What is double spending?
One of the most difficult problems that people have to solve when creating new currencies is how to prevent double-spending.
Double spending means trying to spend the same amount of currency twice without anyone noticing.
Imagine if you could spend the government-issued banknotes in your wallet twice! You would be twice as rich as you were yesterday.
When it was created by the Bitcoin inventor Satoshi Nakamoto in 2008, blockchain managed to do something really special that had never been done before. By creating a public, online ledger of every transaction using the Bitcoin currency, putting a timestamp on each block to explicitly show when each one was created, and putting in place rules based on cryptography to prevent fraud, blockchain solved the double spend problem.
In cryptocurrency, double spending is essentially broadcasting fake transactions to the network of computers that support a blockchain: trying to spend the same amount of currency twice.
How does blockchain stop double spending?
In order for a transaction to be included in a block, it must conform to certain rules. These include the fact that the cryptocurrency users are trying to send to somebody else must not have been spent by any other transaction previously recorded on the blockchain - nor by any other transaction in the same block.
If that has happened, then the block will be invalid and the blockchain rules say it will be rejected by all the computers in the network.
It is this process of including transactions in timestamped blocks which avoids double spending. The process establishes an order and effectively says: “This transaction is the real transaction, any others that try to spend currency that's already been spent is fake.”
So unlike government-issued currencies like the US dollar or euro, Bitcoins cannot be counterfeited.
What is a single point of failure?
A single point of failure is a design flaw that can lead to an entire network being disrupted. If a core part within a system stops working and causes the entire thing to shut down, it represents a single point of failure.
The most robust networks in business, from software applications to supply chain networks, try to eliminate single points of failure.
If a social media platform suffers a multi-hour outage, it is usually because one of its central servers has been disrupted. This is an example of a single point of failure.
One of the advantages of blockchains is that they have no single points of failure. This is because blockchains are powered by decentralised networks of computers. If any one computer switches off, the blockchain continues to run because other computers support it.
As a result blockchains – or distributed ledgers as they are sometimes called – have more protections against outages than their centralised counterparts.
What is hard money?
Hard money refers to scarce commodities with monetary value. Their main characteristics are durability, fungibility, divisibility, and the ability to act as a store of value in relation to goods and services.
Hard money has historically been associated with the properties of metallic money as opposed to “soft” paper money. Paper money – or fiat currencies – fluctuate in value and see their supply inflated over time as governments progressively issue more of it.
Hard money has proven to be a more stable monetary unit in capital markets. Examples of hard money include precious metals like gold or digital assets like Bitcoin.
Bitcoin is considered hard money because its supply has a hard cap of 21 million. For this reason, it is also sometimes referred to as “sound money”.
Some commentators have built on the thesis of Bitcoin serving as sound money by proposing Ethereum as “ultrasound money”.
This is because while Bitcoin's supply will always remain the same, Ethereum's supply may reduce over time; making it deflationary. Each Ethereum transaction involves a fraction of the digital asset being “burned” or removed from circulation.
In theory, this makes Ethereum inherently deflationary. Whether Ethereum can reach a stage where it destroys more ETH than it creates, will come down to the dynamics of user supply and demand.
Why are there so many cryptocurrencies?
The main reason why there are so many cryptocurrencies is that developers and entrepreneurs have started to realise that blockchains are a foundational new type of technology for which there are many different types of applications.
Just like the internet was a transformative technology for sending and sharing data, cryptocurrencies and blockchain are a groundbreaking technology for sending and sharing value over the internet.
Each new project thinks it will be more successful than what is already out there.
And each attempts to apply blockchain technology in slightly different ways.
For new investors looking at the cryptocurrency space for the first time, it can be an overwhelming experience. At last count there were around 10,000 blockchain-based products available for people to buy and trade.
Not all of them are currencies. In fact, the vast majority of crypto projects are not intended as replacements for government-backed currencies like the US dollar.
Some, like Ethereum, are like the new operating systems of the next version of the internet. They are computing platforms on which developers can build and launch new decentralised applications from games to financial prediction markets, and social media platforms to business supply chain tracking.
What's the difference between a coin and a token?
Coins and tokens both hold value and can be used as a means of payment in decentralised digital environments. However, they have distinct qualities compared to one another.
Coins include any crypotassets that have their own blockchain. These blockchains are usually created with the aim of serving some purpose. For example, Bitcoin is a medium of exchange while Ethereum was set up to be a decentralised computer platform.
On the other hand, tokens don't tend to have their own blockchains. They operate on the blockchains of smart contract platforms like Ethereum. Tokens are essentially derivatives of decentralised applications and protocols that inhabit smart contract blockchains.
What is a meme coin?
A meme coin is a cryptocurrency inspired by an internet joke or trending topic in popular culture. For example, Dogecoin was created as a joke by its developers in 2013 to mock mainstream digital assets.
Because the value of meme coins is influenced by cultural trends and celebrity endorsements rather than technological innovation, their prices are notoriously volatile.
There are hundreds of meme coins in existence that are mostly popular with traders looking to speculate on their volatility.
Well-known meme coins like Dogecoin and Shiba Inu have uncapped supplies which negate their value as long term investments. Contrast this with Bitcoin, which has a hard cap of 21 million coins that can ever exist, making it both a scarce and desirable commodity.
Disclosure | Copyright © 2022 ETC Group. All rights reserved