The Main Cryptocurrencies
As part of our work on halal investment at IFG we are covering cryptocurrency and blockchain technology in a lot of detail. You can read all of the series of our article on this topic here.
In this article we give an introduction to some major cryptocurrencies.
Bitcoin popularised blockchain as a concept, but it also initiated a flurry of curiosity and initiative which led to the creation of many other coins and tokens.
There are a few cryptocurrencies that are well-known within the digital currency sphere. We have split these into three types:
- Altcoins – other cryptocurrencies launched after Bitcoin with a similar function. It can sometimes refer to all other cryptocurrencies that are not Bitcoin.
- Privacy focussed coins – unique cryptocurrencies that allow total anonymity when making transactions.
- Stable coins – cryptocurrencies that are designed to minimise price volatility. They are usually pegged to a fiat currency.
This is the most popular cryptocurrency after Bitcoin. To decentralise a system, we need a large network of computers.
The only large network prior to Ethereum was Bitcoin, but the scripting language used in bitcoin was designed as Turing Incomplete- which basically means that the language is limited in its applications.
To create your own complex decentralised system, one would need a new language and a large network of computers that mimics bitcoins behaviour – clearly not an easy task.
Here is where Ethereum steps in. Its primary function is to be a platform for Dapps (decentralised apps) and enable smart contracts (if then protocols). Thousands of worldwide computers use Ethereum and execute programmes as written.
Ether is the token used to incentivise the network. When users deploy a smart contract, they need to pay in ether- this disincentivises unnecessary use of the Ethereum network. All you need to do is learn solidity (the Ethereum language) and you can programme your own decentralised app.
The Ethereum network executes these contracts. A downside to this is that – unlike real world contracts – smart contracts cannot be flexible and take into account the spirit of the law. Once a contract is deployed on the network it is immutable (unchangeable). The underlying rule here is that code is law.
In 2016, the DAO (decentralised autonomous organisation) hack questioned this rule. $150 million in ether was stolen by a hacker who found loopholes in the code. Much like a laywer finds loopholes within the system, many argued the ‘hacker’ merely found a loophole and that code is still law.
Ethereum developers came out and altered the Ethereum protocol. Those who disagreed with this move stuck to the original blockchain- now called Ethereum classic. The updated blockchain is what is more popularly known as Ethereum.
The setup of ripple is very different to other cryptocurrencies. There is a clear governing body – Ripple Labs- who control parts of the validator nodes and decide on how to change the validator structure.
Ripple works with banks and regulators and is designed to enable banks to settle cross-border payments in real-time, with end-to-end transparency, and at a lower cost. Unlike other cryptocurrencies, Ripple does not allow user anonymity behind pseudonyms. There is no mining this currency; 100 billion tokens were minted at its inception.
Build with the Ripple code, Steller has a similar goal in mind. They aim to make cross-border transactions cheaper. While Ripple targets finantial institutions, Stellar is aimed towards individuals and those in developing countries.
Bitcoin Cash (BCH)
When users within a blockchain cannot agree on a particular protocol there tends to be a split. Like Ethereum split from Ethereum classic, BCH cash split from Bitcoin (BTC). They both have a shared history but one runs an updated software’s. The key difference between the two is block size. BCH has an 8mb block size whereas BTC is limited to 1mb. Users of Bitcoin cash typically expect faster transaction times because of this.
Like BCH, Litecoin offers faster transaction times. It is able to do this because It has more efficient and faster block generation rates. It is the sixth largest cryptocurrency in the world.
Privacy focussed coins
Zcash is low in terms of usage, but enjoys wide-spread usage in underground activity such as the dark web. It provides extra cryptographic security on the identities behind transactions.
Ring signatures allow Monero to enable users complete privacy. This technique makes it difficult to isolate a particular signature among the group of signatures that initially signed off the transaction.
Dash allows users to choose whether or not their transactions are anonymous and private. However, the private send feature will raise your transaction fees.
A problem with a lot of cryptocurrencies are that they are highly volatile and cannot rival traditional currencies. Stable coins try to fix this problem.
They are not fully-fledged currencies as they do not have their own exchange rate, but they are pegged to a fiat currency e.g. USD or GBP. However, they are more likely to be labelled as an asset verses a currency which opens up an additional layer of regulatory compliance.
Moreover, stable coin issuers need to ensure a sufficient reserve of fiat to back up its coin.
Tether has the highest stable coin market cap. They describe themselves as “a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner.”
JP Morgan Coin
JPM Coin is backed on a 1:1 basis by the USD reserve capital of the bank. Its primary function is to make cross-border transactions for the bank’s institutional clients cheaper and faster.
Libra is a digital currency proposed by Facebook. It is currently still in its development stages.
Libra aims to be accessible on all entry-level smartphones. To maintain its stability, Libra is backed by a reserve of cash or short-term government securities.
Reception to Libra has not been good. Out of its consortium of 28 founding members, VISA and Paypal have already left.