Five Features of Smart Contracts on a Blockchain

 Bitcoin versus other Blockchain Projects

Towards the end of April, as bitcoins crossed the $450 mark, news articles started appearing focusing on Bitcoin’s seeming resilience despite all the negativity and the price of bitcoin having doubled from last year. 

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Despite so many initiatives coming up that claim to eventually sideline or displace Bitcoin altogether, that gloomy prognosis is still at least five years away. 

What could be the reason? For one, Bitcoin is a use case which was implemented using existing technology. Only two things can take down Bitcoin. One, a better Bitcoin application or two, a 51% attack. 

On the other hand, many blockchain projects are trying to create innovative technical designs while simultaneously looking for use cases that apply. This cart before horse approach is no doubt, where the future lies for enterprise solutions. However, it is both time consuming and expensive. 

In this article, we take a step back toward the underlying premise of Bitcoin and Ethereum applications, which is smart contracts, an idea which has its roots from some of earliest proponents of digital cash and Bit Gold such as Nick Szabo.

Cryptocurrency followers are familiar with the notion of smart contracts as explained through Nick Sbazo’s website, Satoshi Nakamoto’s white paper, articles on the Bitcoin wiki, as well as through Ethereum architecture. 

Long story short, a good blockchain use case should implement smart contracts. Otherwise you are better off with a highly redundant database locked away in a vault. 

What is a smart contract? These are the five features that one can consider as characteristics of a smart contract.

Note: In order to describe the concept, this article has taken several liberties with the definitions. Many terms are not strictly true to the dictionary definitions, but used in a more generic context without losing the meaning. 

1. Smart Contracts enable Peer to Peer Agreements

Contracts are made between two or more parties, who are both beneficiaries of the agreement. When two parties, or peers in this case, who are otherwise unknown to one another, enter into a contract, a third party enforces trust, dispute remediation or even intermediary services. 

For example, Uber, AirBnB or other sharing economy applications allow people to use services in a peer to peer model opening a vast supply of resources than conventional taxi or hotel industry can provide. Uber or AirBnB act as the trusted third party and also provide the platform to connect suppliers and consumers. A contract between two parties is made using the platform and payments are made to the service provider who charge the supplier. Thus Uber can drive pricing and control who can use the system.

In Satoshi Nakamoto’s introduction to Bitcoin on the P2P forum, the creator of Bitcoin has pointed out the disadvantage of a third party aka central authority. Centralized systems can shut down or be shut down leaving consumers and suppliers high and dry, many times causing them some loss as well. 

If Uber fails, consumers have to look for another platform provider. 

A smart contract uses the blockchain to allow two parties to make a contract automatically. Instead of using a third party to determine the pricing and participants for all, two parties can directly set-up and execute a contract with mutually agreed rules. 

For example, Alice and Bob who are unknown to one another can enter into a transaction for a precious asset say a diamond. Alice who owns the diamond can sell the diamond to a highest bidder, Bob in this case. Alice receives payment only when she delivers the diamond to Bob. If Bob does not receive the diamond after a specified interval of time, he receives an automatic refund. 

2. Smart Contracts Secure Rightful Ownership through Cryptography Technology Protocols

A smart contract allows two parties to define and enter into a custom contract. But a trusted third party provides one more function. It establishes who the rightful parties are and this knowledge is limited to the parties of the contract and the third party. 

In a smart contract, rightful ownership is established through security protocols such as cryptographic keys. Bitcoin and other blockchain applications use public private key cryptography to assign digital signatories to a contract. The public portion of the key establishes an identity and the private key is the signing authority. Public keys designate who the parties are and signing using a private key executes or enforces a contract. 

Trust is not limited to the ownership but also extends to the asset or contract object(ive). A smart contract can use cryptography protocols to establish unique and immutable digital identities to assets. 

For example, when Bob buys a diamond from Alice, he sends her digital money by signing the transaction with his private key. Alice has designated the diamond as an asset and she releases the asset by signing it with her private key. The money can now be transferred using Alice’s private key. In turn, the diamond’s ownership is assigned to Bob and only he can unlock it for future transactions such as a sale, a gift or heirloom. 

Three: Smart Contracts Enforce Contract Rules Automatically

A smart contract should include contract rules that can execute automatically. Most contracts involve an exchange (event) between two (or parties) subject to conditions which must be fulfilled (e.g. sufficient balance). These rules should be encoded within the contract. The objective being, of course, fulfilling the role of trust and enforcing rules more consistently, objectively and using escrow than escalation mechanisms. 

In the Alice and Bob example, there are four rules. The price at which Bob and Alice agree for the diamond. Alice should receive the money. Bob should receive the diamond. The transaction should be completed within a stipulated time. A smart contract application would enforce all these rules which would execute at a stipulated time and/or when an event such as payment receipt is triggered. 

Four: Smart Contract Transactions are Immutable

A smart contract once executed cannot be reversed through system rules, hacked or tampered with or violate agreed fulfillment rules. 

Smart contracts are immutable, in the sense that while some rules are changeable, the effects of a contract rule once executed, cannot be reversed or modified, without substantial (and meaningless) collateral damage. The blockchain makes transactions immutable to eliminate the “double spending” problem, another human problem that requires trusted third party. 

Alice can sell her diamond to Bob and then again to Carol, except that the blockchain (or a Merkle tree of transactions) will track her asset history and prevent her or another willing buyer to enter into another transaction unknown to Bob. If (and since) the blockchain is a distributed transaction ledger sitting on many different nodes or a peer to peer network,  timestamped (in real time or near real time), Alice’s transaction is buried under many other transactions and blocks. 

Five: Smart Contracts Enable Fungible Transactions

I think that the most important benefit of smart contracts is the technology allows for an immense scale of transactions from the infinitesimal to large scale. Transaction costs, market driven value and supply and demand, have always excluded micro-transactions or made customization very expensive. 

Like the sharing economy, smart contracts enable peer to peer transactions of smallest value possible. Bitcoins are fungible to 8 decimal places and can be used to make micro-payments and purchase of multi-million dollar luxury villas at the same transaction fee and speed. Smart contracts make allow pricing unit items such as blog article or Internet tipping, where a unit or contract token can break down into a million parts or more. 

Using a smart contract Alice can sell Bob a diamond, a used guitar or even rent a single room in her house, an idea that Slock.it, a smart contracts startup is pioneering on Ethereum.   

Summary

Smart contracts are the single most important use case that blockchain technology enables. Describing blockchains as a globally distributed database is looking at just one aspect. Applying smart contract features is one way to validate use cases for decentralized applications on a blockchain.

Bitcoin News Capsule: Analysis of Ten Developments in Q1 2016

Bitcoin News Capsule: Ten Developments in 2016

In the fast moving world of cryptocurrencies, Bitcoin still dominates headlines. In this post, a quick round-up of events in the Bitcoin universe in the first quarter of 2016.

From the blockchain, markets, blocksize debates and node divisions, Bitcoin businesses, regulation and the competition we have tried to cover notable events across all. 

One: Bitcoin Ruled the Cryptocurrency Markets and Competition

2016 started well for cryptocurrency market with the total market cap reaching nearly $8 billion. Bitcoin ruled finishing with $6.4 billion market cap and 80% market share. Prices remained steady at $400 levels throughout the quarter starting at $433 on January 1 and ending at $417.

Source: Coin Dance

The first quarter also saw the emergence of Ethereum. Ethereum is growing in market cap and Ethereum dapps attract a lot of attention. Ethereum, as we saw in the article comparing the two, is the most serious competitor to Bitcoin but it is not a Bitcoin killer. 

Banks, FinTech and BigTech consortia continued a slew of announcements of successful tests on blockchain technology, partnerships and more, using Ripple and Ethereum. The only reason this is included here is the fact that of headlines include the word Bitcoin blockchain technology, such as this one from Wall Street Journal.

Maybe the Bitcoin tide is needed to float all blockchain boats.

Two: Business as usual at the Bitcoin blockchain

 

The blockchain height grew to by 10,000 blocks to over 400,000, minting 25 new coins per blocks. 

Bitcoins in circulation also grew by 400,000 with a total of 15.4 million BTC at the end of the quarter. Average block sizes have started reaching the 1 MB limits. The blockchain size is now approaching 70 GB. 

Source: Satoshi.info

Three: Blocksize Forks - Nodes divided between Core, Classic, XT and Unlimited

The blocksize limitation debate has fragmented the Bitcoin developer community, businesses and miners with different parties implementing their vision for an immediate and long term fix in a different fork. 

At end of  Q1 2016, nodes are running four different versions Core followed by Classic which between them, account for 94% nodes, followed by Bitcoin XT and Bitcoin Unlimited, at 3%. 

Source: Coin Dance

Will Core or Classic attain the supermajority for consensus? The answer may be evident next year.

Four: Bitcoin Classic Released 2MB hard fork

At least one code release came through with support for 2MB blocksizes. Bitcoin Classic, supported by former released a 2MB hard fork in February 2016. Classic is supported by former core/XT developer Gavin Andresen, businesses Coinbase, Circle, Bitstamp and Genesis mining.  

Five: Bitcoin Roundtable Consensus

Also in February 2016, the Bitcoin Roundtable Consensus was announced, following a meeting in Hong Kong  which was organized by BTC China COO Sam Mow and attended by Bitcoin Core developers and leading miners such as BitFury. 

The agreement in effect rules out any immediate changes, but laid out the proposed roadmap for Bitcoin Core releases. The agreement supports a gradual increase in blocksize, retaining the 1 MB limit at present, with SegWit option to handle block limits, a proposal to release to release code to support 4MB blocks in June 2016 and a hard fork based on majority consensus occurring twelve months further down the line in July 2017.

The news had a positive impact on the price of Bitcoin.

Six: More on Block Size: Satoshi Roundtable and Other Recommendations

The annual Satoshi Roundtable, a private invite event/retreat attending leading names in Bitcoin and cryptocoin industry followed at the end of February. The major slant of the event was towards having a concrete solution for blocksize, such as adopting Classic Release which is now available and having a fallback alternative to Bitcoin Core.

Blocksize and Core roadmap versus Classic was the dominant focus of some of the posts from Gavin Andresen and Brian Armstrong who were among the attendees. The Satoshi Roundtable also ended with members signing a pledge in support of respectful dialogue (on Bitcoin).  

Other recommendations for block size kept coming through the quarter. BitPay, have proposed a release that uses dynamic scalability. Academia also joined the debate. The Initiative for CryptoCurrencies and Contracts (IC3) at the Jacobs Technion-Cornell Institute, Cornwell , released a study that recommends a 4MB block size. 

Seven: Bitcoin in danger of Centralization?

Blockstream, the blockchain solutions startup founded by Bitcoin Core developers, has been at the centre of many debates, primarily around proposed changes (or not) to Bitcoin Core which effectively keeps block size and scalability to be handled via side chains aka Liquid. 

Coinbase CEO Brian Armstrong, remained vocal about his concerns cum opposition to the Core roadmap. Xapo, the Fort Knox of Bitcoin has also moved away from Core and Blockstream.

BTCC and Blockstream (naturally) are those who defend the Core roadmap as the necessary for evolution of Bitcoin as a long term scalable settlements platform.

Will business interests centralize and/or cannibalize Bitcoin for good? Time will tell.

Eight: Funding Bitcoin Development

MIT's Digital Currency Initiative announced that it was setting up a $900,000 Bitcoin Developer Fund raised from contributions from industry and individuals to support development of the Bitcoin protocol.

Bitcoin developers Gavin Andresen, Wladimir van der Laan, and Cory Fields are former Bitcoin core developers who were offered positions with the Digital Currency Initiative after the Bitcoin Foundation ran out of funds in April 2015. Although these developers are associated with the Classic version, the Foundation funds will be used to pay salaries and other expenses to support development on the Bitcoin protocol than any specific position or project.

Nine: Startup Woes - Two More Exchanges Meltdown

CoinTrader the second largest Canadian Bitcoin exchange and its parent company joined the list of exchanges that shut down overnight, without warning and blaming a hack. More bad news were in store for clients Cryptsy, which suspended trading in January. A Florida court has taken control over the exchange's assets and placed it in receivership.

Ten: Bitcoin and Lawmakers

In good news, Australia is planning to end double taxation treatment for Bitcoin, while New Hampshire in USA rejected a proposal to accept tax payments in Bitcoin.

In the USA, six after Circle became the first company to receive BitLicense from New York Department of Financial Services, it remains the only one. Other Bitcoin businesses that have applied for BitLicense are still awaiting approval.

Bitcoin is currently legal in 71 countries.

Summary of Bitcoin in Q1 2016

By Bitcoin standards, Q1 2016 has ended on a fairly mild note. The block size debate has momentarily receded from headlines although nodes are running as many as four different versions of Bitcoin. No pricing bubbles burst and anyone hoping for some negativity to dent the $400 price to bargain levels, was left disappointed. Two exchanges went belly up, a few more governments accepted Bitcoin, and, thanks to the blockchain hype, there is more love going around for Bitcoin.

The second quarter is bound to see some serious action as block rewards drop from 25 to 12.5 bitcoins around June. 

Cryptocurrencies or Blockchains: Comparing Ethereum and Bitcoin

Introduction

In this continuing series on cryptocurrencies we compare Bitcoin with Ethereum, a blockchain platform with a minable crypto token called ether. At the outset, it should be clarified that Ethereum is not designed to work solely as another alt-chain or altcoin. It is also not designed to work only as a payments network, the purpose of Bitcoin. Simply put, Ethereum is a platform and not an application. So what is it for?

Ethereum is the first smart contracts blockchain that has been developed separately from Bitcoin. Ethereum is a blockchain platform for any type of digital smart contracts including digital payments. The Ethereum platform called Frontier is designed to enable building and execution of decentralized applications on the Ethereum blockchain. 

One way to understand this is from a Ripple point of view. Ripple's distributed ledger is a blockchain application and the cross currency exchange and account balances in Ripple transactions can be called a smart contract.

How Ethereum Works – A High Level Overview

For those familiar with Bitcoin and its history, the context of Ethereum and its design is easier to follow and even appreciate. This blog has a complete section on Bitcoin, for Bitcoin newbies. Ethereum has been in public consciousness since Vitalik Buterin’s whitepaper in 2013 and the 2014 crowdsale to fund development. Since the launch of the Ethereum blockchain in July 2015, new developments are reported on a daily basis. 

For purposes of this article, there is a short overview section before moving on to the comparison between Bitcoin and Ethereum. The Ethereum Frontier platform, distributed apps ecosystem and roadmap, will be covered in a separate series of posts. The Ethereum website and Github wiki are go to sources for complete information on Ethereum.

"Say Uncle": The Six Building Blocks of Ethereum. Ethereum's differentiator is the smart contracts language Solidity and EVM that enables decentralized applications to run on the blockchain. 

Smart Contracts Language: Solidity and Ethereum Virtual Machine

The first release of the Ethereum source code, called Frontier, created the genesis block went live in July 2015. Ethereum has a new blockchain with two major enhancements over Bitcoin. The first is a Turing complete programming language for smart contracts called Solidity that supports loops and conditions for contract transactions. Ethereum also includes a runtime Ethereum Virtual Machine or EVM, that executes Solidity bytecode on the blockchain. 

Dapps

Applications which implement the smart contracts in Ethereum are called decentralized applications or dapps. Decentralized applications are different from conventional distributed application architectures. An Ethereum smart contract will execute on all nodes that run the blockchain.

Ether

The digital tokens or coins in Ethereum are called ether.  Ether are used are crypto fuel or costs of transaction. Developers have to use ether to submit smart contract rules/code to the blockchain and users have to spend or burn ether to invoke transactions for an application. Transactions will roll back if they run out of gas (the amount of ether specified).  Ether can be traded against bitcoins and other fiat currencies via cryptocurrency exchanges.

Blockchain 

The Ethereum blockchain in other respects is analogous to the Bitcoin protocol. The blockchain is public and decentralized. New blocks are generated through a mining process. The current version requires full nodes to be downloaded for better security. Ethereum blocks are generated every 12 seconds with uncle blocks allowed to link to the main chain.

Ethereum transactions contain information about accounts and transaction state. Ethereum accounts consist of two types of account (external) user accounts and contract accounts. Contract accounts execute smart contract rules in the EVM. 

Six Differences Between Ethereum and Bitcoin

One: Application

Bitcoins are a cryptocurrency and bitcoins have a complete ecosystem of merchant, wallets, exchanges and payment processors that runs on top of the blockchain. Bitcoins can be used to make payments in the real world. Bitcoin is a decentralized peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. 

Ethereum can be called the next generation of the Bitcoin protocol. The Ethereum blockchain distributed consensus provides for peer to peer contracts without a trusted third party. This has applications for every use case where there is an exchange of value between two parties under a binding agreement or a contract.  Two individuals or parties anywhere in the world can code a smart contract and execute it using ether without the need of a trusted third party. 

The Ethereum website highlights multiple use cases from building your own cryptocurrency to a decentralized autonomous company using Ethereum.  Several industry applications are live on the Ethereum blockchain. We have highlighted some examples such as the solar energy micro-grid in the article on use cases for blockchain applications. 

Two: Ownership

No one owns the Bitcoin platform not even its pseudonymous creator Satoshi Nakamoto or the developer community that continues to maintain it. The network is distributed across nodes all over the world. Bitcoin’s roadmap is driven by the developer and mining community. As the blocksize increase issue has demonstrated, the absence of public owner(ship) and decision making authority is a risk for Bitcoin.

The Ethereum platform is owned and the roadmap defined by the Ethereum foundation. The Ethereum source code is open source. There is also a growing developer and technology ecosystem that is actively involved in 

a) Creating developer tools and infrastructure for dapps e.g. Consensys. Microsoft Azure BAAS.

b) Building new releases Frontier, Homestead, Casper, Serenity through the Ethereum foundation.

c) Building smart contract applications for Ethereum.

d) Building tools such as blockchain explorers and interfaces for the Ethereum blockchain.

e) To a lesser extent, alt-coins forks from Ethereum. 

Three: Blockchain

The Bitcoin blockchain runs on the permissionless network of participating nodes that run in full or light modes. The higher the nodes and longer the block height, the more difficult to attack or take over the network. Anyone can download and run a Bitcoin node. Bitcoin uses SHA256 proof of work algorithm to add valid blocks to the network using consensus method. 

The Ethereum blockchain can be said to be based on the Bitcoin protocol. Ethereum improves upon the problems that Bitcoin blockchain has run into. Miners in the current version download and run the full node and solve proof of work algorithm. Consensus method is used to reward the longest chain. 

Ethereum’s 12 second block rate significantly increases the rate of orphan blocks and forks as well as reducing incentive for miners on a slow network which is handled by including uncle blocks. Ethereum uses an innovative concept of compensation by accepting stale blocks called uncle blocks on the blockchain.

Uncle blocks solve the proof of work but lag behind the winning block. A maximum of two uncle blocks are accepted on the main chain and compensated at a fraction of the main block reward. Uncle blocks should not have parents older than six blocks.

Four: Coins

Bitcoin is a cryptocurrency and payments network. Bitcoins are designed to be in finite supply and deflationary. 21 million bitcoins will be generated through a halving mining block reward. As on April 2016,  15.3 million bitcoins have been mined and the block reward is 25 bitcoins. All bitcoins have been generated through mining.

Ether is the digital token used in Ethereum. Around 72 million ether were pre-mined and distributed through a crowdfunding sale in exchange for bitcoins to launch Ethereum platform development in 2014.  After the Frontier platform went live, Ether are generated as mining block rewards. As on April 2016, there are 78.7 million ether in supply.

Five ether are generated in the form mining reward for new blocks, with five ether per block and uncle blocks are compensated at 7/8th of the block reward or 4.375 ether with a maximum 2 uncles per block which implies a new block confirmation can produce a maximum of 13.75 ether.

Although, the supply of ether is not capped, a final issuance model appears to be under development. The current supply of ether is generated through block rewards.

Five: Mining

Bitcoins are generated by the miners when new blocks are added. Bitcoin uses SHA 256 proof of work method. Bitcoin’s increasing centralization due to high costs of ASIC mining, increased difficulty in proof of work, debates on energy consumed are some of the issues that have emerged as the currency has gone mainstream into public and institutional consciousness. 

Ethereum mining has tried to address the issues that have surfaced with Bitcoin mining. Because ether are not intended as cryptocurrency, there is no limitation on ether mining or changing the block reward. The current Frontier release uses Ethash proof of work algorithm which is ASIC resistant and memory hard. The proof of work is planned to be replaced with proof of stake in the next release.

Six: Market Value

As first mover, Bitcoin rules markets with a $4oo average value and a $6.5 billion market capitalization in 2016. Starting with a near zero market cap, Bitcoin has followed the path of natural evolution and set the stage for other crypto-platforms to follow. Bitcoin’s value is driven by its design properties as digital money (fungible, portable, scarce, divisible etc.). 

Ether has registered the highest growth in market cap starting at $1 USD in August 2015 on launch, and increasing tenfold in value trading at 1 billion or $11 USD in 2016. As the Ethereum protocol takes off, this value will increase based on the intrinsic value of blockchain companies and a potential “dapps economy” running on Ethereum. 

Summary

When comparing Bitcoin and Ethereum, it should be clear that they are not competing systems. Bitcoin can be considered the first successful implementation of a smart contracts platform that makes use of the decentralized nature of the Internet and digital cryptography to enforce contracts between human actors that previously required a trusted third party or intermediary.

As Ethereum matures, it is likely benefit Bitcoin which can go back to its original vision of a peer to peer digital cash payment network. Ethereum may become the defacto standard or protocol for decentralized public or private applications with the same advantages as the Internet and the rise of cheap computing. The Ethereum blockchain has the potential to disrupt many industries that are based on intermediary or arbitrator models. 

While Bitcoin is a public system, Ethereum needs a critical mass of smart contract applications to be feasible. Network security, scalability and using a decentralized datastore is a major paradigm shift to the closed world of technology where the Internet acts as a transport connecting closed application systems.

The evolution and developments of these platforms will be very exciting to watch in the coming months. 

Coins Compared: Seven Differences Between Ripple and Bitcoin

Introduction

In our series on cryptocurrencies we started with mineable altcoins. In this series we explore the non-mineable variety of cryptocoins and crypto assets (generation 2). 

The first in this series is Ripple, the largest pre-mined currency by market cap and also one of the earliest competitors to Bitcoin.
Understanding the concept behind Ripple is a little confusing at first and raises many questions especially if one is looking at it from a Bitcoin point of view. For example, is Ripple a currency like bitcoin or not?  Is it decentralized? Why was it premined? Does Ripple have one universal ledger like the Bitcoin blockchain? Does Ripple share Bitcoin’s goals and use cases? 

This post is for those who like this blogger, grew up on a Bitcoin diet, and want a closer look at other alternatives.

How Ripple Works – A High Level Overview

Since this blog has an entire section on Bitcoin, those interested in a Bitcoin tour, can start with "The Disruptive Innovation of Bitcoin". And if you know how Ripple works, you can skip this section and head straight to the comparison. Note: Ripple’s distributed ledger technology will be covered in a separate post.  

Terminology:Ripple vs ripples vs rippled

Ripple is described as a payment protocol, exchange and remittance platform. In banking industry terms, Ripple Pay is a real time gross settlement (RTGS) platform. 

Bitcoin represents both, a network and the bitcoin currency.  Ripple is likewise, full of similar sounding lexicon with three or four different Ripples or ripples. 

Ripple is the name of the decentralized network. XRP or ripples is the native digital token or currency of the network. Ripple, aka Ripple Labs formerly OpenCoin, is also the name of the company that runs the Ripple distributed ledger which in turn is called Ripple Consensus Ledger (RCL). The software program that runs on the network servers is called rippled.  

Ripple Ecosystem: Transactions, Consensus Ledger and Validators 

Ripple is designed to allow people to make payments to one another in different currencies or commodities. This scope is quite vast. For example, Person A can use a fiat currency like US dollar to pay Person B in bitcoins or even gold, B can pay C in euros and so on, using the Ripple network. 

How is this different from conventional banking and remittances? This is where Ripple’s Distributed Consensus ledger technology comes in. A Ripple network consists of gateways (participating exchanges, banks or any business that accepts currencies), trusted validators and nodes. 

A payment transaction, like an everyday payment in the fiat world, is an IOU between a payor and the gateway. So if A wants to pay B in the above example, A, opens an account with a gateway (Bitstamp is a Ripple gateway)  and purchases a minimum token in ripples (XRP), as an account opening requirement. The transaction is submitted to the Ripple network which validates transactions details such as account and balances and submits the transaction record on a distributed ledger. 

Transactions are cryptographically signed by account holder’s private keys and only signed transactions are accepted by validators.  In the process, the Ripple network also makes programmatic decisions to determine cross currency/commodity conversions. Once the transaction is confirmed, the recipient receives an equivalent payment in (bitcoins in our example) from their receiving gateway (can be the same or different gateway). A small fraction of ripples (0.01 XRP) are said to be used up or burned in the process as transaction fees. The role of ripples is to act as a token asset in the transfer and prevent spam transactions.  

Gateways to Ripple and Market Makers

Gateways form the entry and exit points to the Ripple platform which is a globally distributed network of servers that each maintain a common ledger of transactions. The Ripple Consensus ledger is decentralized and the network uses a consensus method to validate transactions (ledger nodes automatically agree on which transaction block is accepted and added to the ledger chain). 

Ripples can be traded against other currencies on gateways through market makers (similar to an exchange that provides market liquidity and matches orders) and specific cryptocurrency exchanges. 

Seven Differences Between Ripple and Bitcoin

1. Coin Use

Both Bitcoin and Ripple are payment networks for digital cash. The difference is that bitcoins have entered into an ecosystem outside the network. Bitcoins can be used to make payments in the real world. There is a merchant, wallet and payment processor ecosystem for bitcoins. There is also a large trading and asset industry growing around bitcoins beyond currency exchanges. 

Ripples cannot be used as currency to make merchant payments outside the network, although some business had started accepted Ripple in its early days. Ripples exist as digital asset tokens within the Ripple network to prevent transaction spam. Malicious transactions intended to swap the network burn ripples at a higher rate making an attack inefficient. 

Ripples can be traded against other currencies on gateways through market makers and specific cryptocurrency exchanges.

2. Ownership

No one owns Bitcoin not even its pseudonymous creator Satoshi Nakamoto or the developer community that continues to maintain it. The network is distributed across nodes all over the world. 

Ripple on the other hand is a permissioned network owned and currently operated by Ripple. Parts of Ripple code, Ripple Trade and Ripple Charts that provide access to the Ripple ledger , is open source, but the network itself is driven by Ripple authorized nodes.

  

Ripple also determines the operation of the network. For example, Ripple’s own Trading platform, Ripple Trade was recently shutdown, and users had to withdraw funds from their accounts before they could move to the alternative platform Gatehub or other exchanges.  

3. Decentralized

Bitcoin is a true Internet peer to peer network. Two individuals anywhere in the world can exchange bitcoins directly from their wallets without using an exchange. Ripple wallets are available offline but  ripples can be used only via user accounts Ripple’s trading platform or gateways which are needed to access the Ripple Consensus Ledger. 

Ripple’s Consensus Ledger can be described as a decentralized technology. The concept of peer to peer users in Ripple applies largely to the market makers or financial institutions such as exchanges, banks, money transmitters or intermediaries than for individuals. It would be fitting to describe Ripple as a peer to peer payment network for trusted third parties.

4. Network Nodes

The Bitcoin blockchain runs on the permissionless network of participating nodes that run in full or light modes. The higher the nodes and longer the block height, the more difficult to attack or take over the network. Anyone can download and run a Bitcoin node. 

Ripple uses distributed ledgers on participating nodes across the globe but the difference is Ripple ledgers are allowed to run only in a permissioned network on trusted validators and unique nodes.

Ripple secures the network from attack by increasing XRP burn in a concerted attack such as very high transaction volumes from a single source. (Since decentralized, trustless distributed databases are automatically updated, it is possible for someone to take over transactions, although at huge cost, by taking over the majority required for consensus. The probability of attack is lowered by increasing odds or making the costs detrimental to the attacker). 

5. Mining

Bitcoins are generated by the miners when new blocks are added. There is a global mining economy that is actively mining the balance 5.5 million bitcoins from the 21 million limit, igniting several debates on the substantial energy consumed in the proof of work process. 

Ripples on the other hand are pre-mined. A 100 billion ripples were generated and are burned up during transactions. Unless Ripple becomes a global payments network there are enough Ripple waiting to be used. Which brings us to the next point.

6. Trading Value

Bitcoin rules markets with a $4oo average value and a $6.5 billion US market capitalization in 2016. Bitcoin’s value is driven by many factors but a big part lies in it emerging as an asset class with some governments recognizing it as a currency or commodity. 

Ripple has a lower market value and but the high volume and gateways/exchanges platforms have enabled substantial trading of ripples with fiat currencies and even bitcoins. Ripple grew its user base through giveaways from gateways and a Ripple-Bitcoin bridge. It is likely attracting long position speculators if the demand for Ripple as a settlement platform grows or those who believe Ripples may grow into a cryptocurrency ecosystem like Bitcoin.

Ripple’s roadmap at this points appears divided between in the direction of a global ledger for the worldwide financial system that is the Open Ledger project and going down a cryptocurrency path. 

7. Philosophy

Both Bitcoin and Ripple can be called disruptive systems. Bitcoin was launched to the world as an electronic cash network that removed the trusted third party transaction cost barrier for micropayments. Its design as a currency, and decentralized operation has created many more uses, including that as a alternative asset class on fiat doomsday (Greece and Iceland for example) or spurring digital economies in smaller countries such as Estonia. At the same time, Bitcoin’s open evolution and adaption is taking the path of natural selection and has equal chances of success or failure. 

Ripple aims to disrupt an industry process – lowering processing times and fees via a large global distributed ledger with a universal token. Both Bitcoin and Ripple are sometimes compared to the http protocol which made Internet the global peer to peer network today. In that they have adopted decentralized architecture.

But they differ more in philosophy and end goals than in technology.

Summary

The debates around whether Ripple is good or Bitcoin is bad or vice versa may be really for competitive mileage than anything else. 

Ripple is by itself, a significant technical achievement that serves a real need to in the world of settlements, which is not a small task in the globally interconnected, over-regulated and over-leveraged world of fiat currencies and stockpiled commodities. But maybe Ripple was able to leverage the Bitcoin “upstart” wave to come into prominence as a cryptocurrency and got its messages mixed up. That is an association which may ultimately have an impact on the future of Ripple, both positively and negatively.

In the final analysis, both Ripple and Bitcoin can end up having their respective places in the world. Ripple has the potential to create an impact within the financial services industry but Bitcoin’s blockchain, like the Internet, can have applications throughout the world.

Bitcoin Alternatives: The Top Five Mineable Altcoins by Market Capitalization

Overview

In the introductory posts on alternative cryptocurrencies to Bitcoin, we looked at the landscape of cryptocurrencies and evolving next generation of blockchain platforms that have grown since the arrival of litecoins and Ripple in 2011.

In this article we look at the top five minable altcoins that rule the cryptocurrency marketplace today. The infographic is a comparative summary of the top five mineable altcoins based on market ranking on March 10, 2016.

Bitcoin has a 80% market share and the largest network and value. Three other types of altcoins rule the top 100. The wave of altcoins are decentralized, and for purpose of this series,classified into two forms. The first two category consists of mineable cryptocurrencies which are covered in this article. The second form are crypto asset platforms using crypto tokens, many of which are fully mined or substantially premined. These can be used for applications within or built on top of the blockchain for purposes varying from financial settlements, resource management, gaming and so on.  

Ripple, MaidSafeCoin, Factom, NXT and Stellar are examples of fully mined cryptocurrencies.

The first generation of altcoins began as individual ventures and grew like Bitcoin with a community of users. Altcoins make use of the Bitcoin ecosystem with leading Bitcoin wallets, exchanges and payment services supporting leading altcoins. Some of the new wave of crypto asset platforms and centralized networks are building their own ecosystem. 

Poloniex, CCEX and CryptoCompare are popular exchanges for trading in a wide range of altcoins and currency pairs. 

Comparison Data

A quick explanation of the terms on the infographic

• Ticker: Trading ticker used in the marketplace.
• Currency Unit: A majority of cryptocoins use the same name as the currency, but the newer generation of crypto asset platforms denote the currency token by different names (ether). This is done probably to differentiate the token purpose (as not restrictive to being used as currency only). Crypto asset platforms such as Omni have multiple crypto-tokens such as MaidSafeCoin and Synereo). Other examples include NXT and Counterparty.
• Subdivisible: Bitcoin is divisible up to 8 decimal places the smallest unit called satoshi. Most altcoins are divisible to the same length the most subdivisible being ether where 1 wei equals one quintillionth of an ether or a divisibility up to 18 decimal places.
• Launch: The year the currencies began mining on production blockchain.
• Price: Altcoins trade the world over in different fiat currencies. The most popular being USD, Chinese Yen (CNY), Euro (EUR) and GBP. Major exchanges track prices on these currencies as well pegging them against BTC or bitcoin equivalent. Prices change frequently even in the course of the day and the ones listed in the infographic are from the week of March 7, 2016.
• Market cap: The coin price multiplied by the coins available in circulation. 
• Supply: Like Bitcoin, mineable coins are generated through block rewards and will eventually reach a designed cap. Block rewards themselves vary, mostly decreasing over time like Bitcoin’s halving. Coins already mined are those available for transactions while the mining limit denotes the total number of coins that will be generated after which mining rewards will consist of transaction fees only. Not all coins are available for transactions such as the genesis block or the first block in a blockchain, coins lost through invalid addresses and so on. 
• Block Time: The time for transaction confirmation, the time to build a block and receive confirmation by network consensus. Most altcoins compete on lower block confirmation times, although higher the confirmation time, lower the risk of double spending. 
• Block Reward: The number of coins generated as reward for successful creation of a block. Block reward generally decreases as blockchain grows in size. 
• Mining Proof: The method used to ensure effort was spent in creating a new block and it came from honest mode (covered in the post on altcoins differences).
• Application: The most common use of the cryptocurrency. The first generation of coins like Bitcoin are decentralized currencies. Newer cryptocurrencies are designed for applications such as crypto assets and smart contracts. 

The Top Five Minable Altcoins having Market Capitalization above $10 million

A short overview of the top five cryptocurrencies follows. Note that some of these platforms will be featured in depth later in this series, as we track the progress of blockchain applications and progress of cryptocurrency markets. This article has a brief coverage on the history and differentiating features of the top five altcoins and their performance in the cryptocurrency markets.

A comparison of the market performance of the five altcoins featured in this article, from their time of launch till March 2016. Source: coinmarketcap.com.

Ethereum: The Smart Contracts Platform

Just seven months old, Ethereum is the second largest cryptocurrency after Bitcoin, having overtaken the oldest altcoin Litecoin in market capitalization. Ethereum was proposed by Vitalik Buterin in 2013 and the Ethereum blockchain went live in 2015. Ethereum development was crowdfunded with an initial presale of 60 million ether in exchange for bitcoins.

Ethereum is designed to support smart contracts. Ethereum allows creation of smart contracts through its built in Turing complete language. Ethereum’s unit is ether which is used as crypto fuel to execute transactions through applications built on the Ethereum blockchain. Ethereum is an example of a cryptocurrency 2.0 platform. 

Later articles in this series will have an in-depth feature on Ethereum and other crypto asset platforms.

Litecoins: Silver to Bitcoin’s Gold

Litecoin was created in 2011 by Charles Lee, a former Google employee and brother of BTC China founder Bobby Lee. Litecoin was the first to use Scrypt as a proof of work, at the time intended to be a GPU mining resistant algorithm. Litecoin has 4X coin cap compared to bitcoin and block confirmations in 2.5 minutes, a fourth of of bitcoin's 10 minute block confirmations. 

Litecoin trades on all major exchanges and peaked soon after launch 2013. Litecoins have declined through 2014 and 2015, now trading in $3 range. Litecoins use the same ecosystem as bitcoins and are tradeable on almost all crypto exchanges. Charles Lee, the creator of Litecoins, who is now working for Coinbase, emphasized on improving the liquidity of litecoins by encouraging adoption by users and merchants over development of new features. With technical similarities to bitcoin, litecoin remains bearish though stable in the crowded market of altcoins.

Dash: Private Digital Currency

Dash stands for Digital Cash. Dash was introduced by British Developer Evan Duffield in 2014. DashCoin is e-cash, like Bitcoin, but was designed to improve on Bitcoin’s pseudonymous nature, transaction traceability and transaction times, trying to replicate the exact nature of physical world cash transactions.

Dashcoin was launched as XCoin, renamed to DarkCoin a month later and eventually rebranded as Dash in March 2015. 

Dash uses X-11 a chained hashing algorithm that Evan Duffield created, which utilizes a sequence of eleven scientific hashing algorithms for the proof-of-work, a feature that allows ASIC resistant mining while consuming lesser resources (than Bitcoin). Successive releases of Dash have improved on enabling complete transaction privacy (or anonymity) through a feature known as Darksend protocol which mixes user coins through a Masternodes a peer to peer coin mixing and anonymizing network for Dash, in addition to mining nodes. Masternodes are also used to provide near instant transaction confirmations through its InstantX service. 

Dash quickly appreciated very soon after launch rising to $10-$11 and number three after litecoin in market cap. It is priced higher than Litecoins in 2016 although having a lower market cap, due to lesser coins mined. 

Online casinos and drug marketplaces were early adopters of Dash, a path which Evan Duffield points out, was taken by Bitcoin. Dash’s value has increased, with its rebranding from Darkcoin and acceptance by mainstream merchants such as Overstock. 

Dash’s creator and community remain open and committed to the currency as they continue to develop new features, improvements and innovations making it likely to remain a strong altcoin/bitcoin competitor in the future. 

Dogecoin: Internet Tipping Currency

Dogecoin trades at a sub sub fraction of a dollar, yet it owes its market cap to the sheer volume of dogecoins, over 100 billion, that are available in the marketplace. Started as a light hearted cryptocurrency with an inspired Shibu Inu canine cuteness factor on coin logo, based on the famous Internet doge meme, Dogecoin has found a niche as an Internet tipping currency, where online users reward content contributors using dogecoins.

Dogecoin was created and launched by developer Billy Markus and Jackson Palmer in 2013. 

A notable feature of dogecoins is that the currency is inflationary, that is, there is no cap on coins. After the initial production of 100 billion dogecoins, the supply of coins will increase annually by 5.26 billion coins.

Monero: Secure, Private and Untraceable

Similar to Dash philosophy, Monero is a privacy centric currency, based on CryptoNote technology, an open source cryptocurrency protocol that is separate from Bitcoin’s code. Monero uses CryptoNote protocol for generating ring signatures and creating opacity on the blockchain. CryptoNote obfuscates the blockchain making transactions untraceable.  

Monero was created in April 2014. At the time of writing, Monero is trading almost at par with the US dollar.

The cryptocurrency market especially that of altcoins is in very early stages of development. Emerging altcoins and crypto asset platforms that under development, attract speculators who do not want to miss out on the next potential Bitcoin. Miners also benefit from trading easily minable coins in the premine stage, selling them as penny stocks.

As the next wave of blockchain applications take off, coin creators and investors can stand to gain major payoffs from the future valuation of start-ups and applications in the cryptocurrency landscape. Despite volatility driven by fast moving events in this emerging field, "pump and dump" scams that trigger underlying fear, uncertainty and doubt (FUD) alternating with increasing euphoria around the blockchain, the outlook for the multi-billion dollar altcoins market looks promising enough.

Bitcoins vs Altcoins: The Cryptocurrency Landscape Part 2

This is the concluding article on the introduction to cryptocurrency applications that have become part of the crypto economy. 

Bitcoins and other cryptocurrencies that have evolved since 2011 have differences ranging from attribute variations to design and blockchain. A new wave of cryptocurrency platforms are based on or similar to Bitcoin protocol using crypto tokens in a peer to peer network.

The evolution of Cryptocurrencies post Bitcoin

Starting with NameCoin, and Litecoin in 2011, different coins or digital token applications have arrived with varying differentiation, in design characteristics from near clones of bitcoin to separately evolved protocols such as Ripple, as seen in this detailed history published by Coin Telegraph.  

There is no set criteria on how to differentiate between cryptocurrencies. Cryptocurrencies that have evolved from bitcoin can be differentiated on multiple characteristics such as such as mining algorithms, proof of work,  blockchain , and platform purpose. Altcoin projects have also introduced variations in coin maximum (like the 21 million bitcoin limit), block generation time and difficulty and mining rewards.  

In this article, we cover high level design differences which will be useful in comparing different cryptocurrencies later in this series. Note that there are subtle differences depending on the definitions between different communities, while some terms and concepts can seem to overlap (for example altcoins which are forked from bitcoins, alternative chains which use Bitcoin mining). These will become clearer when exploring the design of a specific cryptocurrency. 

Mining Algorithm

Since no one is printing cryptocurrencies, they are mined as digital resources, the hard way using CPU power, electricity etc. Coins are mined by solving a computational problem to generate a hash value that is easy to verify but impossible to decrypt (or invert). Miners compute several combinations till a correct hash is produced. Adam Back's hashcash is applied for proof of work in mining and the ability to generate a successful hash is completely random. 

The majority of cryptocurrencies use SHA-256 or Scrypt algorithms for mining.

SHA-256d

Secure Hash Algorithm (SHA) is a family of hashing algorithms created by NSA and among the most secure forms of encryption today. SHA 256-2 is used in bitcoin mining and creates a 256-bit hash of an input value. Bitcoin mining uses a double SHA-256 that is a SHA-256 of a SHA-256 hash.  

Scrypt

Scrypt generates SHA-256 bit hash using a key derivation process in memory. Scrypt runs a serialised process and was originally positioned as a CPU mining alternative to ASIC and GPU mining which supported parallel processing to increase the hash rate in bitcoins. It is now possible to run scrypt using GPU hardware as well. Scrypt is used as the mining algorithm in litecoin, the fourth largest cryptocurrency by market capitalization.

This article from Coin Pursuit has a a more technical explanation on the differences and rationale behind the two mining algorithms.

Proof of Work Method

The decentralized function of cryptocurrencies without a trusted authority is dependent on the consensus method of confirming transactions. In order the ensure that (honest) miners are confirming valid transactions, a proof of work (POW) is required.

Proof of Work

The proof of work method requires all nodes in a network to use a method to prove they have expended efforts in verifying transactions and ensure “honest” miners are confirming transactions. When a majority of nodes verify the proof of work, the block is added to the blockchain and new blocks are built upon it. Proof of work deters double spending or attack since 51% of the network has to be acquired and controlled to take control of the blockchain. The incentive for Proof of Work is mining reward and transaction fees.

For mining bitcoins, miners solve the mining algorithm used to digitally sign a verified block and broadcast to the network. The bitcoin proof of work requires computing power to solve and reach a hash value that satisfies the target condition with an increasing level of difficulty. 

Proof of Stake

Proof of Stake is a method that tries to address two issues with computing proof of work – not enough nodes mining (an economic market failure theory called Tragedy of the Commons) and the amount of mining resources consumed to generate the correct hash for proof of work. 

Proof of Stake was proposed as an alternative method  in a bitcoin discussion thread and was first implemented in peercoin.

In Proof of stake the miner uses their coins (meeting certain criteria such as age) as input (or stakes) in mining a block. The block hash or signature solves for a target condition that considers network complexity, timestamp and coins staked. Coin age and coins in circulation limit the hashrate and use lesser resources. PoS is considered as an alternative to PoW as the 51% level cannot be reached with this method also, doing so will require enormous time and resources to be invested to proportionately mine and control 51% of coins in circulation. However Proof of Stake cannot work on its own in several scenarios (no coins mined, allowing alternate chains etc.). A POS/POW combination (called proof of activity) or a proof of burn (signing blocks at checkpoints) are used as consensus methods instead of PoS alone.

Blockchain or Decentralized Ledger

Altcoin projects that have evolved from Bitcoin, are based on a fork in the code with modifications such as the mining algorithm, consensus methods and coin features described earlier. These programs create hard forks on the blockchain which follow the consensus rules set by the coin’s source code. These alternative chains then grow into their own blockchain where the currency transactions are confirmed by miners who follow the consensus method for that coin. Alt-coins themselves have spawned other successors using hard forks (such as Feathercoin from Litecoin).

 

Alternative Chains

Alternative chains are transaction databases for non-currency tokens similar to the blockchain but can handle additional information for a transaction. Namecoin was the first alternative chain based on Bitcoin. Namecoin uses merged mining with Bitcoin (miners can hash Namecoin and Bitcoin blocks at the same time)  but has its own blockchain which stores additional information such as name value pairs.  

Blockchain

In this case, the Bitcoin blockchain. Some altcoins use their own protocol rules to define the currency token and transaction rules for decentralized token applications but use the Bitcoin blockchain as the underlying store. The coins are tokenized in an over the top application layer with a persistent record becoming part of the blockchain. Mastercoin and Colored Coins are examples of this wave of blockchain applications. They are also a subject of much debate on their contribution to the growth vis-a-vis overheads on the Bitcoin network.  

Cryptocurrency 2.0 Protocols

These are digital currencies which do not share anything physically with Bitcoin. They are based on similar crypto based, decentralized trustless peer to peer principles as the Bitcoin protocol. Not all of them are public, open source or minable.

Ripple is an example of payment protocol that was created for settlements in financial industry. Ripple Labs has implemented the open source Ripple protocol as a peer to peer digital promissory tokens for settlements. Ethereum and NXT have been created as advanced blockchain platforms that support creation of crypto-assets and allow users to build their own applications such as smart contracts and asset exchanges.

600 Shades of Bitcoins: The Landscape of Cryptocurrencies - Part 1

Between 2011 and 2016 between 600 to 700 different cryptocurrencies have been created and traded in across the world. Litecoins and Peercoins were the earliest versions called alt-coins, while the new wave or version 2 which includes Ripple, Stellar, NXT and Ethereum can be called crypto asset platforms.

Introduction

In the beginning of 2009 there was bitcoin...

In this series on digital payments, we started with the disruptive innovation of Bitcoin, the first successful adoption of a decentralized digital currency (in part owing to the 2008 economic meltdown). We covered Bitcoin and the ecosystem around it extensively, without referring to the larger world of cryptocurrencies and blockchain solutions that have grown with it.

But bitcoin is not alone. 

Satoshi Nakamoto’s first and most successful implementation of digital cash on a block chain in 2009, launched a revolution of cryptocurrencies and cryptoassets.  Today, coinmarketcap lists more than 635 different crypto currencies and 55 crypto assets with a combined market capitalization of USD 7.8 billion (as on March 1, 2016; Source: coinmarketcap.com). 

While bitcoin is still king of cryptocurrencies with 84% share of market capital, alt-coins, other crypto-coins, crypto-assets and blockchain applications are here to stay as well.

In this series, we turn the spotlight from bitcoins to the expanding landscape of other cryptocurrencies. We start with the evolution of bitcoin alternatives, their common features and differentiation followed by a comparison of leading cryptocurrencies.

Note: This series does not cover new wave of proposed bank coins and tech coin patents and proposals that have been announced recently. Most of them are on the drawing board and in all likelihood proprietary, contradictory to the concept of a decentralized public ledger, but a separate topic of discussion nevertheless.  

A Recap of Cryptocurrency Features

Cryptocurrencies have the same basis in their design as bitcoins. This are described in some detail in earlier articles on this site on the Bitcoin innovation and Bitcoin payments ecosystem. To save a long read and for newcomers, we have a quick and simplified recap below.

• Fiat currencies are secured with a legal tender issued by a central bank and sovereign government(s) with several features to verify their authenticity and double spending in payment transactions prevented by using trusted third party. Cryptocurrencies are encrypted adopting Adam Back’s hashcash based proof of work algorithms for authenticity.  
• Instead of being backed by a central authority, cryptocurrencies are maintained and verified via a distributed transaction database (or electronic ledger) over a peer to peer network. 
• The block chain is built as a linked chain of blocks of transactions to prevent double spending without the need for a trusted third party (a trust less environment). In general, the ledger is public, meaning the transaction can be accessible and verified computationally.
• Consensus method is used to prevent double spending and attacks to take control over on the network, all participants must agree to and use one version of the blockchain based on consensus rule.

Why so many alternative cryptocurrencies to bitcoins?

Reason 1: Anyone can do it! (almost)

A facetious and also correct answer is because you could. The vision of making your own brand of digital money has become accessible to anyone with practically no entry barriers. The Bitcoin code is open source and everyone could use the design or make a fork for their version of bitcoin. i.e. a de-centralized peer to peer digital cash or store of value.  The initial coins which started appearing with Litecoin in 2011 followed by Peercoin were called alt-coins. They created forks of the Bitcoin source code with different consensus methods. 

Reason 2: Cheaper Coins, Easier Mining, Faster Transactions

As bitcoin mining moved from commodity CPUs to special purpose ASIC hardware, other ASIC resistant versions were introduced to continue broader public participation in mining. Another feature was blockchains that confirmed transactions faster than the bitcoin blockchain. Alt-coins were also created as a less expensive alternative than buying bitcoins that have soared to hundreds of dollars in value. 

Reason 3: Blockchain Applications

And finally, the next generation of cryptocurrencies is designed to go beyond currency tokens and create crypto-assets and blockchain applications such as smart contracts, which we will explore in detail when covering leading cryptocurrency platforms.

Why cryptocurrencies succeed (or fail)

The 600 to 700 cryptocurrencies that have arrived (and often disappeared) outnumber 180 active fiat currencies by a ratio of four to one. Financial indicators are used to as a key measure the popularity of a cryptocurrency. These are the exchange rate and market capitalization with respect to fiat. Bitcoin has grown in six years from an experiment to an economy with USD 6 billion market cap and over 1 billion invested in bitcoin/blockchain firms. Of the remaining currencies, around 50 have a market cap of USD 1 million and above and only 20 trade at USD 1 or higher.

Financial indicators are not the only test of success, as some forms have been created for specific purpose and applications outside payments. To recall Satoshi Nakamoto's original bitcoin whitepaper, bitcoins are a secure token that have applications outside payments.

These are some reasons that can be attributed to success and failure of cryptocurrencies.

Network Effect

Peer to peer ecosystems can sustain through network effects. Most decentralized cryptocurrencies are open source and dependent on community participation to survive. As the network of users, developers and investors grows, the adoption increases exponentially. Networks also dismantle exponentially. Leading cryptocurrencies have a network of active developers, dedicated supporters, a knowledge community and growing base of users. Apart from bitcoin, the top ten cryptocurrencies have reached tipping point, with sustainable economic, technology and investor ecosystem supporting them. Ethereum used the crowdfunding route giving out the currency to build a community around the project even before it was launched.

Design and Ecosystem

The incentive of building an alternative eco-system is another factor. Alt-coins have grown for specific applications or as a means to addressing some of the issues with bitcoins. Alt-coins can use different programming variations and consensus rules but have to offer differentiated or comparable capabilities to the security, growth and transaction speed of bitcoins. Most are forks from the bitcoin code with some variation of consensus rules. The top alternative coins have an ecosystem of third party block explorers, exchanges, wallets and mining which are critical to maintaining currency circulation and value. Ripple and Stellar are examples of premined currencies with a large market cap. 

Purpose

As of 2016, 600 cryptocurrencies outnumber 180 fiat currencies by 400% but only 20 trade at 1 USD or higher. Not all cryptocurrencies are designed to replace fiat payments. Some operate similar to other forms of virtual currencies such as gaming currencies, online casino tokens or used in dark web transactions. Other started as experiments which did not take off or were abandoned (dogecoins are the most famous exception, having started as a joke and top in the top 10). In the unregulated world of cryptocurrencies, many short-lived cryptocoins were actually designed as "pump and dump" schemes by their creators, burning many investors.

In the second part of this article, we look at differentiating features in cryptocurrencies.