Chapter 2. A Bit of Coin Theory

Like anything in life, to gain an appreciation of how we got to where we are, it's helpful to understand the background and history of how it all started. To some people, blockchains and cryptocurrency are just a technology fad, but to the dedicated few, this is a movement of epic proportions, centered around trust and the decentralization of it.

Understanding some of the fundamental concepts of this technology will help to enable all of us to see the potential revolution that blockchains, the wider concept of distributed ledger technologies, smart contracts, and tokens will bring.

In this chapter, we will go back in time and look at:

• Bitcoin: In the beginning

• Altcoins: The alternative to bitcoin

• Blockchains: The immutable database

• Smart contracts: Are they that smart?

• ICOs: The peak of ICOs in 2017

Since bitcoin appeared on the scene in 2009, it has had its fair share of drama. It has become the "crypto gold standard" that everything is measured against, but...

Bitcoin – in the beginning

Money has not had a major innovative disruption in at least several decades, but there have been many attempts in the past, such as DigiCash (Chaum, 1989), e-gold (Jackson and Downey, 1996), B-money (Dai, 1997), bit gold (Szabo, 1998), and Liberty Dollar (von NotHaus, 1998). It wasn't until the invention of bitcoin that a disruption really started to show, but why did these previous attempts fail?

DigiCash

One of the biggest challenges in creating a cryptocurrency is the double-spend problem. This is where the same digital currency is spent twice because it can be easily copied in the digital realm. In fact, it can be spent many times over.

In 1982, David Chaum, an American computer scientist and cryptographer, published a paper on his idea of Blind Signatures for Untraceable Payments (http://www.hit.bme.hu/~buttyan/courses/BMEVIHIM219/2009/Chaum.BlindSigForPayment.1982.PDF). Then, in 1988, he co-authored a paper on Untraceable Electronic Cash (http://blog.koehntopp...

Alternative coins (Altcoins)

With the bitcoin source code freely available, it wasn't long before someone made a copy and created their own coin. This then led to the era of alternative coins, known as altcoins.

The bitcoin source code has been copied or "forked" 19,358 times thus far. This doesn't mean there are 19,358 different altcoins because many forks will be from people wanting their own copy to learn from or experiment with. As an indication of the active altcoins, there are just over 800 listed at coinmarketcap.com.

Note

Forking: A technical term that programmers use when copying code from one application to another. This means the developer does not have to start from scratch.

There are some purists, or bitcoin maximalists, who see bitcoin as the main or supreme coin, and everything else as an altcoin. However, there are some cryptocurrencies that were created from scratch, with their own independent blockchain, and they would take offense at being called an altcoin. They see themselves...

Blockchain – the immutable database

The word "blockchain" is a term that many people use but few really understand. The reason it is hard to define is because in such a nascent space, there is no single correct definition. For example, when the internet was invented, some people may remember that it was referred to as "the World Wide Web" or "the Information Super Highway." Such terms are non-existent now and if used, are met with an almost "I know how old you are" look. The same will happen to blockchains 10 or so years down the track.

Along with there currently being no universal definition of a blockchain, there is also widespread disagreement over which qualities are essential in order to call something a blockchain.

Bitcoin was designed to be public. Anyone could join the network, and its blockchain was designed to keep participants honest in the absence of a central authority. The architecture sacrificed efficiency in order to ensure that cheating the system would be costlier than playing...

Smart contracts: are they that smart?

Contracts appear all around us in our daily lives: the agreement to meet for a coffee, to shout a friend lunch, or help pick up your in-laws from the airport during their yearly Christmas visit. Technology has not replaced the notion of contracts but simply changed the interface. The act of putting coins into a street parking meter or swiping your bus transportation card all constitute the act of participating in an agreement.

Take the ever-popular vending machine, for example. When coins are inserted, I expect the can of Coke to be dispensed, along with the appropriate amount of change. Back in the days when these vending machines were invented, they were a revolution. They were also considered smart devices. As technology has progressed, we find ourselves in another age of the vending machine revolution, only this time it involves cryptocurrencies.

"Smart contracts" was a term introduced by Szabo in an article that was published in 1996 called Smart...

The peak of ICOs

When the ICO wave hit its peak in 2017, there was a mad rush to learn what was going on and how it all worked. Many people followed instructions issued by the company on how to buy into the ICO, but it was a very new and often complicated process. It involved sending bitcoin or ether to a given address that was published on a bitcointalk forum, on a Slack channel, or on the official website.

Take, for example, the Monaco ICO. An investment of one ether would return 150 MCO tokens. Monaco opened the ICO on May 18, 2017, when 1 ether was about $100 USD. This meant that one MCO was the equivalent of $1.50 USD.

The ICO finished on June 17, and about a month later, it listed on exchanges. By the end of August, it had very quickly shot up to $22 USD. The 150 MCO tokens would now be worth $3,300. That is a whopping 1,366% increase.

Figure 10: Monaco price chart showing volatile swings (https://www.worldcoinindex.com/coin/monaco)

The success story being shared was that the tokens would...

Summary

In this chapter, we learned about the various cryptocurrencies that existed before bitcoin and why they failed. We discussed how bitcoin was born and the founding principles it promotes, namely trust, decentralization, and transparency. Three altcoins were examined, out of the more than 1,000 that were created, with Litecoin being the only one that has consistently ranked in the top 10 of all cryptocurrencies.

The various definitions of a blockchain were compared, noting the challenge ahead for the ISO/TC 307 committee in attempting to define blockchains and DLT.

We looked at all the wonderful information people placed on the bitcoin blockchain, such as a picture of Mandela, and explained the concept of coloring bitcoins.

Smart contracts were explored and shown to exist in a simplistic form in bitcoin, but have been drastically improved with the invention of Ethereum, a global decentralized computing network. While the Ethereum platform didn't give birth to ICOs, it dramatically accelerated...