Sorting out The Cryptoverse
Sorting out the cryptocurrency market involves sifting through a bewildering array of coins. What are the broad stroke categories useful for sorting it all out. Here are my simple yes/no categories for navigating the cryptoverse:
- Bitcoin or Alt-Coin?
- Limited or unlimited circulation?
The ruler of the cryptoverse is, of course, Bitcoin. Bitcoin is in a category all to itself with a total capitalization representing approximately 50% of the capitalization of all the cryptocurrencies combined. Often referred to as digital gold, Bitcoin is the flagship brand of cryptocurrency, like Xerox is to photocopiers, or Kleenex is to tissues.
Bitcoin is universal in the crypto world and trades at all crypto exchanges. Bitcoin is the oldest cryptocurrency and has not wavered from the original commitment of a hard 21,000,000 coin limit. Roughly 18,000,000 coins have been mined to date.
As well Bitcoin is the only local currency crypto for everyday transactions. As of Sep 7, 2021, El Salvador uses both USD and Bitcoin as legal tender. Other countries are following.
All the other cryptocurrencies that are not Bitcoin are referred to as the Alt-Coins. These cryptos can be grouped by three criteria:
- Limited circulation
- Consensus mechanism
Some cryptos have a hard mathematical limit as to the number of coins in circulation. But others have no such restriction. Bitcoin is mathematically bound to a hard limit of 21,000,000 coins. Ethereum, on the other hand, has no limit on the number of coins that can circulate.
Unlimited crypto holders can find their holdings reduced in value if more coins are put into circulation.
The blockchain records all crypto transactions as part of the settling process. Conceptually a blockchain is like a spreadsheet that has multiple identical copies on multiple computers (referred to as nodes) around the world. These individual copies are kept perfectly synchronized by a consensus mechanism that automatically detects and corrects data that is corrupt or tampered.
There are two main consensus mechanisms:
- Proof of Work (PoW)
- Proof of Stake (PoS)
Proof of Work (PoW)
Proof of work involves calculating a “cryptographic proof” for each transaction. This mathematically proves that the transaction is valid. PoW is an intense computer operation that makes the hosting computer use more electricity. As a result, PoW has been criticized as being environmentally unfriendly. However the PoW consensus mechanism is irrefutable and mathematically verifiable. Akin to saying the 2+2=4.
Bitcoin is a PoW crypto.
Proof of Stake (PoS)
Proof of Stake is essentially a voting process. Under PoS node operators run the blockchain processing computers and are required to stake crypto coins in order to participate. If there is a blockchain dispute then the nodes use electronic voting to resolve the issue. A bigger stake gives the node operator more votes in the consensus mechanism.
Consequently PoS uses less electricity than PoW.
Cardano is a PoS crypto.
Crypto Coin Privacy
Most cryptos store transaction information in the blockchain in a manner that is public. Anybody can use a “blockchain explorer” application to see the individual transactions. The date, time, amounts, and wallet addresses are all visible. If somebody knows your wallet address they can learn from the blockchain a full history of all your transactions. Bitcoin, Ethereum, and Cardano all have public blockchains.
There are a handful of cryptos that are private and make it impossible for the public to glean information from an obfuscated blockchain. Monero would be an example of a privacy coin.