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Q: Why is it called blockchain?

Blockchain got its name from two of its key components: blocks of data that are appended together in chronological order to make a chain of transactions that are visible to everyone on the network.

Nov

2021

What Is Blockchain Technology?

By SoFi | Growing Wealth, invest, Investing, Terminology | No Comments

Blockchain technology is a persistent, transparent, append-only digital ledger that can be used to track or record almost any type of asset, from goods and services to patents, smart contracts, and more. Blockchain technology relies on cryptography and a system of peer-to-peer verification to secure transactions and, in the case of cryptocurrency, to mine coins and tokens.

Although most people think of crypto when they think of blockchain, in fact the way blockchain technology works lends itself to many applications. Blockchains run on a decentralized network of computers, called nodes, which enable a form of consensus (peer-to-peer) confirmation that can drive faster, more secure transactions that are visible to everyone on the network — making fraud and duplication more difficult.

The combination of speed, security, and transparency has enabled many organizations to explore blockchain’s applications and uses. Keep reading to learn more about the pros, cons, and potential of blockchain.

Table of Contents

What Is Blockchain?
Characteristics of Blockchain
How Blockchain Came to Be
Is Blockchain Safe?
Pros and Cons of Blockchain
Blockchain vs Bitcoin
Blockchain Uses
Does Blockchain Have Naysayers?
Future of Blockchain

What Is Blockchain?

Although the word blockchain has become synonymous with cryptocurrency, and is sometimes described as “the blockchain,” there is no single blockchain. Rather, there are many different blockchains that have been developed by a wide range of organizations. So “the Bitcoin blockchain” or “the Ethereum blockchain” are indeed separate entities.

Why is it called blockchain?

Another way to phrase the question is: What is blockchain technology built with? Blockchain got its name from two of its key components: blocks of data that are appended together in chronological order to make a chain of transactions that are visible to everyone on the network.

For this reason, blockchain is considered a type of distributed ledger technology (or DLT). Once a block is updated, the new data is visible to everyone on the blockchain simultaneously.

What are nodes?

Distributed ledger technology typically relies on thousands of powerful computers, called nodes. As new data gets added, it becomes part of a block of transactions that are then verified by the nodes, which use complex mathematical calculations known as cryptography to create a hash or a cryptographic record of each transaction that cannot be reversed or deleted.

The majority of nodes must agree on each transaction before it can be added to the blockchain. Thus, no single person or computer can update the system without buy-in from the larger network. This form of consensus verification is a big reason why blockchain technology is considered more secure than most standard record-keeping systems.

What is mining, and what are miners?

The term miners may bring to mind an actual person doing the mining (for cryptocurrency, say). And while individuals can be miners if they have powerful enough hardware, a miner is basically shorthand for any entity that verifies blocks of transactions on the blockchain network. When a miner is successful in being the first to verify a block of transactions, they are typically rewarded in the native crypto of that blockchain.

For this reason, crypto mining has become a highly competitive space.

3 Main Characteristics of Blockchain

Blockchain has three main characteristics that distinguish it from other types of digital recordkeeping.

It’s decentralized

When you think about traditional digital forms of accounting and record keeping, what might come to mind is a central authority, like a traditional corporate structure, that monitors and manages a primary record keeping source.

In contrast, blockchain relies on a network of computers or nodes, as described above, to verify data and blocks of transactions — a system that requires consensus among a majority of nodes before new blocks can be added to the chain. Thanks to this peer-to-peer verification, it’s possible to avoid reliance on third party services, and there is no need for a central authority to keep tabs on transactions and asset movements.

It’s transparent

Transparency is one of the hallmarks of blockchain technology, because as each block of transactions is verified, it’s visible to everyone on the network. That way, each node has a chronological record of the data that’s been stored on the blockchain, and no single node can alter that information. If a blockchain is breached in some way, or there is an error in one node’s data, the other nodes can identify and correct it.

This transparency, in addition to other features, have helped develop the technology that smart contracts need to function on a blockchain network.

It’s super fast

Modern business operations increasingly require real-time updates and responsiveness that require highly sophisticated digital networks (like Internet of Things, or IoT) or artificial intelligence to function. Blockchain enables greater speed and accuracy that can support many business operations.

How Blockchain Came to Be

Using cryptography as part of a distributed, digital system for payments and other transactions emerged in the early 1980s, thanks to the work of cryptographer David Chaum.

In the early ‘90s, other researchers, including Stuart Haber and W. Scott Stornetta sought to enhance the verification process by adding timestamps to blocks of transactions that could not be altered, as well as a Merkle tree structure for encoding data. By the late ‘90s, data scientist Nick Szabo was working on a currency based on blockchain technology.

But it wasn’t until 2008 that developers working under the pseudonym Satoshi Nakamoto published a white paper laying out a more clear-cut case for the use of blockchain in relation to digital currencies — paving the way for Bitcoin, and soon after many other forms of crypto.

Among its many breakthroughs, Nakamoto’s research overcame a persistent hurdle in digital finance: the so-called double-spending problem. Although you can’t spend a $10 bill twice, it’s possible to duplicate the coding of digital currencies and “spend” those funds more than once. But thanks to the way blockchain is built, with timestamps and other codes that establish a payment’s validity, as well as the consensus mechanism that governs all transactions, it’s virtually impossible to execute the same financial transaction twice.

Today, not only are many cryptocurrencies also built on blockchain platforms, but a growing number of them utilize blockchain technology to create smart contracts, non-fungible tokens, and many other applications.

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Is Blockchain Safe?

One of the chief appeals of blockchain is its ability to keep transactions secure, without the use of middlemen or third parties to verify identities or confirm the exchange of property. Blockchain technology is often called “trustless” because there is no need for one entity to confirm the validity of another entity — the blockchain itself takes care of that.

As each new block of data is added to the blockchain, it’s appended in chronological order, with the latest block at the end of the chain. On the Bitcoin platform, for example, a new block is added every 10 minutes, adding to its “height.” The height of a block can refer to the location of a transaction on the blockchain, or the current length of the blockchain. As of April 2021, the Bitcoin blockchain height was over 677,350 blocks.

That doesn’t mean cyber criminals can’t attack a blockchain platform — there are several examples of blockchains being hacked — but the decentralized nature of blockchain platforms does offer a form of protection. To alter a block on the chain, a hacker or criminal would need control of more than half of all the computers in the network — a feat that’s nearly impossible. And because most blockchains are public, anyone with the right equipment can access the information stored on each block on the blockchain, adding to the transparency.

Some of the largest and best-known blockchain networks, such as Bitcoin, Litecoin, XT, and Ethereum, are public or permissionless, and typically allow anyone with a computer and an internet connection to participate. Instead of creating a security crisis, having more people on a blockchain network tends to increase security. More participating nodes means that more people are checking one another’s work and calling out bad actors.

That’s one reason why, paradoxically, private or permissioned blockchain networks that require an invitation to participate might be more vulnerable to attack and manipulation. Private blockchains may not have the same security because they lack peer-to-peer verification.

Pros and Cons of Blockchain

Blockchain’s potential seems almost unlimited, and there are a growing number of industries exploring new use cases for blockchain. Many believe that blockchain technology could transform commerce and economics. Here are some of the pros and cons of blockchain technology.

Advantages of blockchain

The upsides of using blockchain include enhanced user privacy, transactional security, lower costs, and more.

Transparency

A public blockchain uses open-source code, accessible to virtually anyone who has the necessary equipment. The technology of the blocks themselves, which are permanently linked together on a chain, permits greater visibility for all involved, which can aid peer-to-peer verification and help prevent fraud.

Cost efficiency

In traditional transactions such as using credit cards to make payments, users typically pay a fee. Eliminating third-party verification means lower costs per transaction. The use of smart contracts potentially reduces time costs as well as actual fees.

Accuracy

By using thousands of computers on the blockchain network to confirm and validate transactions, the potential for human error is all but eliminated. This leads to greater accuracy in the recording of data.

Helps prevent hacks

Decentralization makes it harder to tamper with any particular block of data, because all data is secured using peer-to-peer verification, rather than a central authority. This self-policing, so to say, contributes to the security of the blockchain.

Financial alternative

Blockchain potentially provides a banking alternative for those who are unbanked (a common problem in many developing nations), and a way to secure personal information for citizens of countries with unstable governments.

Disadvantages of blockchain

The obstacles facing blockchain’s growth and adoption aren’t only technical — especially for businesses adapting their existing operations — but in many cases regulatory.

Sustainability issues

Because blockchain relies on vast networks of super-powerful computers for almost any function (e.g. mining cryptocurrency), the technology typically uses significant amounts of energy that many believe can be harmful for the environment. In particular, crypto mining that relies on a “proof of work” system is particularly inefficient, using quantities of energy comparable to some countries.

Assuming electricity costs of $0.03~$0.05 per kilowatt-hour, mining costs (not including the cost of hardware) can be as much as $7,000 per coin. Miners who are compensated for their efforts with coins may recoup those costs, but it’s a factor for many others.

Speed bumps

Although blockchain can speed up transactions, they may not be as fast as legacy systems (like credit cards), which can process thousands of transactions per second.

Illicit activity

The security and privacy that are hallmarks of blockchain technology cut both ways, in effect, as both legal and illegal activity can take advantage of these features. Indeed, blockchain has a history of being used as part of illegal networks like Silk Road, considered part of the dark web.

Changing regulation

Blockchain technology and its many applications — especially cryptocurrency — still exist in a gray zone, as governments and businesses seek to establish new laws and policies, as well as best practices. This is changing, though, as financial institutions and other organizations begin to embrace both cryptocurrency itself as a legitimate form of payment, and explore new ways blockchain technology can be used.

What Is the Difference Between Blockchain and Bitcoin?

The reason it’s hard to separate blockchain technology from Bitcoin is that Bitcoin’s crypto (BTC), like so many types of cryptocurrency, would not exist without blockchain technology. But in the case of Bitcoin, the emergence of blockchain was critical to launching this new currency nearly 13 years ago. So although Bitcoin is built on a blockchain and relies on blockchain technology, the two entities are quite distinct.

A blockchain, or blockchain technology, is a type of digital ledger that can be used by any company. Although bitcoin was the first crypto to successfully use blockchain technology, since then thousands of other cryptocurrencies have made use of blockchain platforms.

How blockchain and bitcoin work together

In 2008, an individual or group of individuals going by the pseudonym Satoshi Nakamoto, published a paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Although various digital currencies had been attempted in previous decades, as discussed earlier, this was perhaps the first to propose “a system for electronic transactions without relying on trust,” and depending instead on a peer-to-peer system of verification via a blockchain.

In January 2009, the first Bitcoins were created using a blockchain platform, and the bitcoin mining system was established.

How does crypto mining work with blockchain?

Unlike fiat currencies like the dollar or euro, cryptocurrencies typically aren’t issued or regulated by a central authority like a bank. Rather, miners use special computer hardware to do the complex mathematical cryptography required to confirm each item on the blockchain — a process called a “proof of work” that involves literally billions of calculations. When a miner successfully confirms a block of transactions on a certain platform, they’re typically rewarded with coins or tokens native to that platform.

What Is Blockchain Technology Used For?

From its roots as a platform for cryptocurrency, blockchain is now emerging as a potent force for many different kinds of businesses. Following are just a few of the current use cases that are emerging as organizations explore blockchain’s potential.

Recommended: Web 3.0 Guide for Beginners

Smart contracts

Smart contracts are part of what makes many other blockchain platforms possible. The contracts that exist on the blockchain can be executed without an intermediary, only occur when specific conditions are met, and can’t be altered.

The development of smart contracts has fueled a rise in different blockchain applications. Insurance companies, health care companies, governments, and more are exploring ways to use this technology to their advantage.

Finance

In the last year or so, one of the most disruptive new blockchain applications might be the rise of decentralized finance or DeFi. In many cases, DeFi removes the need for traditional financial institutions by giving users more control over their transactions.

Peer-to-peer lending is a popular DeFi application. Instead of getting a loan from a bank, people can make loans to each other in the form of cryptocurrency and other digital assets. The terms of the loan will be enforced by programs written in smart contracts, holding both parties accountable.

Supply chains

Increasingly, blockchain is being used to track goods as they move from one end of the supply chain to the other, verifying quality, provenance, and even food safety in some cases.

Also, by using blockchain businesses can help identify inefficiencies within their supply chains more swiftly, while also being able to pinpoint where any item is at any given time.

Insurance

The way the insurance industry conducts business today leaves room for error and increases the risk of fraud. Indeed, false property and casualty insurance claims cost the industry more than $40 billion every year. Blockchain could offer insurance companies a way to store information securely and potentially reduce incidents of fraud via smart contracts, authentication of claims, and by creating a permanent, immutable record of all transactions.

Equity and currency trading

A decentralized exchange (DEX) is a peer-to-peer marketplace where transactions aren’t managed by banks, brokers, payment processors, or any other intermediary. On a DEX, for example, crypto traders can simply trade with each other.

Some of the most popular DEXs run on the Ethereum blockchain, and are part of the growth in DeFi apps and tools that are making more financial services available to users via a crypto wallet. In just the first quarter of 2021, DEXs saw some $217 billion in transactions. This trend could one day revolutionize the way people buy, sell, and trade assets of all kinds.

Does Blockchain Have Naysayers?

While the excitement surrounding blockchain’s ascendance gets a great deal of attention, there are, of course, skeptics as well.

Although blockchain promises to revolutionize how transactions are done, how contracts are executed, and much more, some industry analysts compare blockchain’s status to the earliest days of the internet, pointing out that it was close to two decades before the majority of people incorporated internet use into their daily lives.

In the coming years, governments and businesses would need to reconceive their basic operations, as well as their technical needs — and be prepared to make new investments in those structures — in order for widespread use of blockchain to take hold.

Certainly, the potential benefits of blockchain are compelling enough that many people are betting that there could be something akin to a blockchain revolution in the future, but it’s hard to predict when or what that will look like.

The Future of Blockchain

While the future of blockchain isn’t 100% clear, new approaches and innovations are emerging every day. For example, dozens of central banks worldwide are exploring ways to create digital currencies themselves — with China, Sweden, and the Bahamas in the lead.

The coins would likely be issued on centralized blockchains controlled by the central banks themselves, giving them greater control over monetary policy and the financial system at large.

The Takeaway

Blockchain may have entered the digital landscape as a kind of technological sidekick to Bitcoin, but the many advantages of this transparent, peer-to-peer distributed ledger technology have fueled a seemingly unlimited number of possible new use cases. Although blockchain technology will always be known for its ability to power cryptocurrency platforms, these days organizations are considering all kinds of new applications, from using blockchain to shore up supply chains, end voter fraud, support health care privacy for patients, and more.

That said, one of the most compelling applications of blockchain technology continues to be in the crypto realm, where blockchain is enabling more than digital currencies, powering far-reaching innovations like DeFi apps and tools, smart contracts, and more.

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Nov

2021

What is Distributed Ledger Technology (DLT)?

Distributed Ledger Technology (DLT): What It Is and How It Works

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

Distributed ledger technology (DLT) provides a new way of storing data and processing transactions, keeping a record of transactions across multiple computers.

DLT and blockchain are the building block of what’s become known as the “internet of value.” These technologies allow people to transfer value between themselves in a peer-to-peer fashion without needing a centralized third-party intermediary. This is a new digital frontier that has only become widespread since the invention of Bitcoin in 2009.

In this article, we’ll answer questions like what is a distributed ledger, how does distributed ledger technology work, and what are the pros and cons of DLT.

What is Distributed Ledger Technology?

A distributed ledger, sometimes referred to as a shared ledger, is a type of digital record that uses independent computers to record, share, and synchronize transactions.

Whereas a traditional ledger would be contained on a centralized server, distributed ledgers have many different servers in different geographical areas. These servers are referred to as “nodes.” In a blockchain, data gets organized into blocks, which are chained together in a way that makes them immutable, meaning the record can’t be tampered with.

All the computers work in concert to agree that transactions are valid in a process called “achieving consensus.” The entire record of transactions is then kept on file with each computer in the network forever.

DLT is instrumental in Bitcoin transactions, which allow for the peer-to-peer transfer of monetary value over a blockchain. But there are also other potential use cases for DLT and blockchain. Decentralized finance (DeFi), which can bring financial services to those without access to the traditional financial system, is one sector that could be transformative for the world economy.

The Difference Between DLT and Blockchain

While all blockchains are distributed ledgers, not all distributed ledgers are blockchains.

Blockchain technology involve the creation of a specific type of distributed ledger that often establishes an immutable database within a decentralized network that uses cryptography to record and validate all transactions through the use of a specific consensus mechanism. Transactions are processed in groups known as “blocks,” with each block being cryptographically linked to the one that came before it, giving rise to the term “blockchain.”

One fundamental way that blockchains differ from distributed ledgers is consensus. A blockchain has to get all of its nodes to agree that transactions are valid, which is referred to as achieving consensus. Distributed ledgers can be designed in such a way as to achieve this goal without validation from the network as a whole.

Pros and Cons of Distributed Ledger Technology

There are pros and cons of using distributed ledgers. Here are the highlights.

Pros of DLT

The upside of distributed ledger technology includes increased security and transparency, and the lack of need for third-party intermediaries. Let’s do a deeper dive.

Security

A distributed ledger removes the possibility of a single attack vector. From a cybersecurity standpoint, this is an outstanding benefit. With a centralized database, attackers only need to compromise one computer or system. With a distributed ledger, attackers would have to compromise the majority of nodes in the network. This can be difficult if not impossible to accomplish.

Transparency

Most distributed ledgers, including blockchains, are fully public, meaning anyone can see their activity. The records kept by a distributed ledger can only be altered by a party in control of at least 51% of the network’s computing power.

Recommended: What Is a 51% Attack?

No Need for Intermediaries

Using a distributed ledger tends to reduce operational inefficiency. Cutting out third parties can save time and money. These ledgers are beneficial for financial transactions, which currently come with high costs and long wait times.

DLT also has the potential to contribute to positive change in industries like clean energy, manufacturing, and government financial management systems.

Cons of DLT

There are some downsides of distributed ledger technology.

Lack of Agility

Because they are decentralized, making changes to blockchains can be a slow and cumbersome process. A majority of nodes on the network have to agree to any proposed changes.

The Bitcoin Cash (BCH) hard fork of the Bitcoin network in 2017 exemplifies this kind of conflict. Some people wanted to increase the block size for Bitcoin’s blockchain, leading to greater transaction throughput, while others wanted to implement different software changes to achieve similar ends. The result was a hard fork, where some of the computers in the network adopt a slightly different protocol and go on to create their own blockchain.

Potential for Centralization

Distributed ledgers can also take a centralized, permissioned form, and this can create problems. When under the control of a single entity, a distributed ledger could empower a person or organization to do just about anything with the data at their disposal. They would be able to decide who gets access to the system and who doesn’t, while possibly presenting the system as democratic. Permissioned ledgers also require participants to be approved before they can participate in the network.

Recommended: What Happens When Bitcoin Forks?

DLT in Blockchain

A blockchain is a specific type of decentralized, permissionless distributed ledger that groups transactions into blocks. Each block gets attached or “chained” to the previous block, creating a chain of blocks, i.e., a blockchain.

Blockchains are decentralized because their distributed ledgers must achieve consensus across its nodes, meaning no single entity can control the network on its own. Blockchains are permissionless because anyone can use them without needing to obtain permission from a third-party intermediary.

DLT in Finance

DLT has the potential to bring fundamental change to the financial sector, increasing efficiency, reliability, and resiliency in many areas.

The use of DLT could lead to solutions for problems that have plagued financial institutions for many years. Central banks are exploring the possibility of their own central bank digital currencies (CBDCs) using DLT or blockchain. This would, in theory, give central banks direct control over monetary policy and money creation, possibly bypassing national treasuries.

In early 2021, China became the first country to run a real trial of its CBDC, the digital yuan. The digital currency was distributed to a number of digital wallets held on the smartphones of Chinese citizens.

A central bank digital currency would presumably be issued on a permissioned distributed ledger or blockchain, making it subject to the cons of the tech detailed in the section on pros and cons of DLT.

The Takeaway

A distributed ledger is a type of database that gets duplicated, synchronized, and shared across multiple regions, users, and servers without needing centralized confirmation or a specific data structure. Blockchains, for example, are distributed ledgers. But distributed ledger technology could have broader applications, within finance and beyond.

Photo credit: iStock/andresr

Nov

2021

What is Baby Doge Coin? What Do You Need to Know?

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

As Dogecoin (DOGE) briefly saw a spike in value in 2021, several related, competing coins have sprung up, despite the subsequent DOGE price plunge.

These are meme coins that are based on the original Dogecoin. Baby Doge Coin (BabyDoge) is one of the spinoffs. DOGE is said to be the “father” of BabyDoge.

What is the Difference Between Baby Doge and DOGE?

The two cryptocurrencies are both meme coins that are highly volatile and speculative. That said, BabyDoge has attempted to incorporate a few added features that make it unique from DOGE.

Here are some of the main differences between the two altcoins:

	DOGE	BabyDoge
Supply	Unlimited	420 quadrillion
Purpose	Meme coin, joke currency	DOGE improvement, Pet charity
Market cap	$33.5 B	$52.4 M
Price	~ $0.25	~ $0.0000000019

A few things that make BabyDoge unique are its commitments to coin scarcity and a pet charity. The crypto currency accomplishes this through coin burning and donating some coins to save dogs.

Baby Doge Coin’s developers maintain a charity wallet with 2.2% of the total supply of coins, which they claim that they donate to dog rescues and shelters.

Is the Supply of Baby Doge Coin Limited?

There are 420 quadrillion Baby Doge Coins in existence, according to the Baby Doge Coin team. They claim that nearly 27.6 quadrillion of these are in public circulation. Note that these numbers have been self-reported by the people behind BabyDoge and have not been verified independently.

Recommended: How Many Dogecoins Are in Circulation?

The coin is very new and no one knows the exact identity of the developers. Information on how BabyDoge works is therefore not 100% verifiable. But as far as anyone knows, the supply is capped at 420 quadrillion. While this is a large total number of coins, BabyDoge brands itself as being “hyper-deflationary” due to three functions designed to reduce the supply. These include:

• Coin burning

• Liquidity pair acquisition

• Reflection

Coin Burning

Coin Burning is a common practice among altcoin projects that seek to limit their supply. This practice involves periodically sending tokens to a “burn” address from which no one can recover them, effectively eliminating those coins from existence.

Liquidity Pair Acquisition

Also known as LP acquisition, this involves adding coins as a liquidity pair on a decentralized exchange, in this case Pancake Swap.

Reflection

Reflection is the process of adding coins to holder’s wallets.

Of the 10% transaction fee that Baby Doge coin pay, half gets redistributed to users of BabyDoge. A smart contract controls the other half, selling it to a smart contract into Binance Coin (BNB) and automatically added as a liquidity pair on the Pancake Swap decentralized exchange.

Where Can You Buy Baby Doge Coin?

Because BabyDoge is a much smaller cryptocurrency, there are only a handful of lesser-known exchanges that trade the coin. At the time of writing just one of 10 centralized cryptocurrency exchanges and one decentralized exchange allowed user to trade Baby Doge Coin. The most common trading pair is Baby DogeCoin against the Tether stablecoin, or BabyDoge/USDT.

At the time of writing, the top exchanges for trading BabyDoge included:

• DODO BS

• CoinW

• Pancake Swap (v2)

• LBank

• XT.com

To buy Baby Doge Coin, you must create an account on one of the exchanges that trades BabyDoge, fund their account, and make a purchase. The process is generally the same for investing in cryptocurrency in general.

Is Baby Doge the Same as Dogecoin?

Baby Doge Coin (BabyDoge) is a separate cryptocurrency from Dogecoin (DOGE). The DOGE meme coin gave birth to the BabyDoge meme coin, metaphorically speaking.

BabyDoge has a market cap of around $564 million, whereas DOGE has a market cap of about $27 billion. Doge was created in 2014 while BabyDoge was created in 2021.

Refer to the table earlier in this article for additional differences between the two coins.

Other Dogecoin Inspired Coins

Baby Doge is not the only cryptocurrency inspired by DOGE. There are many DOGE-like imitators that have sprung up recently. There have even been imitations of the imitators. This has become such a problem that Coinmarketcap.com has had to place a disclaimer on their Baby Doge Coin page stating that the page is, in fact, about the original BabyDoge.

But besides BabyDoge and DOGE, there have been many other dog-inspired meme coins that have risen to prominence as well. Shiba Inu coin can be found among these. The original DOGE meme depicts the face of a shiba inu dog, and someone developed a separate spin-off coin based on this.

Created in August 2020 by someone using the pseudonym “Ryoshi,” the Shiba Inu coin is similar to BabyDoge in that SHIB has a campaign with Amazon Smile that collects donations to help rescue real, live Shiba Inu dogs by partnering with the Shiba Inu Rescue Association. Shib has a much larger market cap than BabyDoge, however, being valued at nearly $3 billion, making it the 40th largest cryptocurrency by market cap at the time of writing.

The Takeaway

The recent Dogecoin craze has spawned a flurry of new dog-based meme tokens. BabyDoge and Shiba Inu are among the most well-known, but there have been many others. There may be more to come in the future, too, but it’s important for investors to do careful analysis in such coins before making an investment.

BabyDoge is a very small cryptocurrency, being ranked #2589 in terms of market cap. Five hundred million BabyDoge coins would be worth less than one U.S. dollar at this time. Many investors believe that meme coins and many other altcoins have no practical value and doubt their long-term future. They are among the riskiest investments available to the average person.

Photo credit: iStock/sdominick

Nov

2021

What is Litecoin & How Does it Work?

By SoFi | Growing Wealth, invest, Investing | No Comments

Litecoin (LTC) is a cryptocurrency created in 2011 by former Google engineer Charlie Lee. It was one of the first “altcoins” — or alternatives to bitcoin. Though it’s built on bitcoin’s original source code and shares certain features with BTC, Litecoin was designed to improve upon bitcoin, especially in terms of transaction speed.

Though Litecoin was initially a popular entry into the crypto category, it has gained and lost value over time, displaying a similar volatility to many cryptocurrencies (or even certain stocks and bonds). As of October 25, 2021, Litecoin was worth roughly $195.13, with a market capitalization of $13.42 billion.

If you’re wondering how Litecoin works, what Litecoin is used for, and whether it makes sense to trade Litecoin, keep reading.

What Is Litecoin?

Like many forms of crypto, Litecoin is a decentralized, peer-to-peer cryptocurrency; it was created from a fork in the bitcoin blockchain, the transparent, digital public ledger used by most cryptocurrencies. Litecoin was designed to enable almost instant, near-zero cost payments that can be exchanged between people or institutions worldwide.

Like Bitcoin, Litecoin uses a proof-of-work system (PoW) to verify transactions on the blockchain, but owing to certain modifications it’s considered a “lighter,” faster version of Bitcoin. The main difference between Litecoin and Bitcoin is that Litecoin uses a mining algorithm called scrypt, to enable faster transaction times.

Litecoin generates a new block to be mined every 2.5 minutes, which is about four times faster than Bitcoin’s 10 minutes. The Litecoin supply is also four times as great. While Bitcoin has a cap of 21 million coins, the Litecoin supply overall has a cap of 84 million.

Unlike traditional fiat currencies like the dollar or the euro, the litecoin supply is capped at 84 million. As of late October 2021, about 67 million Litecoins had been mined.

How Does Litecoin Work?

The process of mining Litecoin is similar to Bitcoin and other blockchain-based cryptocurrencies. Each block of transactions is confirmed by miners, who use high-powered computer hardware to confirm each block and secure it to the blockchain, a process that involves literally billions of calculations. Hence the term “proof of work.”

Once the block is verified, the next block enters the chain. Transactions using blockchain technology are generally assumed to be anonymous (although in essence they are pseudonymous — because each user has a public address). Miners who successfully verify the block are rewarded with 12.5 Litecoins. Similar to bitcoin, the number of Litecoins awarded is halved on a regular cadence.

When was the Last Litecoin Halving?

When Litecoin was launched in 2011, the reward was 50 LTC. The first halving was in August 2015, to 25 LTC. In August 2019, the reward was reduced from 25 to 12.5, and the halving will continue at regular intervals — every 840,000 blocks — until the 84,000,000th Litecoin is mined.

Given that Litecoin blocks are mined about every 2.5 minutes, the halving occurs roughly every four years. This cadence is built into the Litecoin algorithm.

What Is Litecoin Used For?

Litecoin’s primary focus is to act as a medium for transacting payments without a bank or other third-party intermediary.

Litecoin was designed to be used for cheaper transactions, and to be more efficient for everyday use. In comparison, bitcoin can often be used as a store of value for long-term purposes.

How Is Litecoin Different From Bitcoin?

Litecoin differs from bitcoin in four main ways, including the litecoin supply, which is capped at 84 million coins versus bitcoins 21 million. (Note: Not all cryptocurrencies are capped; some, like Ethereum (ETH) have an unlimited supply.) Three more distinctions to bear in mind:

1. Cryptography

In order to add new Litecoin or bitcoin blocks to the blockchain, miners must solve hash functions. A big differentiator between Litecoin and Bitcoin are the cryptographic algorithms they employ. Bitcoin uses the SHA-256 algorithm, whereas Litecoin uses a newer algorithm called scrypt.

Litecoin developers chose scrypt initially so that LTC mining wouldn’t be dominated by ASIC-based miners, thus allowing GPU and CPU-based miners to compete. Over time, though, ASIC-based miners have become more scrypt-capable and typically generate more hashes. Scrypt was also considered less vulnerable to cyber attacks.

2. Speed

Charlie Lee, Litecoin’s founder, wanted to prioritize transaction speed, and this is still a major reason for LTC’s popularity. The bitcoin network’s average transaction confirmation time is about 10 minutes per transaction, while litecoin’s is roughly 2.5 minutes. Thus Litecoin’s network can handle more transactions because of its shorter block generation time.

3. Market capitalization

Bitcoin leads the crypto-verse in terms of market cap, and therefore has a much greater market capitalization than Litecoin. As of October 25, 2021, the total value of all bitcoins in circulation was around $1.1 trillion, while the market capitalization of Litecoin was about $13.42 billion.

How to Invest in Litecoin

You can’t buy Litecoin or other cryptocurrencies through many traditional brokers. Instead, Litecoin must be purchased via one of the cryptocurrency exchanges, or through an online brokerage firm that offers crypto trading.

Consider fees, security, and accessibility before making a decision about where to trade cryptocurrencies.

To store crypto securely, you need to use a cryptocurrency wallet, a software program for managing the assets. But even if you have software you trust, you must remember and secure a password or key that only you know. This has been an issue with crypto, as people who forget their passwords essentially lose the assets.

To get crypto into the wallet itself, investors need to use a crypto exchange. How crypto exchanges work is that they provide a platform for buying and selling crypto — either by exchanging one type of crypto for another, or, more typically, using fiat money (like dollars) to purchase or receiving fiat money for crypto you sell. Even as crypto exchanges grow in popularity and more sophisticated security systems are designed, hacks and instances of theft still continue to take place.

What Is the Price of Litecoin?

You can view the current price of Litecoin on CoinMarketCap and other sites. As with many of the most popular cryptocurrencies, Litecoin has experienced significant volatility over its short history.

At its highest point, in December of 2017, Litecoin was trading at over $375, its most dramatic rise to date. In December of 2018, the price was as low as $24, before another uptick during early 2019. Litecoin is currently trading at about $195, as of October 25, 2021.

What Factors Affect LTC Price?

Like the price of any investment, Litecoin’s price is subject to market demand. But what are some of the key factors that can impact demand?

When Litecoin was launched in 2011, it was one of the first altcoins and it was considered a worthy rival to Bitcoin, thanks to its faster transaction speed and overall efficiency.

A lot has changed in 10 years; now there are thousands of cryptocurrencies on the market, and many coins that offer faster transaction speeds and other important features like the ability to create d’apps (decentralized apps), smart contracts, and more. The increased competition has lowered the demand for LTC, which in turn has impacted its price — and the lower price means it’s less lucrative for miners, who get compensated with Litecoins.

That said, as of Oct. 25, 2021, Litecoin was still the 17th largest cryptocurrency by market cap — hardly a laggard.

What Are the Risks of Litecoin?

The risks of litecoin are similar to the risks of most cryptocurrencies. The entire sector is barely a dozen years old, as of this article’s publication. And like any growing industry — in this case one that’s not yet well regulated — the risk of losses looms large. Here’s why:

High volatility

The crypto market is highly speculative and therefore highly volatile. As of June 2021, Litecoin was among the top 10 cryptocurrencies; as of October 2021, it’s nearing the bottom of the top 20. Given how swiftly things can change, this trend may not be an indicator of things to come, but it’s important for investors to bear in mind when considering litecoin as a speculative play vs. a store of value.

Uncertain future

As noted earlier, when LTC first launched in 2011, traders were intrigued by its innovative use of the bitcoin source code to provide transactional efficiencies. Now that novelty has worn off, thanks to innumerable new crypto contenders, and it’s not clear whether LTC has the staying power to keep investors’ loyal.

Regulatory holdups

Although in theory Litecoin can be used for swifter payments, the reality is that the adoption of crypto as a universal means of payment and legal exchange is still up in the air.

All of which to say, though investing in Litecoin does offer some upsides — the currency has high liquidity, for one, and a full decade’s worth of staying power, for another — it’s not without some risks.

The Takeaway

The 10-year history of Litecoin is a fascinating one. What started as a quasi experiment — a curious engineer crafting an innovative fork off the bitcoin blockchain — quickly became a widely adopted and traded altcoin that remains among the top 20 cryptocurrencies today. Thanks to its use of scrypt, a faster algorithm, litecoin’s transaction speed is just 2.5 minutes compared to about 9 minutes for bitcoin.

A decade later, litecoin is still valued for its faster transaction speeds, although it’s facing some headwinds. At the moment, those include possible regulatory hurdles and perhaps a loss of popularity among investors. But what the future will bring is anyone’s guess. One thing that is certain, investors with a front-row seat will have more visibility as the future unfolds.

Sep

2021

Marginal Propensity to Save: Definition & Formula

A Look at Marginal Propensity to Save (MPS)

By Sarah Li Cain | Budgeting & Goals, Financial Independence, money | Comments Off

The marginal propensity to save (MPS) refers to the amount of disposable income a consumer is able to save. It’s used to reflect the proportion someone is willing to save for each additional dollar of their income.

To understand why MPS is important when quantifying fluctuations in savings and income, we’ll go over how to calculate MPS and how to apply it to your budgeting strategy.

What is the Marginal Propensity to Save?

The marginal propensity to save is defined as the portion of an increase in income that goes towards household savings. In other words, it’s the percentage of additional income a household saves instead of spending on goods and services, and it offers insight into the consumption habits of consumers.

MPS is also referred to as leakage, where the savings is an amount (expressed as a percentage that doesn’t go back into the economy via consumption. Typically, the more a household saves, the more likely it indicates that there is a higher income and better equipped to cover their household expenses.

So, theoretically, if a household saves 10%, it means that for every additional dollar they earn, they’ll save 10 cents.

When consumers are more likely to save as their income grows, the chances are higher they’ll become wealthier. Plus, households will also be able to access services and goods that require more money, such as larger homes in higher cost of living areas, elaborate vacations, or luxury vehicles.

How Income Level Affects Marginal Propensity to Save

Given data on household income and household saving, economists can calculate households’ MPS by income level. This calculation is important because MPS is not constant—it varies by income level. Typically, the higher the income, the higher the MPS because as wealth increases so does the ability to satisfy needs and wants, and so each additional dollar is less likely to go toward additional spending. However, the possibility remains that a consumer might alter savings and consumption habits with an increase in pay.

The Multiplier Effect

The MPS plays an important part in regulating the multiplier effect. The multiplier effect looks at the proportional increase or decrease in income that comes from consumption or savings.

For instance, if there is spending at the government level, it’ll have a multiplier effect (much like how a snowball rolls down a hill) on different parts of the economy. This change is due to the fact there is now additional disposable income consumers can spend on consumption and savings.

By understanding what the MPS is, economists can see how increased government spending can influence savings. It’ll also help to determine how consumers’ saving habits will influence the overall economy. The lower the MPS, the more of an impact on changes in government spending there will be.

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Calculating the Marginal Propensity to Save

Calculating the MPS involves dividing the change in savings by a change in disposable income.

The following formula is used to calculate the MPS:

MPS = change in savings / change in disposable income

The savings represented by the value of the MPS will change if income changes by a dollar. Presented on a graph, the MPS is the equivalent of the savings line that’s created by plotting changes in income on the horizontal line (x-axis) and changes in savings on the vertical line (y-axis).

Another important point to note is that MPS will range between zero and one. If the MPS is zero, then it means changes in income doesn’t have an effect on savings (consumers spend all additional income). If MPS is one, then all additional income is saved.

Example

Jasmine successfully negotiated a promotion and annual bonus and received an additional $3,000 with her next paycheck. Jasmine decides she wants to spend this amount on a nice dinner out with friends totaling $150, and a vacation in Mexico for $2,000. The total she spends out of her bonus is $2,150, saving $850.

Using the above MPS formula, the calculation is as follows:

$850 / $3,000 = 0.283 = 28.3%

Therefore, Jasmine saved 28% of her additional income or 28 cents for each additional dollar she earns.

Remember, MPS isn’t constant since various factors in addition to changes in income will influence consumer spending habits. For instance, the time of the year can influence seasonal trends, which can correlate with higher spending.

Applying MPS to Your Budget Strategy

Though it seems like MPS is more for economists, you can apply this tactic to your personal budget.

When it comes to increasing your income, it might be tempting to spend a large portion of it. After all, you might want to celebrate a pay raise or promotion. Or, you might decide to increase your grocery budget, swapping out some of your regular produce for organic varieties.

However, there are benefits to saving some of the extra money. Perhaps you have a financial goal you can use it towards, like saving for a down payment on a house. Or you want to start investing and with this boost in income, you now have the means to do so.

If you haven’t yet decided what you’re saving for, just getting into the habit of saving will get you on the right track. Plus, you’ll learn how to budget effectively, no matter which type of budgeting technique you use.

Let’s say you want to be able to set aside 20% of each paycheck towards investments and a larger emergency fund. You received a $1,000 bonus from work this month and want to make sure you’re not tempted to spend it all.

Using the above formula, you want to have an MPS of 30%, or 0.3. That means with that bonus, you want to be able to save $300, allowing you to put $800 of it towards other areas in your budget. Once you have this number, you can take proactive steps to save that money. Automatically transferring $300 to a separate savings account is a good start.

Considering your income may fluctuate, you’ll probably want to revisit this formula on occasion to make sure you’re on track. Plus, it’s likely your spending habits will also change—such as spending more during the holidays—so if you need to spend more, then you can adjust your savings rate temporarily. At the end of the day, it’s all about being aware of where your money is going.

Recommended: 39 Ways to Earn Passive Income Streams

The Takeaway

Marginal propensity to save may seem like a term that doesn’t relate to your budget since it’s normally used to help economists. However, thinking about it in simple terms such as a savings rate is more helpful. That way, you can use it to apply it towards your savings goals and budgeting tactics as your income changes.

Saving money is half the battle: making sure your money is working for you is the other half. Opening a checking and savings account with SoFi can earn you more than the national interest average, squeezing even more value from your hard-earned dollars.

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