Introduction to Cryptocurrencies: Categories

The goal of this article isn’t to provide in-depth information of the entire cryptocurrency space (which would be impossible without turning this blog post into a book) but more so to give you a broad overview into the categories in the cryptocurrency world. If you are someone who’s heard about Bitcoin and other cryptocurrencies in the news but haven’t fully gotten around to researching it (or ended up more confused once you did) this should provide some value to you. Topics such as how cryptocurrencies work, have value, how to buy/sell them and their specific differences will be covered in depth in future articles.

Cryptocurrencies can be broadly classified into three types

1) Coins meant to work as a currency

2) Coins meant to pay for using a smart contract platform

3) Coins meant to pay for specific utilities

Coins meant to work as a currency:

Let’s go back to 2008 (good times am I right?) In the past, many people had tried to create a fully digital currency. A currency that you could send to anyone anywhere in the world almost instantly with little to no fees, without requiring banks to be intermediaries that settle the payments, nor need governments to back it and regulate it’s supply.

But the biggest problem was what is known as the “Double Spend” problem. This basically means when you send someone a certain amount of money, it’s important to make sure that you no longer have access to those funds. In the real world, banks debit your account and credit the account of the receiver so that you don’t spend the same money twice. With digital assets however, you can make copies. For ex: When I send a picture to someone, I don’t send the actual picture. I am sending a COPY of the picture. You cannot have people making multiple copies of a currency, because then it would have no value (hence, it’s a crime). This is why central banks are careful when they print more money (quantitative easing) during recessions, you have to control the supply. If the supply is not controlled correctly, it’s value depreciates (resulting in inflation).

On October 31st 2008, Satoshi Nakamoto (whose real identity is still unknown) released a white paper outlining a peer to peer digital currency called Bitcoin. In this paper he provides a solution to the double spending problem through the use of a technology he invented called "Blockchain". Now, the blockchain technology deserves a blog post of it’s own (coming soon), but here’s a very basic summary of it. Blockchain is a distributed ledger. It’s a way of storing transactions and information across multiple people in the network in a way that is tamper proof and hack proof through the use of Cryptography. Every transaction ever made in the network get’s stored in the blockchain and anyone can view it. A transaction once entered cannot be changed. A set of transactions is known as a “block”. Every few minutes a new “block” is created and it is linked to the last block, thus creating a “block chain”. Users known as "Miners" are in charge of validating every transaction and adding it to the blockchain. This is done by solving cryptographic math problems using computers. They get paid in new bitcoins and transaction fees for offering this computing power. You don't have to be a miner or store the blockchain on your device in order to send/receive bitcoins. There are predetermined rules as to who can add transactions to this block (miners), the criteria that the transactions need to meet and the amount they get rewarded for their work.

As with any other technology, there’s always ways to make changes and improvements. The first version is not necessarily the best. Same goes for cryptocurrencies. After the creation of Bitcoin, a bunch of other cryptocurriences were developed each with their own blockchains that had different rules and reasons as to why they thought it would be better. Litecoin, Ripple, Monero etc. are a few examples.

2) Coins meant to pay for using a smart contract platform

What happened after this was when things really started to explode. People realized that blockchain could be used for a lot of other things other than just currency. Ethereum came out with a decentralized platform that allowed users to create “Smart contracts” and run completely decentralized applications and organizations that didn’t require one single authority to control and regulate the whole thing. A smart contract is a contract that can be programmed to self execute when both parties meet the predetermined criteria, without the need for intermediaries.

To run applications on a decentralized platform such as Ethereum, you would have to pay for the computing power offered by the users in the network. Depending on the amount of computing power a smart contract will need to execute, it will cost a certain amount of “gas” which is a standardized unit based on computing power. You pay for this gas using “Ether” which is the native currency of the Ethereum platform. Ether is also traded on exchanges and it’s price fluctuates daily. But the number of “gas” units a certain smart contract takes is constant because it’s based on computing power. NEO, NEM, EOS, Cardano are some other similar projects that claim/aim to provide a better technology all with their own blockchains and native currency used to pay for gas on those networks. One thing to note in the cryptocurrency space is that a lot of these projects are only partially done or aren’t even out yet. The tradition is to release a white paper describing your technology, collect funds through token sales (coming next) and then use the funds to build out the project.

3) Coins meant to pay for specific utilities

Now comes companies that use blockchain for a specific purpose, and operate like a business. Decentralized applications (DApps). This is the most exciting part of the crypto world and why people claim that blockchain is going to completely disrupt several industries and change the way we do business. There is a lot of concern with regard to the centralization taking place in technology today. A handful of companies dominate several industries. Companies operate as middlemen and take huge chunks (or all) of the profit, dictate the terms of operation, and have control of private data of billions of users making hacks even more dangerous.

DApps store information and carry out operations through the use of blockchain and the smart contracts that run on them. Information and control is not in the hands of one single entity but the community as a whole, and you have control of your own data. You pay for the utility (service) offered by these DApps through the currency used by the DApp referred to as "Tokens". Each DApp has it's own token. It’s sort of like buying an airline tickets using the “Miles” you’ve accumulated. Lets look at an example. BeeToken is aiming to disrupt the home sharing space dominated by Airbnb. Unlike Airbnb, BeeToken does not charge commissions and does not control your private information. You book homes (and get paid for hosting) in BeeTokens. You can buy these tokens through cryptocurrency exchanges that list them.

These companies like the other crypto projects, publish a white paper, raise money from investors and use the funds to develop the project. Instead of ownership in the company, the investors typically get the tokens that these companies use to operate, at a discounted price than the market price they will eventually sell at in an exchange.

Now you maybe wondering how these companies make money. The company owns a significant portion of the tokens that users pay to use the network. And these tokens are bought and sold on an exchange. If the project is successful the value of these tokens will go higher (due to limited supply) and the company can sell the tokens (like stocks) to profit and carry out operations. The process of raising money for a project through issuing tokens/coins in advance is known as Initial Coin Offering (ICO). Lastly, some of these DApps run on the blockchains of platforms like Ethereum (Basic Attention Token), some others have their own Blockchain (BeeToken) while others initially issue coins on platforms like Ethereum and then eventually launch (or plan to launch) their own blockchain once it’s fully developed (EOS).

Please note that the entire cryptocurrency space is still relatively young and there is a wide variety of cryptocurrencies (and projects) with unique individual details. What I have provided here is a broad overview that you could use to begin understanding this space and the little details that can seem overwhelming at first.

#Cryptocurrency #ICO #Blockchain