Introduction to Digital Currencies

Lesson 3 – Decentralized Computing and the Rise of Cryptocurrencies

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Welcome back to Introduction to Digital Currencies, an original Coin Academy course. This course is divided into a set of four lessons. We’re now on the third lesson, Decentralized Computing and the Rise of Cryptocurrencies. Let’s begin.

We’re going to start out by talking about the rise of decentralization. And that means we have to look at Napster. Basically, Napster was the first major file-sharing system. It was launched in 2009, and at its peak, Napster had approximately had 80 million users. It was a significant system. The problem, though, is that it was also a centralized system, a centralized network with a centralized corporation. Imagine, if you will, it’ll look like this. Napster, the organization, set at the heart of everything. It attracted, as a result, a great deal of legal attention and a great deal of controversy. It was sued out of existence. It was, simply put, a target and a very clear target for the people who are stakeholders in the intellectual property arenas that were being murdered, if you will, by the Napster effect.

The market learned and an improved model arose. That model was called Kazaa, and it appeared right on the hills of Napster. Like Napster, it was a centralized corporation with a centralized piece of software, but Kazaa was different because it relied on a decentralized network for the distribution of files. Sometimes, this is called a semi-centralized model andnd it looks like this. Now, this is an improvement immediately, but from a legal perspective, it’s still a target, and it provides a very clear target. As a result, Kazaa was sued out of existence and wound up paying out a hundred million dollars in settlement with the music industry over the infringement of intellectual property rights.

Now, there was actually a better solution, and this better solution actually existed all along. It was a system called Gnutella, and it had existed since the year 2000, but it did run below the radar for years. Basically, what was different about Gnutella is that it was a decentralized organization with decentralized software and a decentralized network. In other words, there was no target in the middle for the legal teams to go after. If you took down one note, it did not impair the network. The entire system continued to function. It survives today.

The key, decentralization of both the system and the distribution, it was a true distributed network. We see this sort of peer-to-peer systems in existence in several places today. The Gnutella system was one of the earliest ones. BitTorrent today is one of the largest and accounts for a very large percentage of the actual total Internet traffic. Again, a true distributed network that can’t be easily shut down by targeted legal action like Kazaa or Napster was. Again, you take down one node, one user, it does not impair the network. This is critical because this is one of the key distinctions that leads to the rise of modern decentralized cryptocurrencies, and it led directly to the birth of the first modern cryptocurrency. In 2008, a white paper was published under the name, Satoshi Nakamoto. We don’t know who Satoshi Nakamoto was. Is it a single person? Is it a group of individuals? We have no idea. It was an anonymous paper published under this anonymous name.

That paper outlined how to create a new type of currency based in cryptography for privacy and with an open and transparent ledger. Moreover, it was completely decentralized and it was built on the back of a distributed network of computers. The system in 2009 was first implemented and it was called Bitcoin. It was the first modern cryptocurrency, and if you’ve been following along in the lessons in this course, you can see how it is built on the back of everything that came before from the early cryptography in 1500 BC through the rise of transparent ledgers in the late 19th century, through the movement for decentralization that really got a great boost in the 1970s on the back of the distributed network of computers that developed out of the rise of Napster. Bitcoin built on all of these systems and brought them all together for the very first time into a harmonious whole that was sustainable and was viable.

But surprisingly enough, Bitcoin wasn’t actually the only one out there in the field. There was another group known as Ripple. In 2004, there was actually a payment system created called Ripplepay. Now, that system was interesting and that it relied on lines of trust to facilitate transactions, and it also implemented cryptography to help secure those transactions and maintain privacy. Now, that early payment system, Ripplepay, existed prior to Bitcoin, but it evolved over the years. And it learned from Bitcoin and picked up many of the lessons from Bitcoin. In 2011, it became known simply as Ripple and its digital currency known as the XRP. Now, it relies on a distributed network for ledger updates just like Bitcoin, but it operates more quickly and with less energy than Bitcoin and was designed to operate in that fashion. Moreover, it is actually a protocol for financial transactions. It creates a bridge between fiat currencies, cryptocurrencies, and commodities. In other words, it’s extending the lessons learned and going even further to revolutionize the financial system itself. We’ll come back to that discussion in the next lesson.

The rise of Bitcoin and other systems like Ripple led to the floodgates opening wide. Since 2011, there have been hundreds of new digital currencies. Some of them created by forking the open source code of Bitcoin. Today, we have more than 450 digital currencies in existence. More than 1.5 million market participants involved in digital currencies and a projected valuation of almost $7 billion. It’s become a significant factor in the financial world. Let’s take a look at the top ten digital currencies as they exist today. And in this chart, they’re organized by date of creation. So the first you see here, we list as Bitcoin. We actually list Ripple as number two in 2011 because even though the Ripplypay system is older than Bitcoin, the true Ripple that we know today really didn’t arise until 2011.

But you’ll notice everything on this list after that is fairly recent. Namecoin is actually one of the oldest. But we’re down all the way to Maidsafecoin, which only came about in April of 2014. And these are the top ten which you’ll see in the next slide when you look at their market capitalizations. I encourage you to pause this video. Take a look at this chart and look at the differences here. The big difference is being what are the unique attributes and what are the transaction speeds involved in these things. In other words, how long does it take a transaction to be verified and cleared using any one of these systems? Now, let’s take a look at this in terms of who’s the biggest in market cap and in 24-hour turnover, and this is a real eye-opener because Bitcoin is far and away the largest system.

Bitcoin is larger than all of the other systems combined, both in market cap and in turnover. You also here the ticker symbols for each. So in this chart, we have things arranged by largest market cap to the smallest, and you can see that for the top ten currencies, we actually wind up down at number ten with Maidsafecoin with a market capital of less than $10 million. It is well and truly a market dominated by one big player at this point in time. Bitcoin, with approaching $7 billion in market value, really drives the entire industry at this point in time. The other coins, they have their own advantages. They do certain things very well. Ripple, as we mentioned earlier, is sort of a completely different animal, but bottom line, as far as the market participants are concerned today, it is all about Bitcoin.

Big question is, do modern digital currencies address the shortcomings in fiat money? Well, we think that they do, and the simple answer is yes for the following reason: First, peer-to-peer currencies are not controlled by any one party. Their value rises and falls in a completely open, transparent, and free market. Fiat currencies, in contrast, are subject to government intervention and they’re controlled by major banks. Those major banks oftentimes work together to make sure that the banks win. Next, the money supply of cryptocurrencies is fixed. The amount cannot be arbitrarily adjusted or devalued unlike fiat currencies, which are often manipulated by governments for particular national purposes. And finally, digital currencies exhibit the principles of fair competition between currencies. Whereas, national currencies often engage in very unfair competition leading to economic and sometimes even military warfare.

For those reasons, we think that the current revolution in digital currencies is a positive one for the economies globally and that we feel that in the long run, this move is healthy for everyone. Join us, if you will, for our last lesson when we take a look forward and see what we think is going to come with the future.