Let’s dive into the lives of the three most popular cryptocurrencies of the web3 world- Bitcoin, Ethereum and Solana!
A coin is a digital unit of currency that operates on its independent blockchain network.
Fiat Currency vs. Digital Currency
Let’s first define these terms to make it easier for you. 🖊️
Fiat currency is the legal tender issued by the government of a country.
For instance, if you’re living in India, the Rs. 100 or Rs. 200 notes issued by the government are the fiat currencies.
Digital currency, on the other hand, is any kind of money or monetary asset stored on computer networks worldwide. While cryptocurrency is unarguably a digital currency, central banks of several countries also have currency held in a digital form called Central Bank Digital Currencies. These also come under digital currencies! 😲
Let’s bring out the critical differences between fiat currency and digital currency. ⬇️
1. Legal Tender:
Fiat currencies are, by definition, the money legally issued by the government, and hence they have the authority to be used as legal tender. This means that they are authorized by the government to be used in exchange for goods and services, and no one can deny payment in the form of legal tender. (and we mean, no one!)
Digital currencies may/ may not be used as legal tender. You see, it's subject to a lot of different factors. 🔢
Firstly, digital currency encompasses, within its ambit, both cryptocurrency as well as currency stored in the form of CBDCs. (Central Bank Digital Currencies.) While some countries like El Salvador have accepted the use of cryptocurrency as a legal tender, a few others have only regulated it. Thus, cryptocurrency is still not universally accepted as a legal tender. 😔 (but we’ll get there soon? 🚀)
On the other hand, currency stored as CBDCs can be used as legal tender because it is essentially your fiat currency in a digital form.
The Reserve Bank of India (RBI) recently announced a CBDC which will be called as e-rupee! Unlike cryptocurrencies, this digital currency will be centrally regulated by the RBI.
2. Value of the currency:
The value of fiat currency is determined by the government. It is not pegged to the value of any other precious commodity, such as gold or silver but is purely based on the value unanimously determined by the government.
The value of a cryptocurrency, however, depends on the market forces of demand and supply. Demand, in this case, will be for how much users are willing to pay for a particular cryptocurrency, and the supply will be determined by how much of that cryptocurrency exists in the market. 🤑
If you’re an economics student, you will be able to relate this to your basic theory of demand and supply!
3. The issuer of the currency:
Fiat currency is printed, issued, and regulated by the central government authorities of a particular country. In most countries, the centralized bank of the country takes over this function on behalf of the government.
Digital currencies, on the other hand, are either issued by computer systems in the case of cryptocurrencies or the central banks of respective countries (but in a digital form) in the case of CBDCs.
Now that we’ve understood what digital currencies are, let’s move on to understanding the famous coins- Bitcoin, Ethereum and Solana! 🚀
What is Bitcoin?
Bitcoin is a decentralized cryptocurrency that operates on the peer-to-peer network.
Development of Bitcoin
Ever since its inception in 2009, Bitcoin (BTC) has remained one of the most widely used and valuable forms of digital money worldwide.
Bitcoin first made its appearance in 2008 under the identity of Satoshi Nakamoto, in a white paper that described the blockchain system. This system eventually went on to become the foundation of the entire cryptocurrency market! 👑
Bitcoin was formally launched in 2009, with the generation of its first block- the Genesis.
Satoshi is said to have mined up to 1.1 million Bitcoins in the first seven months after the creation of the currency. Those coins would now be worth nearly $22 billion at August 2022 pricing!
In 2010, Bitcoin first became available to buy, sell and trade in online exchanges. Naturally, the hype around Bitcoin was sensational. Fast forward to 2017, a crypto market frenzy, enthusiasm, and hype combined to form the ideal environment for an asset bubble. Initial coin offerings, or ICOs, were used by many firms to raise money as a result of the cryptocurrency boom. Over 800 ICOs raised $20 billion in investment between 2017 and 2018.
The COVID-19 epidemic in late 2020 marked the beginning of the next significant rise in Bitcoin's popularity. Closure of various industries and forms of entertainment during the lockdown left people with a lot more cash to invest in crypto. This ultimately contributed to another spike in Bitcoin prices.
As of 2022, Bitcoin continues to lead the crypto market in terms of its popularity. However, many other competitors are gradually making a mark for themselves in the crypto world, and hence we'd advise you to do your research before investing in crypto! 🎓
Now that we've taken you along the journey of bitcoin’s growth, let’s try and understand how it works.
How does Bitcoin work?
Like any other cryptocurrency, bitcoin functions on a blockchain. This blockchain is a digital record of all the transactions and is verified by a peer-to-peer network.
Bitcoin was one of the first cryptocurrencies to successfully make a mark in the market, and hence cryptocurrencies that came after Bitcoin built upon the basic structure and improved it.
Bitcoin works on the proof of work (PoW) mechanism, in which miners compete to solve incredibly difficult math problems that demand the use of expensive computers and massive amounts of electricity to properly add a block.
To validate and confirm transactions and put new bitcoins into circulation, Bitcoin employs a PoW algorithm based on the SHA-256 hashing function. (sounds gibberish? 🤔 let us explain!)
The SHA-256 expands to Secure Hash Algorithm 256- bit. It is essentially a cryptographic hashing algorithm that takes in an input of any length to produce an output of 256-bit long hash output.
Bitcoin has a transaction speed of 7 TPS, or seven transactions per second. (so fast? 🚅)
As each block can only hold a certain amount of transactions, Bitcoin blocks are only typically generated every 10 minutes, which limits the number of transactions that can be processed by the blockchain at 7 to 10 per second. (oops 😔)
To help you better understand the concept of TPS, or transactions per second, you can correlate the transaction speeds of different cryptocurrencies to that of the Mastercard! 💳
Mastercard currently boasts of a transaction speed of 5000 TPS! 🤯
This essentially means that the network which supports Mastercard is able to handle 5000 transactions per second. The reputation of a Mastercard or a Visa card depends upon its transaction speed- the higher the TPS, the more efficient is the network.
This concept applies for cryptocurrencies as well. Cryptocurrencies vary in terms of their transaction speeds simply because they use different networks. The higher the transaction speed of a network, the more efficient and scalable is the cryptocurrency! 📈
One of the main features that characterize Bitcoin is its limited supply- Bitcoin is capped at 21 million. There won't be any new bitcoins created after the supply has reached its maximum limit. Why? This is because Satoshi Nakamoto had created Bitcoin essentially as digital gold and set a limitation on its supply to resemble the limited amount of actual gold. 🪙
What is Ethereum?
Ethereum is an open-source platform that powers the ether (ETH) cryptocurrency along with various other decentralized apps.
Despite having multiple founders, Vitalik Buterin was the first one to release a white paper outlining the concept of Ethereum in November 2013. After Buterin's original effort, various other minds joined in on the project in a variety of capacities to assist in its success. Ethereum is said to have been co-founded by Vitalik Buterin, Gavin Wood, Charles Hoskinson, Amir Chetrit, Anthony Di Iorio, Jeffrey Wilcke, Joseph Lubin, and Mihai Alisie.
Too many cooks didn't spoil the broth in the case of Ethereum! 🍲
In January 2014, Buterin introduced the world to the idea of a blockchain project, which came to be known as Ethereum. Later that year, the project received a lot of funds through an initial coin offering (ICO), selling ETH tokens worth millions of dollars in exchange for cash to use for project development. Although ETH coins could be purchased in 2014, the Ethereum blockchain did not go live until July 30, 2015. Hence, ETH buyers had to wait until the blockchain launched before they could transfer or spend their ETH. 🕑
The project was launched in July 2015 with the creation of the Ethereum blockchain, but it would take years for it to develop. The first version of the Ethereum blockchain, called Frontier, had two fundamental purposes- to give users the ability to mine ether and execute smart contracts.
Each smart contract on the Ethereum blockchain is processed by a single miner, and the resulting block is then uploaded to the network.
A user requires a wallet address with some ether in it in order to transact on the Ethereum network (ETH). After establishing a connection to the network, one can initiate a transaction and pay a modest fee to have it added to the blockchain.
The term "gas" refers to this transaction cost. To execute this transaction, miners—a subset of the network's nodes—compete. The Ether is given to the miner who completes this transaction! 🏆
Since the initial release of Ethereum, the blockchain has undergone numerous further updates as part of its development. Ethereum initially operated on the Proof of Work mechanism, similar to that of Bitcoin. But a major drawback of using this mechanism was the immense amount of energy it required in order to keep the network safe.⚡
As recently as September 2022, Ethereum announced the Merge. The Merge is basically an upgrade from the PoW mechanism to the PoS mechanism, which reduces Ethereum’s energy consumption by up to 99.95%. 🤝🏼
The switch to PoS was made to increase the network's scalability, and was a significant modification to the Ethereum blockchain.
How does Ethereum work?
Like other cryptocurrencies, Ethereum makes use of blockchain technology. A network of automated systems that agree on the validity of transaction data authenticates this blockchain. The blockchain cannot be altered unless the network as a whole agrees to do so, thus enhancing security. 🔐
The proof-of-stake algorithm is used by Ethereum to validate transactions. In a procedure called attestation, a validator generates a new block and verifies that the data is accurate. The block is then broadcast to other validators, collectively known as a committee, who verify it and vote on its authenticity.
Owners of Ethereum save their ether in wallets. A wallet does not contain any ether. Private keys stored in the wallet are used as a password when a user commences a transaction. For every unit of ether owned, one obtains a private key. The private key is needed to access ether. 🗝️
No wonder you hear so much about storing keys securely using various techniques!
Everything you need to know about Solana!
Solana is a decentralized blockchain created to support globally user-friendly and scalable apps.
Solana was the first blockchain to use the proof-of-history mechanism!
Solana's beginnings may be traced back to late 2017 when its creator Anatoly Yakovenko released a white paper draft describing a novel distributed systems timekeeping method called Proof of History (PoH). Anatoly believed that PoH could help in the automation of transactions on the blockchain, paving a way for increased scalability for cryptocurrencies.
Later, Anatoly collaborated with Greg Fitzgerald, a former coworker at Qualcomm, to create a single blockchain network in Rust that utilized PoH as its ‘internal clock’.
In February 2018, the two published the project's official whitepaper and the first internal testnet. Greg, Stephen, and three other people were recruited by Anatoly to start the business that would eventually become Solana Labs.
Solana was formally launched in 2019, with its trading price less than $1 per coin.
In March 2020, shortly after receiving $1.76 million through a public token auction held on CoinList, Solana went live on the Mainnet Beta. The project's beta network supported smart contracts and had simple transaction capabilities. Currently, Solana Labs continues to be a major supporter of the Solana network, and the Solana Foundation provides funding for ongoing development and community-building initiatives.
How does Solana work?
Solana uses a hybrid proof-of-stake (PoS) and proof-of-history protocol. The historical proof is used as a way to demonstrate that transactions are made by the proper leader and in the right order.
Solana's blockchain is divided into time slots or intervals where validators take part in transactions and produce blocks. To save time, leaders are selected before each slot in this system.
The PoS process selects a validator or node to serve as the slot leader depending upon the amount of SOL possessed. Every validator is responsible for completing the next block of transactions for the slot that they have been chosen for as well as a PoH sequence, which is a count of the passing of time.
Throughput is increased, and latency is decreased, using the PoH system. This is done so that slot leaders don't have to wait to deliver a full block all at once. They can instead stream transactions in real-time to the remaining validators! 😃
Solana uses the dual system of PoS and PoH to increase efficiency. PoS enables validators to validate transactions based on the number of coins or tokens they possess, while PoH enables very rapid timestamped transaction verification. 🤝🏼
Time stamps are added to the blockchain during PoS block processing, which speeds up network operations. Solana has one of the quickest blockchain networks owing to its PoH algorithm. Its network has an average of 3000 transaction per second capacity. (damn! 🎉)
PoH also ensures that Solana does not face any issues regarding its scalability. Users pay only a small fraction of a penny for each transaction because they aren't contending for block space to process transactions! Lower gas fees and faster transactions? Whaaat! 🥳
While you might have understood the basics of how Solana works, there’s one more thig that might be useful to know. Solana is an account based model, implying that it functions similar to that of a regular bank account. In order for the blockchain cluster to actively preserve the data to process any upcoming transactions, keeping accounts active on Solana results in a massive storage expense.
While Solana bills itself as a safe, scalable, decentralized, and permissionless blockchain, it is frequently criticized in the crypto community for not being really decentralized. Given that Solana uses a much fewer nodes than Ethereum or Bitcoin, this criticism is somewhat valid. The problem lies in the high hardware requirements for validators that come along with Solana's high transaction throughput. 😔
Solana has chosen to give scalability precedence over decentralization on purpose. However, this does not imply that Solana is not sufficiently decentralized because decentralization is a spectrum and involves trade-offs. Diverse blockchains may benefit from varying degrees of decentralization depending on their use cases and security requirements! 🔗
Bitcoin vs. Solana vs. Ethereum
Let’s get down to the crux of the matter. Allow us to serve to you on a silver platter, the key differences among the leading players of the crypto world! 🍽️
We are by no means offering any kind of financial advice. Readers are advised to do their own research before investing.
Let’s take a look at how each of these cryptocurrencies compare to one another.
Each of the 3 major players- Bitcoin, Ethereum and Solana, have its distinct features.
- Bitcoin stands out as a distinct asset class due to its network effects, immutability, censorship resistance, capped supply, and decentralization.
- Solana is renowned for its quick and inexpensive processing of cryptocurrency transactions. Consensus procedures based on proof of history and proof of stake allow for such outstanding performance.
- Decentralized apps (dApps) and smart contracts can be developed and deployed on Ethereum without interruption, fraud, centralization, or outside intervention.
Coming down to the analysis, Bitcoin is seen to have been performing consistently better than the rest of the cryptocurrencies. However, Bitcoin is also extremely volatile, which means prices can skyrocket and fall deep down, variably. It is extremely crucial to have the requisite background knowledge about the trends, market tendencies, and external factors before you can go ahead and invest your money in a particular asset. (and we can't stress this point enough!📢)
Cryptocurrencies are unarguably carving out a niche for themselves in the financial world. It wouldn't be wrong to expect cryptocurrencies to dominate the world of transactions in the years to come. 🚩
Web3 users are constantly learning and experimenting with various cryptocurrencies. Remember, what might work for one user, might not work out for you. This one time, take your mom’s advice seriously when she tells you not to jump into the well just because your friends do! 😉
We understand users’ apprehensions when it comes to investing in cryptocurrencies. It is a scary world out there, but if you’ve made sure to equip yourself with the required amount of knowledge, there’s no reason to be skeptical about anything!
To tame your worries, in the next article, we answer the #1 question in every user's mind- is crypto worth investing in?