Crypto 101-Part II

In part I of the Crypto 101 we had discussed the basics of the blockchain tech and the various use cases of crypto.

Bitcoin being the largest and most know crypto or blockchain product there is a fallacy that blockchain use is restricted to currency and store of value.

However, that is not the case.

In Part II we will talk about the largest blockchain products by use and their various uses.

Cryptocurrency

Most popular of the crypto is bitcoin.

It was created as a medium of exchange and store of value.

Followers of bitcoin consider it to be “digital gold” without the deficiencies of gold i.e., gold needs physical storage and distribution, has compliance challenges and is not easily convertible into cash.

While bitcoin can be converted into cash in seconds and also bitcoin has now been authorized as a medium of exchange by leading payment platforms from Mastercard, Visa, PayPal and Square.

Of-course its price is volatile and subject to sudden 40-50% swings leading some to look at it as a very risky proposition.

Gold doesn’t have such wild swings.

Litecoin use case is the same as bitcoin.

The jury is still not out on this so watch the space.

Smart Contracts

Ethereum gets compared to MS-Excel by the early adapters.

It is used for smart contracts making them secure to hacking.

Giants like JP Morgan, BNY Mellon, Microsoft, Accenture, banco Santander and others are already using this tech.

Ethereum is being used for contracts, issuance of new coins (Called ICO-Initial Coin Offerings), Betting, Escrow and even Digital identity Management.

Clearly if security and privacy are key concerns, Ehtereum has found its place under the sun.

However as of now the cost is high because of the complex blockchain instructions required to create the contract.

A simple contract without complicated logic can cost USD 7000 on the other hand a highly complex one can cost as high as USD 45000.

This means that users go to Smart Contracts only when the business stakes are high, and cost is not a factor.

Having said that already over 1.5 million smart contracts have been entered into using Ethereum tech.

NEO is China’s answer to Ehtereum.

Launched as Antshares, NEO also enables smart contracts.

The difference is that NEO network is built on 2 tokens- NEO and neoGAS.

While NEO is the car, neoGAS is the petrol.

NEO tokens have a limit of 100 mn tokens and these are used for block creation, network management etc., while neoGAS is used for creating security.

One of the differences is that while Ethereum has its own programming language called Solidity, NEO can be programmed using C+ and Java making it easier for programmers.

Also cost of a smart contract using NEO is 27,800 USD compared to 45,000 USD for Ethereum.

Currency Transfer

Ripple enables secure currency transfer (or even commodities like Gold or Oil) using blockchain preventing cases of fraud and making transfer safer.

Currently transfer of assets require first converting the value to USD (involves conversion fee) and then enabling transfer which can take as much as 3 days.

However, with ripple as there is no conversion fee, you can do it smoothly and within second saving time and cost.

Organizations like Bank of America, Standard Chartered Bank, Moneygram, SBI Holdings , Westpac Institutional bank, Bank of Australia have already partnered with Ripple.

The best part is that the cost of money transfer using Ripple is just about 0.00001 SRP when 1 XRP is 0.29$.

This makes it very cost effective apart from being secure.

Stablecoins

 Large volatility in price of crypto has been a cause of concern leading to the creation of “Stablecoin”.

Stablecoins as the names suggests remaining stable in value.

How does that happen, by pegging them to another currency either a USD or another crypto.

There are 4 different kinds of stablecoins:

1. Traditional (Off-chain)-these are the ones that are benchmarked to a fiat currency like USD so that the price remains the same as USD. The issuer can only issue as many coins as the amount of USD available with them. So if they have 10mn USD in the account, the can issue coins up to 10 mn USD with each coin being 1USD in price.

The advantage is that all the security of crypto blockchain is available while avoiding the volatility. Tether is the most knows and traded traditional stablecoin

Other examples are binancecoin, XRP etc.,

• Crypto Collateral (on-chain)-as the name suggest the collateral here is another coin and not USD. This is on chain and fully backed by another crypto. Collateral is usually higher than underlying so that volatility can be taken care of.

DAI, Augmint, Ampleforth are some examples.

So if you want to buy 1000 USD worth DAI using Ether coins.

You might have to put 2000 USD worth of Ether to ensure enough collateral accounting for volatility in Ether price

• Algorathmic Stablecoins-These don’t use collateral but adjusts supply to keep price stable. So if price falls, they reduce supply and if price increases, the increase supply.

Ampleforth, based, Empty Set Dollar, Dynamic set dollar are some examples.

• Commodity back Stablecoins-its clear from the name that these coins are backed by commodities. Most common commodity being used is Gold.

Tethergold and Paxosgold being the 2 most widely used commodity backed Stablecoins.

Primarily this is an easier way to hold the underlying without need for physical possession. For example holders of Paxos Gold (PAXG) stablecoins can sell them for cash or take possession of the underlying gold.

However, because London Good Delivery gold bars range from 370-to-430 per ounce, and each token represents 1 ounce, users must hold a minimum of 430 PAXG to execute token redemption. Once redeemed, token holders can take possession of their gold at vaults throughout the UK.

So, there are multiple use case and options of tokens available as per the use case.

The subject is deep and requires guidance for which I can be reached on manish.verma@manishverma.co.in or +919920741569

Part III will be out next week unless you want it earlier in which case follow my twitter handle irreverentinvestor@manver1974