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News: Bitcoin for bankers: a classification of the crypto world

To be precise, there are currently (as of August 25) 11,389 that are listed on the Coinmarketcap overview page. The question that arises in view of this abundance of projects: How can you keep track of things? The answer is: staying on the ball and dealing with every project is simply an impossibility.

It is important to understand that many crypto projects that adorn statistics such as those from Coinmarketcap are living dead. Founded in the hype of 2017 or before, their coins or tokens are still live and can be found on some addresses. However, they no longer experience developer activity and there is hardly any trading liquidity.

The fact that there are so many cryptos also has to do with the fact that they are extremely easy to launch. While operating your own blockchain takes a little more effort, tokens can also be launched using existing protocols – Ethereum or other smart contract platforms. The latter can be done in just a few hours. Crypto currencies and their crypto networks are ultimately ideas poured into programming code – neither thinking up an idea nor implementing it via software is particularly expensive, as the marginal costs are close to zero.

More than just code

For many people, this inevitably raises the following question: What distinguishes Bitcoin from other cryptos and what distinguishes them from other crypto projects? Although it looks like this at first glance, crypto networks are not just defined by code. The decisive factors are the properties, yes the guarantees (also described as assurances), which a respective network offers.

Crypto networks are actually decentralized ledgers with a transaction history that records who owns how much of a corresponding unit of value and when. In order for the general ledger entries to reflect the true state of the network, they must be as resistant to attack as possible. A user of a crypto network must therefore be able to trust that the general ledger entries, i.e. transactions made, cannot be reversed.

This guarantee – and thus the attack resistance – of a crypto network is not necessarily a design issue, but depends on how much security – that is, computing power or, technically speaking, hashrate – a crypto network combines. This variable is ultimately an emergent feature of every crypto network and cannot simply be programmed in.

Bitcoin as the Switzerland of crypto networks

Of all crypto networks, Bitcoin is characterized by its unmatched hash power, which means that the energy to secure the Bitcoin blockchain – and thus also the costs of an attack on it – by far exceeds that of all other crypto networks. Bitcoin is in a different league in this regard. Other crypto networks such as Ethereum Classic or Bitcoin SV have already experienced so-called 51 percent attacks and thus manipulation of their transaction histories, which makes us question their guarantees.

In addition to attack resistance, Bitcoin is also the crypto network with the highest censorship resistance. The huge network effect also ensures adoption, awareness and persistence. At the same time, Bitcoin is more decentralized than any other crypto network. This decentralization, especially at the level of the full nodes, gives the network valuable inertia. Protocol rules such as the 21 million Bitcoin restrictions can hardly be changed. Bitcoin is to a certain extent the blockchain counterpart to Switzerland. Due to its decentralized, political system, it is also repeatedly accused of being too slow and too little agile. On closer inspection, however, it becomes clear: The federal, decentralized structure of the political system in Switzerland is more of a feature than a bug, not least because of this, the Swiss Alpine Republic has a politically stable order with a high degree of legal certainty.

Opportunities beyond Bitcoin?

If you want to keep a crypto currency and its crypto network mainly because of the guarantees and properties mentioned, you are therefore well advised to rely on Bitcoin. However, maximum security and decentralization are not desirable for all use cases. If they are not, the investor always has to ask oneself whether a crypto network with a blockchain infrastructure is the right technological foundation for the problem at hand.

In certain cases it can be. So security and decentralization may not be in demand, but the property of the inherent programmability of a blockchain. The current hype around so-called non-fungible tokens (NFTs) suggests use cases in this regard: Tickets of all kinds can be issued as NFTs – for example as hash on the blockchain – by a ticket issuer. The latter are less interested in whether the blockchain used is actually decentralized, but rather whether the inherent programmability of this blockchain enables him to monetize a spontaneously emerging secondary market for his tickets without having to own or operate it himself in any way.

“However, maximum security and decentralization are not desirable for all use cases.”

Bitcoin cannot (yet) do everything

One reason why there are other crypto networks: Bitcoin’s image is still bad in many eyes – not least because of the energy issue – which is why people prefer to get involved in an alternative crypto network. The much more decisive reason, however, is: Bitcoin cannot do everything. Bitcoin does not offer this kind of pronounced programmability that enables the use case just described. This is made possible by the so-called smart contract platforms. Here they believe that they have their right to exist vis-à-vis Bitcoin: They make possible what Bitcoin cannot. The argument is therefore not uncommon: Smart contract platforms such as Ethereum ultimately pursue a different goal than Bitcoin and should therefore not be compared with the same.

Crypto projects based on these smart contract platforms also strive for a completely different use case than Bitcoin. For example, the various DeFi protocols that already exist across various smart contract platforms. These are not striving to become neutral digital base money in a global crypto settlement network like Bitcoin. Rather, these projects are about being an open, permission-free application for a specific financial use case. For example, decentralized trading exchanges, decentralized credit protocols or decentralized derivative platforms.

So will every crypto project take the place it deserves, so that everyone can look forward to a bright future independently of one another? Unfortunately it’s not that easy. The various smart contract platforms are in competition with one another. Should one prevail over the other, all projects on the loser platform would be threatened in their existence. At the present time it cannot be ruled out that smart contract applications of all kinds can be implemented on Bitcoin via additional protocols and other technical solutions. Of course, these would not have the same guarantees as the basic protocol of Bitcoin, but would still benefit from the security of the Bitcoin network and the network effects of the Bitcoin asset. Some attribute the fact that Bitcoin is not yet able to offer this extensive functionality to such a pronounced extent to the following fact: Bitcoin first perfects the foundation and then builds the applications based on it, while smart contract platforms have shifted in the opposite direction.

In conclusion, it can be said: The future of the crypto world is still in the stars and can take unpredictable turns. But even if it basically seems to make sense in theory to have an Internet of Values ​​multilayered on the safest crypto network with the highest level of attack resistance – after all, there is only one Internet – it does not have to be that way in practice. Sometimes path dependencies are too strong, people’s needs too different and the relationships too complex.

Hasan Sheikh
Hasan, who loves technology and games, is studying Computer Engineering at Delhi JNU. He has been writing technology news since 2016.


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