What are crypto-currencies, what are they for and what are the differences between Blockchain and Bitcoin? These and other fundamental questions were explored in the webinar on July 15.
The webinar series, which provides basic knowledge about blockchain and crypto-currencies, is a cooperation between CVJ.CH and 21 Shares AG, a provider specialized in digital assets. In a constructive series of six blocks of 30-minute sessions, the aim is to help participants gain a basic understanding of what happens around crypto assets.
In an interactive dialogue, the various topics are dealt with by experts. This is followed by a question and answer session with the participants. The first block took place last week. It dealt with general basic topics: what exactly crypto-currencies are, what they are used for, and the differences between blockchain and Bitcoin. But also infrastructure, the structure and pricing of digital assets, as well as their investment and storage options were covered.
Sina Meier (Managing Director Head of Business Development at 21 Shares) and Hansen Wang (Senior Associate at 21 Shares) led through the topics in a discussion.
Where do crypto-currencies come from?
The crypto currency Bitcoin - explains Wang - has been around since 2009. Bitcoin was created shortly after the last big financial crisis in 2008. Who exactly designed Bitcoin is still very unclear today. Satoshi Nakamoto - a pseudonym - published the Bitcoin White Paper in 2008, in which he explained his revolutionary idea for a new monetary system. Which group or person is hidden behind this pseudonym is still unknown today. Although several people have claimed Satoshi Nakamoto's identity for themselves, they have not been able to provide proof. Meanwhile there are about 5000 other crypto-currencies besides Bitcoin.
What are crypto-currencies?
Although there are now many different crypto-currencies, one common feature remains: they are based on blockchain technology. In total, there are three major categories of crypto-currencies, which Wang calls
First, currencies and payment tokens - such as bitcoins, which are used to make payments.
Second, utility tokens. These are used to finance a project/network by guaranteeing buyers that they can use their own products from that network. For example, if Airbnb was built on an Airbnb blockchain, the Airbnb token would be used to pay for houses, apartments, etc.
Thirdly, security tokens - which are structured similarly to a security (for example shares or bonds), except for the implementation on the blockchain.
What is the difference between Blockchain and Bitcoin?
The blockchain can be described as the underlying technology of the Bitcoin currency. For ease of understanding, Wang cites as an example of the blockchain and the Bitcoin currency the booking with Airbnb. Bitcoin is here the possibility of room booking, where the different booking options can be actively perceived on the screen. The presentation level - in this case the screen - is thus visible to the viewer. But what happens behind this presentation level is unclear.
The data processing and storage on the blockchain takes place in the background. Thus also the process that takes place behind the room booking. For Bitcoin, the blockchain is essential. However, the blockchain can also exist without Bitcoin or another crypto currency. The blockchain is a dynamic database - similar to Excel, which records every transaction ever carried out. This database is divided into several so-called blocks that are linked together (hence the name blockchain). The number of transactions within a single block is about 2000. A great feature of chaining these blocks is that the connection to the respective blocks is unchangeable.
How does a normal database differ from a blockchain?
Wang lists three main characteristics of the block chain to explain the difference between it and a normal database.
First, the blockchain database is decentralized. This means that this database is not located on a single server or at a company, but is distributed over many different computers. These computers all have the same copy of this database. This also explains why a hacker attack on the blockchain is almost impossible.
Secondly, every transaction carried out is completely transparent. All transactions are stored in the database and can be viewed publicly and without time limit by all users. Although the person behind the transaction is anonymized, the transaction process and the amount is visible.
Thirdly, there is no central authority that has control over transactions. For example, a bank has the power to block or cancel transactions. This is not possible with the blockchain.
Is it possible that the blockchain will remain, but all other crypto currencies will die out?
Wang believes that about 99 percent of the crypto currencies will die out. However, this should not affect the currencies that dominate the crypto market, such as Bitcoin or Ethereum. The speaker explains the extinction of a considerably high proportion of crypto currencies with the simplicity of how they have come into existence so far. This will be explained by means of an example. Imagine that there is a desire to found a company of one's own. Fundraising is usually done to get money for the company. Thus, for example, shares of the own company are sold to investors in order to make the establishment of the company possible.
Fundraising is different in the blockchain industry. When most crypto-currencies were created in 2017, the main reason was the possibility to use crypto-currencies instead of shares. Instead of selling shares in the company, utility tokens - which make up 90 percent of all tokens - were created. Hansen also emphasizes that while the blockchain has a number of advantages, it should not be used for everything. Above all, the blockchain is suitable for processes involving large sums of money and processes where security and privacy must be protected.
Is Bitcoin better than regular money?
Wang does not share the assumption that Bitcoin will one day replace normal money. He speaks of a more complementary approach. Bitcoin is best suited for Internet payments. Nevertheless, he adds three examples where Bitcoin can bring more advantages - compared to normal money.
The first point he mentions is inflation. In Switzerland, there is zero interest, and in some cases negative interest. The currency and the government are also stable. For many places in the world this does not apply. In Venezuela, for example, inflation had increased so much that the value of the Venezuelan currency halved within 30 minutes. In the case of Bitcoin, inflation has been clearly predetermined since 2009. Every four years the amount of newly produced Bitcoins is halved. This also limits the availability of the new Bitcoins. 2140 the last Bitcoin is generated.
According to Wang, the second advantage is the possibility of cross-border payment transactions. If you lose your own bank card during a stay abroad, you will need a money transfer from your home country to continue your stay. The money transfer usually takes 3-5 working days, percentages must be given at the exchange rate and a high transaction fee must be assumed. Bitcoin pays a few cents in transaction fees and the transfer takes about 10 minutes. Unfortunately, Bitcoins as a payment method are offered only in a limited way.
The third benefit that Wang explains concerns mainly people who do not have access to standard financial services. In a country where the majority of people have a low economic status, it is often not worthwhile for big banks to open a local bank. These people could be given access to the financial system through Bitcoin. A mobile phone and Internet access is all that is needed.
How can you buy crypto currencies?
The purchase of Bitcoins (and other crypto currencies) can be done in two ways. Either directly on a stock exchange or indirectly via a financial instrument. Like ordinary stock exchanges, there are crypto stock exchanges in the crypto scene. To name but a few: Coinbase, Binance or Kraken. On these crypto exchanges, after creating an account, bitcoins can be exchanged for Swiss francs. These Bitcoins can then either be left on the exchange or kept on a separate wallet.
How do I store Bitcoin?
Bitcoins can be stored either on crypto exchanges or in your own wallet. Wallets are digital wallets that can be compared to an ordinary bank account. On the Bitcoin blockchain, wallet owners have a public address - similar to an e-mail address. Any person who has the address of others can send Bitcoins to them. This public address is called a Public Key. A password is required to access the wallets' Bitcoins. This password is called the Private Key.
Although people who have their own wallet have more power and control over their assets, it also increases their personal responsibility. Since, unlike traditional banks, there is no third party with wallets that has control over funds, there is no possibility of retrieving a private key if it is lost. Assets on the wallet can never be accessed without a password.
How is it regulated with financial products?
There are different financial products in the world. Certificates and hedge funds, for example, are intended for people who refuse to own a wallet. However, according to Wang, it is important to pay attention to a few things when buying a financial product. The financial instrument should imply the performance of Bitcoin and not deviate from it. Counterparty risk should also be taken into account.
How safe is the blockchain?
Wang keeps emphasizing that the blockchain is very safe. The Bitcoin blockchain, for example, has never been hacked due to its decentralized nature. Suppose 50,000 computers maintain the blockchain database. Theoretically, 25,001 computers would have to be accessed to hack it. There have been hacking attacks in the blockchain industry. However, the blockchain itself has never been the victim of an attack. Probably the most significant hacker attack on crypto-currencies took place in early 2014 on the then world's largest Bitcoin exchange, Mt. Gox. Here the private key of the exchange itself was hacked. Human error is therefore the only reason why hacking attacks in the blockchain industry exist at all.
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