While cryptocurrency has only recently become a popular term in finance, it has been around for a long time. Before names like Bitcoin, Ethereum, and Litecoin even existed, there were attempts to create a decentralized currency.
David Chaum, a respected cryptographer, launched ECash, an anonymous system in the 1990s but it failed. Chaum built the system on currently existing government financial principles and infrastructure like credit cards. RPOW, BitGold, B-Money were also created but failed.
Cryptographers could not get past specific challenges that they faced at the time. The first challenge was how to achieve true decentralization and the second was the issue of double spending. The prevention of double spending meant the use of a third-party clearing house. This wasn’t acceptable because to achieve the type of innovative digital finance they wanted; the system had to be independent of any institution.
In 2008, cryptographers finally stumbled on the information they had been searching for when an anonymous contender released the blueprint for a digital currency known as Bitcoin. It showed the technical specifications of the blockchain — a decentralized technology that creates a trustless, permissionless system and eliminates the problem of double spending. This new technology took the world by storm, later leading to changes in the financial industry as well as other industries such as real estate. With the cryptocurrency revolution, came many coins, tokens, and altcoins. Here, we take a deep dive into the similarities and differences between some of the most popular and valued ones: Bitcoin, Ethereum, and Litecoin.
Bitcoin is a digital currency, created as a store of value for the anonymous exchange of goods and services online. It typically has all the properties of a more traditional currency and can be broken down into smaller parts, up to eight decimal places. It’s also the largest cryptocurrency by market capitalization.
A brief history of Bitcoin
Bitcoin first originated in 2008 when an anonymous programmer under the pseudonym of Satoshi Nakamotoreleased a paper in a cryptography mailing list. This paper detailed the workings of a new digital currency, built on blockchain technology. The virtual currency was designed to imitate key qualities of traditional money while providing anonymity, transparency and eliminating the need for a third party.
Researchers tried to find out the identity of this anonymous programmer, all to no avail. It became a mystery to the cryptography community who could not ignore this act of charity, containing a brilliant solution that had eluded them for so long.
The technology behind Bitcoin is open source, meaning that developers can modify it according to guidelines in the paper. Nakamoto aimed to create a currency that would be uniform, scarce, portable, durable and valuable, without the risk of double spending. This was achieved by creating a mathematical problem that would only ever have 21 million possible solutions. These solutions would represent Bitcoins, ensuring that only a finite amount of the currency would ever exist. This solution created scarcity, an essential property of any valuable item.
When Bitcoin was first released, it wasn’t well-known or widely accepted by the general public, and for up to eight months, it had no value. Critics laughed at the idea of a random digital currency that would be able to up-end the use of paper money as a means of exchange. However, software programmers continued to adjust the technology.
In October 2009, Bitcoin was valued for the first time when the New Liberty Standard published its exchange rate, listing the value of 1 USD to 1309.03 BTC. Soon after, in December, the second version of Bitcoin was released, and more people started spending the currency.
By the following year, exchanges had begun to pop up and, July 2010 saw the launch of MtGox, one of the largest Bitcoin exchanges. The Infamous Pizza cryptocurrency exchange also occurred in 2010, setting the precedence for other Bitcoin purchases for everyday items. It was allegedly also used to purchase illegal items and substances on the Dark web because the transactions were untraceable. The use of Bitcoin had become so popular that on February 9th, 2011, its value became equivalent to that of the US dollar.
By July 2011, 1 BTC was trading at almost 10 USD, and it continued to increase in value. As with any valuable commodity, Bitcoin began to attract theft. In March 2012, due to a security breach at Linode, almost 50,000 BTC was stolen. It was the first recorded Bitcoin crime in history. The theft would later get much worse with the loss of about 850,000 BTC from MtGox in February 2014.
Theft of Bitcoin reinforced its value in the eyes of the public, and price of Bitcoin continued to rise. Soon, several new exchanges started operating to cater to the needs of the growing horde of cryptocurrency users. It wasn’t long before groups running Ponzi schemes, pyramid schemes and different scams also began to emerge. In September 2012, a group charged with the promotion and protection of Bitcoin known as the Bitcoin Foundation was launched and since then, Bitcoin has hit many major milestones including a record value of almost $20,000 in December 2017.
How does Bitcoin work?
Bitcoin transactions are conducted on a public ledger known as a "blockchain." When a user exchanges another currency for Bitcoin, the balance is kept in a Bitcoin wallet.
Transactions are records of value exchanges between two parties. They occur whenever a payment has been made and typically consist of four main parts:
The output of a transaction contains information vital to the outgoing payment, usually the address that BTC is being sent to and the number of tokens being sent. The input, on the other hand, contains relevant information on where the payment is coming from, i.e., the sender’s details. The information contained in the input are:'
Just like the process of sending money from one bank account to another, the output is similar to entering the account details of the receiver. The receiver would be able to view the amount sent, the transaction number, and the sender’s details. Transactions also come in various types, usually regular, reward, and fee transactions. Regular transactions are the normal exchanges that occur between two parties sending and receiving Bitcoins.
When users send coins, they pay a fee that allows that transaction to be added to the blockchain which acts as proof that the transaction indeed occurred. The process of adding transactions to the blockchain is done by a select group of people called miners.
When miners confirm new transactions by adding them to the blockchain, they're awarded a preset amount of coins in the form of a reward transaction. This confirmation usually takes about 10 minutes for Bitcoin and attracts a fee of about $2.
Just like traditional money needs to be held in physical wallets and bank accounts to keep it safe and create accountability, Bitcoin is held in wallets. Technically, a wallet gives user ownership of a certain balance and facilitates the retrieval and transfer of coins from one address to another.
When a user exchanges fiat currency like the US dollar for BTC, it can be transferred to a wallet at a particular Bitcoin address. From this wallet, users can decide also to spend their BTC tokens which are transferred to a destination address. While wallets are commonly web-based, there are other forms of wallets which include mobile wallets, desktop wallets, and hardware wallets.
Web wallets can be accessed from anywhere as long as a user is online via a browser. These wallets store a user’s private key online and are susceptible to hackers. It’s essential to ensure that online wallets are backed up and encrypted. This ensures that it can still be accessed by its owner even when compromised. Some notable web-based wallet providers are Coinbase, Electrum, and Blockchain.info.
Desktop wallets are better for users who prefer their wallets in a more controlled environment, rather than online. Desktop wallets store information concerning Bitcoin transactions and can be downloaded and stored on a user’s desktop. This type of wallet also allows a user to create an address as well as a private key which will be used to send and receive Bitcoin.
While desktop wallets are a good option, they have the disadvantage of being fixed in just one place. If users want to access their wallets, it can only be done on the desktop of the computer it was installed on. This dramatically limits use and can be inconvenient for users who travel or have to be away from their desktops for other reasons. Some notable desktop wallets are Armory, Multibit and Bitcoin Core.
This type of wallet is usually in the form of a mobile application which can be accessed on any mobile device. Just like traditional banking apps, the owner of the mobile wallet can carry out Bitcoin transactions at any time. This is a better option for mobile users who need to make quick purchases frequently. Some mobile wallets are Bitcoin wallet and Mycelium wallet.
These wallets provide more security than any other type because they're separated from a user’s computer, ensuring that they can’t be hacked unless they're physically stolen. They're usually in the form of devices which can be plugged into the USB port of a computer. Some hardware wallets like the Ledger Nano S can sign off on users’ Bitcoin transactions with their private key. They generally cost between $100 to $300 and are a better option for storing a significant amount of Bitcoins.
An exchange is an online destination where users trade cryptocurrency, in this case, Bitcoin. For example, if one user would like to exchange USD for BTC from another user, an exchange may be necessary to facilitate the payment. In regular exchanges, sellers usually set a minimum trade price, relative to the current BTC price against the currency they would like to trade.
This minimum price is called an ‘order’ and is entered into the exchange’s order ledger. Buyers may also set orders containing the minimum price they wish to buy BTC at. After orders have been set, the exchange matches both parties and carries out the transaction. Although Bitcoin transaction confirmation takes up to 10 minutes, the exchange instantaneously carries out the transaction.
In peer-to-peer exchanges, buyers and sellers are matched using software which allows them to carry out transactions on their own, without an intermediary to facilitate the transaction. The system is completely decentralized just like the technology, which Bitcoin itself is built on. Unfortunately, because the users on peer-to-peer exchanges are left to do their trades independently, they bear the full risk of fraud and theft.
This article is first seen on MintDice