Breaking into Blockchain #1: Intro and FAQ
First in a series on cryptocurrency.
By Harrison Gross
2017 was the year of the Bitcoin. Billions of dollars were poured into cryptocurrency coins and tokens around the world. Hundreds of a new style of crowdfunded projects called Token Generation Events (aka ICOs) were successfully funded. Thousands of new people are using crypto every day. Regulators are debating hotly how to manage the cryptoverse. Out of all of this, one thing is abundantly clear: the nature of money is changing. The purpose of this article is to give a brief introduction to some of the most important applications and features of cryptocurrency.
What powers cryptocurrency is blockchain technology, which enables an open, decentralized software ledger. Although it allows for many different functionalities, the first use case that has driven the popularity of the cryptoverse is in digital payments. This is because blockchain allows for a transparent, secure database that is extremely difficult to compromise. The security of cryptocurrency stems from its distribution–copies of a blockchain are stored on all computers on its network, and are constantly ratifying each other. This makes it very difficult to compromise the network, while also making it easily readable by any party.
An additional benefit of cryptocurrency is its peer-to-peer nature. It allows transactions between any two parties without intermediary. In this way, it brings many of the properties of cash transactions to the digital world: anonymity, privacy, flexibility and convenience. Despite the inherent freedom of crypto, governments around the world are beginning to regulate it, which ultimately can be a positive by adding security layers and protections to crypto funds, and ensuring individual’s earnings are taxed correctly.
Another benefit of cryptocurrency is its extremely high level of personal security. With crypto, an individual can hold unlimited value in both hardware and software wallets, and secure it so only they can access to it and have knowledge of it. This is very different from fiat currency, which is essentially controlled by government and national economic forces in terms of value and production. On the other hand, cryptocurrency, the responsibility to maintain it, and its value, are all based on its community of users. And in the case of popular cryptos Bitcoin and Ether, both number in the millions of dedicated followers. Proof-of-stake systems and similar for creating new coins on a crypto chain are also useful, because they reward positive contributions to the network, such as supplying processor power.
Crypto can enable a true “greater good” store of value, because when one person makes a contribution, it benefits the entire community. Further, when one individual engages in large-scale buying of a crypto coin, it raises the value of the entire community’s coins. The dependence on a user community for value is not without its share of risks, however—if a new crypto with better features comes out, the value of a crypto can deprecate rapidly as users shift to the new option. Another potential risk stemming from crypto is its volatility, a product of rapidly fluctuating community interest and the terraforming regulatory environment. The faith-based economic forces that apply to traditional currencies also apply to crypto, but with faster impact because its userbase is on a much smaller scale than major world currencies. Better liquidity options (such as Coinbase’s and Circle Exchange’s ability to instantly cash out of crypto) and growing userbases should improve stability. In sum, blockchain is an incredible emerging technology that can give the world access to better financial instruments, but not without risk factors that will hopefully be mitigated over time.
Now we will directly answer some of the biggest questions for those new to the cryptoverse.
- What is blockchain?
It is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. A blockchain can serve as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” Blockchain allows for decentralization of software, currency and in the case of Lucyd, the potential of a tokenized hardware platform.
- What is decentralization?
Decentralization is the process of distributing or dispersing functions, powers, people or things away from a central location or authority. Blockchain allows for decentralized networks and systems, where the power is in the hands of the community rather than an individual entity or business. For example, Bitcoin is a decentralized cryptocurrency, that is tied to the global economy instead of a single regime like the US dollar. Similarly, Lucyd is seeking to build a decentralized app store and token, that lets the Lucyd community create and share information, and perform transactions in a frictionless, untampered way.
- What is cryptocurrency?
Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. By using a blockchain ledger at their core, they enable high security transactions in a borderless fashion. A unique property of crypto is that while most of it is held anonymously, its transactions are all fully public. Cryptocurrency transfers are peer-to-peer transactions, which have much lower transfer fees and processing times than sending fiat currency like USD to another party via a bank or wire service like Western Union. However, they are also associated with their own set of risks, such as vulnerability to high level hackers, loss of private keys and corruption of the blockchain due to computing bugs. Bitcoin, Ether and LCD are all cryptocurrencies.
- What is cryptocurrency mining?
Most cryptocurrencies are released from their blockchain to miners over time, in exchange for supplying server power or other utility to the network. For example, “Earnie,” our small mining server in our office, offers up its computing power to the Ethereum network, processing and verifying new transactions on the chain along with the rest of the network. In exchange for this aid, Earnie’s owners receive a small amount of Ether. Over the course of a cryptocurrency’s life, the trend is for mining to become more difficult (ie, requiring more processing power to receive the same amount of Ether), this rationalizes the supply with demand and may perhaps mitigate inflation. In the case of Lucyd, LCD is “mined” from the Lucyd blockchain via AR content creation and community participation (eg, creating and reviewing apps both mine LCD, albeit in very different quantities).
- How does the Lucyd blockchain work exactly?
There are certain types of transactions that will be potentially much easier in augmented reality (virtual interfaces like Google Glass) with a native token, so we are creating the Lucyd blockchain and its LCD token as a native AR economic tool. LCD facilitates value transfer in Lucyd’s proposed smartglasses. LCD is created by the Lucyd blockchain, initially some is released during the token generation event, but after is “mined” by developer and user participation in the Lucyd community. Because of its ability to purchase AR content and smartglasses, it will have some cash value, and be exchangeable for other currencies, as well as used in the AR economy. Therefore, fungible rewards of the LCD token should accelerate growth of the Lucyd content ecosystem, and subsequently user engagement and financial investment in our platform. Rewards are determined by content blocks on the blockchain, with the corresponding block to an app releasing more LCD to its developer in response to positive reviews, and slight amounts to users for their participation in ratings, ads, referrals and the like. One of Lucyd’s main sources of revenue will be collecting minimal network fees on transfers and purchases using the LCD token.
- What is a token generation event (TGE)?
A TGE is a crowdfunding round done by new companies via a company-created cryptocurrency. At the core of an TGE is usually a software solution to some international problem, which runs on the company cryptocurrency (“altcoin”) for various utilities. Participating in the TGE gets you company tokens, which will have use for their product when it releases, and can be traded and sold for other currencies at a value that fluctuates according to faith in their represented company or community. Some altcoins act like a de facto share in the company and provide dividends, some are just a utility token, that acts like a powerful type of credit in the system or network the company is creating. LCD is a utility token that will be used to acquire goods and services on Lucyd’s AR platform.
- What is proof of work vs. proof of stake?
POW and POS are different algorithms used to operate cryptocurrencies. In POW, miners get rewarded new tokens for supplying computing power to the network, by solving complex computing problems. This is inherently problematic because the amount of tokens mined per unit of power contributed reduces over time, and because a vast amount of electric and computing power is used by the mining process. This causes the transaction fees to rise, as is the case with bitcoin where even a small transaction can sometimes cost $10. This issue with POW is being addressed for Ethereum, which is trying to change to POS. In a POS system, token profits are only from transaction fees, no regular mining takes place. Tokens are issued based on the size of an individual entity’s stake in the network. E.g., if two people own all of Ethereum 50/50, then they will each get half when new tokens are minted. The cost/power of using POS is much less than that of POW. For more info on proof of work and proof of stake, go here.
Thanks for reading, we hope you learned a little bit about what is causing crypto to become one of the hottest technologies in the world. Like anything that is simple, useful and fair, it is gaining a vast amount of traction around the globe. It is rapidly becoming the preferred method of payment for many individuals and businesses, because of its convenience and potential for appreciation.
This article is for informative purposes only and does not constitute investment advice.