3. Cryptocurrencies

Core message: Many cryptocurrencies have been launched since the introduction of Bitcoin in 2009 - all heavily influenced by the original. Currently, the next 3 largest by market capitalization are Ethereum, Cardano and Solana.

Our 2-Cents: An area of intense growth and rapidly rising and falling prices and market capitalisation. All cryptocurrencies are not the same and care has to be taken in understanding the differences between them and the levels of decentralization employed - which can vary considerably.

Let's break it down...

The following chart represents the landscape of the cryptocurrency ecosystem in December 2021. Today’s position.

Top 3 Cryptocurrencies - behind Bitcoin

1. Ethereum

Ethereum, like Bitcoin, is an open-source project that is not owned or operated by a single individual. Anyone with an internet connection can run an Ethereum node or interact with the network.

However, Ethereum differs from Bitcoin in its ability to build and execute decentralized smart contracts. Smart contracts enable a broad ecosystem of applications on Ethereum, such as Non-Fungible Tokens (NFTs), decentralized finance apps (DeFi), other decentralized apps (or dapps) and Decentralized Autonomous Organisations (DAOs).

Ethereum has its own coding language in which smart contracts are built called Solidity.

Once a smart contract is built and deployed it cannot be edited or corrected: it is immutable. It is very hard to cover every eventuality when creating complex smart contracts which can result in negative unforeseen consequences in these self-executing instruments.

2. Cardano

The Cardano blockchain is divided into two separate layers: the Cardano Settlement Layer (CSL) and the Cardano Computing Layer (CCL).

The CSL contains the ledger of accounts and balances (and is where the transactions are validated by the Ouroboros consensus mechanism).

The CCL layer is where all the computations for apps running on the blockchain are executed — via the operations of smart contracts.

The idea of splitting the blockchain into two layers is to help the Cardano network to process as many as a million transactions a second. Cardano is a proof of stake cryptocurrency.

3. Solana

Solana is, again, both a cryptocurrency and a flexible platform for running decentralized apps (dapps).

Its major innovation is speed, via a bundle of new technologies including a consensus mechanism called proof of history (PoH).

Solana can process around 50,000 transactions per second - compared to 15 or less for Ethereum (the ETH2 upgrade, which is currently underway, is designed to make Ethereum much faster than it is now).

Because Solana is so fast, congestion and fees remain low. Developers hope high speeds and low

fees will eventually enable Solana to scale to compete with centralized payment processors like Visa.

Open, Public, Permissionless, Peer-to-Peer

The following questions are important to ask when looking at any cryptocurrency and guaging how decentralized its operations and governance are:

Open: Can anyone join the network? Or are there any restrictions?

Public: Are transactions verifiable/auditable by anyone, i.e., is there transparency?

Permissionless: What roles can network participants play? User, Validator, Auditor, Developer, Tester - are there ways in which participation is limited?

Peer-to-Peer: Does a central authority have power over the network (and changes thereto) or is it truly peer-to-peer where participants enjoy autonomy inside the rules of the system while changes (to the system) are made by participant consensus?

Secure, Decentralized, Distributed Network

The minimum requirement of any transaction network is that it is secure.

Decentralized / distributed systems offer a better opportunity for security than centralized systems as every user of the network can independently verify the validity of any transaction rather than trust the data provided by a third party.

The more users actively validating/confirming transactions, the more secure the system.

The important questions to ask to assess how secure and decentralized/distributed the network is:

- What consensus mechanism is being employed to confirm transactions?
- Is the right to validate/confirm transactions restricted in any way?
- How many nodes are validating/confirming transactions?

Proof of Work

Proof of Work involves nodes (computers) entering into a competition using processing power to solve a maths puzzle to gain the right to add a block to the blockchain and receive a reward. Hashing power is required to win the block and reward.

The decentralization and security of proof of work networks are largely dependent on how high their hash rate is and how many nodes are participating.

In proof of work, the penalty for miners submitting invalid information, or blocks, is the sunk cost of computing power, energy, and time.

Leading Proof of Work blockchains:
(Ethereum is switching to Proof of Stake)

1 PH/s (petahash) = 1000^5 = 1 000 000 000 000 000 hashes per second
1 EH/s (exahash) = 1000^6 = 1 000 000 000 000 000 000 hashes per second

Proof of Stake

Proof of Stake involves nodes staking/pledging an amount of tokens to the network in order to be chosen (no competition) to create a new block to add to the blockchain and receive a reward. Pledging coins/tokens is required to win the block and reward.

Decentralization of a proof-of-stake blockchain can be measured by the number of validators and the percentage of token supply that is staked. The higher the percentage of the token supply that is staked, the harder it is to disrupt the network.

In Proof of Stake, if a validator accepts a bad block, a portion of their staked funds will be withheld as a penalty.

A validator cap is the limit of coins a validator can have.
A lock-up period is the time during which tokens cannot be moved after they are staked.

Proof of Work V Proof of Stake

Proof of work is a more robust consensus mechanism than Proof of Stake.

Should a bad actor seek to attack a proof-of-work network, they would need to buy enough hardware to represent the majority of the network, and then they would need to pay the energy costs to run it all.

The two-fold security system of the initial cost of equipment and the ongoing energy costs makes the network more resistant to attack.

Tying the consensus mechanism to the expenditure of energy also provides an objective way knowing/maintaining the 'true chain' (from competing chains in the network).

Proof-of-stake systems require solely an initial upfront staking fee to participate, leaving them more open to attack. There is no objective way of knowing the 'true chain' using proof-of-stake.