Cryptocurrency and ICOs – an introduction

In a time where a new form of virtual currencies is sweeping the global internet world, many trends and terminologies have surfaced, which need clarity and answers to provide a clear and better understanding of what constitutes the modern world of cryptocurrency.

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What are blockchains and which ones exist?

Blockchains refers to the technology behind the creation of Bitcoin. It is a shared, reliable, trusted, public ledger of transactions which is accessible to everyone for inspection but which is not in the control of any single user. Blockchains refer to distributed databases in which a continuously growing list of data transaction records is maintained, and is cryptographically secured from illegal revision and tampering.

There are three main types of blockchains:

Public Blockchains
The protocols of Public Blockchains are currently mostly based on a Proof of Work (POW) consensus (besides Proof of Stake (PoS)) and robust algorithm with open source as the most prevalent validator, meaning everyone can participate in them and explore them. It also signifies that any interested person can download the code and begin running a public node on their local device and validate transactions in the network, thus effectively participating in the consensus process. Public blockchains also allow anyone in the world to read and use the network to send transactions and expect to see them added to the blockchain provided they’re valid.Examples of Public Blockchains include: Ethereum, Bitcoin, EOS, Tezos, Dash, Monero, Dogecoin, Litecoin
Federated Blockchains or Consortium Blockchains
Consortium Blockchains are the type of blockchains which operate under a group’s leadership. Unlike in Public Blockchains, a person with an independent internet connection is not allowed to take part in the verification of transactions process. Federated or consortium blockchains are faster and provide more privacy for transactions. They are mostly used in the banking sector, and the consensus process is strictly under the control of a pre-selected set of nodes. For instance, a consortium of 16 financial companies each of which is operating a node, and out of which 11 must sign every block for the block to be valid.Under this type of blockchain, the right to read the block may be limited to the participants only or open to the public.
Examples of Federated Blockchains include: EWF (Energy), B3i (Insurance), R3 (Banks), Corda.
Private Blockchains
These are blockchains where permission to read may be public or limited to an arbitrary extent, while write permissions are centralized to one organization. Applications that are allowed under Private Blockchains are likely to be database management, auditing, and more which are internally limited to one company, and may never require public readability.
Private Blockchains offer the benefit of setting up groups and participants for internal verification of transactions, and they readily comply with state regulations on data privacy rules.Examples of Private Blockchains include: Multichain, MONAX.[divider]

Proof of Work

Differences in Proof of Work/Mining and Proof of Stake

With Proof of Work the algorithm rewards miners for solving mathematical challenges (a.k.a. mining) with the aim of validating transactions and creating new blocks on a blockchain.
Mining – Mining primarily serves two purposes. Firstly, avoiding what is known as ‘double-spending’ and verifying the legitimacy of a transaction.
Secondly, creating new digital currencies by way of rewarding miners.
Proof of Stake – Proof of Stake is where a new block creator is chosen in a deterministic process, subject to the level of its wealth in AppCoins, which is also defined as stake. There is no reward for creating new blocks, rather miners (called forgers in the PoS system) take the transactions fees.

Check out Blockgeeks for an in-depth analysis of this topic

What are AppCoins?

AppCoins (a.k.a. Application-specific Tokens) are blockchain-based digital assets employed as a mode of incentivizing individual behavior and to raise money from supporters for sole development of an open platform or application thereby providing a monetization model for creating and maintaining a public good, remunerating the developers and token-holders if the platform proves popular.

A little history: The idea behind AppCoins has been in existence for years, morphing from the form of in-game currency one would use in a game like World of Warcraft. However, these sorts of ‘tokens’ are not immutable and are curated by a single trustee, so they can rig the system

Notwithstanding, the term ‘AppCoins’ is more concerned with tokens that are created on a decentralized protocol. In broader terms, Appcoins can be in any of the following forms:

Token: Decentralized Applications create value by facilitating access to protocols. A Token enabling end users to pay transaction fees for this convenience is used/purchased in order to access that specific function.
Bitcoin: “A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.” (Google)
Altcoin: Alternative cryptocurrencies launched after the success of Bitcoin built up on the basic framework provided by Bitcoins, such as e.g. Litecoin
Metacoin: A token on top of an existing blockchain which represents a fixed value for an alternative asset (e.g. Gold, shares etc.) or through a smart contract on e.g. the Ethereum blockchain.
Metacoin: A token on top of an existing blockchain which represents a fixed value for an alternative asset (e.g. Gold, shares etc.) or through a smart contract on e.g. the Ethereum blockchain.

Check out Will Warren’s article on ‘AppCoins vs Protocol Tokens’

What are smart contracts?

Smart contracts refer to computer programs designed to execute the terms or provisions of a contract automatically. A standard contract outlines the terms of a relationship enforceable by law, a smart contract enforces a relationship with cryptographic code.

The ground work for smart contracts was laid back in 1994 by Nick Szabo, a stoic cryptographer who first used the word ‘smart contract’ and was credited with establishing the foundation for the emergence of Bitcoin. Today, as the widespread use of blockchains continues unabated, smart contract technology is gaining popularity as it is being built on top of most famously, the Ethereum blockchain.

Check out CoinDesk’s article on ‘smart contracts’

What are ICOs?

An ICO, which stands for Initial Coin Offering, is a means or process of crowdfunding the release of a new cryptocurrency or blockchain-based applications. In simple terms, an ICO refers to a fundraising process by which companies attract investors, e.g. used by start-ups as a means of bypassing the rigorous and regulated capital-raising process demanded by banks or venture capitalists. Currently, an ICO is subject to little or no government regulations, unlike an IPO.

Before an ICO campaign, a certain percentage of the new Cryptocurrency a.k.a. AppCoins a.k.a. Application-specific Tokens is usually sold to early backers of the project or blockchain-focused hedge funds such as e.g. Polychain Capital, while the majority is then made available for the fundraiser.

Generally, these digital assets are sold to raise the money needed for technical development of a new cryptocurrency or application and therefore Whitepapers are usually made available beforehand, describing in detail what the cryptocurrency or application is supposed to accomplish.

Check out Ouriel Ohayon’s article on ICOs

Spending, exchanging and sending cryptocurrency:

How do bitcoin/appcoin wallets work and which kinds of wallets exist?

CryptoWallets are responsible for storing the private keys you will need to access your bitcoin address and to spend the funds available to you. Bitcoins are a new equivalent of cash, and with each passing day, their legality and acceptability is gaining ground among merchants as sources of payment for goods and services. Although we know how they are created and how their e-transactions work, the question sometimes still is; how are they stored?

Well, we store our physical cash in wallets tucked away in our pockets, so too, AppCoins are stored in wallets except that they are digital in nature.

How it works

There are different types of bitcoins/appcoins wallets with peculiar characteristics and functionalities, but they have one thing in common, and this is that they work in the same way—storing your private and public keys.

It must be noted that your cryptocurrency or the pieces of code that represent them are not really stored in your wallet, but are stored right on the blockchain, which conversely is stored inside node computers across the world.

In reality, the content of your wallet is your e.g. bitcoin address, which also operates as your randomly generated public key (a list of characters and numbers.) This key is visible to members of the public. However, the wallet also contains the secured, private keys that are tied to the address/public key. If you don’t have the combination of these two keys, you won’t be able to make use of your cryptocurrency.

Types of Bitcoin Wallets

Wallet apps

Cryptocurrency wallet apps are secured, digital wallets that are used for sending, receiving and storing digital currency such as Bitcoin. It isn’t the cryptocurrency that is “stored” in the wallet, but a private key– a secured digital code known only to you and your wallet—that is stored in the wallet. Most coins come with an official wallet, with a few having officially recommended third-party wallet apps. To make use of any cryptocurrency, you will need to use a cryptocurrency wallet app such as Bitcoin Wallet, HolyTransaction or Litecoin-QT, Jaxx etc. or just google it and go by the reviews and recommendations.

Online Wallet/Exchange

Online exchanges are websites designed to handle the trading of Bitcoin and/or other cryptocurrencies and even their conversion to FIAT (“real” money). Exchanges therefore offer users a number of benefits in cryptocurrency management. Aside the fact that exchanges act as medium of storage, users also get to engage in buying, selling, trading and converting cryptocurrency.

Examples of notable online cryptocurrency exchanges sites are Coinbase, Kraken, Bittrex… and the list goes on.

Hard Wallets

Compared to the above these types of wallets are rather limited in numbers and use even though they offer greater security and privacy. Hard wallets are dedicated devices capable of holding private keys in an electronic mode and facilitate payment. They are usually connected to the internet through a PC via USB and e.g. via a Browser-extension.

Examples of hard wallets are the Trezor, the Ledger and the KeepKey wallets. Applying to users who wishes to maintain a stash of coins without relying on third-party cryptocurrency storage service providers.

Paper Wallets

Not to omit the most important (and secure) wallet – the paper wallet.

Basically if you take a computer with software on it, you can create a random public/private key pair and print out both. Use the public key to receive money, and the private key has never been online, so the wallet is perfectly safe.

Most exchanges and sites keep their money on this type of ‘tech’.