This article is an excerpt from the book The Layman’s Guide to Bitcoin by Logan Brutsche and is republished here with permission of the author.
From very early on in Bitcoin’s history, there have been efforts to create other cryptocurrencies, sometimes called “altcoins”. At first, they offered very little innovation, and were largely nothing more than copies of Bitcoin with parameters tweaked. Today there are technically hundreds in existence, but most of them have almost no market and have faded into obscurity, having made no lasting impact on the industry.
Even though the majority of these coins don’t innovate, they do offer a certain insurance: the fate of the cryptocurrency industry isn’t completely dependent on Bitcoin alone—something particularly comforting given the stagnant issue of Bitcoin’s blocksize debate. If Bitcoin stumbles or fails to grow, there are other cryptocurrencies eager and able to take its place.
In the last few years, some cryptocurrencies have emerged with remarkable innovations. In some cases they’ve already leapfrogged beyond what Bitcoin alone can do, although they’re largely in an even earlier prototype stage. Even so, they are demonstrating some interesting applications of blockchain technology.
1. Private Payments (Zcash, Monero, Dash)
When sending a Bitcoin transaction, the network is only aware of your Bitcoin address. It’s therefore possible to own or send BTC without revealing anything about who you are. But because all of Bitcoin’s history is stored transparently, it’s possible for others to cross-reference transactions and gain information about some targeted Bitcoin address, possibly discovering the identity of its owner with enough investigation. So with Bitcoin alone, retaining privacy is possible, but it requires additional effort and knowledge, and in the end it’s not a guarantee in the face of a sufficiently motivated investigator.
Cryptocurrencies like Zcash and Monero offer various schemes to protect the privacy of payments—Zcash with cutting-edge cryptography, and Monero and Dash with a technique known as “mixing groups”. We’ve already had private payments in the form of cash, of course. The difference is that now they will move into the online world, with all of the blockchain’s guarantees.
Uses such as tax avoidance and darknet markets involve murky ethics and can be flash points for sensational headlines. Regardless, any ethical qualms result in little impact on the momentum (and blockchain-enabled indestructibility) of these projects. Private payments are a part of our future just as surely as any blockchain technology is.
2. Decentralized File Storage (Siacoin, Storj)
Bitcoin charges users transaction fees, and these fees are awarded to miners, who process the payments and secure the network. Projects like Siacoin and Storj use a similar economic model to incentivize and offer decentralized file storage.
Users can earn money by renting out their hard drives to the network; together these users form a backend cloud of hard drives waiting for files to store. Other users pay fees into the system to store their files—encrypted and duplicated—on this cloud. Deposits financially incentivize this hard drive swarm to take care of the data, lest they lose their deposits.
Because this system opens the business of renting out hard drive space to anyone with a computer, the system ends up being magnitudes cheaper than centralized services that must maintain the whole backend themselves.
3. Decentralized Apps / Smart Contracts (Ethereum)
A blockchain enables a decentralized network to agree on a single state and history. It can be seen as a single “virtual computer”, which is simulated in parallel by miners but has a single, unambiguous state—From this viewpoint, Bitcoin is just a specialized virtual computer built only for financial purposes.
Cryptocurrencies like Ethereum are a more generalized virtual computer, allowing users to upload and run arbitrary code on this system. Because these “dapps” (decentralized apps) are stored and processed on the blockchain directly (as opposed to on some server or personal computer), they inherit all of the benefits of the blockchain: unhackable, transparent/trustless, immutable, unstoppable, always-online, etc.
Just like a regular user, these dapps have their own address, and can send and receive money. Because of their ability to act autonomously and handle money, they are sometimes called smart contracts.
The potential and unanswered questions of this technology could warrant its own book. In short, dapp platforms offer any programmer access to a trustless, global, always-online system that can, in theory, run any money-capable app they dream up; anyone in the world could then access and interact with the dapp.
This has applications for the Internet of Things, enabling devices to autonomously send and receive payments. It can be the seed for a new economic engine much more powerful than Bitcoin, where augmentation of its capabilities are open to the public in a much more direct way. It could also have applications for things like real estate, the sharing economy, financial derivatives, voting, and more.
But like computers in general when they first came out, to predict the ultimate utility of dapps now is a fool’s game. The same generality that makes it so exciting, makes it impossible to predict how it will become most useful. Nevertheless, there is an incredible amount of developer activity and investment in this field.
This article is an excerpt from Logan Brutsche’s book, The Layman’s Guide to Bitcoin.