Bitcoin, Ethereum, Blockchain, Tokens
As you can see, the digital currency market is booming.
A picture to feel the volatility of Bitcoin in one year
The price volatility of ether in a year
Below is the price list of the top 8 digital currencies (excluding Bitcoin and Ethereum)
...and multi-million dollar token sales are already commonplace, with traditional news headlines blazing the trail to discuss Ethereum, Bitcoin, ICOs, tokens, hard drives and other tech topics.
Even my 13 year old brother called me to explain to him what this was all about!
I've been investing in this market for a while now - as an engineer at Coinbase, but I'm still amazed at how quickly the cryptocurrency market has developed over the past six months.
If you want to understand why digital currencies are in the spotlight, you have to understand the behind-the-scenes catalysts driving the market. Now, that catalyst is the "token sale" or "initial coin offering (ICO)" phenomenon.
ICO vs IPO: Wild West Investing
So what exactly is this ICO?
I believe everyone is familiar with IPOs (initial public offerings) - when a company goes public, it sells some of its shares to institutional investors, who in turn sell their shares to ordinary citizens in a securities exchange. The public is excited about IPOs because they are directly involved in the stock market.
Is ICO the same thing? Yes and no. Both IPOs and ICOs are used by companies to raise capital. The main (and very important) difference is regulation. Public companies are regulated by the SEC and have a series of legal requirements and formal processes. ICOs are currently unregulated and more of a "Wild West" practice.
Overall, there seems to be a lot of confusion and uncertainty when it comes to ICOs. But proponents claim it is a new form of venture capital.
Necessary background knowledge
You can't understand ICOs if you don't understand the underlying digital asset sales in ICOs.
If you already know the basics about digital currencies, feel free to skip this section. For the rest of us, let's start at the top!
digital currency technology stack
bitcoin
Bitcoin is a decentralized digital currency using peer-to-peer technology.
Peer-to-peer basically means that there is no central authority to issue new currencies or track transactions. Instead, these operations are centrally managed by the network. These transactions happen directly between users and are recorded on the blockchain (described below).
There are a lot of good explanations on the Bitcoin internet, so I won't go into that. Below is some information that will help you understand.
Bitcoin Wiki , Wikipedia , What is Bitcoin , Bitcoin Magazine , Why Bitcoin Matters .
Blockchain
Regarding the blockchain, I have already introduced in the above article what the hell is Bitcoin's black technology blockchain (Blockchain)? A blockchain is a distributed public database that keeps a permanent record of digital transactions.
In other words, it is a log file that stores an immutable record of all digital transactions. This distributed database is not controlled by a central administrator, but is a replicated database network shared and visible to anyone in the network (meaning that each node in the network stores its own copy of the blockchain).
Each "block" in the blockchain contains a record of the most recent transaction and a reference to the block immediately preceding it, as well as the answer to a difficult math puzzle.
A "block" is jointly maintained by a group of "miners" who are members within the network that compete to validate Bitcoin transactions in each block by solving complex algorithmic problems associated with the block.
They run these complex algorithmic problems by buying or renting large amounts of computing power. What motivates them to use their computing power to validate transactions is that if they solve the problem and validate the Bitcoin block, they are rewarded in Bitcoin.
The power of this decentralized network is that economic value and governance are distributed among network stakeholders (i.e. miners and consumers) rather than centralized in one organization (e.g. banks, governments and accountants). Thanks to this setup, blockchain technology is not limited to Bitcoin. It can be used to create any other digital currency such as Ethereum and Litecoin using its own blockchain.
Protocol layer
Next is the protocol layer. Generally speaking, a protocol is a special set of rules used by network nodes when transmitting information. These rules specify interactions between communicating entities.
One example of a protocol used in telecommunications is the Transmission Control Protocol (TCP), which is a set of rules for exchanging messages at the information packet level on the Internet. TCP guarantees that packets will be delivered, and they will be delivered in the same order they were sent. Another example of a protocol is the Internet Protocol (IP), which is a set of rules for sending and receiving messages at the Internet address level, which primarily specifies the packet format and addressing scheme on the Internet.
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When discussing blockchain, the term "protocol" refers to the "rules of the digital economy" implemented through the blockchain in order to maintain distributed consistency in the blockchain's peer-to-peer network.Digital economy rules are the rules governing a decentralized digital economy:(1) Authentication using public key encryption(2) There are financial incentives to ensure compliance with the rulesFor example, in Bitcoin's blockchain, it has economic incentives, and miners are rewarded with one Bitcoin for every Bitcoin transaction they verify. This mechanism protects the network.What exactly are these financial incentives?
token
Enter the token.Economic incentives for miners come from Bitcoin blocks - the native token on top of Bitcoin. The coin is a "carrot and stick" - miners who use their computing power to validate transactions get a certain amount of coins.Generally, when you hear the terms "digital currency tokens" or simply "tokens", they refer to tokens like bitcoin that are built on top of the blockchain and represent what you own and can access. Digital assets transferred to others.There are multiple ways to create tokens on the blockchain. For example, the easiest code to understand is an inherent token like Bitcoin, which is built directly on top of Bitcoin blocks. Or you can choose to fork the Bitcoin blockchain and build tokens on top - some examples include ZCash, Litecoin, Monero, etc. Or you can build a whole new blockchain technology and build a token on top of that - which is what Ethereum does. The token on top of Ethereum's blockchain is "Ether"....even build code on top of Ethereum's blockchain itself. Gnosis ( GNO ) and Augur (REP) are examples of this. Maybe this is confusing because "Ether" is a token built on top of the Ethereum blockchain. I will explain later. Now, it is possible to build other tokens besides Ethereum Blockchain's intrinsic token as long as it is accepted.Here's a useful analogy with traditional currencies - you can think of tokens as the currency itself (like USD, EUR, etc.) and the blockchain protocol as monetary policy.The main difference here is that each token is based on some underlying blockchain - be it Bitcoin's blockchain, Ethereum, or some other forked/new blockchain.application layer
So far, we have learned about Bitcoin and the underlying blockchain. We also learned about the protocols that determine the rules of the blockchain, and the tokens built on top of it.These technologies have made us rethink our definition of money as something digital, easily transferable, secure and decentralized.However, the important point is that currency is just one application of blocks. Money aside, many in the digital currency world are obsessed with blockchain because it reveals (1) the potential future of protocols and (2) applications .(1) Agreement
The ultimate dream of digital currency developers is that we can use this encapsulation technology to build new and improved communication protocols from scratch. The protocol being developed for digital currency has the potential to solve the centralization problems plaguing the internet as the first dial-up modems are up and running.What are examples of these agreements?Then they can include payment protocols, identities, domain name systems, cloud computing, reputation systems, and more. Many of these systems today are highly centralized (e.g. Stripe, Paypal, Google, Amazon) and there is no default or standard like these on the web.Therefore, in the long run, we hope that the blockade technology will enable decentralized, open and secure protocols to be built for use cases far beyond digital currencies.(2) Application
Blockchain enables what we call "decentralized applications".Decentralized applications or "dApps" are applications built on top of the blockchain. How does this work?Let's take the Bitcoin blockchain as an example. Bitcoin uses a scripting system for transactions that occur on Bitcoin blocks. A script is a simple list of instructions. So Bitcoin's scripting language enables us to write a script that records every transaction. The purpose of the script is to define the requirements that the recipient must meet in order to access the Bitcoin being transferred.For a typical Bitcoin transfer, the script will define what the spender must provide:- public key that matches the target address contained in the script when hashing
- Signature, showing the private key certificate corresponding to the public key just provided
There is some flexibility in the parameters that can be sent per transaction. For example, we can write a script that says "this transaction is only valid if there are two private keys". So essentially, this scripting language now allows us to encode the rules for how to move money, or more generally, any information, without requiring us to trust some third party to follow a set of rules we care about. We just trust the code and everything is fine.
Because Bitcoin has this scripting language, it can be used to build certain types of applications that interact on blocks. In other words, we can build applications that communicate using Bitcoin transactions.
For example, let's say we want to build a blockchain-based crowdfunding application. You may have a set of rules for how funds are transferred (or communicated) between one party and the other, which will be coded in a scripting language. The user of the application can then run a crowdfunding event controlled by the blockchain.
This is the main idea behind dApps: a decentralized set of rules that define a specific application. This set of rules resides on a public and decentralized block (rather than a central server owned by some large entity, like Facebook or Amazon) . This allows it to be subject to autonomy and resilient to censorship.
"Where are the Apps?" Dilemma
After the above introduction, do you think developers will immediately roll up their sleeves and start building decentralized applications using Bitcoin's scripting language.
But the truth is, almost 8 years (Bitcoin was released in 2009), and Bitcoin has not yet become a great value and speculative investment .
Of course, we saw a handful of wallets and exchanges. ( Coinbase , Kraken , Poloniex , and GDAX to name a few)
Of course, we can’t forget Silk Road , the digitally anonymous drug market that processed over $1 billion in sales in two and a half years . It was closed by law enforcement at the end of 2013. In some ways, Bitcoin can be considered the first decentralized application because it runs on block technology, is completely open source, and operates without a central authority.
But a serious thing is that many of us are still searching and wondering " where are the killer apps?"
Sadly, almost no one knows about the block-based apps we use on a daily basis.
I think these factors are preventing the development of these apps (note: these are my personal opinions):
1. Lack of developer friendliness and tools
Programming applications using Bitcoin's scripting language is not easy. Why?
One reason is that scripting languages are too limited. A scripting language is a programming language in which you write code to perform certain actions. An example of a scripting language that is widely used on the web today is JavaScript.
const greeting =（name）=>“你好，”+名称+“！”;
const add =（a，b）=> a + b;
const subtract =（a，b）=> a - b
Compare with Bitcoin's scripting language:
OP_DUP OP_HASH160 62e907b15cbf27d5425399ebf6f0fb50ebb88f18
OP_EQUALVERIFY OP_CHECKSIG
The JavaScript above looks a lot like English. On the other hand, Bitcoin's scripting language looks like machine code. Most developers are used to writing in expressive languages like JavaScript, Ruby or Python, not machine code. Bitcoin scripts are scary for most developers.
Second, it takes a long time for developer tools and good documentation to be widely accepted by developers. React , for example, is one of the most popular front-end libraries today. One of the biggest reasons React has become so popular is due to the huge amount of development tools the community has invested in (like IDEs, Babel , Webpack , boilerplate , Create React App , etc.), documentation and tutorials. Bitcoin’s ecosystem is the opposite of user-friendly.
Finally, Bitcoin's scripting language is not complete . A complete programming language can be used to simulate any single-recording Turing machine . In other words, it can be used to solve any computational problem where a Turing machine can run given enough time and memory. (For more on this, read the discussion on Stackoverflow ). By not being done, Bitcoin scripts limit what you can do.
Overall, Bitcoin's scripting language has historically been limited, difficult to use, and lacked adequate tools and documentation. Therefore, it does not encourage the formation of a developer community,
2. Building decentralized applications with strong network effects is not easy
Many of the applications we use in our day-to-day work (markets, exchanges, social networks, etc.) derive value from their strong network effects . A network effect is when the value of a product or service increases as more people use it.
A typical example is WeChat. Each new user connecting to other users on the platform increases the number of connections non-linearly. Likewise, WeChat is useless if you are the only person on the platform. For every new friend that joins, the value of the product goes up because you can now pay and/or receive payments from this friend.
Network effects help build better products and services. However, building this network is one of the hardest parts of building a successful product, commonly known as the "chicken or egg" problem.
So even if developers are trying to build a decentralized crowdfunding platform on top of Bitcoin's blockchain, acquiring users from both ends of the platform (i.e. investors and product manufacturers) is a very difficult challenge.
Blockchain provides the technical foundation for creating decentralized applications, but it does not provide the framework or tools necessary to drive network adoption.
3. Decentralization alone does not provide a 10x improvement
When we discuss decentralized applications built on top of the blockchain, we might consider transaction-based platforms such as crowdfunding, remittances, payments, coupons, etc. Decentralized versions of these types of services might be a neat technical feat, but the reality is that we already have existing applications that are working fine.
For crowdfunding, we have Kickstarter . For sending money, we can use TransferWise . For payments, we can use credit cards, Paypal , Venmo , Square , etc.
Peter Thiel's 10x rule is very important to think about how to get users to use new decentralized alternatives to existing solutions.
Take Weifu as an example, which is a decentralized crowdfunding platform. As a user, WeiFund's interface and user experience seem similar to traditional well-known platforms such as Kickstarter or GoFundMe. The main difference seems to be that they claim to have lower costs and use smart contracts to run crowdfunding, allowing for more complex agreements. Is this enough for users to make the switch (especially when the cost is not very low)?
I definitely don't believe there is no benefit to decentralized applications. In fact, I foresee a future where decentralized applications are 10 times more secure, 10 times cheaper, 10 times more efficient, or 10 times more efficient in some dimension than they are today.
The point is, these benefits have yet to be proven, so there is no reason for users to consider decentralized applications today.
in conclusion
That concludes the discussion on Bitcoin, blockchain, Ethereum, tokens, ICOs, and the pros and cons of blockchain-based decentralized applications.
If you feel like I've made any inappropriate assumptions in this exercise, please share a comment below! I prefer to talk more and learn from each other.
We need everyone's input to figure out the right path towards a healthy and sustainable digital currency economic future.
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