publicly announced countries that failed to produce and enforce comprehensive AML laws and had minimal to zero participation in the international crusade against illegal moneymaking activities.
Another international group that participates in combating money laundering is the International Monetary Fund (IMF). With 189 member countries, the IMF has been expanding its anti-money-laundering efforts since 2000.
The events of September 11, 2001 led to an intensification of the IMF’s work in this area and spurred the broadening of its goals to include fighting the financing of terrorism. Shortly thereafter, the IMF began assessing the compliance of its member countries with the international standard for combating terrorist financing.
The IMF pays special attention to the effects of money laundering and terrorist financing on the economies of its member countries. The IMF points out that people who launder money and finance terrorism target countries with weak legal and institutional structures and use the weaknesses to their advantage in order to move funds. Ways in which the IMF helps its members stop money laundering and terrorist financing include serving as an international forum for the exchange of information and helping countries develop common solutions to these problems and effective policies to guard against them.
In addition, the IMF contributes to the evaluation of each country’s compliance with anti-money-laundering measures and to the identification of areas where improvements are needed. The IMF focuses its work on assessing the strengths and weaknesses of each member’s financial sector in complying with the FATF recommendations, providing members with the technical assistance needed to strengthen their legal and financial institutions, and offering advice to members in the process of developing policies directed toward compliance with FATF measures.
KYC - Know-Your-Customer
What is KYC?
KYC: 3 Steps to Know Your Customer
Know Your Customer (KYC) procedures are a critical function to assess and monitor customer risk and a legal requirement to comply with Anti-Money Laundering (AML) Laws.
Do you know your customer? You better, if you’re a financial institution (FI) or you face possible fines, sanctions and maybe even public ridicule if you do business with a money launderer or terrorist. More importantly, it’s a fundamental practice to protect your FI from fraud and losses due to illegal funds and transactions.
“KYC” refers to the steps taken by a financial institution (or business) to:
- Establish customer identity
- Understand the nature of the customer’s activities (primary goal is to satisfy that the source of the customer’s funds is legitimate)
- Assess money laundering risks associated with that customer for purposes of monitoring the customer’s activities
To create and run an effective KYC program requires the following elements:
1) Customer Identification Program (CIP)
How do you know someone is who they say they are? After all, identity theft is widespread, affecting over 13 million US consumers and accounting for 15 billion dollars stolen in 2015. If you’re a US financial institution, it’s more than a financial risk; it’s the Law.
The CIP mandates that any individual conducting financial transactions needs to have their identity verified. As a provision in the Patriot Act, it’s designed to limit money laundering, terrorism funding, corruption and other illegal activities. The desired outcome is that financial institutions accurately identify their customers:
A critical element to a successful CIP is a risk assessment, both on the institutional level and on procedures for each account. While the CIP provides guidance, it’s up to the individual institution to determine the exact level of risk and policy for that risk level.
2) Customer Due Diligence
For any financial institution, one of the first analysis made is to determine if you can trust a potential client. You need to make sure any potential customer is worthy; customer due diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against criminals, terrorists, and corrupt Politically Exposed Persons (PEPs).
There are three levels of due diligence:
- Simplified Due Diligence (“SDD”) are situations where the risk for money laundering or terrorist funding is low and a full CDD is not necessary. For example, low value accounts or accounts where checks are being on other levels
- Basic Customer Due Diligence (“CDD”) is information obtained for all customers to verify the identity of a customer and asses the risks associated with that customer.
- Enhanced Due Diligence (“EDD”) is additional information collected for higher-risk customers to provide a deeper understanding of customer activity to mitigate associated risks. In the end, while some EDD factors are specifically enshrined in a countries legislations, it’s up to a financial institution to determine their risk and take measures to ensure that they are not dealing with bad customers.
3) Ongoing Monitoring
It’s not enough to just check your customer once, you need to have a program that knows your customer on an ongoing basis. The ongoing monitoring function includes oversight of financial transactions and accounts based on thresholds developed as part of a customer’s risk profile.
Up to now, regulations call for a risk-based assessment. However, as of January 1, 2017 The New York Department of Financial Services (NYDFS) requires specific measures of transaction monitoring and filtering.