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The reasons why Litecoin is the future of cryptocurrency

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Litecoin is the silver to Bitcoin's gold

Litecoin is a peer-to-peer internet currency that enables instant, near-zero cost payments to anyone in the world. It is an open source, global payment network and fully decentralized without any central authorities. Mathematics secures the network and empowers individuals to control their own finances. Litecoin features faster transaction confirmation times. It also features improved storage efficiency than the leading math-based currency. With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of commerce complementary to Bitcoin.

Litecoin logo

The new kid on the block

As the cryptocurrency industry continues to grow Bitcoin is unable to handle the demand from an increasing user base. This has led to the creation of a new cryptocurrency that provides the same functionality as Bitcoin while, doing so on its own blockchain. It can process transactions for a fraction of the cost and at higher speeds. As the demand for Bitcoin increases, Litecoin could play a huge role in the future of the cryptocurrency industry. However, it could also suffer the same fate of a market that is prematurely growing beyond its true value.

What is Litecoin?

In 2011, former Google employee Charlie Lee was impressed with the idea of Bitcoin and the new paradigm it was creating. However, he noticed deficiencies that would forever plague the largest blockchain on the planet. In order to keep the foundation of Bitcoin in his new project, Lee created a fork of the Bitcoin core blockchain. With modifications to the code base, he created an additional cryptocurrency to support the entire industry. It is one that transacts in quicker times with lower transaction fees for end users. As a result, Litecoin was born.

Litecoin v Bitcoin

Litecoin is designed with faster block times than Bitcoin. It registers an average of 2.5 minutes, while utilizing the Scrypt hashing algorithm.  It has a supply limit of 84 million coins. These characteristics distinguished Litecoin from its predecessor. It also caused it to grow in popularity as a digital currency and payment processor. Lee also decided to have no coins pre-mined,so as to allow developers to get rich and lose interest in the project. He even sold all of his Litecoin holdings in an attempt to show the public he is not developing Litecoin to get rich. Instead, he is truly interested in changing the way the world transacts across the globe.

The silver of cryptocurrency

Global transactions for digital cash are increasing in demand by the day. The most in-demand blockchain, Bitcoin, is having trouble keeping up with demand. This is even before there has been mass market adoption. This has resulted in Charlie Lee describing Litecoin as, “the silver to Bitcoin’s gold.”

The lack of overall blockchain processing power gives Litecoin an opportunity for picking up transactions that are requested by users but unable to be fulfilled on other blockchains. The current rate of processing for Bitcoin is only about 7 transactions per second. This pales in comparison to a global processor like Visa, which can conduct over 2,000 transactions per second.

A key market player

If cryptocurrency is going to take over the remittances market, Bitcoin alone would have to process transactions at a rate that is 250 times what it does today. This gap in transaction supply and demand is where Litecoin finds its place as a key market player. With a rise in the use of Bitcoin for remittances and daily payments there will inevitably be a higher demand for processing on the Bitcoin blockchain, 

When it is unable to handle the demand, Litecoin can process the transactions Bitcoin leaves behind. In this way, Litecoin doesn’t look to dethrone Bitcoin’s market dominance. Instead, it supports it by creating an additional blockchain on which users can transact.

A likely scenario emerges from this situation in the crypto marketplace. Believers in blockchain technology can hold much of their value in Bitcoin as it is the standard on which the industry is set, much the same as the way gold is viewed. At the same time, Bitcoin holders can transact on a daily basis using Litecoin, as it presents quicker transaction times and lower fees. This is how Litecoin will come to support Bitcoin and also have the potential for playing a huge role in the future of cryptocurrency.

Easy exchange

Developers have quickly realized that if Bitcoin holders wish to transact via Litecoin it would be extremely helpful if the two currencies were interchangeable, and users didn’t have to use a third party on which to transfer the currencies between one another. This has led to the creation of “atomic swaps” which allow for seamless transition from one digital currency to the next. This idea is starting to come to fruition in Litecoin, with successful tests of swaps between Litecoin and Bitcoin being completed in 2017.

Atomic swaps could further build a case for Litecoin’s place in the market. As previously mentioned, when the Bitcoin blockchain gets overwhelmed with transactions that slow down the network and increase fees, Litecoin becomes an increasingly better option. Throw on top of this the ability to use an atomic swap to change out of Bitcoin and into Litecoin (and vice versa) without a third party, and Litecoin becomes almost completely interchangeable with its counterpart. However, atomic swaps still have a long way to go before they are fully implemented, and both Bitcoin and Litecoin will need to activate the Lightning Network and SegWit to turn this dream into reality.

Could silver be the new gold?

Even with its claim as the silver to Bitcoin’s gold, Litecoin is working towards creating a scalable solution that could overtake Bitcoin as the new norm of digital cash. Litecoin has constantly shown its ability to implement new upgrades to its blockchain much faster than Bitcoin, having implemented SegWit in mid-2017 and future potential blockchain upgrades such as SegWit2x and the Lightning Network in the works.

As of January 2018 Bitcoin was processing about 7 transactions per second, whereas Litecoin could handle up to 56. Fees on the Litecoin blockchain are already better for end users than Bitcoin, making it a better choice at the moment for blockchain transactions.

On the mining front, the higher supply limit of total coins incentivizes miners to validate Litecoin blocks over Bitcoin, and this will only compound over time as the reward for mining Bitcoin continues to decrease. Utilization of the Scrypt hashing algorithm means that Litecoin mining is not just confined to large mining farms, with users mining Litecoin from their home CPU devices. When users and miners are both aligned and incentivized towards the use of one blockchain it could mean mass market adoption for Litecoin.

Litecoin has the crypto problem

While this sounds all well and good for the prospects of Litecoin, it still suffers from the same problem that plagues the cryptocurrency market as a whole, volatility. The idea of digital cash becomes less of a reality in a highly volatile market. Consumers shy away from storing their value in an instrument than can fluctuate in price by 10% on any given day. Regular payments and remittances also become difficult.

The price of Litecoin doubled from $160 to $320 in December 2017, only to see its price fall back down below $160 a month later. As the price fluctuates so does the value of its exchange, making a cup of coffee cost the equivalent of $2 one day and $3.50 the next. This volatility makes it hard for consumers to rely on it as a medium of exchange on a regular basis, and until the entire cryptocurrency industry stabilizes consumers will shy away from utilizing it for its intended purpose.  

These fluctuations in price due to speculation are a sign of the cryptocurrency market being more controlled by investors and short-term speculators than it is by actual market users. Litecoin only has about 100,000 users of the currency even though its daily trading volume on exchanges regularly surpasses $1 billion. This is consistent with the entire market lagging behind in technological adoption and run by traders and investors. This is not sustainable for growth in market value. If user adoption doesn’t increase, and soon, the entire industry could be in for a rude awakening.

Family ties

As Bitcoin goes, so does the overall cryptocurrency market, and this is especially true with Litecoin. Improved scaling, coupled with decreased transaction times and volatility would cause a mass adoption of Bitcoin with a carryover effect into Litecoin as well, as users look for a comparable alternative to Bitcoin that provides the same function and usability for payments and store of value.  

Yet, as with most technology, Litecoin has an opportunity to overtake Bitcoin if it solves the scaling issue first. Although this is an unlikely scenario, Litecoin seems happy being silver in the crypto-marketplace. This is a good standing which any digital cash would be happy with. In Lee’s own words, “Litecoin versus Bitcoin is like Facebook versus Google Plus. It would be hard for Plus to overtake Facebook. But if something catastrophic happens to Bitcoin, I could see Litecoin positioned to overtake it.”

Analysis

Dash

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Dash – a fork of Litecoin – includes the features of Litecoin (limited supply, 2.5 minute block times, proof-of-work (POW) validation system) along with the ability to transact instantly, via an instant send feature, and anonymously, via a private send feature, and to vote on updates to the network. This is implemented through a two-tiered validation system. The first tier involves the traditional mining/POW system from Bitcoin, Ethereum, Litecoin, and many others. The second tier includes a network of Masternodes which are required to maintain a minimum of 1000 DASH. Each node that maintains this minimum is deemed a Masternode that participates in confirming transactions instantly, anonymizing transactions by mixing public keys so you don’t know who the sender or receiver are, and voting on updates to the network. In exchange, the Masternodes receive rewards of about 2 DASH to every Masternode per week.

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Pros: Contains many of the benefits of Bitcoin including decentralization, immutability, and limited supply; two-tiered system allows for very fast (~ 1 second) and/or private transactions for users willing to pay an additional fee as well as governance where Masternodes can vote on updates to improve the network (e.g., such as increased block sizes to improve scalability); fungible – due to the anonymity associated with the private send features, unlike Bitcoin where coins used in illegal transactions may be “marked”  

Cons: Two-tiered system can lead to centralization as the cost to operate a Masternode of 1000 DASH is prohibitive to most; several competitors in the daily transactions space (Bitcoin Cash, Litecoin, Nano) and in the privacy coin space (Monero, Zcash, ByteCoin); private send feature does not fully anonymize transactions and they can be traced to previous transactions that were not anonymized; attempts to address multiple problems (transactions speed, anonymity, etc.) with one coin, whereas multiple coins focus on each of these problems individually and arguably in a better way

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Dash uses the same proof-of-work (POW) system as Bitcoin to validate transactions, but a different mining algorithm in X11. Originally, miners could run X11 on CPUs but hashing power has increased considerably and now requires ASICs. As described above, Dash has a second tier made up of Masternodes that perform decentralized governance by voting on updates, mix transactions to anonymize them, and instantly validate transactions within a second as opposed to about 2.5 minutes to validate a transaction via the first tier POW system. Masternodes receive 45% of the block reward (currently 5 DASH per block), miners obtain another 45%, and the remaining 10% goes to the treasury system for development. Each Masternode has 1 vote for updates to the network. If a threshold number of Masternodes vote in favor of the update then it is enacted. In other systems like Bitcoin and Ethereum, updates to the network are made through a fork where the chain splits into two. Miners effectively vote for the update by continuing to validate transactions from the old chain or moving over to the new chain. However, this voting occurs after the fork, so the developers can add an update which does not end up being enacted if the miners continue to devote computing resources to the original chain. In Dash’s Masternode governance system, updates are voted on before they are added into the protocol.

Leadership/Community Participation

Dash is led by its creator and lead developer Evan Duffield and the Dash Core Team, a company made up of about 30 employees. Duffield has received some criticism for the release of Dash where almost 2 million coins were released due to a bug when the code was forked from Litecoin. Although Duffield claims that the community did not want him to relaunch or perform an airdrop, some suspect he did this on purpose to ensure he would have a significant portion of the coins. In this manner, he could control the network through the use of Masternodes by running a large percentage of them and voting for his own proposals and against proposals that did not directly benefit him. To be fair no one knows how many Masternodes are owned by Duffield or members of the Dash Core Team.

Transaction Volume and Market Capitalization

Dash is 13th in market cap (~4B) with a transaction volume of about $130M per day.

Industry Participation

A few online retailer and businesses accept Dash such as Dash Video Casino, Organic Contraband Coffee, and a few other small companies. Additionally, it can be purchased through several exchanges, such as Bittrex, Binance, Bitfinex and many others. There are also Dash ATMs in select locations throughout the world. However, Dash has yet not received widespread acceptance and may only be used at very limited locations.

Security

In terms of security, Dash has many of the same advantages and disadvantages as Litecoin. Some argue that the second tier of Masternodes leads to additional security vulnerabilities, because the large cost (1000 DASH) of running a Masternode prohibits individual users or small entities from participating. Thus, only large entities may be able to run Masternodes which can lead to centralization. On the other hand, currently there are over 4700 Masternodes running on the network and while some speculate that the Masternodes are owned by a few entities, it seems more likely that there are at least a thousand owners. Accordingly, it is unlikely one company can take over the network or a hacker can attack one company that owns thousands of Masternodes and gain control.

Usability

Like Litecoin, Bitcoin Cash, and NANO, Dash is intended to be used for day-to-day transactions. With the advent of the instant send feature, transactions can be completed in less than a second which allows for very fast cash like transactions. Additionally, Dash can be used with an element of privacy due its private send feature. There are many reasons why someone would want to transact privately. For example, on the Bitcoin network hackers and thieves may identify the wallets with the largest number of coins and target them.

Technical Features

As described above, Dash has many of the same features as Litecoin. The main difference is its second tiered network of Masternodes that performs decentralized governance and instant and/or anonymized transactions. Decentralized governance allows for the Masternodes to vote on updates to the network (where each Masternode has 1 vote) before they are implemented into the protocol. For example, Dash has dynamically increased block sizes through these updates during periods of high transaction volume. Though this seems to be more efficient than alternative mining systems which fork the code to perform an update, critics argue that a user or company, such as Evan Duffield or the Dash Core Team could control the voting power and thus, the network by owning enough Masternodes. Furthermore, unlike Monero the transactions executed by the private send feature are not fully anonymized. For one, they can be traced to previous transactions that were not anonymized. Additionally, the private send feature is a coin mixing service based on CoinJoin. The coin mixing service breaks down transactions into specific dominations of 0.01, 0.1, 1, and 10 DASH, mixes the denominations with similar denominations from other users and includes several outputs to each person’s wallet at a different address called a change address.Though the senders are anonymous in this implementation the transactions are not. Other privacy coins such as Monero utilize Ring Confidential Transactions to anonymize the transactions themselves.

Growth/Legal Risks

Being in both the daily transactions and privacy coin arenas, Dash has many competitors including Litecoin, Bitcoin Cash, NANO, Monero, ZCash, and Bytecoin. Nevertheless, Dash does set itself apart via its two-tier system that allows for decentralized governance and by providing both privacy and daily transactions features in one coin. If only a small percentage of altcoins survive in the long term as many have predicted, Dash may be one of them since it implements multiple features.

Estimated Time of Arrival

Dash launched in 2014 and is now fully developed and ready for use. However, the Dash network has not been tested to the same extent as Bitcoin’s.

ETA: Now

Conclusion

The two-tiered network sets Dash apart in a unique way and allows for even more features to be implemented through its decentralized governance. Nonetheless, as Dash has not yet shown it is the best at any single feature (e.g., daily transactions, privacy), users may prefer coins that can focus on and perfect individual attributes within cryptocurrency over one that addresses several.

Acknowledgment:

Analysis brought to you by the hugely talented Cameron Pick. Originally published on https://cryptonalysis.net which everyone follows on Twitter.

 

 

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Consensus Mechanisms

All You Need to Know about Ethereum’s Move to PoS

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Ethereum’s move to PoS: radical shift from PoW to PoS

Ethereum, the world’s #2 cryptocurrency, with its impressive capabilities, has become a force to be reckoned with in the cryptoverse. One of its few criticisms, however, is it’s current mining method, PoW. That, however, is set to change. In this post we will explore Ethereum’s move to PoS.

With the first release of Casper, Ethereum will transition from pure Proof of Work (PoW) to hybrid PoW/PoS. According to Buterin “In this scheme, all of the proof-of-work mechanics will continue to exist, but additional proof-of-stake mechanics will be added”.

The main reason why PoS is seen as a necessary development is, of course, the need to reduce the energy requirements of PoW blockchains like the current versions of Ethereum and Bitcoin. A recent report claims that Bitcoin mining consumes as much power in a year as 159 countries, which is clearly far too much, and Buterin admitted that today’s Ethereum isn’t any better than Bitcoin in that respect.

As Ethereum prepares to make a radical shift in its Blockchain consensus algorithm from Proof of Work (PoW) to Proof of Stake (PoS), here is a brief overview of all that transpired till now – and the changes that are planned.

So, what is Ethereum?

Ethereum was created in 2013 by the Russian-born programmer Vitalik Buterin when he was just 19. In basic terms, Ethereum is a distributed public blockchain network that runs smart contracts. For an in-depth analysis, check out our article on Ethereum.

Just how Bitcoin mining earns Bitcoin, in the Ethereum blockchain, miners work to earn Ether, a type of crypto token that fuels the Ethereum network. Ether is a tradeable cryptocurrency which is also used to pay for transaction fees and services on the Ethereum network by application developers.

Ethereum’s ultimate aim is to grow into a decentralized world computer that replaces server farms. Imagine it as one computer that can be used by the whole world, which cannot be turned off.  Each update of Ethereum is planned to align this mission. So, every stage is designed to help Ethereum to scale while adding new features and improving security and user-friendliness of the platform.

The road till now – the 4 developmental phases of Ethereum

There are 4 development stages for complete launch process of Ethereum. They are as follows:

  1. Frontier
  2. Homestead
  3. Metropolis
  4.  Serenity.

We will now look at each in turn.

Phase #1 Frontier: This was the first live release of the Ethereum network. Launched in July 2015, this phase introduced the mining of Ether and started building dApps and tools.

Phase #2 Homestead: This happened in March 2016 and was the first production release of Ethereum. This phase introduced many protocol improvements. These became the foundation for improving transaction speeds and for future upgrades.

 

Phase #3 Metropolis: This phase focused on building a lighter, faster and more secure Ethereum. It includes two hard forks – Byzantium and Constantinople.

Phase #4 Serenity: This would be the final phase wherein the long-awaited Proof of Stake (PoS) using Casper consensus algorithm will be brought in.

Ethereum’s move to PoS: why move from PoW?

The short answer – to reduce the power consumption of the Ethereum network and avoid enormous waste of energy. Proof of Work (PoW) and Proof of Stake (PoS) are both algorithms for reaching consensus on the blockchain. However, the approach is quite different.

In PoW, miners attempt to solve complex mathematical problems, which requires massive computing power and electricity. There are disadvantages like the possibility of 51% attack in PoW protocol. On the other hand, in PoS protocol, the miner putting up a stake – basically locking up an amount of their coins – to verify a block of transactions. So, the higher the stake, more the percentage of blocks that he can confirm.

Ethereum currently uses PoW algorithm and plans to move to PoS protocol shortly.

Casper – Ethereum’s PoS Protocol

Casper is the name given for the ‘proof-of-stake’ protocol for Ethereum. It is actually a combination of two research projects –   Casper the Friendly Finality Gadget (FFG) and Casper the Friendly GHOST: Correct-by-Construction (CBC). They are referred to as Casper FFG and Casper CBC. The final form of Casper is expected to draw from learnings from both FFG and CBC.

Casper FFG: Nicknamed as Vitalik’s Casper, this is a hybrid POW/POS consensus mechanism. Here, there is a PoS protocol overlaying on top of the normal ethash PoW protocol. So even though blocks are still going to be mined via POW, every 50th block is going to be a PoS checkpoint wherein finality is assessed by a network of validators.

In short, Casper FFG PoS system on the current PoW chain to create a PoW/PoS hybrid and it focuses more on a multi-step transition to introducing PoS for the Ethereum network.

Casper CBC: This is being developed by Vlad Zamfir. Casper CBC is intended to replace the current PoW system used by Ethereum so that the main chain produces blocks through PoS.

Casper could be a part of the Constantinople hard-fork of Ethereum’s Metropolis phase. This hard fork may be likely to occur between 2018 and 2019 to ensure that Ethereum would be resistant against Bitmain’s powerful Ethereum miner named the Antminer E3. For more information about Ethereum Casper click here 

Casper is pretty close, sharding number one priority, Buterin recently said at a conference in Singapore.

Ethereum’s move to PoS in the Serenity Release

Ethereum plans to move from 100% PoW to 100% PoS in the Serenity release. Developers have programmed a difficulty bomb into Ethereum’s Blockchain so that PoS Ethereum Blockchain would be supported. This is expected to eliminate any confusion on which chain to follow – the chain with PoW or the chain with PoS.

Casper is expected to fundamentally change the way the Ethereum network functions – hopefully helping Ethereum scale new heights!

Ethereum: where PoW falls short, PoS is expected to thrive

In conclusion, Ethereum’s move to PoS will be beneficial for the following reasons:

  • As no mining, in its traditional form, will take place, the issue of unnecessary energy wasting will be forgotten about.
  • No competition in solving computational puzzles will mean no demand for advanced mining hardware. Therefore, more people will be encouraged to participate in the validation process.
  • PoS will make attacks on the blockchain even more expensive, despite significantly reducing energy costs.  If anyone decides to buy up 51% of ether to try to alter transaction blocks, they’ll have to pay millions of dollars to get the coins (due to limited supply and increased demand ether price will be increased drastically) and then risk losing their money by destabilizing the very blockchain they’ve put their funds in.

Updates:

20/04/2018 – it was announced at a developers meeting on 20th April that the Ethereum Casper consensus protocol is ready for review.  The Ethereum Improvement Proposal (EIP) 1011 – also known as Hybris Casper FFG (Friendly Finality Gadget”) – is the long-awaited code that will serve as a bridge in the transition from the energy-soaking proof of work (PoW), to a safer, less power-intensive proof of stake (PoS). This process is called “minting”, and it is meant to be more environmentally friendly. EIP 1011 developer Danny Ryan reported, during a meeting, that the code is “ready for reviews and community discussions, etc.” He also stated testing phase for clients using the Ethereum blockchain would begin soon. “As these pieces of the puzzle are getting closer to being completed, I’ll signal that it’s time to start talking about fork block numbers.

10/05/2018 – the release of the first version of the Casper “Friendly Finality Gadget” has been announced.  Danny Ryan, the developer behind the Casper protocol update announced its first version on GitHub. This upgrade will help the client, auditors and other external parties to integrate the source code into their software more easily as explained by Ryan: “v0.1.0 marks us more clearly tagging releases to help clients and external auditors more easily track the contract and changes.”

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Analysis

Monero

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Monero describes itself as ‘cash for a connected world’. It is an open-source cryptocurrency that focuses on privacy and decentralization.  It uses a public ledger to record transactions while new units are created through a process called mining. Monero aims to improve on existing cryptocurrency design by obscuring sender, recipient and amount of every transaction made as well as making the mining process more egalitarian.

Many people (including dark web users) were under the impression that Bitcoin was anonymous. However, some members of Silk Road found out the hard way that because transactions are publicly recorded for everyone to see, users can be traced through their IP addresses.

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Monero Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

Monero addresses this issue by creating a privacy coin that masks the sending address, the receiving address, and the amount for every transaction on the network. Monero also uses a different hashing algorithm, CryptoNight, designed to be suitable for an ordinary PC and does not require a GPU or ASIC for mining. This reduces the costs of mining and allows for more users to participate, thereby increasing the decentralization of the network.

Pros: Anonymous transactions; fungible – due to its anonymity all Monero coins are the same, unlike Bitcoin where coins used in illegal transactions may be “marked;” increased decentralization with mining algorithm that can be run on a CPU; dynamic block sizes improve scalability and prevent the network from slowing down during periods of high volume

Cons: Anonymous transactions can be used for nefarious purposes (buying and selling guns, drugs, etc.); dynamic block sizes come with increased security risks as nodes may become expensive to operate and transactions are larger for Monero than other cryptocurrencies due to the extensive amount of encryption to anonymize the transactions; unlike many other cryptocurrencies that are deflationary, Monero is subject to inflation; difficult to use (e.g., there are no hardware wallets for Monero); vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Monero uses the same proof-of-work (POW) system as Bitcoin to validate transactions, but a different mining algorithm in CryptoNight. CryptoNight is considered to be ASIC resistant as the algorithm can run on a CPU instead of a GPU or ASIC. The algorithm is actually better suited for a CPU due to the amount of RAM it requires, and this was designed specifically so that each CPU could perform mining and have voting power in the Monero protocol. By contrast, the mining algorithms employed by Bitcoin, Ethereum, and many others perform better on GPUs and/or ASICs, and only a small group of miners can afford the hardware necessary to validate transactions on these networks. Nonetheless, almost half of the hashing power on the Monero network is controlled by 3 mining pools making it vulnerable to a 51% attack.

Leadership/Community Participation

Though several of Monero’s developers remain anonymous, we are aware that the platform is led by developers David Latapie and Riccardo “fluffypony” Spagni. In addition to the lead developers, Monero has over 240 contributors working on improving the network.  Software updates are added on OpenHub on a regular basis.

Transaction Volume and Market Capitalization

Monero has less than 1% of the transaction volume of Bitcoin (~$32M in transactions per day). Nevertheless, Monero is in the top 15 in market cap (~$2.6B) for cryptocurrencies.

Industry Participation

The coin has gained acceptance at a few retailers, including from several musicians such as the Backstreet Boys, Weezer, Mariah Carey, and Lana Del Ray. Additionally, Monero can be purchased through several exchanges, such as Binance, Poloniex, Bittrex, and many others. Still, the platform has not yet received widespread acceptance and is limited in where it may be used.

Security

In terms of security, Monero has many of the same advantages and disadvantages as Bitcoin. One of the main distinguishing features is the ASIC resistant hashing algorithm (CryptoNight) which was designed to combat centralization. However, dynamic block sizes and the extensive amount of information in each transaction may limit the number of miners who can run a full node on the network, so there is a bit of a trade-off there.

Usability

Monero is intended to be used in a very similar manner as Bitcoin, but with the assurance of privacy due to anonymized transactions. Although it may appear on its face that Monero was designed specifically with nefarious or illegal transactions in mind for use on the dark web, there are many reasons why someone would want to transact privately. For example, on the Bitcoin network hackers and thieves may identify the wallets with the largest number of coins and target them. Additionally, as the technology progresses further, it may become easier and easier to identify the owners of each wallet and people may not want everyone to know the amount of Bitcoin or other cryptocurrencies that they own.

Technical Features 

Monero uses advanced encryption techniques to anonymize the sender and receiver of a transaction, while still allowing miners to verify that the sender had enough Monero to send to the receiver and allowing the receiver to spend the received amount of Monero in a later transaction. This is accomplished by generating one-time private and public keys for the receiver and a one-time ring signature for the sender that is a combination of the actual signature and several decoy signatures. For example, when user A sends Monero to user B, the ring signature may consist of user A’s signature and 4 decoy signatures. Additionally, in the Bitcoin protocol and many other decentralized ledgers, each user has a public key and a private key. A user signs transactions using the private key. On the other hand, in the Monero protocol users have two private keys (a private spend key and a private view key) and two public keys (a public spend key and a public view key). When user A sends Monero to user B, user A uses a combination of user B’s public spend key and public view key to generate a one-time public key. User B then employs her private spend key to retrieve the coins. Some additional privacy features are also implemented in the protocol, such as hidden transaction amounts, and hidden internet traffic through the invisible internet project (I2P). Monero does allow users to make transactions transparent to a selected auditor, for example.

Growth/Legal Risks 

Monero’s main competitors are other privacy coins, such as Dash, Zcash, and ByteCoin.Currently, Monero is recognized as the leader in privacy coins due to its popularity amongst dark web users although Dash has a larger market cap. As mentioned above, Monero has an unlimited supply although the block rewards gradually drop until they reach a fixed amount of 0.6 XMR per block starting in 2022. This will lead to about 1% yearly inflation. It is also worth noting that Bitcoin could implement privacy features for example, using a second layer protocol that sits on top of Bitcoin’s blockchain. Due to Bitcoin’s advantage over Monero in networking effects, users concerned with privacy could go back to Bitcoin driving down the demand for Monero. In fact, the Lightning Network by Lightning Labs implements some privacy features although they are not as strong as Monero’s. Participants opening and closing channels on the Lightning Network record transactions on Bitcoin’s blockchain which does not include the added privacy features.

Estimated Time of Arrival

Monero was launched in 2014 and is now fully developed and ready for use.

ETA: Now

Conclusion

As the emerging leader in privacy coins, Monero has a bright future particularly if users come to expect a level of privacy in their transactions. On the other hand, Monero has a significant amount of competition from the other privacy coins and its association with the dark web seems to taint the currency. The demand for privacy in cryptocurrency transactions for the average user in the future is unclear, but Monero has positioned itself well in the event that this feature becomes a necessity.

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Analysis

Ethereum

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Ethereum

As a decentralized platform that utilizes blockchain technology, Ethereum has many of the advantages (better security, immutable, trustless, no need for a central authority) and drawbacks (scalability issues and high transaction fees) of BitcoinEther Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017.

Its distinguishing feature, however, is the ability to generate and execute “smart contracts,” which are a set of terms and conditions that allow for the automated exchange of tokens or digital assets. For example, Alice may automatically receive Bob’s tokens when the Cubs win the World Series, and Bob may automatically receive Alice’s tokens when the White Sox win the World Series. Through the use of these smart contracts, companies can develop decentralized applications (dApps) on the Ethereum platform, where users receive digital assets when a particular set of conditions occur. The Ether coin is referred to as the “gas” for executing the smart contracts on the Ethereum platform, which means users have to pay a certain amount in Ether to run a contract.

Pros: Executes Turing-complete smart contracts; platform for developing dApps; allows for the exchange of a wide range of digital assets; strong leadership in Vitalik Buterin and a development team of over 200 contributors; several tokens run on the Ethereum ERC20 token standard; second largest market cap to Bitcoin

Cons: Scalability issues; rising transaction fees (has reached ~$0.50 per transaction); vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Ethereum Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Like Bitcoin, Ethereum uses a proof-of-work (POW) system to validate transactions by miners required to solve a cryptographic riddle which is difficult to compute but easy for others to verify. Therefore, mining requires a large amount of computing resources and electricity. Additionally, a POW system is vulnerable to a 51% attack, where a single miner or mining pool (made up of several miners working together who split the rewards) has more than half of the mining power of the network. As a result, the miner can refuse to validate transactions and can double-spend Ether. On the other hand, the likelihood of a 51% attack is low, because this would devalue the currency that the miners are working to obtain.

Currently, Ethereum is considering switching to a proof-of-stake (POS) system called Casper, where the validator for the next block is selected based on a combination of random selection, account balance, and the number of days the coins have been held. 

Leadership/Community Participation

The Ethereum Foundation is led by Vitalik Buterin, a Russian-Candian programmer and entrepreneur who co-founded Ethereum before he turned 20 and has been referred to as a “boy genius.” The Ethereum Foundation includes over 200 members who are actively improving the functionality of the network. Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

Ether has the second largest market cap to Bitcoin (~$80B)  and a transaction volume of about 1 million transactions per day. Nevertheless, Ether has been experiencing scalability issues as transaction volume has rapidly increased leading to rising transaction fees. Multiple solutions to this problem have been proposed including a multi-layered protocol similar to Bitcoin’s Lightning Network where most transactions will occur on off-chain micropayment channels. Another proposed solution is referred to as “sharding,” where nodes no longer store the full state of the network and instead each node merely stores a subset of the data. Then the nodes communicate with each other to obtain data which is not stored at a particular node. But, this system isn’t trustless since nodes need to obtain data from the other nodes. 

Industry Participation

Several players have been involved in creating dApps on the Ethereum platform. This includes CryptoKitties (an extremely popular game where virtual cats have been sold for up to $100k), Eth-Tweet (a microblogging service), and WeiFund (a crowdfunding service). While we have not yet seen dApps created by large companies, some big businesses such as Toyota have been experimenting with applications utilizing the Ethereum blockchain.

Security

In terms of security, Ether has many of the same advantages and disadvantages as Bitcoin. Executing smart contracts on the blockchain may open Ether up to additional security issues, however, because the code used to run the smart contracts is made public. Everyone in the network then has the ability to review the code, find bugs, and exploit them before the developers become aware of the bugs and are able to make corrections.

Usability

Ether is a utility token used as fuel for operating the Ethereum platform. This means that each time a developer creates a smart contract or issues a token on the Ethereum platform, a designated amount of Ether is transferred. Several tokens and altcoins have been created on the Ethereum platform using the token standard ERC20. These tokens include: Tron, ICON, OmiseGo, Binance Coin, VeChain, Tether, Golem, and many others.

Technical Features

Although smart contracts can also be executed using Bitcoin, the Bitcoin smart contracts have limited functionality. Ethereum, on the other hand, uses an Ethereum Virtual Machine which executes Turing-complete smart contracts that can perform just about any computation, and are not limited to exchanging tokens. In this manner, additional information can be recorded and exchanged via the blockchain, such as identity information, product information, etc. Ethereum also utilizes oracles to communicate with the off-blockchain world for evaluating conditions in the contract. For example, if the terms of the contract indicate that Alice will receive 100 Ether from Bob if the average temperature in Chicago is over 50 degrees in January, an oracle collects temperature data for Chicago which is then evaluated by the smart contract.

Growth/Legal Risks

Currently, there are over 32000 ERC20 token contracts executing on the Ethereum platform, and this number has been increasing at an exponential rate. As developers and companies find more uses for smart contracts, the value of Ether should continue to rise. Even though the supply of Ether is technically unlimited, the issuance of Ether is capped at 18 million per year.

Estimated Time of Arrival

Like Bitcoin, Ether is currently in use and several developers have created dApps and tokens on the Ethereum platform. While it is still in its infancy, developers will likely experiment with more and more uses of smart contracts.

ETA: Now

Conclusion

Ethereum has the advantage of being the first cryptocurrency to be used in the execution of Turing-complete smart contracts. The possibilities for these contracts are endless, and the Ethereum project has the opportunity to transform not only the legal landscape, but how people and machines exchange value.

Acknowledgment:

Analysis brought to you by the hugely talented Cameron Pick. Originally published on https://cryptonalysis.net which everyone follow on Twitter.

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Analysis

Bitcoin Cash

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Bitcoin Cash is a hard fork of Bitcoin – meaning that it shares almost all of the same characteristics with Bitcoin except one: Bitcoin Cash uses 8 MB blocks while Bitcoin uses 1 MB.

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Bitcoin Cash Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

This adjustment to the Bitcoin protocol was made to address Bitcoin’s scalability issues. By using larger block sizes, the Bitcoin Cash protocol is designed to increase transaction speeds and decrease fees compared to Bitcoin. Those in favor of Bitcoin Cash argue that the larger block size solves Bitcoin’s scaling problem making it useful for daily transactions (e.g., for a cup of coffee) including micropayments. They also claim that the cryptocurrency that can handle small, constant transactions can also be used as a store of value, thereby replacing the need for Bitcoin. However, those opposed cast it in a much different light. They argue that a larger block size does not permanently solve the scaling problem and instead is a temporary solution that Bitcoin could easily adopt if it’s successful. Instead, Bitcoin Cash is one of many cryptocurrencies competing to be the leader in daily transactions. There are strong arguments on both sides making it very difficult to evaluate. 

Pros: Contains many of the benefits of Bitcoin including decentralization, security, immutability, and limited supply in addition to improved scalability due to the 8 MB block size; fast confirmation times (~a few seconds); low transaction fees (~$.10 per transaction); decentralized development

Cons: Provides a quick fix to the scalability issue without finding a long-term solution; Bitcoin could always increase its block size in the future to match or exceed the Bitcoin Cash block size; vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power; Bitcoin Cash mining is centralized

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Bitcoin Cash uses the same proof-of-work (POW) system as Bitcoin to validate transactions. But its larger block size leads to expensive data storage costs, and as a result, only a few miners participate in the Bitcoin Cash network. Thus, it is highly centralized (only three miners control over 50% of the hash power: Antpool, ViaBTC, and BTC.com), making it vulnerable to a 51% attack.

Leadership/Community Participation

Unlike many other cryptocurrencies, Bitcoin Cash has a decentralized development team made up of developers from Bitcoin ABC, Bitcoin Classic, Bitcoin Unlimited, Bitcoin XT, and several others. This prevents any single group of developers from controlling the code. Although Bitcoin Cash does not have a prestigious leader like Vitalik Buterin of Ethereum or Brad Garlinghouse of Ripple, the cryptocurrency has many influential supporters such as Roger Ver, better known as “Bitcoin Jesus.”

Transaction Volume and Market Capitalization

Bitcoin Cash has about 1/10 the transaction volume of Bitcoin (~$400M in transactions per day). Even though confirmation times and transaction fees are significantly lower for Bitcoin Cash, the network has not been fully tested. On the other hand, Bitcoin Cash does have the 4th largest market cap (~$20B) of all cryptocurrencies and just recently came into existence after the hard fork of August 2017.

Industry Participation

Bitcoin Cash is accepted at some retailers, such as Overstock.com. Additionally, it can be purchased through several exchanges, such as Coinbase, Bitstamp, Binance, and many others. However, Bitcoin Cash has yet not received widespread acceptance and may only be used at very limited locations.

Security

In terms of security, it has many of the same advantages and disadvantages as Bitcoin.

Usability

Many argue that Bitcoin is meant to be used as a store of value, while Bitcoin Cash is better suited for day-to-day transactions including micropayments. Although this idea makes sense in theory, it is yet to be seen whether Bitcoin Cash can maintain low transaction fees and fast confirmation times when the network is flooded with billions of transactions per day. It appears that off-chain solutions like the Lightning Network or solutions that do not require a blockchain are better suited to handle exponential increases in transaction volume and micropayments.

Technical Features

As described above, Bitcoin Cash has almost all of the same features as Bitcoin. The main difference is its block size of 8 MB. This means 8 times as many transactions are included in a block, preventing the network from overloading and having a backlog of transactions that need to be confirmed. While Bitcoin’s mempool had been reaching close to 300 MB of unconfirmed transactions in January, the amount of unconfirmed transactions for Bitcoin Cash is typically under 1 MB.

Growth/Legal Risks

Even though it may appear that Bitcoin Cash is a direct competitor with Bitcoin, there is an argument that the two can coexist and users can have both for different purposes. Bitcoin may end up being used as a store of value while Bitcoin Cash is the cryptocurrency for day-to-day peer-to-peer transactions. As such, Bitcoin Cash’s main competitors are other cryptocurrencies that intend to be used in a similar manner, such as Litecoin, Dash, Nano, etc. Although there are many competitors in this space, Bitcoin Cash is currently the leader according to market cap, and has room to grow as the demand for cryptocurrencies that can perform day-to-day transactions and micropayments increases. On the other hand, if Bitcoin can address its scaling issues Bitcoin Cash may lose its advantage as the leader of a niche market within cryptocurrency.

Estimated Time of Arrival

Because Bitcoin Cash shares almost all of the same features as Bitcoin, the protocol is fully developed and ready for use. Nevertheless, the Bitcoin Cash network has not been tested to the same extent as Bitcoin’s, and we won’t know for sure how well Bitcoin Cash can handle daily transactions until its required to confirm hundreds of millions or even billions per day like a credit card company.

ETA: Now

Conclusion

The future is very hard to predict as there are so many possible outcomes when it comes to this cryptocurrency. It may emerge as the cryptocurrency used as a store of value and for daily transactions while Bitcoin is considered old technology. On the other hand, it may become obsolete when developers discover a more permanent solution to the scaling problem, such as by using off-chain transactions or a data structure other than blockchain. Of course, its ultimate fate is likely somewhere in between, but because their solution to the scaling problem doesn’t seem to be a permanent one, it’s value may be surpassed by other coins down the road.

Acknowledgment:

Analysis brought to you by the hugely talented cryptocurrency enthusiast Cameron Pick. Find out more at https://cryptonalysis.net and be sure to follow the cryptoanalysis Twitter account: https://twitter.com/Cryptonalysis1

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Analysis

Bitcoin

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Bitcoin was the first cryptocurrency created and is often referred to as “digital gold.”Although there are numerous advantages to being the first in its field, newcomers have built alternative cryptocurrencies (altcoins) by making various changes to the Bitcoin protocol.

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Pros: First cryptocurrency to enter the market; largest market cap and highest transaction volume; fully decentralized; strong development team in Bitcoin Core with over 500 contributors; limited supply; considered a store of value and can be exchanged for altcoins; bitcoin is an acceptable form of payment at many retailers and has been considered a legally-recognized currency in some countries

Cons: Slow transaction times (has reached ~1-3 hours); high transaction fees (has reached ~$20-30 per transaction); vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Bitcoin uses a proof-of-work (POW) system to validate transactions. This requires validators known as miners to solve a cryptographic riddle which is difficult to compute but easy for others to verify. This process may require a lot of trial and error before a valid proof of work is generated. The miner who generates the proof of work adds the next block to the chain and receives a block reward as well as a transaction fee. Solving the cryptographic riddle requires a significant amount of computing power, and miners typically purchase expensive hardware that is operating 24/7 to generate adequate returns.   Therefore, mining requires a large amount of computing resources and electricity. Additionally, a POW system is vulnerable to a 51% attack, where a single miner or mining pool (made up of several miners working together who split the rewards) has more than half of the mining power of the network. As a result, the miner can refuse to validate transactions and can double-spend bitcoins. However, the likelihood of a 51% attack is low, because this would devalue the currency that the miners are working to obtain.

Leadership/Community Participation

Unfortunately, the creator of Bitcoin is unknown and simply goes by the pseudonym, Satoshi Nakomoto. The Bitcoin Core development team is led by Wladimir van der Laan and includes over 500 members who are actively improving the functionality of the network. Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

Being the industry leader, Bitcoin has the largest market cap (~$180B) and transaction volume (~$13B in transactions per day). Nonetheless, being the leader in transaction volume has led to long confirmation times and large fees. Lightning Labs is currently working on a Lightning Network to address its scalability problem by processing millions of transactions per second off-blockchain which will also reduce fees considerably. Unfortunately, the Lightning Network is still in the development phase and it is unclear when it will be added to Bitcoin Core.

Industry Participation

Bitcoin has gained acceptance at many retailers, such as Expedia, Microsoft, Overstock.com, and even Subway in select locations. Additionally, Bitcoin can be purchased through several exchanges, such as Coinbase, Bitstamp, Bitfinex, and many others. Moreover, Bitcoin futures trading is also available on major financial exchanges including CBOE and the Chicago Mercantile Exchange. Still, Bitcoin has not yet received widespread acceptance and is limited in where it may be used.

Security

The immutable, decentralized network has been considered more secure than traditional banking systems, where account information for a large number of users is stored at a centralized location. In a traditional banking system, if a hacker gains access to the server where this information is stored, the hacker can obtain information from thousands of users at once. By contrast, in Bitcoin’s decentralized protocol, a hacker can only gain access to individual wallets and cannot breach the security of multiple users at the same time. Bitcoin also does not require users to trust those who maintain the network, because every transaction is published on its public blockchain. On the other hand, as mentioned above, Bitcoin is vulnerable to a 51% attack even though the likelihood of that is low.

Usability

Bitcoin has several uses as a store of value (digital gold), a means for transacting in alternative cryptocurrencies, and a form of payment. Even though some countries have accepted Bitcoin as legal tender, most all have not, and some have gone so far as to make it illegal to transact in Bitcoin. Furthermore, several retailers are hesitant to accept Bitcoin and it is only accepted as a form of payment at a small subset of stores. Additionally, the large transaction fees seem to be scaring users away from making small payments with Bitcoin, and many prefer to hodl (i.e., hold) while transacting in other forms of cryptocurrency.

Technical Features

As the first in its field, Bitcoin shares similar technical features with many of the altcoins: decentralization, immutability, and transactions validated by miners in a POW system broadcasted to the network on a public blockchain. Unknown to many, Bitcoin also has the ability to execute smart contracts, although in a limited form. Further developments may include the addition of the Lightning Network to increase transaction speed and reduce fees, and an improved developer environment for writing smart contracts.

Growth/Legal Risks

As the coin with the largest market cap, many are concerned that Bitcoin does not have much room to grow. Nevertheless, Bitcoin is estimated to have a user base on the order of 1-10 million. If Bitcoin does become digital gold and/or a global currency, the user base can grow to the hundreds of millions or even a billion. Additionally, there is a limited supply of 21 million bitcoins. As of January 2018, about 16.8 million bitcoins have been mined and the value of Bitcoin should increase as the number of bitcoins left to mine decreases. Although Bitcoin has been outlawed in some countries, the more prevalent it becomes the more likely those countries are to remove such bans.

Estimated Time of Arrival

Unlike many altcoins, Bitcoin has arrived and has been widely used for the last few years. While other players in this space created tokens before fully developing their respective platforms, Bitcoin is currently functional.

ETA: Now 

Conclusion

Even though Bitcoin may no longer be the hidden gem it once was, the future is still bright for the industry leader in cryptocurrency. With a growing user base and the development of the Lightning Network, Bitcoin remains a good value.

Acknowledgment:

Analysis brought to you by the hugely talented cryptocurrency enthusiast Cameron Pick. Find out more at https://cryptonalysis.net and be sure to follow the cryptoanalysis Twitter account: https://twitter.com/Cryptonalysis1

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