Cardano (ADA)

chart-14
ADA Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

Cardano – also known as the “Japanese Ethereum” – takes many of the pitfalls of Bitcoin and Ethereum and attempts to improve upon both networks. For example, Cardano uses proof of stake as its validation method rather than the proof of work systems employed by many cryptocurrencies including Bitcoin. This significantly reduces the amount of processing power required to validate the network. Furthermore, unlike Ethereum, Cardano utilizes a two-layered system (i.e. two sets of processes occurring simultaneously): (i) a settlement layer similar to Bitcoin to record transactions, and (ii) a control layer for executing “smart contracts” similar to Ethereum. By separating the network into multiple layers, Cardano can address problems with each layer independently. This is similar to the communications protocol for the Internet, which uses several layers including an Internet layer for routing data to the appropriate destination, and an application layer for defining the protocols used to exchange the data.[1] The ADA coin is utilized as the “gas” for executing the smart contracts on the Cardano platform, which means users have to pay a certain amount in ADA to run a contract.

Pros: Executes Turing-complete smart contracts; platform for developing dApps; strong development partner in IOHK; multi-layered network that separates the transaction from the terms and conditions of the transfer; proof of stake validation method increases transaction speed and significantly reduces computing power necessary to run the network compared to proof of work used in Bitcoin, Ethereum, and many other decentralized networks

Cons: Unproven and untested – the Plutus programming language for writing smart contracts is still in development; proof of stake can lead to centralization as only a select few may have enough coins to participate in staking

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Unlike Bitcoin, Ethereum, and many other cryptocurrencies, Cardano uses a proof-of-stake (POS) system to validate transactions rather than the more common proof-of-work system. In a POS system, the validator for the next block is selected based on a combination of random selection and account balance. For example, in a POS system if you own 2% of the coins, you can expect to validate about 2% of the blocks, and consequently, receive about 2% of the rewards.[2] In a POS system, the likelihood of a 51% attack is lower than in a POW system, because it is typically more expensive to own more than 50% of the coins than it is to have more than 50% of the computing power. Conversely, a POS system is vulnerable to the “nothing-at-stake” problem, where an attacker sends a transaction, forks the blockchain from one transaction behind the attacker’s transaction, and then rewrites the transaction to himself to double-spend the currency.[3] Because there is no disincentive for validators to mine both chains in a POS system, they will continue to mine on both validating the attacker’s transactions. However, this problem is more theoretical in nature, and is not perceived as an imminent threat.

Leadership/Community Participation

The Cardano Foundation partnered with Input Output Hong Kong (IOHK) – a technology company founded by Charles Hoskinson and Jeremy Wood who were previously involved in Ethereum.[4] IOHK also employs Professor Aggelos Kiayias, a cryptographer from the University of Edinburgh, along with a team of researchers and scientists that have contributed to the protocol.[5] With these great minds at the forefront of cryptography and distributed ledgers working together, Cardano has the potential to improve upon the existing platforms. Cardano is also the first academically peer-reviewed distributed ledger.[6]

Transaction Volume and Market Capitalization

Cardano has the 7th largest market cap (~5.7B)[7] and a daily transaction volume of over $200 million despite requiring substantial development before any token holder can participate in staking and smart contracts can be deployed on the network.

Industry Participation

A few companies have indicated an interest in the Cardano platform once the virtual machine and Plutus programming language are available for use. This includes Traxia[8], a token for financing small and medium sized businesses, which plans to migrate to the Cardano platform at the end of 2018. However, as Cardano is still in its very early stages, the majority of companies seem to prefer Ethereum at this time.

Security

In terms of security, Cardano has many of the same advantages and disadvantages as Ethereum. In some instances, staking can lead to increased centralization as only a small number of users will have enough tokens to win a block reward. An attack directed at one of those accounts could severely disrupt the network.

Usability

ADA is a utility token used as fuel for operating the Cardano platform.[9] This means that each time a developer creates a smart contract or issues a token on the platform, a designated amount of ADA is transferred. ADA may also be used as a store of value and/or for daily transactions, but its primary intended use appears to be as fuel for executing smart contracts.

Technical Features

To perform proof-of-stake, Cardano uses an algorithm named Ouroboros which has been extensively peer-reviewed.[10] As mentioned above, the Cardano protocol is separated into two layers: a settlement layer and a control layer. The settlement layer is used to record transactions, while the control layer executes smart contracts through a virtual machine called IELE and a programming language named Plutus, both still under development.[11] By separating smart contracts and transactions into two layers, the development team can address problems such as scaling with each layer independently. By contrast, Ethereum records all of this information in the same layer, creating large storage requirements and in some instances, slowing down the network. Finally, Cardano intends to enact an on-chain governance system, where token holders vote on updates to the protocol, and if a majority vote in favor of the update then it is enacted.[12] In other systems like Bitcoin and Ethereum, updates to the network are made through a fork where the chain splits into two. Miners effectively vote for the update by continuing to validate transactions from the old chain or moving over to the new chain. However, this voting occurs after the fork, so the developers can add an update which does not end up being enacted if the miners continue to devote computing resources to the original chain. In Cardano’s on-chain governance system, updates are voted on before they are added into the protocol.

Growth/Legal Risks

Cardano has plenty of potential for growth as development proceeds further.  Eventually, Cardano may compete with Ethereum as developers and companies try out the Cardano platform for generating smart contracts. Moreover, the supply of the ADA coin is capped at 45 billion which it should reach in a little over 20 years.[13] While the supply is several orders of magnitude larger than Bitcoin’s, Litecoin’s, or Ethereum’s, the ADA coin may see a spike in growth as it reaches the maximum amount.

Estimated Time of Arrival

Although ADA is readily available on many exchanges, a significant amount of development is still necessary before this coin becomes viable. Currently, the proof of stake system requires users to have at least a 1% of the total supply of ADA (or about $130 million) to participate in staking. Additionally, both the virtual machine (IELE) and programming language (Plutus) for writing smart contracts remain under development.

ETA: 2020

Conclusion

While the concepts behind Cardano are very intriguing and address many issues with other cryptocurrencies, there is still a lot of work to do to build the platform.  The ADA coin has tremendous potential, but it is yet to be seen how developers will adapt to the Plutus language, or how the IELE virtual machine and the Cardano network will handle a large volume of contracts/transactions.

[1] https://technet.microsoft.com/en-us/library/cc958821.aspx

[2] https://hackernoon.com/cardano-ethereum-and-neo-killer-or-overhyped-and-overpriced-8fcd5f8abcdf

[3] https://blog.goldmint.io/nothing-at-stake-and-longrange-attack-in-pos-4ec486f1fc89

[4] https://iohk.io/team/#iohk

[5] http://storeofvalueblog.com/posts/a-deep-dive-into-cardano/

[6] https://hackernoon.com/cardano-ethereum-and-neo-killer-or-overhyped-and-overpriced-8fcd5f8abcdf

[7] https://coinmarketcap.com/currencies/cardano/

[8] https://www.traxia.co

[9] https://steemit.com/cryptocurrency/@nrek/the-real-next-neo-is-here-meet-cardano-and-ada

[10] https://www.investopedia.com/news/introduction-cardano/

[11] https://cardanodocs.com/technical/plutus/examples/

[12] https://hackernoon.com/cardano-ethereum-and-neo-killer-or-overhyped-and-overpriced-8fcd5f8abcdf

[13] https://onchainfx.com/asset/cardano

Litecoin

chart-16
Litecoin Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

Litecoin – a fork of Bitcoin – has been dubbed by creator Charlie Lee as the ‘silver’ to Bitcoin’s ‘gold.’ That is, Litecoin does not intend to compete directly with Bitcoin. Instead, Litecoin aspires to be the industry leader in the daily transactions space. Litecoin shares almost all of the same characteristics as Bitcoin. The main differences are that Litecoin has shorter block times (2.5 min compared to 10 min for Bitcoin), a larger supply (84 million to 21 million for Bitcoin), and uses a different mining algorithm (Scrypt instead of SHA-256). By using shorter block times, the Litecoin protocol is designed to increase transaction speeds and decrease fees compared to Bitcoin. While shorter block times expose Litecoin to greater security risks, Charlie Lee explained he is willing to sacrifice a little on security to increase speed for daily transactions. He further surmised that Bitcoin needs to have the highest level of security to store users’ savings. Litecoin could then operate like cash, where it’s acceptable to sacrifice some security for increased convenience when users are transacting in small amounts and a security breach would not result in financial ruin.

Pros: Contains many of the benefits of Bitcoin including decentralization, immutability, and limited supply in addition to improved scalability due to the 2.5 min block time; fast confirmation times (~a few seconds); low transaction fees (~$.20 per transaction); first cryptocurrency intended for daily transactions

Cons: Decreased block time comes with increased security risks; several competitors in the daily transactions space (Bitcoin Cash, Dash, Nano); if Bitcoin solves its scaling problem there may not be a need for an additional cryptocurrency for daily transactions; vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Litecoin uses the same proof-of-work (POW) system as Bitcoin to validate transactions, but a different mining algorithm in Scrypt.[1] Originally, miners could run Scrypt on CPUs but hashing power has increased considerably and now requires ASICs. Because blocks are generated every 2.5 minutes rather than every 10, Litecoin experiences a much larger number of stale blocks and orphaned chains than Bitcoin.[2] This means that miners find blocks which are not added to the blockchain, because another block has its chain extended first. Additionally, the shorter block time leads to an increased number of blocks, making data storage expensive. Between the expensive data storage and likelihood of finding orphaned blocks (where miners do not receive a reward), only a few miners participate in the Litecoin network.[3] Thus, Litecoin mining is centralized (only three mining pools control over 50% of the hash power: LitecoinPool.org, Antpool, and LTC.top), making it vulnerable to a 51% attack.

Leadership/Community Participation

Litecoin is led by its creator Charlie Lee, a former Google engineer and MIT grad.[4] Mr. Lee has a strong vision for the future of Litecoin. As the first major adopter of the Segregated Witness (SegWit) upgrade, Lee is a strong proponent of the Lightning Network as an off-chain solution. He envisions Litecoin and Bitcoin using the Lightning Network for atomic swaps to exchange one coin for the other.[5] Although the Lightning Network may allow Bitcoin to scale to the point where it can perform its own daily transactions, Charlie Lee believes Bitcoin Lightning Network transactions will be more expensive than Litecoin Lightning Network transactions. As such, he sees a scenario where users who want to transact in Bitcoin convert to Litecoin, transact in Litecoin, and convert back to Bitcoin via an atomic swap to reduce transaction fees.[6]

Transaction Volume and Market Capitalization

Litecoin has about 1/10 the transaction volume of Bitcoin (~$400M in transactions per day). Even though confirmation times and transaction fees are significantly lower for Litecoin, the network has not been fully tested. Nevertheless, Litecoin does have the 5th largest market cap (~$9B) of all cryptocurrencies.[7]

Industry Participation

Recently Alza, a major European online retailer, announced that it is accepting Litecoin.[8] RE/MAX London also accepts Litecoin as a form of payment. Additionally, it can be purchased through several exchanges, such as Coinbase, Bitstamp, Binance, and many others. However, Litecoin has yet not received widespread acceptance and may only be used at very limited locations.

Security

As mentioned above, Litecoin is not as secure as some other cryptocurrency such as Bitcoin, due to its relatively short block times. Charlie Lee also intimated that he would be willing to increase block size as well to increase transaction times, despite further security risks. He explained that for Litecoin some vulnerability is okay, because he does not envision users having large amounts of Litecoin at any given time.[9] Instead, he sees users keeping their savings in Bitcoin and converting small amounts to Litecoin for daily transactions, like withdrawing cash from an ATM. Even so, some studies have shown that reducing block times to as little as 1 minute have little negative impact on security.[10]

Usability

As the silver to Bitcoin’s gold, Litecoin is intended to be used for day-to-day transactions including micropayments.[11] Lee explained, “Bitcoin can be used for like moving millions of dollars between banks, buying houses, buying cars. It’s really secure. Litecoin can be used for cheaper things.”[12] While this idea makes sense in theory, it is yet to be seen whether Litecoin can maintain low transaction fees and fast confirmation times when the network is flooded with billions of transactions per day. It appears that off-chain solutions like the Lightning Network or solutions that do not require a blockchain are better suited to handle exponential increases in transaction volume[13] and micropayments. But, Lee envisions a world where Lightning Network complements Litecoin and increases its value rather than destroying it.

Technical Features

As described above, Litecoin has almost all of the same features as Bitcoin. The main differences are block times of 2.5 minutes, a limited supply of 84 million coins as opposed to 21 million, and Scrypt for its hashing algorithm.[14] Whereas Bitcoin’s mempool had been reaching close to 300 MB of unconfirmed transactions in January, because of its shorter block times the amount of unconfirmed transactions for Litecoin is typically under 1 MB.[15] Additionally, Litecoin was the first major cryptocurrency to adopt SegWit, meaning it has been testing the Lightning Network for longer than many others including Bitcoin.

Although Litecoin has some similar drawbacks as Bitcoin Cash (increased security risks and mining centralization), Litecoin has been around much longer and isn’t trying to compete directly with Bitcoin.[16] Additionally, Litecoin embraces off-chain scaling solutions like Lightning Network, whereas Bitcoin Cash appears to believe it has the best solution to scaling. 

Growth/Legal Risks

Litecoin’s main competitors are other cryptocurrencies that intend to be used for day-to-day transactions, such as Bitcoin Cash, Dash, Nano, etc. Despite the fact that there are many competitors in this space, Litecoin was the first to market, and has room to grow as the demand for cryptocurrencies that can perform day-to-day transactions and micropayments increases. Additionally, Litecoin has a limited supply although it has 4 times as many coin as Bitcoin. As the number of Litecoin left to mine decreases, Litecoin’s value should go up.  On the other hand, if Bitcoin can address its scaling issues Litecoin may lose some of its advantage in this niche market within cryptocurrency.

Estimated Time of Arrival

Litecoin was launched in 2011 and is now fully developed and ready for use. However, the Litecoin network has not been tested to the same extent as Bitcoin’s, and we won’t know for sure how well Litecoin can handle daily transactions until its required to confirm hundreds of millions or even billions per day like a credit card company.

ETA: Now

Conclusion

Litecoin has strong leadership with a well thought out vision for the future, and a concrete plan to make that vision come to fruition. Nonetheless, it is unclear whether gold and silver can co-exist if and when off-chain solutions are widely adopted.

[1] https://www.coindesk.com/information/comparing-litecoin-bitcoin/

[2] https://www.coindesk.com/lower-bitcoin-block-time-scale/

[3] https://www.litecoinpool.org/pools

[4] https://twitter.com/SatoshiLite

[5] https://www.youtube.com/watch?v=U2KP8koYC3s

[6] https://segwit.org/my-vision-for-segwit-and-lightning-networks-on-litecoin-and-bitcoin-cf95a7ab656b

[7] https://coinmarketcap.com

[8] https://www.alzashop.com/alza-introduces-a-payment-by-litecoin

[9] https://www.youtube.com/watch?v=U2KP8koYC3s

[10] https://www.coindesk.com/lower-bitcoin-block-time-scale/

[11] https://bravenewcoin.com/news/for-bitcoin-is-being-a-store-of-value-more-important-than-a-payment-system/

[12] https://www.express.co.uk/finance/city/905756/Litecoin-bitcoin-fork-miners-China-South-Korea-Charlie-Lee

[13] https://lightning.engineering

[14] https://www.coindesk.com/information/comparing-litecoin-bitcoin/

[15] https://dedi.jochen-hoenicke.de/queue/litecoin/#3m

[16] https://www.express.co.uk/finance/city/905756/Litecoin-bitcoin-fork-miners-China-South-Korea-Charlie-Lee

Bitcoin Cash

chart-5
Bitcoin Cash Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

Bitcoin Cash is a hard fork of Bitcoin – meaning that it shares almost all of the same characteristics with Bitcoin except one: Bitcoin Cash uses 8 MB blocks while Bitcoin uses 1 MB. This adjustment to the Bitcoin protocol was made to address Bitcoin’s scalability issues. By using larger block sizes, the Bitcoin Cash protocol is designed to increase transaction speeds and decrease fees compared to Bitcoin. Those in favor of Bitcoin Cash argue that the larger block size solves Bitcoin’s scaling problem making it useful for daily transactions (e.g., for a cup of coffee) including micropayments. They also claim that the cryptocurrency that can handle small, constant transactions can also be used as a store of value, thereby replacing the need for Bitcoin. However, those opposed cast Bitcoin Cash in a much different light. They argue that a larger block size does not permanently solve the scaling problem and instead is a temporary solution that Bitcoin could easily adopt if it’s successful. Instead, Bitcoin Cash is one of many cryptocurrencies competing to be the leader in daily transactions. There are strong arguments on both sides making Bitcoin Cash very difficult to evaluate. 

Pros: Contains many of the benefits of Bitcoin including decentralization, security, immutability, and limited supply in addition to improved scalability due to the 8 MB block size; fast confirmation times (~a few seconds); low transaction fees (~$.10 per transaction); decentralized development

Cons: Provides a quick fix to the scalability issue without finding a long-term solution; Bitcoin could always increase its block size in the future to match or exceed the Bitcoin Cash block size; vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power; Bitcoin Cash mining is centralized

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Bitcoin Cash uses the same proof-of-work (POW) system as Bitcoin to validate transactions. But its larger block size leads to expensive data storage costs, and as a result, only a few miners participate in the Bitcoin Cash network.[1] Thus, Bitcoin Cash is highly centralized (only three miners control over 50% of the hash power: Antpool, ViaBTC, and BTC.com), making it vulnerable to a 51% attack.

Leadership/Community Participation

Unlike many other cryptocurrencies, Bitcoin Cash has a decentralized development team made up of developers from Bitcoin ABC, Bitcoin Classic, Bitcoin Unlimited, Bitcoin XT, and several others.[2] This prevents any single group of developers from controlling the code. Although Bitcoin Cash does not have a prestigious leader like Vitalik Buterin of Ethereum or Brad Garlinghouse of Ripple, the cryptocurrency has many influential supporters such as Roger Ver, better known as “Bitcoin Jesus.”[3]

Transaction Volume and Market Capitalization

Bitcoin Cash has about 1/10 the transaction volume of Bitcoin (~$400M in transactions per day). Even though confirmation times and transaction fees are significantly lower for Bitcoin Cash, the network has not been fully tested. On the other hand, Bitcoin Cash does have the 4th largest market cap (~$20B) of all cryptocurrencies and just recently came into existence after the hard fork of August 2017.

Industry Participation

Bitcoin Cash is accepted at some retailers, such as Overstock.com.[4] Additionally, it can be purchased through several exchanges, such as Coinbase, Bitstamp, Binance, and many others. However, Bitcoin Cash has yet not received widespread acceptance and may only be used at very limited locations.

Security

In terms of security, Bitcoin Cash has many of the same advantages and disadvantages as Bitcoin.

Usability

Many argue that Bitcoin is meant to be used as a store of value, while Bitcoin Cash is better suited for day-to-day transactions including micropayments.[5] Although this idea makes sense in theory, it is yet to be seen whether Bitcoin Cash can maintain low transaction fees and fast confirmation times when the network is flooded with billions of transactions per day. It appears that off-chain solutions like the Lightning Network or solutions that do not require a blockchain are better suited to handle exponential increases in transaction volume[6] and micropayments.

Technical Features

As described above, Bitcoin Cash has almost all of the same features as Bitcoin. The main difference is its block size of 8 MB. This means 8 times as many transactions are included in a block, preventing the network from overloading and having a backlog of transactions that need to be confirmed. While Bitcoin’s mempool had been reaching close to 300 MB of unconfirmed transactions in January, the amount of unconfirmed transactions for Bitcoin Cash is typically under 1 MB.[7]

Growth/Legal Risks

Even though it may appear that Bitcoin Cash is a direct competitor with Bitcoin, there is an argument that the two can coexist and users can have both for different purposes. Bitcoin may end up being used as a store of value while Bitcoin Cash is the cryptocurrency for day-to-day peer-to-peer transactions. As such, Bitcoin Cash’s main competitors are other cryptocurrencies that intend to be used in a similar manner, such as Litecoin, Dash, Nano, etc. Although there are many competitors in this space, Bitcoin Cash is currently the leader according to market cap, and has room to grow as the demand for cryptocurrencies that can perform day-to-day transactions and micropayments increases. On the other hand, if Bitcoin can address its scaling issues Bitcoin Cash may lose its advantage as the leader of a niche market within cryptocurrency.

Estimated Time of Arrival

Because Bitcoin Cash shares almost all of the same features as Bitcoin, the protocol is fully developed and ready for use. Nevertheless, the Bitcoin Cash network has not been tested to the same extent as Bitcoin’s, and we won’t know for sure how well Bitcoin Cash can handle daily transactions until its required to confirm hundreds of millions or even billions per day like a credit card company.

ETA: Now

Conclusion

The future of Bitcoin Cash is very hard to predict as there are so many possible outcomes when it comes to this cryptocurrency. It may emerge as the cryptocurrency used as a store of value and for daily transactions while Bitcoin is considered old technology. On the other hand, Bitcoin Cash may become obsolete when developers discover a more permanent solution to the scaling problem, such as by using off-chain transactions or a data structure other than blockchain. Of course, the ultimate fate of Bitcoin Cash is likely somewhere in between, but because their solution to the scaling problem doesn’t seem to be a permanent one, it’s value may be surpassed by other coins down the road.

[1] https://coinsutra.com/btc-vs-bch-bitcoin-cash/

[2] https://news.bitcoin.com/developer-amaury-sechet-discusses-the-values-of-bitcoin-abc-development/

[3] https://www.cnbc.com/2017/12/20/bitcoin-jesus-says-investors-should-be-ready-in-case-bitcoin-falls-out-of-favor.html

[4] https://acceptbitcoin.cash

[5] https://bravenewcoin.com/news/for-bitcoin-is-being-a-store-of-value-more-important-than-a-payment-system/

[6] https://lightning.engineering

[7] https://dedi.jochen-hoenicke.de/queue/#30d

Ripple

chart-13
Ripple Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

The Ripple network is a protocol that acts as an intermediary for global payments between banks. For example, Bank A can transmit a payment to Bank B using one fiat or cryptocurrency (e.g., USD) and Bank B can receive the payment in another fiat or cryptocurrency (e.g., Euros). Typically, these transactions are expensive costing around $1.6 trillion per year, and time consuming taking 3-5 days to settle. Using the Ripple network, global payments are settled in a few seconds with extremely small transaction fees. This is accomplished through the use of gateways. For example, when converting between US and Canadian dollars, Bank A transmits its payment in US dollars to a first gateway, which instructs a second gateway to release funds to Bank B. Bank B then receives the equivalent amount in Canadian dollars from the second gateway. The first gateway then owes the second gateway the payment from Bank A. Instead of transmitting an IOU, the first gateway transmits an equivalent amount of cryptocurrency (the Ripple token XRP) to the second gateway and the transaction is immediately settled. As such, the Ripple token XRP is used as a bridging currency between the gateways and also to pay transaction fees to prevent users from spamming the network.

Pros: Used in a protocol for international payments that significantly reduces transaction fees and allows for real-time settlement; strong leadership in CEO Brad Garlinghouse who held senior positions at AOL and Yahoo!; banks are beginning to test and adopt the protocol 

Cons: About 60% of Ripple tokens XRP are owned by Ripple; there are 100 billion XRP in circulation and the amount of XRP destroyed per transaction in fees is miniscule (~10 tokens are destroyed per million transactions), so the supply is not decaying and banks do not need to hold onto a large amount of XRP to use the protocol; XRP is currently being used as the bridging currency, but the banks can select another currency and are likely to select one that has higher liquidity such as bitcoin or ether; the Ripple protocol uses validator nodes to confirm transactions making it a centralized network

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Unlike Bitcoin, Ethereum and many other cryptocurrencies, Ripple does not use a proof-of-work (POW) or proof-of-stake (POS) system to validate transactions. Instead, a recommended list of a little over 50 trusted nodes are selected to validate transactions on the Ripple network. These nodes are operated by companies and organizations, such as Microsoft, MIT, and CGI. Although this validation method does not require the computing resources of a POW system, the network begins to resemble a client-server relationship where the trusted nodes act as servers. Unlike many other cryptocurrencies, the Ripple protocol is not decentralized and the trusted nodes have control over the network. For example, the trusted nodes control validation, vote on protocol changes, and can modify fees.[1] 

Leadership/Community Participation

The Ripple leadership includes CEO Brad Garlinghouse who previously served as President of Consumer Applications at AOL and Senior Vice President at Yahoo!. The CTO Stefan Thomas previously created several Bitcoin libraries that are currently in use by Bitcoin businesses.[2] This team has amassed years of experience and is very knowledgeable in both cryptocurrency and the broader software technology arena. Ripple includes over 50 contributors who are actively improving the functionality of the network.[3] Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

XRP has a market cap of about $30B and a transaction volume of over $1B per day.[4] However, while 100 billion XRP tokens have been created over 60% are owned by Ripple.[5] This means the majority of the tokens are not being circulated and if Ripple cashes out, the market could crash.

Industry Participation

Several banks have indicated an interest in the Ripple network with some beginning to experiment with the protocol. For example, Moneygram, American Express, CIBC, UBS, Banco Santander, Bank of America, YES Bank, RBC, National Bank of Australia, Unicredit, and more have agreed to test Ripple’s distributed ledger.[6]

Security

Operating in essentially a client-server system, Ripple has many of the vulnerabilities of legacy systems. If a validator node gets hacked the entire system may be compromised.

Usability

As mentioned earlier, the Ripple token XRP has two main functions: (1) as a bridging currency between two parties transacting in different currencies and (2) as a form of payment for transaction fees.[7] Unfortunately, the bridging currency doesn’t have to be XRP, and banks will likely prefer a global reserve currency having higher liquidity, such as bitcoin or ether.[8] Additionally, the transaction fees on the network are extremely small (~10 XRP per million transactions).[9] Even though this will encourage banks to use the Ripple protocol, each bank only needs a few hundred XRP to transact for years.

On the other hand, measures have been taken to encourage users to select XRP as the bridging currency in the network. CEO Brad Garlinghouse suggested that XRP removes the need for currency exchanges to maintain local currency accounts in remote locations.[10] 

Technical Features

The Ripple network includes a decentralized ledger operated by a network of servers (trusted nodes).[11] The decentralized ledger follows the Interledger Protocol (ILP), where a sender sends one form of payment (e.g., Mexican pesos) to a first gateway via a first ledger. A second gateway releases a second form of payment (e.g., Japanese yen) to a receiver via a second ledger. Then the first gateway sends a third form of payment as a bridging currency (e.g., XRP tokens) to the second gateway to settle the transaction.[12]

Because the Ripple network is not fully decentralized, it scales much better than competitors like Bitcoin and Ethereum. While Bitcoin and Ethereum can handle about 10 transactions per second, Ripple blows them out of the water in terms of scalability and delivers 1500 transactions per second! The transaction speed of Ripple is also significantly better as it takes only a few seconds to settle a transaction.[13]

Growth/Legal Risks

XRP’s potential for growth is curbed by the fact that Ripple owns over 60% of the tokens and only 10 XRP are destroyed in fees for every million transactions! Although destroying XRP over time should make the currency scarcer, the amount of XRP is only expected to decline by 0.29% over the next 100 hundred years at the current destruction rate.[14]

Additionally, even though XRP is only valued at about $1 per coin, because Ripple has issued an extremely large number of tokens, XRP’s market cap is on par with Bitcoin and Ether. Despite all of this, XRP may continue to grow as more banks and currency exchanges continue to experiment with and adopt the technology. 

Estimated Time of Arrival

Ripple is mainly in the testing phase. While further along than many other cryptocurrencies, it is yet to be seen whether banks will use the distributed ledger protocol for foreign exchanges.

ETA: 2019

Conclusion

Although many in the cryptocurrency community seem to think XRP is overvalued, because it’s not necessary as a bridging currency in the Ripple network and banks only need a marginal amount of XRP to transact via the Ripple network, there are arguments in its favor. For example, XRP is part of a protocol that has captured significant interest in the banking industry. However, the downside risk does not seem to outweigh the benefits at this point, and it’s hard to justify a $30B market cap for a token that may not be utilized in the Ripple network.

[1] https://ripple.com/insights/xrp-ledger-decentralizes-expansion-55-validator-nodes/

[2] https://ripple.com/company/leadership/

[3] https://github.com/ripple/rippled

[4] https://coinmarketcap.com/currencies/ripple/

[5] https://www.coindesk.com/counterargument-value-proposition-ripples-xrp-token/

[6] https://www.fool.com/investing/2017/12/17/5-big-banks-currently-testing-ripples-blockchain-t.aspx, http://fortune.com/2018/01/11/ripple-moneygram-xrp-cryptocurrency-bank-transfers/, https://www.influencive.com/amex-ripple-partner/

[7] https://www.coindesk.com/ripple-medieval-banking-digital-twist/

[8] https://www.forbes.com/sites/ksamani/2017/12/20/the-bear-case-for-xrp-bitcoin-futures-edition/#6810ec1d14e6

[9] https://steemit.com/cryptocurrency/@primeer/why-ripple-token-xrp-is-terribly-overvalued

[10] http://fortune.com/2018/01/11/ripple-moneygram-xrp-cryptocurrency-bank-transfers/

[11] https://ripple.com/build/fees-disambiguation/

[12] https://interledger.org/rfcs/0001-interledger-architecture/

[13] http://www.valuewalk.com/2018/01/bitcoin-vs-ethereum-vs-ripple-comparison/

[14] https://steemit.com/cryptocurrency/@primeer/why-ripple-token-xrp-is-terribly-overvalued

Ether

chart-12
Ether Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

As a decentralized platform that utilizes blockchain technology, Ether has many of the advantages (better security, immutable, trustless, no need for a central authority) and drawbacks (scalability issues and high transaction fees) of Bitcoin. Its distinguishing feature, however, is the ability to generate and execute “smart contracts,” which are a set of terms and conditions that allow for the automated exchange of tokens or digital assets. For example, Alice may automatically receive Bob’s tokens when the Cubs win the World Series, and Bob may automatically receive Alice’s tokens when the White Sox win the World Series. Through the use of these smart contracts, companies can develop decentralized applications (dApps) on the Ethereum platform, where users receive digital assets when a particular set of conditions occur. The Ether coin is referred to as the “gas” for executing the smart contracts on the Ethereum platform, which means users have to pay a certain amount in Ether to run a contract.

Pros: Executes Turing-complete smart contracts; platform for developing dApps; allows for the exchange of a wide range of digital assets; strong leadership in Vitalik Buterin and a development team of over 200 contributors; several tokens run on the Ethereum ERC20 token standard; second largest market cap to Bitcoin

Cons: Scalability issues; rising transaction fees (has reached ~$0.50 per transaction); vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Like Bitcoin, Ethereum uses a proof-of-work (POW) system to validate transactions by miners required to solve a cryptographic riddle which is difficult to compute but easy for others to verify.[1] Therefore, mining requires a large amount of computing resources and electricity. Additionally, a POW system is vulnerable to a 51% attack, where a single miner or mining pool (made up of several miners working together who split the rewards) has more than half of the mining power of the network. As a result, the miner can refuse to validate transactions and can double-spend Ether.[2] On the other hand, the likelihood of a 51% attack is low, because this would devalue the currency that the miners are working to obtain.

Currently, Ethereum is considering switching to a proof-of-stake (POS) system called Casper, where the validator for the next block is selected based on a combination of random selection, account balance, and the number of days the coins have been held.[3] 

Leadership/Community Participation

The Ethereum Foundation is led by Vitalik Buterin, a Russian-Candian programmer and entrepreneur who co-founded Ethereum before he turned 20 and has been referred to as a “boy genius.”[4] The Ethereum Foundation includes over 200 members who are actively improving the functionality of the network.[5] Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

Ether has the second largest market cap to Bitcoin (~$80B) [6] and a transaction volume of about 1 million transactions per day.[7] Nevertheless, Ether has been experiencing scalability issues as transaction volume has rapidly increased leading to rising transaction fees. Multiple solutions to this problem have been proposed including a multi-layered protocol similar to Bitcoin’s Lightning Network where most transactions will occur on off-chain micropayment channels. Another proposed solution is referred to as “sharding,” where nodes no longer store the full state of the network and instead each node merely stores a subset of the data.[8] Then the nodes communicate with each other to obtain data which is not stored at a particular node. But, this system isn’t trustless since nodes need to obtain data from the other nodes. 

Industry Participation

Several players have been involved in creating dApps on the Ethereum platform. This includes CryptoKitties[9] (an extremely popular game where virtual cats have been sold for up to $100k), Eth-Tweet[10] (a microblogging service), and WeiFund[11] (a crowdfunding service). While we have not yet seen dApps created by large companies, some big businesses such as Toyota have been experimenting with applications utilizing the Ethereum blockchain.[12]

Security

In terms of security, Ether has many of the same advantages and disadvantages as Bitcoin. Executing smart contracts on the blockchain may open Ether up to additional security issues, however, because the code used to run the smart contracts is made public. Everyone in the network then has the ability to review the code, find bugs, and exploit them before the developers become aware of the bugs and are able to make corrections.

Usability

Ether is a utility token used as fuel for operating the Ethereum platform.[13] This means that each time a developer creates a smart contract or issues a token on the Ethereum platform, a designated amount of Ether is transferred. Several tokens and altcoins have been created on the Ethereum platform using the token standard ERC20. These tokens include: Tron, ICON, OmiseGo, Binance Coin, VeChain, Tether, Golem, and many others.

Technical Features

Although smart contracts can also be executed using Bitcoin, the Bitcoin smart contracts have limited functionality. Ethereum, on the other hand, uses an Ethereum Virtual Machine[14] which executes Turing-complete smart contracts that can perform just about any computation, and are not limited to exchanging tokens.[15] In this manner, additional information can be recorded and exchanged via the blockchain, such as identity information, product information, etc. Ethereum also utilizes oracles to communicate with the off-blockchain world for evaluating conditions in the contract.[16] For example, if the terms of the contract indicate that Alice will receive 100 Ether from Bob if the average temperature in Chicago is over 50 degrees in January, an oracle collects temperature data for Chicago which is then evaluated by the smart contract.

Growth/Legal Risks

Currently, there are over 32000 ERC20 token contracts executing on the Ethereum platform, and this number has been increasing at an exponential rate.[17] As developers and companies find more uses for smart contracts, the value of Ether should continue to rise. Even though the supply of Ether is technically unlimited, the issuance of Ether is capped at 18 million per year.[18]

Estimated Time of Arrival

Like Bitcoin, Ether is currently in use and several developers have created dApps and tokens on the Ethereum platform. While it is still in its infancy, developers will likely experiment with more and more uses of smart contracts.

ETA: Now

Conclusion

Ether has the advantage of being the first cryptocurrency to be used in the execution of Turing-complete smart contracts. The possibilities for these contracts are endless, and the Ethereum project has the opportunity to transform not only the legal landscape, but how people and machines exchange value.

[1] https://en.wikipedia.org/wiki/Proof-of-work_system

[2] https://learncryptography.com/cryptocurrency/51-attack

[3] https://seekingalpha.com/article/4132934-ethereums-casper-protocol-will-address-problems-proof-stake

[4] https://www.inc.com/sonya-mann/vitalik-buterin-ethereum.html

[5] https://github.com/ethereum/go-ethereum

[6] https://coinmarketcap.com/currencies/ethereum/

[7] https://www.computerworld.com/article/3245928/emerging-technology/ethereum-explores-a-fix-for-blockchains-performance-problem.html

[8] https://www.coindesk.com/information/will-ethereum-scale/

[9] https://www.cnbc.com/2017/12/06/meet-cryptokitties-the-new-digital-beanie-babies-selling-for-100k.html

[10] https://github.com/yep/eth-tweet

[11] http://weifund.io

[12] https://www.trustnodes.com/2017/05/28/toyota-prototypes-ethereum-blockchain-based-car-sharing-uber-alternative

[13] https://www.ethereum.org/ether

[14] https://themerkle.com/what-is-the-ethereum-virtual-machine/

[15] https://www.coindesk.com/information/how-ethereum-works/

[16] https://bitcoin.stackexchange.com/questions/40389/what-advantages-and-disadvantages-does-ethereum-have-over-bitcoin

[17] https://etherscan.io/tokens

[18] https://www.ethereum.org/ether