Andrew Lockley – Exponential Investor (United Kingdom) –
I’m going to introduce you to a technology at the cutting edge of cryptocurrencies.
Whether you’re a seasoned crypto specialist or are just getting started, it’s unlikely you’ll have heard much about this technology yet. But you will.
It could potentially solve all the biggest issues bitcoin, Ethereum and others are facing right now.
If it can achieve what it’s claiming – and there’s evidence staking up that it can – it will lead to much more mainstream adoption of cryptos. And of course, it will see certain coins shoot up in price.
I’ll also cover the three most promising cryptos based on this technology, and what they’re trying to achieve.
So let’s get started.
Blockchain technology will change the face of money
To explain how this new technology works, we need to go back to fundamentals.
With all the money being made trading cryptos, it’s easy to forget why they are so valuable in the first place.
Most of the press cites bitcoin’s scarcity as the reason for its value. But that’s not really the case.
The reason bitcoin is valuable is because it solves the problem of trust
You can’t “forge” a bitcoin. You can’t send someone a fake bitcoin. You can’t pretend you didn’t receive a bitcoin that was sent to your wallet. And you can’t pretend to have sent someone a bitcoin when you haven’t.
All of that information is permanently written into a ledger. Every transaction ever made is there on the ledger for anyone to look up at any time.
No one person controls that ledger. It is created and maintained by thousands of people all over the world. All of these people have to independently agree on what it contains and all of them keep a copy.
These people are known as miners. They keep the ledger secure, and they are rewarded with a small percentage of each transaction that is recorded on the ledger.
Anyone with a computer can become a miner. There no central authority to stop you. And no central authority controls the network. It’s controlled by all the different miners. This is why it’s known as a decentralised ledger.
This decentralised ledger is called the blockchain.
And the blockchain solves the problem of trust.
In ordinary transactions you have to trust the person you’re dealing with. Or trust in a third party – such as a bank – to compensate you if that person turns out not to be trustworthy.
The blockchain ensures you can transact with people, even if you don’t trust them. And it removes the need for a third party, such as VISA, PayPal, your bank, etc, to process and guarantee your transactions.
This is huge. It completely changes the basis of our monetary system. With no need for third parties, every transaction can be cheaper, faster and more secure.
This is why people call bitcoin a monetary revolution.
It really could change the world, in a big way. This is also why the traditional institutions fear it so much. It takes away our need for them.
It takes away the power of the big, corrupt institutions and puts it back into the hands of the people.
But anyway, that’s enough philosophy, let’s get back to the blockchain.
Bitcoin and monetary transactions were the first big uses of the blockchain. This is why it’s sometime called a first generation crypto. Second generation cryptos – such as Ethereum – took this concept and ran with it.
Blockchain 2.0 will change the world
First generations cryptos use a blockchain to record financial transactions. Second generation cryptos use a blockchain to execute contracts.
These contracts are called smart contracts. They are smart because they execute automatically with no need of a third party to verify them.
It is difficult to convey the scope of what this could mean for, well, everyone. But particularly for business.
All businesses are founded on contracts.
Your business provides a good or a service.
Your customers pay you for that good or service at a price you both agree on, when you deliver it in a timeframe and to a standard you both agree on.
This is the basic contract of most businesses.
Just as with a financial transaction, it requires trust. If you’ve ever invoiced someone and had a late payment, you’ll know it’s widely open to abuse.
You are trusting that the other party sticks to the terms you both laid out. If they don’t you will need to get a third party involved – lawyers, the Department of Trading Standards, the Financial Conduct Authority, etc – to settle it.
Smart contracts automate the whole process. They can be customised endlessly to fit different situations. But in the most basic example, you can think of them like a vending machine.
Say you want to buy 10,000 cans of coke from Coca-Cola…
- You both agree that you will pay £0.20 a can, and you will receive them within five days.
- To make sure Coca-Cola delivers on time you write it into your purchase agreement that for every day Coca-Cola is late you will pay 1% less.
- Both you and Coca-Cola agree to this condition. You use an Ethereum smart contract to submit your order and wait.
- The contract is there on the blockchain and you can see it by its transaction hash (a unique string of digits you can search the Ethereum blockchain for).
- Coca-Cola delivers five days late.
- The contract automatically executes when this delivery is confirmed on the Ethereum blockchain. Coca-Cola is automatically sent £1,900 from your bank account.
Now, the above is a very simplistic example, but it can be applied to all kinds of contracts from all kinds of businesses in all kinds of situations.
Many of the new cryptos coming out today are based around the creation and execution of smart contracts.
There are cryptos that are used for paying advertisers, trading electricity, storing files, transferring currencies, sending messages, loaning money, registering land, creating insurance policies… everything.
Blockchain 2.0 is already changing many businesses around the world.
But blockchain isn’t without its flaws
Theoretically it all sounds amazing.
Not only are blockchain 2.0 cryptos vastly reducing costs and speeding up how people do business, but they are cutting out the middlemen, the vultures, the gatekeepers.
They are putting ordinary people back on a level playing field with the massive institutions. This is what decentralisation is all about. And it is all possible because blockchain solves the problem of trust.
However, it’s not without its flaws.
The biggest problems with blockchain technology 1.0 and 2.0 are:
- Mining uses vast amounts of energy.
- In order to use it, you have to pay fees to the miners.
- As the price of the crypto goes up, the fees also go up. It currently costs around £20 to make a single bitcoin transaction.
- Only certain people can afford to mine which is leading to centralisation.
But the biggest problem is that blockchain doesn’t scale very well.
What that means is there is a limit to the amount of transactions or contracts it can execute per second. For bitcoin, this is currently around seven.
Even Ethereum, a blockchain 2.0 crypto, can only carry out about 15.
VISA – the company that makes your debit card work – processes around 2,000 transactions per second on average. And maxes out around 45,000.
So you can see that if cryptos are to get wide-scale adoption, they need to speed up, drastically.
This is what all the bitcoin forks were about. People were proposing solutions to the scaling problem.
But none of them were much better than a sticking plaster.
Ethereum is desperately working on solutions to its scaling problems. These involve switching from a proof-of-work mechanism, which relies on miners, to a proof-of-stake mechanism, which relies on people staking their Ethereum.
There are also plans that involve doing transactions “off chain”. This means the transactions are carried out away from the main blockchain on a smaller, faster blockchain. This is what bitcoin’s lightening network will do.
The problem with all these solutions is they are being created after the fact. Blockchain wasn’t designed to work at this kind of scale and now it is hard to fix it.
Blockchain 1.0 and 2.0 cryptos are basically running on dial-up internet. And a new technology known as the directed acyclic graph (DAG) is like upgrading to broadband.
You know all the above problems with blockchain, well…
The DAG potentially solves all of these problems
DAG cryptos don’t have a blockchain, they have a graph.
I will go into exactly how they work in another Exponential Investor. This issue is already getting pretty long and it will take a fair bit of explaining.
So for now, I’ll just say why they are an improvement and omit the how.
The advantages a DAG crypto has over a blockchain:
- They are free to use. When you make a transaction your computer does the “mining” itself and so it is free to use.
- Because each person making a new transaction does the mining themselves, there are no scaling limits. In fact, the more people that use a DAG-based crypto the faster it will get.
- This also means they are less centralised because they don’t rely on small groups of miners.
- They are very energy efficient. The amount of energy they use, even if they were adopted on a huge scale is negligible.
- And they are arguably even more secure.
Now, I should stress that this is very new technology and it hasn’t been completely proven at scale yet.
But some of the DAG cryptos have been around for some time now and are working well.
The three top DAGs
The most well-known of the DAG-based cryptos is IOTA.
IOTA is sort of like the Ethereum of DAG.
It can do many different things (or will be able to once it’s fully completed):
- Smart contracts
- Near instant, free transactions
- Secret transactions
- Machine-to-machine automatic transactions.
Its main aim is to become the go-to crypto for Internet of Things (IoT) transactions. Think driverless cars automatically paying for petrol and tolls, etc.
You can read up about it in its official website, here.
And here is IOTA’s white paper.
Next up is the pure payment crypto: RaiBlocks.
RaiBlocks’ ethos is to do one thing and do it well. To do it the best, in fact.
Where IOTA is aimed at machine-to-machine transactions, RaiBlocks is aimed at person-to-person ones.
It doesn’t do smart contracts, or any fancy stuff. But what it does do, it aims to do magnificently.
- Free to use – that’s right. No fees, ever.
- Instant – transaction speeds are reported to be around 7,000 per second on current hardware. As computer technology improves this will improve with it.
- Infinitely saleable – in theory this could work at any scale because by using it, you’re making it faster.
- Very secure.
Often the simplest, most well-executed ideas win out. And if that maxim holds true, RaiBlocks could have a very bright future.
However, RaiBlocks is even newer and less proven than IOTA. It is only on smaller exchanges at the moment, and it is having issues with its next-generation technology.
There have been some pretty major RaiBlocks deposit and withdrawal issues on these exchanges.
But just last week it won the community vote to be listed on Binance, one of the biggest exchanges in the world.
As it’s so new, it’s hard to tell how this listing will go. It could rocket, or it could get dumped.
However, if RaiBlocks eventually works the way it’s supposed to and the kinks get ironed out, it’s hard to see how any other payment coin – including bitcoin – could compete.
You can read up on RaiBlocks on its website, here.
Or, if you want a more in-depth view, read the elegant white paper here.
And last up, we have a much less well-known crypto. It’s called Byteball.
Again, Byteball is going after simplicity. That’s why its logo is just a black ball on a white background.
You can think of Byteball like a simpler IOTA. It can do smart contracts, it has super-fast transactions, and it can be used to make all kinds of services work.
But it is not – currently – as ambitious as IOTA.
Its team is much smaller (just one main developer from what I can work out) and it doesn’t do any real marketing yet.
However, it is actually working, well. And it’s already mid-way up the top 100 cryptos by market cap.
From what I can see, if Byteball starts marketing and gets some more business people on board it could do extremely well.
It’s worth noting that although Byteball is a DAG, it does charge very small fees in order to keep the network secure. These fees are negligible though, and would be reduced if it became hugely adopted.
You can read the white paper here.
And you can see the Byteball website here.
Until next time,
Editor, Exponential Investor