Here are excerpts from two current articles on the website elevenews.com that helped greatly to explain the relationship between several cryptocurrencies being developed for digital currency transactions.
The on-going discussion is about which one will be the best to use for cross-border payment solutions.
Both XRP and Stellar Lumens (XLM) are distributed ledger technology (DLT)-based platforms that aim to provide cross-border payments solutions between large banks and financial firms. However, Stellar’s products have also been developed for the individual consumer.
Notably, the Stellar payment network is a fork of the Ripple protocol and was founded by Jed McCaleb in 2014. McCaleb is also the co-founder of the Ripple protocol. When the Stellar project was proposed, a non-profit Development Foundation was launched as well – in order to support the ongoing development of the Stellar platform.
Stellar Backed By Stripe
One key difference between XRP and Stellar is that the latter was created by a non-profit organization. Due partly to the lower overhead costs of operating as a non-profit entity, the transaction fees on Stellar’s network are quite low. Early stage investors in the Stellar project include San Francisco-based Stripe, an internet-based payment processing service.
Similar to how the XRP cryptocurrency (developed by Ripple Labs) is used to facilitate transfers between two parties who may use different fiat currencies, the Stellar network also allows users to send and receive payments to/from bank accounts that support different currencies – without having to pay high currency conversion fees.
Transactions Only Cost Fractions Of A Cent
For example, the Stellar network can be used to send a payment in British pounds (GBP) to an account that accepts USD. The sender of the payment on the platform only has to pay a 0.00001 XLM network usage fee – which is only a fraction of a cent.
San Francisco-based Ripple Labs has also developed products which are quite similar to those offered by Stellar. XRP is a cryptocurrency that was developed by Ripple Labs and its transactions are conducted on the XRP ledger, at incredibly small costs. In order to transact on the XRP ledger, however, an address must hold at least 20 XRP.
As explained on Ripple’s official website, users must hold a minimum of 20 XRP so that “the shared [XRP] global ledger [does not] grow excessively large as [a] result of spam or malicious usage.”
As most XRP community members would know, not all of Ripple’s products use XRP as the base currency. xCurrent, which does not use the token, is an enterprise-level software product that utilizes the Interledger Protocol (ILP) to “instantly” process international payments – as it allows for “inter-operability” between virtual and fiat currencies.
The Interledger Protocol was created by Ripple Labs, but its ongoing management and development is now handled by the World Wide Web Consortium (W3C) group. The W3C is an international body that creates open standards to support further growth of the internet.
Notably, xCurrent supports real-time messaging between banks (similar to SWIFT) – which is useful because static messages may have typos or might not include important information. This often leads to transactions being delayed.
Another popular product developed by Ripple Labs, xRapid, was also launched recently. If XRP is used to send payments using xCurrent, then Ripple refers to these types of transactions as xRapid. Prior to going live (production), xRapid was tested by leading money transfer services such as Western Union and MoneyGram.
One of the main benefits of using xRapid, according to Ripple, is that it provides liquidity through XRP – which allows money to be transferred cheaply and quickly.
Public Vs Private DLT Networks
Although Ripple, the company, claims to have partnered with around 150 different financial institutions who are either currently testing its products or are even using them in a production environment, the American fintech’s critics say that transactions on RippleNet are not transparent. That’s because it’s a private DLT-based payment network.
However, digital currency transactions on the Stellar network can be verified and seen by anyone – which is something that generally holds true for most public blockchains. Another thing which Stellar’s community focuses more on, compared to Ripple, is serving the underbanked – meaning helping to provide financial services to people who do not have access to modern banking services.
Before the dust has even settled on Bitcoin’s civil war, which saw an acrimonious disagreement about how Bitcoin should handle its scaling debate, the major digital currency could be splitting again.
Bitcoin Cash was threatened, laughed off, created, boomed, and them fizzled out as Bitcoin carried on its merry mooning way, now with more capacity because of SegWit. Bitcoin Cash was the alternative to SegWit where blocks were blown up to monstrous proportions.
Bitcoin Gold, as the new potential hard forking currency will be called, is now an attempt to wrest the lucrative mining component of Bitcoin out of the hands of the giant firms that have monopolised the creation of the digital currency.
The people’s fork?
The new fork, set to reach landfall on October 25, is aiming to democratize mining. Mining farms and pools hold all the cards within Bitcoin, both as a voting demographic and as manipulators of things like price and fees.
Bitcoin Gold wants to see at-home enthusiast miners back in control. The project was apparently co-founded by Jack Liao, CEO of Hong Kong-based Bitcoin mining company LightningASIC. LightningASIC also conveniently sells the hardware that this new market of miners will need.
This fork seems to be a reaction to the general hatred that is flung towards Chinese mining giant Bitmain who, along with their controversial leader Jihan Wu, had a big part in the creation of Bitcoin Cash.
It must also be noted that Bitcoin Gold is different from another fork that is scheduled for November: Segwit2x. The November fork is aimed at increasing the capacity of the network where as the Bitcoin Gold split is looking to cut more people in on the mining pie.
A change in the hash
It used to be that mining was totally open to anyone who felt like firing up the software on their home computer. However, over time, Bitcoin mining became relegated to expensive custom miners operated in giant factories to achieve economies of scale.
Bitcoin Gold is changing their proof of work algorithm to Equihash, something fans of Zcash will be familiar with. It’s a “memory-hard” algorithm, which means common home computer hardware like GPUs will be able to profitably mine Bitcoin Gold for the foreseeable future.
Bitcoin Gold is somewhat enigmatic at the moment, mostly because there is no technical information available anywhere. This is pretty strange, and quite disconcerting seeing as it is meant to go live this month.
Bitcoin Gold will also have the same address format as Bitcoin, and Bitcoin Cash, and this has already caused problems. There have been reports of people sending huge sums to wrong addresses – e.g. Bitcoin being sent to Bitcoin Cash wallets.
Finally, it should be noted that we use the word “fork” lightly. As Bitcoin Gold has essentially zero chance of replacing Bitcoin in the marketplace, it’s more of an air-drop than a chain split. Everybody that owns Bitcoin will also own Bitcoin Gold once the network goes live, but transactions on the Bitcoin Gold network won’t affect Bitcoin’s network, or vice versa.
There’s a cartoon currently popping up in the inboxes of Mayfair’s bitcoin-obsessed hedge fund managers. It’s titled ‘how to be an analyst’ and the hedgies are poking fun at their financier ‘inferiors’. When the digital currency rises in value, the analyst declares it a ‘bubble headed for a crash’. When it falls, it’s ‘bitcoin’s dead!’ The value’s flat? ‘No return on investment’. And if bitcoin’s price moves, it’s ‘too volatile’. The bitcoin believers are mocking the way cryptocurrency sceptics find fault whatever happens.
All of which illustrates how split the City is over bitcoin. Some herald it as a ‘monetary revolution’; others decry it as a boom about to go bust. Earlier this month, Jamie Dimon, chief executive of JP Morgan, declared the currency a ‘fraud’, arguing that it should only appeal ‘if you were in North Korea… a drug dealer or a murderer’. At the Barclays’ financial conference in New York, he said, ‘If we had a trader who traded bitcoin, I’d fire him in a second,’ sending bitcoin’s price down 6 per cent. He proclaimed it ‘worse than tulip bulbs’, a reference to the tulip mania in the Dutch golden age. Meanwhile, Chinese regulators have ordered all digital currency exchanges to close and banned fundraising through initial coin offerings (ICOs). The central bank warned that cryptocurrencies are being used ‘as a tool in criminal activities such as money-laundering and drug-trafficking’.
Could the most famous cryptocurrency be headed for a crash? The likes of Dimon arguably have a vested interest in bitcoin failing. ‘As the boss of one of the biggest banks in the world, why would he like anything that reduced his control over the money supply?’ says one hedge fund manager and bitcoin fan. A further concern is how in vogue bitcoin is. In the late Nineties, before the dotcom crash, celebrities piled in to internet start-ups that mostly ended up going bust. Now, Paris Hilton is taking part in a fundraising for digital token LydianCoin, while bra baroness Michelle Mone has said she will accept bitcoin as payment for lavish Dubai flats.
Outside the financial world, bitcoin remains little understood. Notably, Google’s auto-complete suggestions for ‘is bitcoin…?’ are ‘safe’ and ‘legal’. What makes people pay attention, though, are headlines like this: ‘If you bought $100 of bitcoin seven years ago, you’d be sitting on $72.9 million now’.
So what exactly is this magical money tree?
Bitcoin is the grandaddy of thousands of other cryptocurrencies. It was released in 2009 by an individual under the pseudonym Satoshi Nakamoto. Speculation abounds about who he actually is — the late computer developer Hal Finney and computer scientist Nick Szabo were touted as possibilities, though both denied it. It’s a virtual payment network, not unlike Paypal, except with no owner. Instead, computers across the globe process transactions and keep a shared ledger (a ‘blockchain’) that enables different contracts to occur. It has its own currency, bitcoin, the unit in which the network carries out transactions. Getting your hands on bitcoin is relatively straightforward: you can buy them on an exchange, as you would any other currency (one is worth around £3,000), or you could accept them for goods and services. But you can also ‘mine’ new ones — like mining gold, except instead of digging it out of the ground, you are rewarded with bitcoins by using your computer to verify other bitcoin transactions.
With bitcoin, the money supply is controlled by the computers. That means it doesn’t require a central bank, so there’s no Bank of England printing money (hence the Twitter meme with the Queen looking irked: ‘Tried Bitcoin. Didn’t have my face on it’). That prize keeps shrinking, meaning there’s a finite supply. Circulation is limited to 21 million by 2140, although each one can be subdivided into millions of pieces. Every bitcoin is accounted for in the ledger, so you cannot get a counterfeit.
You spend them in the same way you would spend other currencies. Contrary to perception, bitcoins are traceable — you can see which internet addresses every bitcoin has been at — but the owners’ names are encrypted. As of 2015, 100,000 vendors, including The Pembury Tavern in Hackney and Nincomsoup café in Old Street station, accepted bitcoin as payment. There’s even a church in Gospel Oak that accepts it for its collection. It is now so mainstream that a £1.65 million Peckham townhouse has just become the first UK property that can be bought using the digital currency, and there are ‘bitcoin ATMs’ (including one in the Londis on King’s Road).
The irony of the debate over a bubble is that bitcoin was born just six weeks after Lehman Brothers went bust, as people searched for an alternative to the existing monetary system. It had its roots in the Julian Assange-backed ‘cypherpunks’ movement of the Nineties, in which activists argued the internet would create a new world outside the nation state. The conversation had died down until the financial crisis resurrected it. The first transaction came in 2010, when computer programmer Laszlo Hanyecz persuaded someone to accept 10,000 bitcoins he’d ‘mined’ in exchange for two pizzas. It came to be embraced by libertarians as a way, like gold, to store wealth. Silicon Valley then joined the bitcoin crypto-rush, interested both in the technology and its potential as a way to raise cash.
Bitcoin has, however, been hit by crisis and scandal. It first entered mainstream consciousness as the currency of the Silk Road, the online black market where drugs were sold. Two major bitcoin names have also ended up in court. Charlie Shrem, who set up Bitinstant (in which the Winklevoss twins invested), went to prison after being convicted of aiding and abetting an unlicensed money transmitting business, a charge related to the Silk Road. Meanwhile, Mark Karpelès, former head of what was once the world’s biggest bitcoin exchange, Mt Gox, was charged in Tokyo with embezzlement and data manipulation after Mt Gox collapsed in 2014.
‘I reject the idea that [cryptocurrencies] are only used by criminals and terrorists,’ says Arthur Hayes, the co-founder of BitMEX, a bitcoin derivatives exchange based in Hong Kong. ‘The real currencies that finance terrorism and crime are the dollar and the euro. The cryptocurrency movement will only expand. It is a digital currency version of “I don’t trust the government”; the analogue version being gold.’
It has emerged that even JP Morgan has routed customer orders for bitcoin-related instruments, although the bank does not take positions on this with its own cash. Emad Mostaque, co-chief investment officer at hedge fund Capricorn Fund Managers in Mayfair, says, ‘I can bet you JP Morgan’s wealth customers are asking, “Why don’t I have bitcoin?” It doesn’t move with other assets, so it’s a good hedge.’ Mostaque adds that savers can even buy bitcoin in their ISA: ‘If you could put one per cent of your ISA in it, and it can return 10 times that or it can collapse, what would you do?’
The main worry about bitcoin, Mostaque explains, is initial coin offerings, the latest financial fad. ICOs are where ‘tokens’ in a new digital currency that promise future goods and services are sold as a way for a company to raise cash. This is where it starts to look like a bubble. Ethereum is a cryptocurrency, but also a platform for apps, allowing developers to sell a stake in the app by issuing tokens with ICOs. In June, one raised $30,000 in half an hour; purchasers were buying a token called ‘F***’ (described as ‘a social cryptocurrency that aims to help everyone around the world give a F***’). There’s even a prostitution cryptocurrency, Lust, for sex workers and their customers.
‘ICOs are like when companies floated in 1999 with a website address and a smile,’ says one Square Mile cynic. ‘Same thing, different way to throw your money away. People are basically selling air.’ Scammers can use blockchain technology to create ICOs that perhaps look promising but are essentially flimflam. More than £1.3 billion has been raised in ICOs this year. Where is the money coming from? Analysts say it is often from those who bought bitcoin on the cheap some years ago and are now millionaires. The UK watchdog, the Financial Conduct Authority, warned that anyone thinking of buying coins in an ICO should only do so if they are prepared to lose everything. One banker likened it to the South Sea Bubble of the 1700s, where a company bought up the rights to trade in the South Seas, then sold shares in its company which eventually become worthless.
There are echoes of other crises too. In 1929, millionaire Joe Kennedy sold his stocks after a shoe-shiner gave him share tips, the theory being that by the time the boy on the street is telling you what to buy, values have become inflated. The Wall Street crash followed. ‘This time, it’s bankers hearing their teenage nephew has bought bitcoin,’ says that same sceptic.
So what’s the problem with bitcoin? ‘The main issue is that established currencies have a legal footing in each country whereas bitcoin doesn’t,’ says a banker who asked not to be named. ‘Governments can clamp down on trading in it, like in China, saying it is circumventing capital controls.’
Governments have reason to fear bitcoin. It removes the role of government as the central issuer of money — and guarantor that money is real. As another banker notes: ‘There’s a huge amount of power in controlling the money supply, such as using quantitative easing to pump cash into the economy. All the Western economies are based around an ever-increasing money supply. Bitcoin has a fixed supply of currency — that hasn’t ended well in the past, like when Britain came off the gold standard in the 1930s. If a government can’t print more money, it can’t run a budget deficit.’ As the founder of the Rothschild banking dynasty probably didn’t actually say: ‘Give me control of a nation’s money and I care not who makes its laws.’ This is why China — where most of the biggest bitcoin miners are — has cracked down heavily on cryptocurrencies. ‘China is afraid of anything it can’t control,’ Hayes explains. ‘But it can’t stop people using bitcoin — you can’t shut off the internet.’
Bitcoin’s fans argue it will have the most profound uses in countries where the money system is broken, such as in Zimbabwe and Venezuela. It could also benefit the 2.5 billion adults who don’t have bank accounts, and enable immigrants to send remittances home more cheaply than services like Western Union do. As such, fans believe bitcoin could help create a more equal world. ‘In the region we work in — emerging economies — banks don’t provide services for the majority,’ says Hayes. ‘Bitcoin allows people to invest, to participate in a global phenomenon.’
When the central bank of Cyprus seized savings, citizens downloaded bitcoin apps on their phones. Others believe Brexit could make bitcoin take off in Britain — although it’s probably too expensive to trade (there’s an $8 transaction fee, so you’re not using it to buy a Starbucks mocha). Still, the technology is likely to become more sophisticated, ironing out flaws and making a future cryptocurrency viable — a bitcoin 2.0. If there is a crash, something sustainable could emerge from the wreckage.
That could still be used for nefarious purposes. In Lionel Shriver’s most recent novel, The Mandibles, she envisaged a dystopian future in which the US experiences hyperinflation due to a newly created international reserve cryptocurrency.
For those who don’t understand how Bitcoin, or any other crypto-currencies are perceived as a scam, here is an article from The Market Ticker. Comments at the end of the article source are also worth reading.
A quick primer for those who don’t understand how these work.
Digital “currencies” are all basically the same. There is a finite number of a given “coin” type at inception; each has a cryptographic “key” that must be discovered in order to “acquire” it, which the proponents argue is similar to digging it out of the ground, and thus it is called “mining” them.
However, each successive coin in a given currency is harder to “mine” than the previous one; the cryptographic series is designed intentionally this way. The first few coins are easy and they get more difficult as the number of them mined is a greater percentage of the whole. The designer attempts to slightly outpace the growth rate of processor capability to solve said problem so that (1) it’s reasonably practical to “mine” them at the outset but (2) as time goes on it becomes more difficult at a fast enough rate that the stock of said coins is not completely exhausted at any given time, NOR does it become so prohibitively difficult that there is no point in trying.
The “coins” are designed to be “self-proving” through a technology known as “blockchain” in the generic sense. In order to confirm your coin is valid (and owned by you) others must reproduce your published “signing” result on the coin you claim to have mined. In addition to prevent your “coin” (which is just a series of bits — that is, a number) from being duplicated (counterfeited) whenever you exchange it with someone else they have to sign the “coin” and that transaction has to be published and the signature verified by some number of others before the “spend” is considered to be good. Once it is considered good then ownership of said coin has passed to the new person. Through this mechanism, the transfer of a given coin – from its mining onward – can be irrevocably traced and it is thus impossible (in theory anyway) for someone to duplicate (counterfeit) said coin.
Digital “coins” are divisible and such divisions are just as valid as an original, but again a division must be confirmed and signed as well. Thus you can spend 1/10th of a coin, the person who has 1/10th can spend half of that (or 1/20th of the original) and so on.
The design of these systems, however, is intentionally deflationary. That is, not only is it harder and harder to “mine” more coins but any coin in which the signature cannot be confirmed because the person who last signed it loses their signing key is irrevocably lost.
There are nuances between all the different “coins” but they all share a common set of problems:
While the number of a given coin is distinct, discrete and finite there is no limit to the number of competing digital “coins.” If you don’t like the ones that are present today you can set up another one and nothing prevents you (or someone else) from doing so. This means that the common chestnut of there being a “finite supply” is false.
A deflationary “currency” over time ultimately becomes extinct and valueless. In order for something to have a price it must in some form or fashion, for some period of time store value. The creators of digital currencies try to insure this through their deflationary design.
The problem is that in order to get the value out of a non-physical thing that thing must be a medium of exchange. That in turn requires wide acceptance by various individuals and firms transacting in that coin in some fashion.
As the number of coins in circulation inevitably decreases due to its deflationary design it ultimately must lose individuals and firms willing to transact in same. At some critical mass point it becomes crippled sufficiently in terms of exchange that the alleged “value” collapses.
Alleged “exchanges” have no clean business model. A valid exchange must exist solely on fees charged for transactions. The problem is that a distributed authentication model, which is what makes “blockchain” work, inherently has no means for the validating nodes to charge back the work of validation to the transacting parties. This results in those nodes having to exist via some other means (e.g. mining), and that means is usually speculating on the coins themselves! If you want to know why these exchanges seem to have a record of absconding with your coins (or “losing” them), this is the reason — they have no legitimate business model to otherwise pay for the continuing daily costs of validating and transacting between parties.
ALL such “digital currencies” are by design and intent a means to separate you from wealth and give it to whoever founded said “currency.” They are for this reason all effectively a pyramid scheme. This will inevitably lead to the seizure and closing of all such systems — if and when governments figure it out. The reason is simple: With a finite and ever-more-difficult means of mining each successive coin the effect on value for participants is exactly the same as it is in any pyramid scheme. Since nothing of physical existence is created or dug out of the ground there is no utility value and thus no floor price, unlike gold or silver (both of which have industrial value due to the metallurgical properties.) The person who “invents” such a system gets to “mine” many coins at very low cost (in electricity or whatever.) He then watches the “value” of said coins escalate as each one becomes harder to “mine” and as hype takes over, and can convert that “wealth” into some other form, whether it be a fiat currency, real property or otherwise. The founder always makes a grossly outsized “profit” in this fashion with the available profit dropping exponentially and ratably in every single case simply based on the number of participants. At the beginning recruiting others who also make money is easy because mining the coins is easy. However, over time recruiting others becomes harder and harder.
This is exactly identical to what happens in a traditional pyramid scheme — the founder gets a cut off all the sales from everyone under him. The next layer who all find the field “un-mowed” with lots of customers make a lot of money too, but always less than the first group and so on. But since the number of customers is finite, just as is the number of coins, with each successive layer of participants it gets harder and harder to find others to transact in sufficient volume to turn a profit because the acquisition of each new (coin or customer) becomes exponentially more-difficult. It is thus impossible on a mathematical basis for any such design to be self-sustaining since it relies on an exponentially more difficult act in a finite world. ALL such systems are inherently ponzi schemes whether we are talking about digital currencies or the alleged sale of products.
This doesn’t mean you can’t try to speculate in such “currencies”, because you certainly can. However, you must recognize a few things before doing so.
First, it is my contention that you are probably participating in an illegal scheme, albeit one that is not currently recognized as such by the authorities. No matter the instance, design, product or service any exponentially more-difficult (with time or number of “wins” or “participants”) system is inherently a pyramid scheme. That is it will always result in less return for the second participant than the first, for the third than the second, and so on. Eventually the return will always become negative at which point the scheme collapses. This is mathematically provable and is why such schemes are supposed to be illegal everywhere. Part of your risk profile assessment thus must include whether such digital currency schemes will be ruled an illegal pyramid scheme by governing authorities somewhere (or everywhere) and if it is whether you will simply lose all the money you put into it or worse, potentially be criminally prosecuted.
Second, because blockchain inherently records every transaction for each “mined item” back to its point of origin the risk of that loss through said action never disappears. Cryptographic signatures are admissible evidence since they are very close to being absolutely tamper-proof and as a result if such an outcome occurs the risk of a forcible unwind of any transfer out of said “currency” into some other form of money or property never expires.
Third, any attempt to evade paying taxes on any gains you make in such “currencies” is idiotic because your ownership and the exact P&L on your transactions is not only trivially able to be determined it is published in the blockchain and visible to anyone who cares to look! If you don’t declare every penny of such gains and a government decides to look they can trivially nail you and since there is no statute of limitations on intentional tax fraud in the United States (only on errors) you can get hammered retroactively literally for the rest of your life.
Fourth, because there is no means of payment to the validators of transactions from those who do transact due to the distributed design any “coins” you have at an exchange are subject to being lost or stolen if said exchange is unable to fund itself, and many of those exchanges, if not most, must be presumed to be speculating on the increasing price of said “coins” as their primary means of funding. With the “miners” being validators (which is true for, I believe, all existing systems) this adds a second level of risk in that they can quit too since they don’t get paid for validating — only for discovering “new” coins. This exposes you to an insane amount of business risk over which you have no control. In addition you must contend with all the other risks associated with third-party custody of anything such as theft or destruction. Since a coin is non-duplicable and if stolen, spent and validated (or worse deleted) it is irretrievably gone such risks are exactly the same as those involved in holding a bar of gold or stack of $20 bills. We have existing insurance systems for physical storage of various items of value for other things, but I am aware of none that are worth a bucket of spit when it comes to digital currency exchanges. This may change in the future but for now it makes any holding of such “coins” by a third party extremely risky.
Fifth, because all such systems are self-extinguishing in that they are deflationary by intent and eventually either run out of coins to mine or cost more to mine one than the value that can be obtained through their exchange the number of persons willing to continue to provide validation of transactions as an uncompensated “part of their operation” (that otherwise makes money, e.g. by mining) eventually falls to zero. Along with this the ever-increasing size of the transaction chain that must be maintained this makes the computational cost of validation as coins are divided and subdivided become ever-larger. Ultimately this forces some sort of payment model into the validation system but that’s not a solution either as the larger and larger size of said chain causes the cost to continually increase without boundary. Somewhere well before there are either zero validators or the cost of validation exceeds the marginal value of your proposed transaction you will lose the critical mass necessary to validate transactions in a reasonable amount of time and with reasonable certainty at which point said “digital currency” becomes worthless. Nobody knows exactly where this “knee point” is for any given instance but that this problem exists by design in every case is a fact.
So go ahead and play if you wish folks, but just recognize that you’re riding a ponzi scheme — and that all of them, without exception, eventually collapse.