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  • Writer's pictureDavid Conquest

Big picture part 3/3: The Alts

Updated: Apr 1, 2021

Continued from Big Picture part 2/3.


Bitcoin is what’s known as a digital currency or cryptocurrency (‘crypto’ for short). Bitcoin isn’t the only one though – you may have heard of Ethereum, USDT, Chainlink, Litecoin and hundreds of others. All the cryptocurrencies that are not Bitcoin are known collectively as ‘Altcoins’ or ‘Alts’ (short for alternative) but Bitcoin was the original and is still by far the biggest. The total value of all the Bitcoin in circulation is over $1 trillion while the number two, Ethereum, is valued at about $200 billion (at March 2021).


Cryptos such as Litecoin, Bitcoin Cash or Doge were copied very closely from Bitcoin and are meant to be alternatives, essentially doing the same job. They haven’t taken off like Bitcoin but do have a lot of followers and can sometimes make a profit, kind of like mini-Bitcoins.

Many of the Alts however were created to be more powerful than Bitcoin – as a general-purpose computer in the cloud – and to solve practical issues that have appeared with Bitcoin – such as speed and congestion on Bitcoin’s blockchain network, although these solutions tend to be a trade-off which create their own problems. Ethereum for instance is technically more advanced than Bitcoin, but can have high fees when busy and still suffers congestion. Ethereum V2 is being developed at the moment to fix these issues.


Automatic money

As we’ve seen, Bitcoin works well as a currency but its uses beyond that are limited. Some other cryptocurrencies, notably Ethereum, are not just intended to be used as money but to do something more practical as well, such as powering apps or tracking goods. Ethereum uses ‘smart contracts’ which make or receive payments on your behalf, usually when something has happened or you’ve used a real-world service. These payments happen automatically on the internet, so you don’t need to have your computer or phone switched on, and they don’t need anyone in a company to approve them, they just happen. Think of Ethereum like a big general-purpose computer sitting on the internet that you can use through apps – or strictly speaking ‘dapps’ (decentralised apps).


Another way to look at dapps and smart contracts is as ‘programmable money’. You might be familiar with how Amazon Alexa and Google Assistant let you create skills and routines to automate things around the house, such as turning the lights and heating on when you arrive home. Now think of that applied to your money, and not just in the house. Your favourite band might set up a smart contract that lets you stream their music, without using any middlemen (eg Spotify, banks, etc). As soon as you stream a track, the smart contract automatically makes a ‘micro-payment’ to the band directly, so they get all their royalties immediately instead of having to wait months for a small percentage.


DeFi

In 2019/2020, a new range of start-up companies began to kick-start a whole new generation of the financial services industry called Decentralised Finance, or ‘DeFi’ for short, with – you guessed it – no banks, or many people for that matter, involved. It’s all run by computer programs. Using these new services, such as Compound, Aave and Uniswap, you can do things like exchange cryptocurrencies, get loans and earn interest on deposits, all at much better rates than the banks can give. Of course, this comes with risks too – you have to trust new companies and software that may have problems. New money also attracts scammers and the regulators haven’t yet caught up and figured out how to protect consumers – so these new financial services firms still have a lot to prove. Still, DeFi is growing fast – at the beginning of 2020 there was $830 million deposited in DeFi services; in January 2021 there is $23 billion ‘locked in’.


Again, as with all things crypto, it’s early days. Some of the examples that developers give for smart contract ideas can stretch things a bit and quite often what they’re trying to achieve could be done with normal apps and websites now, if there was the corporate motivation. The new DeFi financial services, however, all run on smart contracts. To apply, for example for a loan, if you meet the conditions then there is no human approval needed – it’s a black and white decision – and instant.


Arts

A new use of blockchains that has been getting a lot of attention recently is using NFTs to publish art forms. NFT stands for Non-Fungible Token – a horrific technical phrase that sorely needs to be replaced with something more friendly, like saying cash machine instead of ATM (Automated Teller Machine). Briefly, an NFT is a one-off unique digital token (unlike Bitcoin which has 21 million identical tokens) that can be used to prove ownership (and perhaps copyright) of a work of art such as a painting, an animation, a song, etc. Since the summer of 2020, the auction prices of NFT artworks have been reaching astronomical numbers. One piece, called ‘Everydays: The First 5000 Days’ by an American graphic designer known as Beeple, sold in March 2021 at Christie’s for $69.3 million.


Critics of NFT artworks (often from the mainstream art world) say it’s not worth the high price because anyone can download a high-resolution image of Beeple’s work and display it. Except for the high-resolution part, that argument is true for most art and music these days – anyone can have a copy of the Mona Lisa on their wall and the music industry has had to accept that MP3 files get copied and find new ways to get money from fans to artists. The NFT industry is growing rapidly and attracting more artists – Damien Hirst is planning a major NFT release in 2021 – but it is still very early for the technology and business models that use it so expect big changes in how creative artists use them.


Digital Pounds, Dollars and Euros

Governments have started looking at what cryptocurrencies are doing with a mix of horror and a sense of opportunity. Horror, because politicians can see a lot of money potentially moving into a system they have no control over and because they hear of fraud, money laundering and scams bypassing consumer protection laws. Opportunity, because some see that cryptocurrency technology might be the future of all money, which they might be able to take over to give them more monitoring ability and control than they have even now. The Covid pandemic has accelerated the push away from cash and most advanced countries are now investigating how to regulate cryptocurrencies and are investigating ways to issue their own digital pounds/dollars/euros/yen/etc – called ‘Central Bank Digital Currency’ (CBDC).


They aim to keep control of their existing currencies (and power over printing money and setting interest rates) while streamlining the payments process and deterring criminal activity, although perhaps without some of the privacy protections that Bitcoin has and with more central control over how it can be spent and where. The European Central Bank is expected to decide in 2021 on whether to develop a digital Euro, which would launch in 2-4 years.


China, however, is way ahead of everyone else. They have already started public retail trials of their own CBDC – known as the ‘digital yuan’ – and want it fully operational in time for the Beijing 2022 Winter Olympics. In the trials, they gave free digital money to a small group of people but built-in strict controls over where and when it could be spent. It’s not hard to see their bigger ambitions for it either. At the moment they buy resources such as oil and ore from around the world with dollars, but if they start encouraging (mandating) use of their digital currency, with faster transfer times, lower fees and fewer middlemen, then it could begin to challenge the supremacy of the dollar as the international currency.


Some companies too are looking at issuing their own private digital currencies. For instance, Facebook has been working on one (originally called Libra but now Diem) that users could use to transfer money between friends or to buy goods from inside Facebook Messenger or Whatsapp. Whether these private currencies take off will depend on whether enough people are convinced of its privacy and security and accept it as useful money.


These ‘Big Picture’ articles have only scratched the surface of the possibilities of Bitcoin, blockchain and altcoins. Each topic is worthy of a dedicated article which at some point I’ll try to write. Like the internet over the last 25 years, over time these topics will all evolve as new ideas come along, regulations change and customers take to some ideas and not others. In ten years, we may look back and think ‘remember when we did cash/art/finance/banking/music/energy/shopping/supply chains/trust/contracts the old fashioned way’.

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