Use cases for cryptocurrencies: peer-to-peer transfer of money part 1
I, like many of you, am convinced that public cryptocurrencies will fundamentally change the world, just like the web did in the mid 1990’s. But for us that want to try, learn and experiment with the technology now it’s not that easy to find working use cases. However, more and more applications are going live and I will try to highlight these and how they fundamentally change the world as we know it.
Bitcoin, launched by the anonymous Satoshi Nakamoto in 2009, was the blockchain that set off the cryptocurrency revolution. The basic idea is quite simply: to be able to transfer money to another person without intervention from or trust on a third party. While we’ve been able to do this with cash for hundreds of years the digitization of money have actually introduced more hurdles and limitations at the same time as the virtual distances across the globe has been reduced. Cryptocurrencies changes all this with a direct, non-blockable channel for transferring money to any other person or entity.
As a person, I want to be able to transfer money to any other person without intervention from or trust on a third party.
Banks and other institutions sanctioned by governments have until now had a monopoly on the transfer of money. In order to satisfy inter-country agreements as well as local laws the existing routing mechanisms are filled with restrictions, high cost and a trust on third parties. Whether you pay the global credit card networks fees of multiple percentage points of the total transfer of wait days for money to be transferred between your own accounts in different banks. However, this is just nuisances compared to the exclusion of large groups from the economic system or how central authorities freeze or even take funds from depositors (as was the case in Cypress in 2013).
In theory, cryptocurrencies are close to optimal for storing and transferring value. Lightning fast transfers and no institution that can suddenly increase the supply or otherwise tamper with the value. The problem is that with no central authority the value is only what the consensus among its holders think that the value is - and it’s fluctuating a lot. Some attempts has been made to remedy this by pegging a token with fiat currency, where Tether is the most known example. One Tether is simply $1 and backed with an equal supply, but this introduces trust on a third party into the equation. Agreeing on the value has been a problem with intermediary currencies (like gold or silver) since these were first adopted and can probably only be solved with global, mainstream adoption and complete transparency into the supply and past transactions.
The second problem is that in order to gain access to cryptocurrency tokens you have to go through an exchange for converting your ordinary money. These need to be regulated somewhere and as such are still governed by the same laws that regulate other institutions that handles money. The result is that transferring money in and out of these exchanges is as slow, expensive and limited by know-your-customer laws as any other transfer. So right now it’s usually more efficient to make international transfers using a regular wire transfer as long as it’s available, at least until we all have a significant part of our personal economy in cryptocurrencies.
These two hurdles are more like growing up pains than roadblocks. Bitcoin, and its more evolved successors like Ethereum, has come a really long way from 2009. With the continuous increase in adoption these problems will gradually diminish until the cryptocurrencies are as natural to our economy as the web is for sharing information.
Cryptocurrencies for storing and transferring value
Bitcoin (BTC) is the granddaddy of cryptocurrencies and until now (June 2017) has been the most dominant when it comes to market cap and trading volumes - and thus liquidity and ease of getting into and out of the crypto market. The development of Bitcoin has been hindered by ideologists, developers and powerful miners who all see to their vision of what Bitcoin is and have failed to come to a common vision. At the same time it is the most known cryptocurrency to the mainstream audience and often synonymous with blockchain technology.
Through its sheer size Bitcoin can be seen as a stable back-bone for transferring money even though transactions are more expensive and slower than most of the other cryptocurrencies. The average transaction time is around one hour but with peaks at up to 24 hours and cost on average $2.33. Transaction volume is also limited, making it a bad choice for merchant solutions or micro transaction on its own.
Bitcoin is open source, which has helped with the trust-issue but also opened up for new versions popping up. At first a number of currencies showed up with little change except for the name and number of coins. Litecoin (LTC) changed the game though, it started out as a software fork that used a different cryptographic puzzle algorithm for resilience against specialised integrated circuits that made mining Bitcoin unprofitable using graphic cards and computer processors. It also features a shorter block time for faster verification of transactions and a more developer driven community that’s been quicker to adopt new solutions to evolve the blockchain. Some of which are now starting to be adopted back into Bitcoin. Litecoin was for a long time the second biggest cryptocurrency by market cap, until Ethereum steamrolled onto the scene in July 2015. Transaction fees hover around $0.3 with 10-20 minute confirmation time.
Ethereum (ETH) is a distributed computing platform with its own programming language as much as it is a cryptocurrency. This means that ether can be transferred between accounts, just like Bitcoin and Litecoin, but it can also be used to set up so called smart contracts. For this overview, it’s Ethereums ability to send and store value that’s interesting. And the Ethereum works brilliantly for sending Ether between accounts. Pure transactions cost around $0.15 and takes ca. 40 seconds to confirm, but if you’re willing to wait for half an hour the transaction cost can be reduced to $0.03.
Just like Bitcoin, Ethereum was quite experimental when it was launched and went live at the same time as people started to familiarize themselves with the technology. This led to a couple of quite public failures, if you’d like to call it that. The most known was The DAO hack during the summer of 2016 which led to a consensus-driven hard fork of Ethereum to effectively rewrite history. While the blockchain itself have proven resilient to various attacks a too complex smart contract was the achilles heel. Practices to avoid similar situations have since been developed and the Ethereum project is now thriving and rapidly approaching Bitcoin in market cap and with a similar daily volume.
One problem, or feature depending on how you look at it, of the mentioned cryptocurrencies is that they all have a public ledger where anyone can backtrack all transactions from the genesis block. This is not a problem if your account address is not publicly known, but this provides an immutable trail with full insight for anyone that wants to look at it. Zcash (ZEC) is a cryptocurrency where the individual transaction amounts and addresses are hidden. This makes it impossible to trace the tokens flowing through the system for increased privacy while it still features the same kind of immutable blockchain that’s trustless verified in public.
Finally, for this brief walkthrough we’ll go through Tether (USDT). Every tether token is backed by one U.S. dollar, to solve the problem of wildly fluctuating values of the cryptocurrencies. Many of the exchanges uses USDT as a base pair against other currencies to allow traders to effectively exit the cryptocurrency market. It’s also much easier to denominate prices in a known and stable “currency” than the wildly fluctuating native cryptocurrencies, so I see a use case for e-commerce using Tether. It’s smaller than the other mentioned ones though and as of now mainly used on the exchanges themselves. While simple and stable on the surface, this introduces a trusted third party into the equation, a more closed network and higher fees when entering and exiting the cryptocurrency system, even though transfers between Tether wallets are free.
With this overview, I hope that you’ve gotten a brief overview over some of the most popular cryptocurrencies that are mainly used storing and transferring value, i.e. money, in an open system without any borders. Check back for the next part on how to setup wallets and use exchanges to actually store and transfer value with these cryptocurrencies.