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#Financefridays - Bitcoin, Ethereum and Stablecoins Explained Simply

11/09/2020


‘Bitcoin is Microsoft and Ethereum is Apple, Ethereum is the train and all these other cryptocurrencies are the cargo.’ These were the words my colleague used to make me understand what the fuss was about cryptocurrency.



Bitcoin and Ethereum have many similarities, but their differences are what sets Ethereum apart from Bitcoin, even though for years, Ethereum has been lagging behind Bitcoin in rankings. Bitcoin essentially was created and uses blockchain technology to be able to become another type of money (medium of exchange). Whereas Ethereum was not created to ever replace money, and its creators do not have that ambition like Bitcoin (whose creator has never been seen only known by the name of Satoshi Nakamoto).



Bitcoin and Ethereum are both cryptocurrency that uses cryptography, which makes them practically impossible to counterfeit or double spend. My colleague also believes there is a global incentive to make the world cashless. He also stated ‘many people don’t know that it is in fact the government themselves that has bought a lot of cryptocurrencies, in large amounts, and use bots (automated software), to fluctuate the market’.




He mentioned how eventually, this will bring an end to some types of criminal activity. The government will have a digital footprint of all money, and therefore it will be easier to track discrepancies, and possible criminals that seem to suddenly have more money than their regular jobs payout. Digital money would also make it harder to sell bootleg products as the currency can be tracked.




However, popular cryptocurrencies use decentralised networks that are not regulated by the government or any central institution. This is why criminals also enjoy using these digital currencies as a means of payment, especially on the black market. It also came to my attention that there are some that believe the government themselves created certain cryptocurrencies (it is not actually hard to do just with software), and criminals were told to use this as the government can not track them, but they did not know it was the government themselves that created these specific tokens, as they themselves do not want to be tracked for their criminal activity. Now of course I cannot verify this.



If a student ever asks you why maths is important, or where they will use it in the real world, you should let them know technology advancements they enjoy from PS4 to Xbox are only possible because of maths. In fact, even this cashless system including cryptography uses algorithms for its encryption which involves number theory and abstract algebra.




Bitcoin in simple terms is a computer file that is stored in a digital wallet app, people can then send bitcoins or fractions of one to each other using different apps. Every transaction is recorded on a system called blockchain, which is seen on a public list (but not identities). Blockchain is just a system for recording information in a secure way, which makes it hard to hack, cheat, or change the system. It is simply a digital ledger (finance records of transactions) that are then shared throughout the whole system/network within the blockchain community.




Bitcoin and Ethereum are both public blockchains on an open network. This means anyone can download the protocol, and participate by reading or writing in the blockchain language/algorithm. ‘Transactions are recorded as blocks and linked together to form a chain. Each new block must be time stamped and validated by all the computers connected to the network, known as nodes, before it is written into the blockchain.’



Hyperledger is an example of a private blockchain. Some people do not like these types of blockchains, as they are invitation-only, and in a sense are not decentralised, as one entity has supreme power about who can access the system, and what levels of control they are given. However, private blockchains provide more security and are faster, more cost-effective and efficient, compared to public blockchains. They are also better and quicker at validating transactions.




Bitcoin is transaction-based only, you have to create your own Bitcoin wallet on other platforms. Bitcoin uses private and public keys. Individuals must hide their private keys so people do not steal their bitcoins. Transactions have an input and output. The input is linked to the previous transaction’s output. And the owner of the previous output has to give a signature that shows they own the coins. Bitcoin is public, the amazing rise of Bitcoin was because the creators learned how to keep the transactions public, while still hiding the owners private key. They did this using maths, and an Elliptic Curve Cryptography (ECC). The formula is y squared equals x cubed + ax + b.




Within Bitcoins code there are only 21 million bitcoins available. Bitcoin miners are essential, Bitcoin miners are the ones that verify transactions before they are then added to the blockchain. Bitcoin mining is still profitable and we will look at this in future posts. And even though there are only 3 million bitcoins left able to be found/mined, because of how long it can take to mining them, bitcoin is not coming to an end as some may believe. It would even take up to 2040 for the remaining 3 million to be fully mined, and it is possible the owners change the code and allow more to be mined.




Ethereum has over 100 million mined coins, and has not set a limit on how many can be mined. Ethereum mining is not profitable for the everyday person as it would take too long compared to bitcoin mining.




Without bitcoin mining, there would be no transactions, as it is the mining that entices users, and helps to keep the integrity of the system. Miners are given rewards because they mine. They are given bitcoins for essentially just having software that runs a program. Miners help to solve the double-spending problem, with physical money once it is spent it is in someone else’s hand, but with digital money, if someone smart is able to keep spending the same bitcoin this would ruin the entire system, and this is why the creators of bitcoin created this ingenious method of having miners be the auditors, and as there are so many protecting the system, it means the system is not controlled by one person. Without mining, there would also not be any new bitcoins found as miners are the ones that find/create the new bitcoins just like gold mining.



The exciting news about Ethereum is, it does a lot more than bitcoin. Ethereum blockchain also allows its users to create their own coins using existing codes or new codes. For example, even Akon has his own Wakanda city he is building, and I believe his cryptocurrency is an identical model of bitcoin, as you are allowed to copy the source codes but the coin will be given a different name and you will still need to convince people to use it.




Ethereum is not just a cryptocurrency, but it has taken the framework behind bitcoin and advanced it. Even bitcoin themselves have understood the potential of Ethereum and have used the Ethereum platform to launch a WBTC (Wrapped Bitcoin), which is a token/cryptocurrency using the Ethereum platform to represent a bitcoin token. 1 bitcoin is the same value as 1 WBTC. By being on the platform, bitcoin can enable its bitcoin holders to earn interest using the sophisticated financial services the Ethereum platform also provides known as Compound.




Ethereum platform also allows new types of cryptocurrencies known as Stablecoins. The problem bitcoin has, is how volatile their value is, fiat currency has more trust by its users as they roughly know how much it will be valued in the near future, and it does not change rapidly as bitcoin could. Stablecoins are cryptocurrencies that try to have the cryptocurrency also backed by another asset to enable price stability. For example, WBTC is backed by bitcoin, or USD Coin is backed by the US dollar. This amazing capability of the Ethereum platform sets it apart from Bitcoin.




There are many arguments of whether Ethereum is a better investment than Bitcoin, or if Ethereum is the new Bitcoin or if Ethereum could put Bitcoin out of business. However, I think the most important thing is remembering they are here to serve two different purposes, but only time will tell and the probability of bitcoin failing is actually 0.4% and Ethereum probability of it ever becoming worthless is 0.3%.




What do you think about cryptocurrencies and there is still more to go into about mining for passive income and the potential for catching the next bull run?




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