Aug

2021

How to Start a Cryptocurrency: Can Anyone Create a New Coin?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Despite ongoing crypto volatility, there’s nothing to stop people from launching new crypto projects. In fact, anyone could start a cryptocurrency, but not everyone has the knowledge or resources necessary to take on the task.

Even after someone manages to create a new type of crypto, one that offers new features or aims to solve existing problems, there is still work to do in terms of promotion, listing on exchanges, never mind ongoing maintenance and upgrades.

Table of Contents

Understanding Coins vs Tokens
Ways to Create a Cryptocurrency
How to Make a Cryptocurrency in 7 Steps

Understanding Coins vs Tokens

Before getting started, however, it’s important to know the difference between a token and a coin. Both fall under the blanket term of “cryptocurrency,” but while a coin like Bitcoin or Litecoin exists on its own blockchain, a token like Basic Attention Token, functions within an established blockchain technology infrastructure like Ethereum. Tokens also do not have uses or value outside of a specific community or organization.

Cryptocurrencies function like fiat currencies, without the centralized bank. Users typically hope to use their coins to store, build, or transfer wealth.

Meanwhile, tokens usually represent some kind of contract or have specific utility value for a blockchain application. Basic Attention Token for example, rewards content creators through the Brave browser. Tokens can also serve as a contract for or digital version of something, such as event tickets or loyalty points.

Non-fungible tokens (NFTs) represent a unique piece of digital property, like artwork. And DeFi tokens serve many different purposes in that space.

Ways to Create a Cryptocurrency

There are three primary ways to create a cryptocurrency, none of which is fast or easy. Here’s how each of them works:

Create a New Blockchain

Creating a new blockchain from scratch takes substantial coding skills and is, by far, the most difficult way to create a cryptocurrency. There are online courses that help walk you through the process, but they assume a certain level of knowledge. Even with the necessary skills, you might not walk away from these tutorials with everything you need to create a new blockchain.

Fork an Existing Blockchain

Forking an existing blockchain might be a lot quicker and less complicated than creating one from scratch. This would involve taking the open source code found on GitHub, altering it, then launching a new chain with a different name and a new type of crypto. The developers of Litecoin, for example, created it by forking from Bitcoin.

Developers have since forked several coins from Litecoin, including Garlicoin and Litecoin Cash. This process still requires the creator to understand how to modify the existing code.

Use an Existing Platform

The third and easiest option for those unfamiliar with coding is making a new cryptocurrency or token on an existing platform like Ethereum. Many new projects create tokens on the Ethereum network using the ERC-20 standard, for example.

If you’re not familiar with writing code, you might consider a creation service that does the technical work and then hands you a finished product.

Up to $100 in bitcoin² – just for you.

With 30 coins available, our app offers a secure way to trade crypto 24/7.

How to Make a Cryptocurrency: 7 Steps

After considering everything above, you can start taking the steps to build the cryptocurrency. Some of these steps will be less relevant when paying a third-party to create the new coin. Even then, anyone undertaking the task should be familiar with these aspects of how to create a cryptocurrency.

1. Decide on a Consensus Mechanism

A consensus mechanism is the protocol that determines whether or not the network will consider a particular transaction. All the nodes have to confirm a transaction for it to go through. This is also known as “achieving consensus.” You will need a mechanism to determine how the nodes will go about doing this.

The first consensus mechanism was Bitcoin’s proof-of-work. Proof-of-Stake is another popular consensus mechanism. There are many others as well.

2. Choose a Blockchain

This goes back to the three methods mentioned earlier. A coin or token needs a place to live, and deciding in which blockchain environment the coin will exist is a crucial step. The choice will depend on your level of technical skill, your comfort level, and your project goals.

3. Create the Nodes

Nodes are the backbone of any distributed ledger technology (DLT), including blockchains. As a cryptocurrency creator, you must determine how your nodes will function. Do they want the blockchain to be permissioned or permission less? What would the hardware details look like? How will hosting work?

4. Build the Blockchain Architecture

Before launching the coin, developers should be 100% certain about all the functionality of the blockchain and the design of its nodes. Once the mainnet has launched, there’s no going back, and many things cannot be changed. That’s why it’s common practice to test things out on a testnet beforehand. This could include simple things like the cryptocurrency’s address format as well as more complex things like integrating the inter-blockchain communication (IBC) protocol to allow the blockchain to communicate with other blockchains.

5. Integrate APIs

Not all platforms provide application programming interfaces (APIs). Making sure that a newly created cryptocurrency has APIs could help make it stand out and increase adoption. There are also some third-party blockchain API providers who can help with this step.

6. Design the Interface

There’s little point in creating a cryptocurrency if people find it too difficult to use. The web servers and file transfer protocol (FTP) servers should be up-to-date and the programming on both the front and backends should be done with future developer updates in mind.

7. Make the Cryptocurrency Legal

Failing to consider this last step led to trouble for many who initiated or promoted ICOs back in 2017 and 2018. At that time, cryptocurrency was in a kind of legal grey area, and they may not have realized that creating or promoting new coins could result in fines or criminal charges depending on the circumstances.

Before launching a new coin, it a good idea to research the laws and regulations surrounding securities offerings and related topics. Given the complexity of the issues and their regular updates, you might consider hiring a lawyer with expertise in the area to help guide you through this step.

The Takeaway

This is only the beginning of what someone needs to know about how to create a cryptocurrency. In addition to the technical aspects, creators of a new coin or token will have to figure out how their cryptocurrency can provide value to others, how to persuade them to buy in, and how the network will be maintained. Doing so often involves many costs like hiring a development team, a marketing team, and other people who will help keep things going and perform needed upgrades.

Creating a cryptocurrency can take a lot of time and money, and there’s a high risk that it will not succeed. There are more than 5,000 different types of cryptocurrencies listed on public exchanges according to data from Coinmarketcap, and thousands more that have failed over the years.

Simply participating in cryptocurrency trading might be a better route for those who don’t have the time, money, or interest in creating their own. A great way to do that is by opening an investment account on the SoFi Invest brokerage platform, which makes it easy to trade crypto, stocks, and exchange-traded funds.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

Photo credit: iStock/MF3d

Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

Aug

2021

Everything You Need to Know About GRT (The Graph)

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

GRT, or “the Graph” is a relatively new kid on the block when it comes to cryptocurrency. And like some other cryptos, it’s not merely a digital currency—there’s a little more to it than that.

Read on to learn what “the Graph” is, GRTs role, how to buy it, and whether it’s a good investment.

What Is GRT?

The Graph Network, also known as “the Graph” allows users to build APIs, known as subgraphs, to allow applications to talk to each other, and it also makes querying networks fast and secure. While it may require a further deep-dive to really understand the ins and outs of APIs and querying, we’ll save that for another time.

In technical terms, the Graph is a decentralized query protocol built for use with blockchains. More specifically, it works with Ethereum and the InterPlanetary File System (IPFS) to make it easy for users to build and publish APIs, or application program interfaces. Applications built on the Graph do not need a centralized server.

Users also use the Graph to query specific networks (again, like Ethereum or IPFS) to collect data without a third party.

GRT is an ethereum token that runs on the Graph Network. GRT is central to the Graph’s economy. Users swap it to keep things running.

History of the Graph (GRT) Crypto

The Graph Network and its token, GRT, are a very new type of cryptocurrency. As of spring 2021, GRT has been on the crypto markets for less than a year.

The team behind the Graph Network includes a slew of industry veterans, and the founding team consists of Yaniv Tal, Brandon Ramirez, and Jannis Pohlmann. They started working on the Graph back in 2017, finally seeing the project come to fruition a few years later.

In October 2020, The Graph Foundation sold roughly $12 million worth of GRT during its initial public sale, comprising 400 million tokens. The Graph protocol launched in December 2020, giving GRT utility.

Some traders or investors have not yet heard about GRT because it’s still very new to the market, but it has gained ground with larger investors. Ten holders control more than half of GRT’s supply.

How Does GRT Work?

In effect, the Graph Network works as an intermediary between blockchains and decentralized applications—it helps the two communicate in a secure and efficient way using a query language called GraphQL. The Network comprises users who need queries to be processed, and who are willing to pay for it. As such, there are indexers, curators, and delegators who make it all happen on the back end.

Some of these users act as GRT stakers, supporting the others, who run nodes and process those queries. To run nodes, however, users must hold a certain stake of GRT token—which is where the token comes into the mix.

GRT allocates resources within the Graph Network, and acts as an incentive for users within the network to keep the Network up and running. That can mean processing queries, improving APIs, etc.

Effectively, the Graph Network is similar to networks like Ethereum in which users use the network for their own purposes, and use GRT tokens to facilitate transactions on the network. GRT also has value outside of the Graph’s ecosystem, although not much utility. It’s the utility on the network that gives it value, and why crypto traders and investors may want to add it to their wallets.

Subgraphs

Users can create open APIs, known as subgraphs, to index and store data pulled from the Ethereum blockchain, like Google indexes data from the Internet. Developers query via GraphQL to build on blockchain with these subgraphs.

GRT Price

Having been in existence on the market for only a handful of months, as of spring 2021, GRT’s price history is short, but fairly volatile.

GRT hit crypto exchanges back in December 2020, as you’ll recall, and its value soon shot up to around $0.70. When many other cryptos started to see values start to skyrocket in February 2021, GRT’s followed suit—although not quite to the lofty heights as some of its crypto cousins.

GRT prices hit their all-time peak (so far) in mid-February 2021, reaching more than $2.70 per token. Since then, prices have slowly declined, and as of July 2021, are hovering around $0.66 per token. So, in a matter of months, GRT’s value has nearly quadrupled, and then fallen by more than 75%.

Recommended: Crypto Bear Markets: What Are They?

Investing in GRT: Benefits and Disadvantages

For investors and traders, GRT won’t have much utility outside of the Graph Network’s ecosystem. Like many other cryptocurrencies, it’s going to be very difficult, if not impossible, to find a business willing to accept GRT in exchange for goods or services. But you can always trade your GRT for US dollars if need be, via an exchange.

Benefits of GRT

For investors or traders, GRT is yet another cryptocurrency that can help diversify a crypto portfolio. GRT’s value is currently down, but there is potential for it to go up in the future, depending on adoption of the Graph Network in the future. But that may require investors to HODL for some time.

Drawbacks of GRT

GRT is a cryptocurrency, which means it comes with a slew of risks. Cryptos are incredibly volatile (as is easy to see with GRT’s price history), and risk-averse investors may have trouble handling daily or weekly price fluctuations. Additionally, there is always the potential that the government could institute or change crypto regulations and rules, which could throw the crypto market into flux.

How to Trade GRT Cryptocurrency

Seasoned crypto traders: You know the drill when it comes to buying GRT or other cryptocurrencies. For newbies, it’s time to go over some investing in crypto basics:

Step 1: Choose an exchange and fund your account

If you want to trade cryptos like GRT, you’ll need to do so on an exchange—it’s pretty much the same thing as choosing a broker to buy stocks. Pick one, fund your account, and get yourself a crypto wallet (if one isn’t offered by the exchange) to store your holdings.

Step 2: Make the trade

Log in to your crypto exchange, and look up GRT—of course, you’ll want to make sure your chosen exchange offers GRT on its platform, first. Assuming it does, the process should be as simple as looking up GRT, deciding how much you want to buy, and executing the trade.

Step 3: Transfer your holdings

With your trade executed and GRT listed among your account holdings, you may want to transfer your tokens to your crypto wallet. Do some research into different types of wallets, and see which is right for you depending on how long you plan to hold onto your GRT.

The Takeaway

GRT is a relatively new ethereum token that powers the Graph, a decentralized protocol that indexes and queries blockchains. Users can build subgraphs, known as APIs, that can collect data without a third-party.

Photo credit: iStock/Eva-Katalin

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0521213

Aug

2021

8 Ways to Make Money With Cryptocurrency

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

With the rise of Bitcoin over the past decade, and new alternatives like Ethereum and Litecoin springing up in recent years, cryptocurrency, as a whole, has become an investment category that more are considering. If you’re new to the asset class, however, you may be wondering just how to make money with Bitcoin or other cryptocurrencies.

There are numerous ways to potentially make money with cryptocurrency. Read on for some suggestions on how to make money with cryptocurrency, blockchain, and Bitcoin.

Ways to Make Money in Crypto

1. Investing in Cryptocurrency

Investing is, perhaps, the most obvious and common way that some people are making money with cryptocurrency.

The idea here is simple, though: Investors buy cryptocurrencies like Bitcoin, Ethereum, etc. with a traditional account or a Bitcoin IRA. Then, they let it accrue value over time, with the goal of selling it for more than they purchased it. That is, this really only works under the assumption that cryptocurrencies will continue to see their values increase.

However, cryptocurrencies are a risky and volatile investment, so it’s important for investors to consider that before undertaking this strategy. In general, crypto investors may want to make sure that their crypto holdings are just one part of a diversified portfolio that includes other types of investments.

2. Day Trading Cryptocurrency

One could make the argument that trading and investing are the same thing. But they’re often differentiated, to a degree, by time horizons—traders are looking to make a relatively quick profit, while investors may only make a handful of changes to their portfolios per year.

Nonetheless, day trading can be another way to make money with cryptocurrency, just like it is with stocks or other securities. Day traders buy and sell assets within the same day, in order to try and score a quick profit. This is a risky strategy, since it’s hard to know how cryptocurrency values could change in any given day or over time. It should be noted that day trading is an extremely risky activity, and most day traders tend lose money. As with any investing strategy, it is smart to consult with an advisor, and only ever trade with extra money you don’t need to cover your lifestyle costs.

3. Stake Your Crypto

The process of crypto staking is similar to locking your assets up in the bank and earning interest—similar to a certificate of deposit (CD). You “lock up” your crypto holdings in exchange for rewards or interest from the platform on which you’ve staked the assets.

4. Mining

Crypto miners use any available processing power to solve complex equations, producing the next block in a blockchain, and earning new coins or tokens as a reward. If you don’t have the computing power to become a Bitcoin miner on your own, you may be able to join a Bitcoin mining pool—in which numerous miners “pool” their resources—to mine Bitcoin.

Recommended: How Bitcoin Mining Works

5. Earn Crypto Dividends

Another way to make money with your crypto assets is to earn dividends. If you’re at all familiar with trading stocks or bonds, you’re probably at least somewhat familiar with dividends. In short, dividends are small cash payouts to shareholders. If a company turns a profit during a quarter (or year, it depends on the individual company), it’ll chop those profits up and return them to the company’s ownership (shareholders!).

While it’s unlikely you’ll see a huge proverbial tidal wave of dividends hit your crypto account without a huge balance, it can be a way to make money with cryptocurrency that you already have. That said, you’ll need to do some research to see which cryptos indeed pay dividends, and if the dividends they do pay are enough to make it worth it to you.

Some cryptocurrencies that do shell out dividends in the form of more coins (or tokens) include VeChain, NEO, Reddcoin, NAVCoin, Decred, and Komodo—and their annual dividends vary wildly. So, crypto dividends differ from stock dividends in that they’re not paying out cash, but rather, additional tokens.

6. Earn Dividends on Crypto-focused Funds

There is another way to earn crypto dividends, however, and it involves investing in mutual funds or exchange-traded funds (ETFs) that invest in the technology or platforms powering cryptocurrency. (To date, the Securities and Exchange Commission has not approved any ETFs that invest directly in cryptocurrency.)

While investing in crypto-related funds is not technically making money with cryptocurrency directly, it does allow you to generate passive income from the crypto and blockchain markets.

7. Crypto Lending

A final way to make some additional coin from your crypto investing activities is to get into cryptocurrency lending. Crypto lending basically involves a borrower and a lender, and an agreement between the two. There are several platforms that facilitate crypto lending, including Nexo, SALT lending, Oasis, and Celsius.

More specifically, cryptocurrency loans involve a borrower who offers their own crypto holdings as collateral, a lender who accepts the terms and offers either cash or another cryptocurrency, and an agreement that the borrower will pay the lender interest.

Generally, the lender and the borrower in a crypto lending agreement are both individuals, not institutions like banks. The key point is that a cryptocurrency is the focal point of the loan, either being used as collateral, or as the primary source of value that’s being borrowed.

So, for lenders, it’s possible to lend out crypto assets or holdings, and in turn, generate returns via interest payments in the form of additional crypto assets. This isn’t without its risks, of course, and it may take some time to research platforms that connect potential borrowers and lenders together. But again, if you’re looking for ways to put your cryptocurrency to work and earn you some additional money, lending it out is one possible avenue worthy of exploration.

8. Work for a Cryptocurrency Company

As crypto has expanded into the mainstream consciousness, so has the opportunity to work in the crypto industry. You could work for any of the hundreds of cryptocurrencies themselves, or for other companies or industries looking to take advantage of the crypto boom. In addition to developers, crypto companies need to hire for all the other roles of a growing business, including marketing, human resources, and cyber security.

The Takeaway

There are several ways to put crypto holdings to work to earn returns and additional money. All have their risks and potential rewards, but for enterprising crypto investors, there can be more to a return-boosting tactics than simply a “crypto HODL” strategy, or starting up a Bitcoin IRA.

Photo credit: iStock/filadendron

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0621266

Aug

2021

Litecoin vs Bitcoin: Prices, Growth, & Advantages

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Tempted to start investing in cryptocurrency? There are plenty of ways you can and many coins and tokens to invest in. However, it can be difficult for crypto newbies to know where to begin or which specific cryptocurrency might be best to build your portfolio with.

While many individuals start with Bitcoin, there are many different types of cryptocurrencies out there, like Ethereum, Litecoin, and Dogecoin.

Below, we’ll look at Litecoin versus Bitcoin, as well as the similarities and differences between the two markets.

Litecoin vs. Bitcoin: An Introduction

Litecoin may be a relative newcomer to many crypto investors’ lexicons. Litecoin is considered in the cryptocurrency market to be an altcoin, which is the term used for coins and tokens that aren’t Bitcoin.
So, before we delve into the differences and similarities between Litecoin and Bitcoin, we’ll quickly give an overview of both.

What is Litecoin?

Litecoin is a cryptocurrency that dates back to 2011 when it was created by Charlie Lee, a former Google computer scientist. Litecoin came about from a fork of the Bitcoin blockchain—meaning that it’s something of a Bitcoin offspring. In fact, Litecoin is often considered to be Bitcoin’s “little brother.”

Despite the “little brother” moniker, Litecoin is one of the largest cryptocurrencies in the world. As of July 19, 2021, Litecoin was the 13th biggest cryptocurrency in the world, data from CoinMarketCap.com show. Litecoin works in a very similar fashion to Bitcoin, allowing peer-to-peer, instant payments to be transacted across the globe.

Recommended: What is Litecoin?

Litecoin was designed as a faster alternative to Bitcoin, which is what makes it attractive to crypto traders and investors. It can create blocks on the chain (blockchain!) four times faster than Bitcoin, for example.

Back in 2017, the first time there was a wave of cryptocurrency buying among mainstream retail investors, Litecoin reached as high as $359.13 in December of that year. Around that time, founder Charlie Lee announced on Reddit that he was selling and donating all his Litecoin tokens. Prices tumbled throughout 2018, getting to as low as around $25.

In 2021, as stay-at-home orders and stimulus package checks drove investors back to buying cryptocurrency, Litecoin soared again, reaching as high as $386.45 in May. However, the market fell along with other cryptocurrencies, and as of July 19, 2021, Litecoin was trading at around $113.65.

What is Bitcoin?

Bitcoin is a cryptocurrency employing blockchain technology—essentially a decentralized ledger system—to operate. It’s decentralized, meaning that it isn’t issued or managed by a central authority, like a government. And usually Bitcoin is used as a currency to conduct transactions, or as an investment to buy, sell, and trade.

Since its initial inception in 1998 to its market debut in 2009, Bitcoin has become the largest and most recognizable cryptocurrency out there. And it’s the crypto that most others, including Litecoin, are trying to catch up with.

As mentioned, there was a wave of cryptocurrency buying among retail investors in 2017. That year, the price of Bitcoin went from $963.77 on Jan. 1 to $19,497.40 by mid-December–a more than 1,900% move! However, the crypto frenzy cooled in 2018, causing prices to plunge to the $3,000s by December 2018.

Recommended: What is Bitcoin and How Does it Work?

It took a pandemic and stay-at-home orders to drive the price of Bitcoin to new highs again. Other factors that potentially drove the price of Bitcoin included signs that institutional investors were warming up to the digital coin, as well as a decision by PayPal Holdings to allow customers access to cryptocurrencies.

Bitcoin was trading at around $5,000 when stay-at-home orders went into effect in the US in mid-March 2020. It went on to soar to $29,000 by the end of December 2020. Bitcoin eventually reached a new record high of about $63,000 in April. However, volatility plagued Bitcoin again in 2021, with prices plummeting, and on July 19, 2021, they were around $30,000.

Litecoin vs Bitcoin: Similarities

We already noted that Litecoin was somewhat born of Bitcoin. For that reason, it makes sense that there’d be a lot of similarities between the two. Here is a rundown of some of the ways that the two stack up.

Storage and Transactions

One way in which Litecoin and Bitcoin are similar is how they are transacted and stored. Both can be purchased or traded for US dollars. And when it comes to actually making transactions using either crypto, the underlying processes involving validation and confirmation are more or less the same.

As for storing Litecoin and Bitcoin, investors need a hot wallet or cold wallet in order to keep their holdings. Much the same with many other cryptocurrencies.

Proof of Work and Algorithms

Both Bitcoin and Litecoin use a “proof of work” algorithm, albeit they use different specific algorithms. Essentially, a proof of work algorithm is a process or ecosystem by which miners or other actors active on the crypto’s blockchain network validate ownership. It also relates to how new coins are mined.

Since new Litecoins and Bitcoins are both mined by solving complex equations, new blocks added to the blockchain are validated by the network using this proof of work protocol. It’s an energy-intensive process and one that both Litecoin and Bitcoin use (again, in slightly different ways) to summon new coins.

Utility

While you may not be able to use Bitcoin or Litecoin to purchase goods or services everywhere—although some businesses will accept crypto as a form of payment—the basic utility for both Bitcoin and Litecoin comes from their ability to store value.

With that in mind, both operate and are used like any other currency, in that they can be used to pay for stuff. If the person on the other side of the transaction is willing to accept it, that is. While it may be relatively rare to find a business willing to accept Litecoin for, say, a pizza, that may change in the future if and when crypto becomes a more common form of accepted payment.

In that case, the utility of cryptos will increase substantially.

Recommended: How to Start Trading Litecoin

Bitcoin vs Litecoin: Differences

As we’ve laid out, the battle between Litecoin versus Bitcoin is something akin to a slap-fight between two brothers or cousins. The two have several similarities, in other words. But that doesn’t mean there aren’t some rather stark differences between the two, as well.

Availability and Distribution

In terms of availability, Litecoin reigns supreme. Bitcoin is limited to a supply of 21 million coins, and the majority of them have already been mined. Conversely, Litecoin’s supply is limited to four times that amount: 84 million total coins. This is because Litecoin’s developers created it to process transactions four times faster than Bitcoin, and thus, produce four times as many coins.

So, while there may be more Litecoins (eventually) on the market, it’s important to remember that cryptos like Bitcoin and Litecoin can be divided up and sold as fractionals. For example, an investor could purchase 1/10,000 of a Bitcoin, which, in effect, can help mediate the scarcity effects over time.

Mining Rewards

For many in the crypto space, the prospect of earning rewards via the mining process is a selling point. And this is another important area in which Litecoin versus Bitcoin differ to a degree.

Bitcoin mining rewards gradually reduce over time, as fewer and fewer Bitcoins remain to be mined. At first, a miner would be rewarded 50 Bitcoins for mining a block, a reward that falls by 50% every four years or so, until the reward reaches zero. That won’t happen until the next century, though. The current reward is 6.25 Bitcoins.

As for Litecoin, the mining and “halving” process is similar. But the rewards are different. Miners can currently earn 12.5 Litecoins per block—twice as much as Bitcoin miners.

Transaction Speed

As mentioned, Litecoin processes transactions a whole lot faster than Bitcoin—four times faster. Transactions occur on the blockchain, where they are confirmed and validated. And this takes a little bit of time: For Bitcoin, something like ten minutes. That means that a new block is mined and added to the chain every ten minutes.

But Litecoin is faster. Since Litecoin processes transactions four times faster than Bitcoin, the same validation and confirmation process occurs roughly every two-and-a-half minutes.

The reason Litecoin is so much faster is partly due to design by the founder Charlie Lee, who made tweaks to the original Bitcoin system. Litecoin transactions are also faster due to the fact that there’s less congestion on the network. The transaction time accounts for the amount of time it takes for a block to be verified and added to the blockchain.

Transaction Fees

Transaction fees also tend to be cheaper on the Litecoin network, usually totaling around 3 to 4 cents on average per transaction. Meanwhile, Bitcoin’s average transaction fee is around $7.60.

Fees are partly lower on the Litecoin network because the design sets aside coins to incentivize miners, which isn’t incorporated into the transaction fees.

The Takeaway

Whether you choose to invest in crypto will ultimately come down to you—your goal, risk tolerance, etc. And whether or not you should do it is a question best suited for a financial professional.

That said, if you are looking at investing in Litecoin versus Bitcoin, you can use the above criteria to help gauge your decision. There are pros and cons to each, and though they’re similar in a number of ways, it may simply come down to price. The price of a Bitcoin is, as of June 2021, around $40,000, whereas the Litecoin price is around $165.

In addition to price, altcoins like Litecoin can demonstrate greater volatility. However, it’s also true that transaction fees and costs tend to be lower with Litecoin.

If you do decide to pull the trigger and invest, the steps to invest in Litecoin are more or less the same as they are to invest in Bitcoin—so, at least there’s one easy aspect to making the decision. And also remember that there are other cryptos out there, too. It’s not merely a choice between Litecoin versus Bitcoin, it can also be a decision between Litecoin versus Ethereum, for example, too.

Photo credit: iStock/Pekic

Aug

2021

What Is Proof of Stake?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Proof-of-stake is what’s known as a consensus mechanism, as is proof-of-work. They are both mechanisms by which a blockchain can maintain its integrity.

Consensus needs to be achieved on a blockchain as a solution to the “double spend” problem of money in the digital realm. To have value, users of a cryptocurrency have to be able to only spend their coins one time. Otherwise, people could send the same transaction over and over, and the currency would be worthless.

This is a tough problem to solve in the absence of any kind of centralized governing authority like governments or banks. The first digital currency to solve this problem was the Bitcoin network using proof-of-work (PoW).

Proof-of-stake (PoS) has started to be seen as a potential alternative to proof-of-work. Some developers believe that PoS could be more efficient than PoW while accomplishing the same thing, although the subject is still being debated.

What Is Proof-of-Stake (PoS)?

Proof-of-stake is a different consensus mechanism that can be used by blockchain technology to verify their transaction history. While miners in PoW networks use electricity to mine blocks, validators in PoS commit stakes to validate blocks.

Why Do Blockchains Need Consensus?

In centralized systems, preventing double spending is relatively easy. A single entity manages the ledger of transactions, simplifying the process. If Alice wants to give a dollar to Bob, the central manager just takes a dollar from Alice’s account and gives it to Bob. Nothing more is needed. Third-party payment apps like PayPal function in this manner.

With cryptocurrencies, however, things get more complicated because there is no single entity controlling the system. Keeping a record of the ledger of transactions becomes more difficult.

Instead of one central server, many thousands of people around the world run the Bitcoin software. These individuals are referred to as “nodes.” The nodes need to have a way to agree with each other, or to “achieve consensus.” All the nodes need to be on the same page for the network to function seamlessly.

Accomplishing this is harder than it might sound. This made decentralized digital currency something that eluded the grasp of researchers and developers for decades. That is, until 2009 when the Bitcoin network launched, thanks to Satoshi Nakamoto. That’s the pseudonym used by the person or group who wrote the Bitcoin white paper and invented the proof-of-work algorithm that first made cryptocurrency a real-world phenomenon.

Proof-of-Stake vs Proof-of-Work

Proof-of-stake has hopes of being an improvement over proof-of-work, but this has yet to be proven and is still a topic of much debate. It seems likely that proof-of-stake will indeed use less energy than proof-of-work, but other variables seem less clear.

Namely, it’s not certain if proof-of-stake will be as secure against threats like 51% attacks, and it remains to be seen if PoS will wind up being decentralized or not.

Let’s first take a look at how PoW works before getting into how PoS is different.

Proof-of-Work

Proof-of-work is the most commonly used consensus mechanism. So far, it has proven to be fairly secure and reliable, though not infallible. Proof of work is fundamental to how bitcoin mining operates.

Miners are the people who run computers that maintain the network by solving complex mathematical problems. The miner that first solves the problem gets to add the next block of transactions to the blockchain and also earns the new coins minted along with that block. This process creates a verifiable history of transactions on the blockchain.

PoW has shown to be a strong and secure consensus mechanism. It would be so difficult to overtake a large PoW network that any potential bad actors would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just become a miner than it is to attack the network.

Some of the main criticisms of the PoW mechanism of achieving consensus are that the process can be energy-intensive, it has difficulty scaling, and it can trend toward centralization due to the high costs of entry.

Proof-of-Stake

With PoS, validators are the network participants who run nodes. They do this by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, making them unusable. Validators who do this become eligible to be randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have done this, the block will be added to the blockchain. All validators involved in the process are rewarded with new coins. Validators that propose blocks or go offline for a time get punished by having some of their staked crypto slashed by the protocol.

One of the main differences between PoS and PoW is that PoW requires network participants to expend energy in the form of electricity to mine blocks. PoS requires network participants to stake their own crypto on the network, or in other words, to deposit money. For this reason, proof-of-stake is praised for using less energy than proof-of-work.

While some argue in favor of proof-of-stake’s potential decentralization, others criticize it. For example, when Ethereum upgrades to Ethereum 2.0 and a proof-of-stake model, it will require a minimum of 32 ETH (about $67,200 at the time of writing) to become a validator. The average individual cannot afford this.

So, centralized exchanges will deposit the crypto necessary to become validators (using the crypto they have on deposit from users) and distribute some of the rewards to their account holders. This could wind up making the entire system even more centralized than proof-of-work, with a few large exchanges being the only validators.

Proof-of-Stake and 51% Attacks

A 51% attack refers to an event where an individual or group attempts to gain control of a network by controlling the majority of hashing or staking power.

It’s unclear if PoS networks are more or less prone to 51% attacks than PoW networks. The subject is mostly theoretical, and 51% attacks have rarely occurred in the real world.

Conducting this type of attack against a network as large as Bitcoin would be practically impossible due to the enormous amount of computational power required.

When it comes to proof-of-stake, attackers would have to buy up more than half the number of tokens being staked. From there, the attacker could become the sole validator and control the network.

One theory is that this could be difficult to achieve because of how high it would drive the price of any particular token. The hope is that people would rather participate honestly in the system by staking tokens than go through the trouble of trying to attack the network, which could get expensive fast.

The Takeaway

While it’s not too hard to answer the question “what is proof-of-stake,” answers to how it works over the long-term on a large scale are lesser-known. Some existing tokens do utilize PoS, but they tend to be altcoin cryptos that are younger and smaller than Bitcoin or Ethereum.

Proof-of-stake could be an improvement over proof-of-work or it could be a regression. The world will have more certainty on the matter after the Ethereum network upgrades to the Ethereum proof-of-stake model known as “the Merge”.

While it does take significant energy to validate transactions using proof-of-work, some reports indicate that over 70% of energy used to mine bitcoin comes from renewable sources. On top of that, the total energy used is also a fraction of that needed to power the gold mining or banking industries.

However, it’s significant that the Bitcoin network has faced criticism for its high energy usage. Less energy-intensive consensus mechanisms might not be a bad thing if they can achieve similar results.

Photo credit: iStock/shapecharge

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