Cryptocurrencies are changing the way the planet trades, deals, and connects online. In light of this, it is now more crucial than ever for technology executives to be familiar with them. Cryptocurrencies have been the subject of doubt, skepticism, enthusiasm, and disillusionment ever since the inception of Bitcoin in 2008. While they are still in the early stages of development in terms of technology, they have already proven to be extremely useful. Cryptocurrencies currently have a market capitalization of $2 trillion, while crypto-based lending apps and decentralized trading platforms have $65 billion in assets. Several areas, such as community governance, file storage, and cross-border payments, etc., are still in the exploring stage.
Along with the development of cryptocurrencies, there has been a rise in interest from technology leaders in learning more about the industry. Despite the abundance of literature detailing cryptocurrency technology, there are few solid, practical recommendations for where and how technology professionals can get started with cryptocurrency.
In an effort to get more people and professionals acquainted with the concepts of cryptocurrency, the World Economic Forum, in June 2021, published a community paper titled Cryptocurrencies: A Guide To Getting Started.
This World Economic Forum guide outlines the fundamentals of cryptocurrencies and helps readers get started, and contains useful information on the concepts of privacy, governance, and regulation, all of which form a central part of blockchain technologies and cryptocurrencies. In this post, we attempt to share a brief summary of this World Economic Forum guide with a comprehensive discussion of all topics covered.
Getting started with cryptocurrency: From The World Economic Forum
The first part of the guide outlines the concepts on getting started with cryptocurrency, starting with buying cryptocurrency, owning wallets, custody of assets through cool or hot wallets, and elaborates on the concepts of private keys. Next, the guide explains that users can start buying cryptocurrencies from centralized and decentralized exchanges or earn through activities like mining, staking, and others once the wallet is set up. It also briefly explains how cryptocurrencies can then be bought, and transactions will be validated through private keys.
Blockchain and privacy
Next, the topics of blockchain and privacy are explored. The guide explains how blockchain, the technology that makes them possible despite cryptocurrencies being private by nature, is only pseudonymous, not anonymous. Since the majority of blockchains are transparent, all details of each transaction can be documented in public. As a result, traders can confirm that transactions have been completed, agencies can audit and validate reported data, and law enforcement can track the supply of funds. In addition, most blockchains keep data in a format that anybody can access at any time.
The guide also mentions the functionality of privacy coins like Monero (XMR) and Zcash (ZEC) and how they enable private blockchain transactions through the Zero-Knowledge Proofs (ZKPs) protocol in an effort to maintain privacy. It also explains the concepts of ring signatures and stealth addresses that make it nearly impossible to trace the data. Although these privacy coins face liquidity challenges, they have been accepted by several people in the crypto community.
- Consensus mechanisms
Consensus mechanisms, which protect permissionless blockchain ledgers and enable immutability and censorship resistance, are another important feature of blockchain technology and are covered in detail in the guide. It explains on Proof of Work (PoW), the consensus mechanism of Bitcoin, and explains more on the process. To put it simply, it is a process in which two or more computers compete for rewards by using a cryptographic mining algorithm to produce an output with a pre-defined amount of difficulty.
- Energy consumption
The guide also explores the concept of energy consumption, another important aspect of cryptocurrencies. PoW, for one, requires a significant amount of processing power. The costs of running a node to participate in PoW networks include both upfront capital expense and ongoing electricity expenditures (e.g., Bitcoin). Energy usage is often determined by the difficulty of the cryptographic puzzle that a mine must solve in a PoW system. However, the Cambridge Centre for Alternative Finance estimates that Bitcoin uses roughly 126.98 terawatt-hours (TWh) of electricity every year. As a result, although being significantly energy demanding, PoW is critical in tackling the double-spending problem and assuring the blockchain’s security. Because of this, when participating in blockchain networks, users should always balance the economic benefits of choosing a specific form of consensus mechanism and make sure that the energy consumption is weighed against its advantages.
Programmability and languages
Ethereum is the first and most extensively used blockchain platform that enables the creation of programmable applications that run on its network. Some major components of Ethereum which make it more than just a currency are also covered briefly. These include:
- Ethereum’s smart contracts
- Solidity – the high-level programming language for coding smart contracts of Ethereum
- Ether (ETH) – Ethereum’s native currency, and
- dApps or decentralized applications
The next concept to be discussed is governance, which is another crucial concept in blockchain and cryptocurrencies. It primarily involves decision-making, conflict resolution, and making changes to the protocol, amongst other things. The guide explains why it is critical to have a governance mechanism in place in order to reduce risk and assure functionality and operational success. The most prevalent form of governance is decentralized governance, in which numerous community members govern transparently rather than a centralized authority with exclusive hierarchical control.
Throughput and scalability
The next area to be covered is throughput and scalability. Within blockchain technology, scalability is a comparison term that is used to analyze throughput. For example, the amount of transactions that may be completed per second is referred to as throughput. However, with so many new and innovative blockchain technologies and underlying protocols on the market, throughput has become just one criterion to examine when determining a network’s total scalability. Therefore, the guide also provides examples and statistics on the throughput and scalability of various networks mentioned below.
- Algorand – Algorand is an open-source, permissionless PPoS blockchain system that supports 1,000 transactions per second with a five-second ledger close time.
- Cardano -Cardano is an open-source PoS blockchain network and smart contract platform which allows for 257 transactions per second.
- Celo – Celo is a mobile-first, open-source, PoS blockchain network with a five-second ledger close time and a maximum transaction rate of 1000 transactions per second.
- Stellar – Stellar is a public blockchain network that facilitates smooth cross-border payments around the world. The ledger limit for Stellar is 1,000 operations per ledger and 250 transactions per second.
Compliance and regulatory considerations
Finally, the guide touches on the topic of compliance and regulatory considerations in crypto. It states how all users of cryptocurrency need to keep several regulations in mind before getting started. There is still a lot of dispute over cryptocurrency taxation and classification. This has important policy and regulatory consequences, including, but not limited to, taxation, consumer protection, and even which regulators are relevant in the field.
Know Your Customer (KYC), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CFT) are some of the most common crypto legislation and compliance requirements (CFT). Although identification is a critical component in combating financial crimes, this is in direct conflict with the concept of cryptocurrency pseudonymity.
The guide mentions how several international bodies, including the Financial Action Task Force, the Financial Stability Board, the International Organization of Securities Commissions, and the Bank of International Settlements, are working to develop international standards and guidance for blockchain and cryptocurrencies, despite the lack of a globally coordinated regulatory framework.
In conclusion, the World Economic Forum guide talks about how despite cryptocurrencies being the new talk of the town, regulations around them were still evolving and subject to changes, given that cryptocurrencies were still a relatively new financial instrument. As a result, individuals should check with the appropriate jurisdiction for the most up-to-date regulations before embarking on blockchain and cryptocurrency projects.