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Jun 11, 2022
If you’ve ever looked a romantic partner in the eye and gently suggested it’s time for the two of you to invest in crypto, then today’s Daily Dose is for you. Across the internet you’ll find endless posts, sites and threads fighting to convince you that their token is the best to buy and hold. In part two of our series aimed at demystifying cryptocurrency, we start with a little history to help explain why today there are over 18,000 different coins, and counting. By the time you finish reading, you’ll see how different coins serve different purposes — and you might be a little closer to knowing if crypto is right for you.
– with reporting by Jesse Seaver
One coin to rule them all: Bitcoin
Crypto existed before Bitcoin
While Bitcoin has become the category king of cryptocurrency, it was hardly the first. The origins of the actual concept and implementation of a (crypto)graphic coin came a good 20-plus years before Bitcoin's fame and fortune. Innovators worldwide — from truck drivers in the Netherlands looking to foil petrol thieves to projects such as HashCash — have attempted to prevent hacker attacks through the use of cryptography. While these early innovators built things strikingly similar to Bitcoin, their products suffered from being ahead of their time. They were also plagued by an issue that still haunts Bitcoin today: immense and inefficient energy consumption.
Bitcoin changed the world with an ingenious design
After nearly two decades of attempts, the concept of a headless, non-trust-based system changed how the world would think of cryptocurrency forever. In 2012, the Bitcoin Foundation launched to help standardize, protect and promote the coin as a new paradigm in currency. I first wrote about Bitcoin in HuffPost almost a decade ago, when the price was just $136. As this went to press, one Bitcoin was worth $30,242 — and it’s still the best example to understand how the technology works and why creating a cryptocurrency is so energy intensive.
What makes Bitcoin special — and what it’s missing
In Bitcoin’s simplicity lies its genius. Bitcoin doesn’t try to do everything but it does one thing exceptionally well: It acts as a decentralized ledger of account value. Thanks to this core focus and by forgoing other features — including more energy-efficient means of finalizing transactions — Bitcoin created a model that, astonishingly, has never been hacked. But for an evolving, would-be environmentally conscious and innovative society, more was needed from crypto than what Bitcoin alone had to offer. The world needed cryptocurrency technology to go beyond simply tracking account value, and without such intense energy consumption.
Ethereum (also) changed the world
All coins are tokens, but not all tokens are coins
You may hear people use “coin” and “token” interchangeably but they have slightly different meanings. Coins can be thought of as the native currency of a given blockchain as they are directly tracked and controlled by their associated blockchain and are used to pay for the transactions that occur on that blockchain. (For a refresher on blockchain, see part one in this series.) While coins do only one thing — track value — tokens do all sorts of things. And unlike coins, tokens are not directly controlled by the blockchain but rather by a layer called a smart contract.
Ethereum is born
In 2015, Ethereum took the same trust-free simplicity of Bitcoin and built on it, creating what can be thought of as a global computer that was able to run applications on the world's largest decentralized software platform. In short: Bitcoin can send a recipient money, but Ethereum can send a recipient money after verifying that a precondition for the transaction has taken place. This functionality is achieved with what is known as a smart contract and is often used, for example, to pay software developers for their services once a specific application has been completed within a certain amount of time. In other words, Ethereum adds the concept of logic to the payment process.
Welcome to the Ethereum Virtual Machine, or EVM
The addition of logic allowed developers to “commit” functional code to the blockchain that would run rules around payments, giving birth to what is known as the EVM and, with it, Ethereum, the second most valuable cryptocurrency. Thanks to the EVM, encoded rules run exactly how developers first publish them, forever. These major advances spawned the Decentralized Finance (Defi) movement, the evolution of smart contracts and, most notably, NFTs. Ethereum is also on track to operate with far less energy than Bitcoin, by verifying transactions via methods that do not require as much processing power. Now that you understand what makes tokens distinct from coins, we can get specific about some of the major types of tokens and what they do.
The same way you would call a stock or bond a security, security tokens are a type of investment. One of the most well-known security tokens is Blockchain Capital (BCap); when you own BCap tokens, you hold an interest in Blockchain Capital’s venture fund, similar to owning a share of a mutual fund.
Utility tokens give users control and access
Utility tokens can be awarded or earned and then spent in the cryptocurrency ecosystem. For example, they can provide access to exclusive content such as a members-only website. In another example, the application Brave Browser tracks users’ attention as they browse the web, then rewards users for their time and attention with a utility token called Basic Attention Token (BAT), which can then be traded for other cryptocurrencies.
Stablecoins are a parking place for value
Intended to serve as a reliable investment, the most popular stablecoins are backed 1:1 by a real-world asset. For example, the stablecoin USD Coin (USDC) is pegged in value to the U.S. dollar, which means one USDC is always worth $1. Why hold a stablecoin? Because they allow investors to move easily in and out of a reliable asset without exiting the cryptocurrency exchanges. (The importance of a true one-to-one pegged value cannot be overstated, as was shown with the recent meltdown of TerraUSD, a coin backed by an algorithm rather than a genuine one-to-one relationship.)
Non-fungible tokens (NFTs) are unique assets
As discussed in part one of this series, non-fungible tokens are unique and can be traded as a one-of-a-kind item — like a collectible card and a concert ticket wrapped into one. Wildly successful in the arts and entertainment world, NFTs are becoming a whole new breed of crypto.
Why do people buy these tokens?
In combination, these tokens represent the beginnings of a new, decentralized internet and financial system. Many people are choosing to invest in such tokens as they anticipate the growth potential they represent. Holders of these different token types may be rewarded with either access to exclusive events or content, or financial gain as the new, decentralized internet continues to grow. NFTs in particular are being used to provide access to gated areas of the metaverse — something we’ll touch on in part three of this series. Stay tuned.
Can you tell us about people in your life who turned a profit from investing in crypto?
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