Cryptocurrency has been all over the news recently. In early December 2017, the price of a single bitcoin topped more than $17,000. Why the sudden explosion? Why are even big name investors, such as J.P. Morgan, taking an interest in bitcoin? The introduction of bitcoin futures and digital assets index funds reveals the potentially lucrative nature of cryptocurrencies.
What Is Cryptocurrency?
At its core, cryptocurrency uses a peer-to-peer network to send transactions without the involvement of a centralized bank. In order to send a digital asset to an individual, nodes must verify a transaction for it to be valid. These transactions are verified by performing cryptographic calculations – hence the name “cryptocurrency.” Other blockchain projects beyond bitcoin, such as Ethereum, achieve multiple innovations beyond a form of payment.
Ethereum is the second-largest cryptocurrency next to bitcoin by market cap. In 2017, Ethereum was one of the top performers in the crypto space, seeing astounding growth from a $700 million market cap to more than $40 billion. Analysts attribute Ethereum’s growth to its use of smart contracts in addition to its use as a currency.
Although both bitcoin and Ethereum are considered cryptocurrencies, they differ vastly under the hood. Bitcoin is designed to be a peer-to-peer cashless system. Ethereum is designed to operate as a decentralized application through the use of its smart contracts.
Smart Contracts and Their Uses
A smart contract is a program that allows users to exchange goods, services, or other cryptocurrencies without the involvement of a third party. Smart contracts act as a binding document with terms and conditions outlined in code using Ethereum’s own language, called Solidity. Futhermore, smart contracts are executed on the Ethereum platform by nodes on the network. If the nodes on the network reach the same conclusion, then the contract is valid. Data on the blockchain cannot be altered or tampered with once a contract has been validated.
Although smart contracts have just started to gain traction in the cryptocurrency world, many new services are being built around them. For example, EtherDelta is a completely decentralized exchange built upon a smart contract that lets users buy and sell different cryptocoins. Prism is a similar service that allows users to create a portfolio of coins using smart contracts.
Smart contracts can have a significant impact on how businesses operate. For example, a smart contract can be used in hotels to deliver a digital key and room number automatically to guests after they have sent payment for their room. Car sharing services can use a smart contract to allow individuals to rent out their cars for specified periods of time. Their customers can deposit money into the smart contract to automatically unlock the car.
Scaling has become a big issue in the crypto world. Though it is the most recognized cryptocurrency, bitcoin is starting to experience the effects of scaling because of its rapidly increasing transaction times. Sending bitcoin to someone else can take hours, and transaction fees are greater than $5, even for small transactions.
For this reason, adoption of bitcoin can be problematic for businesses. Ethereum is already handling a higher volume of transactions than bitcoin without a high transaction fee or long wait times because its block generation time consistently runs less than 20 seconds. However, Ethereum is not immune to the effects of scaling.
Bitcoin might have been the first cryptocurrency on the scene, but the next generation of digital assets offers new uses of blockchain technology that extend beyond the vision of bitcoin. Learning more about these exciting innovations can help organizations meet security challenges in the midst of the digital transformation of the economy.