It has almost become a tradition that crypto prices rally around the new year. Experts attribute this to a range of factors, each bearing differing degrees of substance. Some say money sits loosely in the wallets of Wall Street brokers after they have pocketed their annual bonus while others point to the ever-increasing Google searches for crypto-related topics (often indicating growing trade activity). But what exactly causes this growing interest? And is there something different about this hype cycle?
Truth is, while most of the mainstream turned away from crypto over the last year, dismissing it as a short-lived trend, developers remained unfazed by the loss of interest and continued building on their vision of a decentralised future. Over the last year, venture capital funds, endowments and other institutional investors joined the crypto club. They not only invested in the protocols’ native assets themselves (like Bitcoins or Ethers) but also backed the companies building applications or tools on top of these new platforms.
It has also become increasingly apparent that there are really only two projects with serious traction: Bitcoin and Ethereum. Most other ‘challenger’ projects that raised money through so-called Initial Coin Offerings (ICOs) in the hype phase of 2017, are dying a slow and, dare I say it, deserving death. With these distractions gone, Bitcoin and Ethereum’s unique properties have become better understood by the public.
That’s why it’s important for people to understand the basics behind the two major crypto networks, Bitcoin and Ethereum, and look at some of the major events taking place this year for each.
Bitcoin was launched in 2008 during the depths of the financial crisis. To put it simply, it’s a currency that is completely electronic, lives on a peer-to-peer network that anyone can connect to, that is not controlled and can’t be controlled by any single entity. Contrary to fiat money issued by governments and their monetary policy, Bitcoins are not created out of thin air, but by miners all over the world who provide computing power to the network to validate the transactions that are broadcasted to the network.
These properties make Bitcoin a unique financial asset. Like gold, it is rare and ‘mining’ comes with operational costs giving it monetary value. Unlike gold, however, it can be divided into a million pieces and sent across the globe in minutes, which makes it a highly marketable and liquid asset. For citizens in countries with high inflation, Bitcoin is already a much safer asset than their local currency and much more accessible than the US Dollar, for example.
In May 2020, Bitcoin’s supply schedule will be halved. This happens every four years and means that Bitcoin miners will only receive 6.25 bitcoins (down from 12.5) for every block they solve. With fewer bitcoins earned, there will be less supply available on cryptocurrency exchanges, which will drive the price up, assuming a constant or rising demand.
Most properties described for Bitcoin hold true for Ethereum as well, with two exceptions: global acceptance and liquidity. Bitcoin, having had a head start of a couple of years, is more easily tradable and its value is better understood by the mainstream. However, Ethereum has many attributes that Bitcoin doesn’t have.
For one, it allows developers to create applications or agreements on top of its platform (so-called “smart contracts” in Ethereum lingo) and people can trust that the code specified in the contract will be executed. Unlike traditional apps, which are hosted and ‘owned’ by companies, these applications can be deployed and used by anyone. Because users hold their funds in non-custodial wallets (retaining control over their funds) no middleman is necessary when they use these applications.
Secondly, it introduces the concept of ‘tokenization’, which allows issuing other assets on top of the network besides the native currency Ether. Where Bitcoin is a transaction network for Bitcoin only, Ethereum is a transaction network for any financial asset. These assets can, for example, represent a share in a company, a piece of real estate or a currency like the US dollar.
These two building blocks together led to the emergence of a movement called ‘Decentralized Finance’ or ‘DeFi’. In short, it aims to re-create the financial system that we use today, but in a way that removes the need for intermediaries like banks. Today, users can draw loans, trade synthetic securities or deposit their ‘crypto dollars’ in interest accounts by using smart contracts instead of banks. The value locked in these decentralised applications exceeds $1B dollars today and keeps rising.
Ethereum 2.0 Upgrade
While the last years were successful in experimenting with this new type of finance, Ethereum is now at a point where it is constrained by the capacity of the network. The good news: for the last few years Ethereum’s developers have been working on an upgrade of the network called Ethereum 2.0, which is planned to finally launch this year. From then on, Ethereum will be much faster, giving way to new types of applications and allowing existing applications to scale.
The next era of finance
Cryptonetworks create a common standard for exchanging financial assets in a trustless way.
Centralized Finance has been around for so long that many people don’t challenge the fact that there’s a better way to do it. The truth is that just like other human inventions, money has evolved a lot throughout history. Hopefully, we’ll see cryptocurrency and cryptonetworks shape the next phase of money innovation.
Cryptotesters is a crypto product comparison platform helping you to find the best products and get started with your crypto journey. Find the best cryptocurrency wallet, hardware wallet or cryptocurrency exchange!
It’s now official. Facebook will launch a global, digitally-native cryptocurrency in mid-2020. In a white paper published by the social-media giant earlier this week, Facebook introduces its future digital currency, Libra, as an easy-to-use replacement for cash, which it claims will grant access to financial services for people across the globe (particularly to the 1.7 billion ones who do not have a bank account). Yet, alongside promise and entrepreneurial zeal, the impending interference of the company in the world banking system evokes a great deal of doubt and concern.
You gotta give it to Facebook. Venturing to develop a monetary system that will replace cash is a massive undertaking, particularly since it involves exploring largely uncharted territory. With cryptocurrencies such as Bitcoin failing to gain the trust of the masses and others like Q simply disappearing into the ether, it would take an enormous amount of creativity, financial acumen, and technological ingenuity to formulate a system that would seem appealing for investors to back and people to contemplate as legitimate. And that’s precisely what Facebook has managed to do, long before the actual launching of its product.
Libra is being developed as a blockchain-powered cryptocurrency. Unlike other digitally-native currencies, however, Libra will be fully-backed by a reserve of real assets, which will be locally regulated in each country. Each Libra issued will be backed by a currency or asset stored in the Libra Reserve in order to ensure the cryptocurrency’s stability and guarantee its intrinsic value. Facebook announced that Libra could be exchanged by anyone who has an iPhone and an Android at rates approximately ten-times lower than it costs to wire money electronically or internationally through the regular banking system. The company predicts that this will enable people in developing countries to obtain financial security and access services that currently are not available to them.
While the initial intent for Libra is to serve primarily as a money transferring tool, Facebook’s ultimate goal is to turn it into a mainstream currency, used to make every-day purchases and even serve as a loan and credit system.
Libra’s most unique characteristic, however, is the decentralisation of its governing body. Although Facebook is the one developing the currency, the company claims it has no intention to control it. To that end, it established the independent nonprofit Libra Association, presently comprised of 27 partners entrusted with monitoring the development and management of Libra. Among the members are major financial and technological corporations and service providers, including Mastercard, Visa, eBay, PayPal, Spotify, Uber, and Lyft, as well as nonprofit organizations, such as Mercy Corps.
So how does Facebook fit into this global financial ecosystem? The answer is simple: through its subsidiary—Calibra, a Switzerland-based company tasked with developing, launching, and bringing Libra to the masses. Calibra intends to do so by developing a digital wallet designated to send, receive, and use the Libra currency. Calibra will be implanted into Facebook-owed platforms such as Messenger and WhatsApp, and eventually launch a standalone Calibra app. Calibra (AKA Facebook) will, at least initially, possess one seat on the Libra Association board panel.
While Calibra will be the world’s first introduction to Libra, the company stated it will welcome any competition by another group seeking to establish a platform to exchange in Libra, and avoid any aspirations to monopolise the cryptocurrencies. In an interview for The Verge, Calibra Vice President of Product Kevin Weil stated, “Calibra can only be successful when the Libra ecosystem is successful.”
As great as this utopian virtual ecosystem appears, it also raises several red flags. One of the greatest risks about the Calibra enterprise is fraud and identity theft. And while Facebook vows to install the strictest technologies to ensure the safety of both users and the financial system as a whole, it remains to be seen whether it can keep this promise. This could particularly be an issue in countries where government-issued identification is unavailable or easy to forge.
In the U.S., numerous lawmakers and politicians have expressed grave concerns about the prospect of allowing a company notorious for data leaks and mismanagement to spearhead a global market revolution. The Senate Banking Committee has therefore announced this week that it will hold a hearing to examine Facebook’s cryptocurrency proposal on July 16.
Yet the most troubling aspect about the whole Libra/Calibra initiative is that we still don’t know how Facebook stands to gain from it. Currently, the company has only one vote on the multi-member board, and has declared in its white paper that data from Calibra will not be shared with other Facebook apps or platforms for ad-targeting purposes. It also stated that the very minimal fees Calibra will charge per-transfer will only be used to maintain the network’s security system. And so, we know there is money to be made—otherwise why would leviathans such as Visa and Mastercard be down to join the party—we just don’t know where exactly it will be coming from.
As the scandal surrounding Facebook churns, and calls to break up the company intensify, the social media network volunteers to introduce a brand-new global market, which it will supposedly not dominate, for no other purpose than to facilitate the transfer of money and welcome the world’s most underprivileged into this virtual financial oasis. In a world where Zuckerberg is, ultimately, only about Zuckerberg, one must ask: where is the catch?