This article is complementary to previous articles related to ICOs. Now that you understand the ICO system, you will now know the different scams that “everyone else” is likely to fall into. Indeed, the crypto-currency market is in a way the “El Dorado” of the most experienced hackers and scammers, both for the mass of money they can earn thanks to the thousands of small investors in search of wealth and thinking they have seized the financial opportunity of their lives, and the non-existent or still too weak legal context to deter. This provides the best opportunities to carry out the most illegal activities.
The strong attractiveness of crypto-currencies only reinforces this trend, which unfortunately is not likely to change any time soon. Faced with this increase in the number of scams, it is up to investors to ensure their security through a thorough fundamental analysis upstream in order to detect inconsistencies related to projects. In this article, we will give you some tips on how to easily detect the biggest scams.
False ICO
In this frantic race for wealth and a golden retirement well before the average, many are crooks, ready to do anything to set up false projects very realistic for the most confirmed, that too many investors fall for. Since this principle is widely used in the crypto world, it is the most successful and difficult to detect scam for the most fragile investors, even for confirmed ones. The CIA has written a guide explaining the basics of fundamental analysis to distinguish good projects from scams.
If you do not wish to read the guide, here is a summary of the things you should keep in mind when investing in cryptocurrencies:
Find out about the project team (If they want to remain anonymous, you need to ask yourself questions)
Have a look in the ANN section on Bitcointalk.org to see any announcements regarding the launch of the project.
Reading the white paper is essential before any investment. If there are none, run away.
Consulting the source code is also an important point that you should not neglect.
Even if this is not prohibitive, the quality of a site must attract your attention if it is not in line with the financial ambitions of the project.
Find out about the exchange platforms to which cryptocurrency is listed (Names recognized in the cryptographic sphere are reassuring for all stakeholders)
Cloud Mining or lending platforms
Cryptocurrency mining is the system that brings the blockchain to life. Minersearn crypto-currencies in exchange for their services. In theory, the more miners operate, the faster the transactions are, which is beneficial for the functioning of the blockchain. However, the equipment required for this activity is very expensive and does not allow everyone to access this activity. Don’t worry, because it is still possible for the greatest enthusiasts to contribute to the existence of the blockchain, while earning money through cloud mining.
Indeed, some companies with a sufficient computing capacity may offer individuals the rental of a part of these resources in order to participate in mining and thus make a profit.
But this is godsend for smart crooks who take advantage of the very logic of the blockchain’s operation in order to deceive the most sensitive people to the profit generated, without the slightest effort. How do they do it in practice? they creates attractive websites and promise future investors utopian investment returns, while they have nothing more than a bank account located in a tax haven. It is difficult to detect scams in this type of activity. The only thing to do is to find opinions on the most recognized forums such as Bitcointalk or Reddit for example.
You can also check the company’s customers so that you can easily see public and real results, especially through press releases or other media that are legit enough to give you confidence. Otherwise, if a project promises you a daily return equivalent to several A passbooks and for life, the only advice I can give you is to run away while there is still time, because this is a pyramid scheme from which you can never recover your hard-earned money.
Identity theft
This scam takes place more commonly on Twitter and is done in 2 ways
Scammers will imitate the original count of heavy references such as leaders for example.
Or these charlatans comment directly on the publication of official accounts, making it easier to attract more victims.
Techniques used
Spammers ask people in publications to send cryptocurrencies like ETHs to an address and promise to multiply your bet by 10 once the amount is returned. A recurring problem? No one gets their money back in these situations.
You should know that money doesn’t come out of the blue, so no team will ask you to send them money, especially on social networks.
Twitter is obviously used as an example, but all social networks are full of scams that, even if they are practiced in different ways, will be based on the same method, which will consist in impersonating official teams.
This is also the case on collective messaging app such as Telegram where problems regularly arise, especially for popular projects, when the payment address on the often saturated website does not allow the money from investors to be received. These, as a first reflex to redirect themselves to Telegram but on bad channels unfortunately created by scammers who do not hesitate to fool users by indicating an address different from the one specific to the project.
The scammers do not stop there, however, because they act by sending public or private messages but also e-mails through look-alike accounts of the people on the team representing the ICO thanks to the addresses they have been able to collect.
As you will have understood, the world of cryptocurrencies can be dangerous for anyone acting in haste. You must redouble your attention and anticipate in every aspect of the situation in which you find yourself.
Tools to uncover scams
Google image Yandex, less known to the general public but formidable weapons to counter crooks. Indeed, these search engines offer very powerful features to find the sources of images used on all websites.
Similar web is a powerful solution and offers you many measures to allow a thorough audienceanalysis. This tool allows you, for example, to check the veracity of the comments of the project team members. For example, if the Community Manager claims to have raised millions of dollars but the site specifies an audience of about 5,000 visits per month, you have the right to ask yourself questions. It doesn’t always work because the most sophisticated scammers think about buying traffic. In this case, it is always possible for you to see the origin of the traffic. For example, an ICO whose head office is in France and that the entire audience is located in Eastern countries or on the African continent should attract your attention. The way in which the site allows us to interpret the figures appeals to and engages users in a thorough reflection before any investment.
The regulatory authority
If you wish to invest in brokers (trading platforms), please note that an authorisation from the financial authorities is required to offer investment advices and order execution services on the financial markets. It is generally easy to find out about this point through the register of financial officers from your country. In addition, the Financial Markets Authority regularly updates a black list of all websites specialising in cryptocurrencies that are not authorised to carry out their activity, which you can consult online.
Example of authority regulator in USA
Example of authority regulator in France
A few basic points to learn about
The authorizations
The origin of the site
Its age (rare are scams to last in time)
The site community
Its visibility on social networks
His reputation in the forums
I hope you enjoyed this article and that you know enough to counter the most serious traps. If you want more articles on cryptomarket scams, let me know in private message on Twitter or LinkedIn. Feel free to subscribe to our social networks to be informed of the latest articles written by the CIA!
Passionate about digital technologies and thanks to my experiences as advisor in the crypto sector, my goal is to popularize this fascinating but nevertheless vague world to the general public as simply as possible
“Bitcoin makes all banks look ridiculous!” This is a sentence I hear too often! Indeed, there are still many steps take before convincing our people to replace traditional currencies in order to benefit from the advantages of the blockchain. Indeed, the network is confronted with several limitations and today we will focus on one size limitation, I named scalability, the ability to use theblockchain network on a large scale. Without the possibility of making the Bitcoin usable by several thousand people simultaneously, the advantages of the blockchain are non-existent. In other words, the hardest work still needs to be done because the capacity to process banking transactions managed by visas has reached 50,000 peacefully. Concerning bitcoin, we are talking about 7 transactions per second and the number of transactions waiting to be processed is exploding as the enthusiasm around this technology increases. The solution designed to solve this problem is called the Lightning Network.
What is the Lightning Network?
It is a kind of network that overlaps with the Bitcoin network, which would make it possible to pay in pairs without transaction fees, at the rate of several hundred thousand transactions per second. In this case, transactions are made outside the blockchain.
How does the Lightning Network work?
The scripting language of Bitcoin is used to program intelligent contracts on which bidirectional payment channels will be based. This two-way channel should be considered as a tunnel with a safe in the middle of the road. In this tunnel, the buyer and seller must meet to engage a part of their fund as a signature in order to formalize the opening of the payment tunnel and ensure the next transaction is successful.
To explain more simply how it works, let’s say I want to pay a service to my friend Florian. To do this, we will both put into escrow an amount greater than the amount of the transaction as a guarantee. This money guarantees that there will be a transaction. Indeed, in the event that a person wishes to cheat by not honouring his requested transaction, he would take the risk of being penalized by losing all the funds committed.
Once the payment channel has been formed, both parties are free to proceed with any transaction agreement within the limit of the number of Bitcoin they have in their possession. This means that the bitcoins are not deducted directly from the accounts.
The payment channel remains open for the desired time and can be closed when both parties reach an agreement. We will not be able to recover all the money, i.e. our guarantee followed by the transactions carried out only when the payment channel is closed. Thus, the final balance of the parties will be credited according to the transactions previously carried out.
Video explanation
What software is used?
The number of companies developing the Lightning protocol implementation software can be counted on the fingers of one hand and look like the following ones:
lnd which is developed by Lightning Labs.
c-lightning which is supported by Blockstream.
Éclair which is developed by the French start-up ACINQ.
What about the protocol?
Following the deployment on the Bitcoin network during the “Segwit” update in March 2018, the Lightning protocol is still in the BETA test phase.
Did you know that on the Rompert.com website, you will be able to view in real time the different channels that are active at the moment? Try it and see for yourself!
Currently there are more than 25,000 payment channels for more than 3200 nodes and 665 BTCs.
Advantages and disadvantages of using Lightning
Advantages
Transaction costs: being carried out outside the blockchain, transaction costs are considerably reduced. Transaction fees would only finance the opening and closing of the payment channel.
Increased transaction speed: While verification of a transaction through Bitcoin takes ten minutes after six verifications, the Lightning Network would allow payment to be made instantly and independently of the network’s transaction volume. This would initially allow us to compete with market giants such as VISA for example.
Scalability improvement: The protocol would theoretically handle up to one million transactions per second, 20 times the theoretical capacity of VISA. This is a key factor in the massive adoption of crypto-currencies.
Anonymity: Since transactions are carried out in OFF chain, exchanges that take place using these different channels are almost impossible to trace.
Disadvantages
Technology in need of maturity: As long as the protocol is in the test phase, it is still difficult to see the theoretical advantages that can be drawn from this technology. Many technologies offer fast, secure and free payment methods. As a result, the road to success is still full of pitfalls for Bitcoin.
Payment Limit: Each payment channel has a maximum authorized amount that can be placed in a “common safe”. This greatly reduces the target of future users because they will not be able to transfer more money than they want.
Strengthening of centralization: The way intermediaries are selected is called routing. Each payment will take a route from participant to participant until it reaches its recipient. The routing algorithm is struggling to find the optimal route for transactions. As a result, these often obstructed roads contribute to the weakening of the network. This does not correspond to the very ideology of the blockchain whose goal is the decentralization of all information
Plausible increase in costs: The last disadvantage is not related to the Lightning network itself, but to transaction costs on the main chain: if Bitcoin were massively adopted and the size of the blocks were not increased, there would be a record increase in costs, if only to open and close a payment channel. This is a rather serious problem when you know that you can be forced to close (non-consensually) a channel at any time.
A word from the CIA
Although the protocol is still in the test phase, the development of Lighting seems to be bearing fruit. Indeed, the number of payment channel networks and their reliability is constantly increasing. However, if you would like to test the Lightning Network, I advise you to take precautions and make small transactions first. Scalability being a major problem for the massive use of bitcoin, lightning will decongest the Bitcoin network. This bodes well for the cryptocurrency ecosystem. To be continued…
Passionate about digital technologies and thanks to my experiences as advisor in the crypto sector, my goal is to popularize this fascinating but nevertheless vague world to the general public as simply as possible
When you return from a tropical holiday, do you also regret finding yourself with extra tickets that you cannot exchange? Because of the expensive costs associated with the exchange rate and the commissions charged during the exchange? Do you also regret having to wait several days to make bank transfers after multiple communications with your financial advisor? Have you ever wished for an universal currency to overcome all these problems faced by millions of people? This has been the case for about ten years now with cryptocurrencies, very recently advertised to the whole world, I mean Bitcoin. Still a fuzzy concept due to its lack of maturity, the decentralized electronic currency is increasingly talked about, thus improving the development of an ecosphere.
What the F*** is a cryptocurrency ?
Although traditional money is also an electronic currency representing 90% of the world’s money supply, a cryptocurrency is a digital currency that uses encryption techniques to secure its transactions, known as cryptography. Unlike currencies whose flows are controlled by governments, cryptocurrencies are generated by softwares open to everyone and minors. These are Internet users who offer the computing power to form a network and contribute to its proper functioning by verifying and recording transactions and their history between the parties in an accounting register. Unlike banks and other centralized systems, the accounting book is distributed to all peers in the network so that a single person or organization can’t interfere with it. We are talking here about the Blockchain, a technology whose existence is only ensured by crypto-currencies. Decentralised digital money complies with the same rules as cash money, since it makes it possible to purchase products, goods and services, make transfers, store value or even exchange it for traditional currencies. The difference here between traditional currencies and crypto-currencies is the absence of a trusted third party or intermediary in the execution of a transaction. We are talking about a Peer to Peer or “P2P” transaction. What difference does it make, you say?
Here are the theoretical advantages we can expect:
Transactions are much faster: There is no waiting time to complete transactions and no one asks you the reasons of your transfer
Cryptocurrencies flows are determined as soon as they are created, making inflation impossible.
Banks do not own your money, you’re the only one with full power over it
Trust between the parties is strengthened without going through intermediaries who charge fees in addition to slowing down your transfer. Fees are reduced
Confidentiality is respected despite the transparency of the information
A means of tax optimization
How is this possible? How can we respect Internet users’ data with transparency in these public transactions?
To give a simple explanation, the blockchain encrypts exchanges, which means that you can see all exchanges in real time but you can’t know the identity of the parties, except for a series of numbers and letters called public addresses. The content of the information is only transmitted to individuals with decryption clearance. In concrete terms, this means that it is possible to know how much money the addresses have while respecting the anonymity of individuals, although it is easy for specialists to know our identity if they really want to. Of course, among the two thousand crypto-currencies available, some of them allow you to be completely anonymous. Thus thanks to cryptocurrencies and blockchain, users have access to a simple and secure system to spend their money.
Crypto-currencies reflect the evolution of digital exchanges and the public’s desire to regain the full power of their purchasing behavior as was the case with gold. In addition, gold and cryptocurrencies have many points in common, such as
Reserves are limited: gold is a rare commodity and cryptocurrencies are also limited since the number of units created is determined at the time of creation and their circulation is regulated according to the transactions check carried out by miners.
Both cannot be created industrially in unlimited number.
They require some effort to be acquired.
They are durable over time.
They can be used anonymously.
What is the purpose of cryptocurrencies?
Crypto-currencies have a specific use for each of them. Indeed, they allow you to benefit from the services offered by the company.
Here are some examples of how we can use the crypto-currencies:
Rental services (rent, equipment, computing power of your computer, vehicles…)
Transport services (holidays, plane tickets…)
Tuition fees for education
Purchasing services (home, cars, books, shopping)
Professional services (lawyer, accountant, notary, supplier, subcontractor)
Monitoring services related to the traceability of products and services
Insurance services (compensation for delayed travel)
Salaries and commissions
In short, it is possible to do many things with crypto-currencies, although many of them are not universal. You will not be able to buy the same thing with Ethereums or Vertcoins or other crypto-currencies than with Bitcoin.
Here are the disadvantages observed in the use of crypto-currencies:
The high volatility of stock market prices, makes it impossible to store them securely or to use them in everyday life.
This volatility is due to the speculation enjoyed by crypto-currencies owners, particularly during price manipulations by whales or during pump and dump movements.
The low transaction processing speed: compared to VISA whose transaction processing capacity is close to 50,000 transactions/second, the Bitcoin blockchain cannot handle more than 7 transactions per second (soon the arrival of the Lightning Network technology currently in the BETA phase, whose theoretical capacity is close to 1,000,000/second) is not scalable, which does not allow mass adoption. Indeed, to be successful worldwide, bitcoin should be able to support the load of several tens of thousands of transactions per second.
Since the transaction verification process is sequential and therefore inefficient in the context of mass adoption, the network quickly becomes saturated, thereby significantly increasing transaction costs. (In December 2017, to $10, you had to pay $55 in fees and wait several days to complete a transaction)
The increase in transaction costs creates an auction and a competition to verify them. In other words, the people who have paid the highest transaction fees have priority in the queue. This does not respect the promise of cost savings and the advantages of cryptocurrencies compared to traditional currencies are non-existent.
Lack of security: As it is the case in all sectors where it is possible to generate great wealth, the crypto-market is confronted with an increase in the number of scams. Indeed, hacking of exchanges or individuals, particularly with Ledger physical portfolios, but alsofake ICOs and other types of fundraising that are rampant, may jeopardize the security of your money.
Very energy-intensive network: The network requires considerable computing power, to such an extent that its energy requirement is equivalent to nearly 7% of France’s electricity consumption, one of the world’s largest consumers, which is enough to make you dizzy when you understand that it would supply millions of people with electricity for a whole year.
The regulations that governments put in place to counter the development of cryptos (bans, penalties) are highly dissuasive.
In short, you have to be patient before blockchain becomes a norm in our society. But it should be mentionned that companies are adopting this technology more and more and are starting to explore potential synergies. Indeed, while public opinion played against crypto-currencies by assimilating them to the “currency of criminals”, large groups are beginning to integrate the blockchain into their services further democratizing it.
Will cryptos ever replace traditional currencies?
This is very unlikely or even impossible for the reasons mentioned above. However, with a loss of confidence in banks and rumors that the future financial crisis is imminent, many hope that crypto-currencies will explode at that time and that their use will evolve to the benefit of society. In the meantime, scientists agree that blockchain is a technology that will disrupt our economy.
Several types of cryptocurrencies
You’ve probably heard about corners and tokens. But what is it concretely if they are cryptocurrencies? A side note: the term cryptocurrencies does not suit many corners and tokens because they do not function as a mean of exchange. But let’s assume that they are cryptomonal.
Tokens or tokens: this is a non-little crypto-currency using the blockchain of a corner and often working with the ERC20 protocol of the Ethereum.
Tokens have the advantageous feature of being able to be used as:
Stock market shares: Tokens come from an ICO, i.e. a fundraising that allows you to quickly obtain financing without control from an organization, as is the case with IPOs. By doing this, companies do not need to sell shares, which has the advantage of preserving full power to the company.
The creation of decentralized projects and applications is facilitated since it is not necessary to create a Blockchain from scratch
Serves as legal contracts by replacing intermediaries (notary, physical insurer, broker, lawyer)
Each token has its own utility in terms of functionality
Altcoins or coins: A corner is a cheap virtual currency alternative to Bitcoin and completely independent since it has its own Blockchain technology. This is particularly the case for Ethereum, Bitecoin, Ripple. In addition, each corner has its own criteria, codes, algorithms and performance. For example, a transaction with Bitcoin takes about 10 minutes to complete, while the Ripple allows it in a few seconds.
How to acquire it?
Did you know that it was possible to spend your cryptos at the local merchant who does not accept crypto-currencies? Thanks to some online banks that exchange your cryptos for “fiat” currencies (euros, dollars), here there is indeed an intermediary, but things are likely to evolve toward decentralization. The good news is that a growing number of companies are recognizing that crypto-money are an alternative mean of payment to traditional currencies.
At first glance, it may seem difficult to make your first purchase of cryptocurrencies, but after reading our tutorial, you will see that it is easy. Although there are many purchase platforms to buy and sell crypto-currencies andtransfer cryptos to trading platforms, the CIA has its own preferences and offers several analytical articles to help you make the best decision.
The word from the CIA
In other words, even if the adoption of crypto-currencies evolves in its favor, they are confronted with many limitations that greatly reduce their opportunity for democratization. Thanks to this article, you’ve probably understood that in view of the lack of regulation, you might as well say that it is a bit like the far west in the world of crypto. When a new crypto-money appears, many disappear, taking with them the fruit of several years of savings for many of us. This is why I strongly recommend not investing money that you can’t afford to lose.
In the midst of economic uncertainty, crypto-currencies are subject to many controversies. Will they soon collapse as many specialists predict, or will they shake up traditional currencies? No one knows the answer, not even Warren Buffet. In the meantime, capitalization has finally increased again after a difficult year and a half.
The revolution has begun. If multinationals, banks and governments are starting to buy crypto-currencies, it is because something is happening in our society. Crypto-currencies are starting to challenge the financial system.
Passionate about digital technologies and thanks to my experiences as advisor in the crypto sector, my goal is to popularize this fascinating but nevertheless vague world to the general public as simply as possible
Leonardo FIBONACCI was an Italian mathematician who lived in the 12th and 13th centuries ((1175 – 1250). He is known to have highlighted the famous Fibonacci sequence.
The sequence of fibonacci numbers is, after 0 and 1, a sequence in which each new digit is the sum of the two previous ones: 0, 1, 1, 1, 2, 3, 5, 8, 13, 21, 34, 34, 55, 89, 144, 233, 377, 610. This suite can continue indefinitely and has many properties, especially in mathematics.
It is thanks to this sequence that the golden number 1.618 and it’s opposite, the golden ratio 0.618 were found.
However, this figure is very present all over the world around us: from starfish to sunflowers, cactus, galaxies, molluscs and even galaxies… The numbers of the Fibonacci sequence and the golden number are everywhere.
I greatly invite you to take an interest in this exciting issue.
To get to the heart of the matter at hand, these figures are also present in finance and particularly in technical analysis.
Indeed, FIbonacci retracements generally correspond to resistance or support objectives during the corrective phases. Since these figures are well known and used by everyone, these levels of support and resistance often play their role since all traders operate in these same price areas!
Calculation
Tracing can be configured in different ways depending on the trader’s choice on the different technical analysis platforms but the most used and therefore most followed by the market are 14.6%, 23.6%, 32.2%, 50%, 61.8%, 78.6% and finally 85.4%.
A small clarification concerning 78.6%: some use 76.4% which is the reciprocal of 23.6% rather than 78.6% which is the true figure because it is the square root of 61.8.
Why these figures? Indeed, they are not directly related to the Fibonacci sequence. In fact, they were obtained with mathematical relationships between certain numbers and this famous sequence. The basis of the gold ratio is 61.8% and comes from the division of 89 by 144 (which are numbers from the famous sequence) and gives 0.618.
–> 14.6 is obtained by dividing 89 by 610 which gives 0.1459 rounded to 14.6%.
–> 23.6 is the division of 89 by 377 and gives the result of 0.2360.
–> 38.2 is obtained by dividing 89 by 233 which gives 0.3519 which is rounded to 38.20%.
–> 50% is not linked to the continuation of Leonardo but it is often a technical level that is quite monitored by the market because it is a retracement that is widely used in the range: the average level of the range is often a level on which stakeholders take profits.
–> 61.8 is the inverse of the golden number (1.618 – 1)
–> 76.4 is the reciprocal of 23.6
–> 78.6 is the square root of 0.618
–> 85.4 the reciprocal of 14.6
How are these numbers almost out of the hat relevant?
As explained earlier, these are what we call in finance “self-fulfilling prophecy’’ everyone thinks that these levels will work so everyone acts on these levels: taking a position, stopping a position, modify stops loss… and it works!
Trading strategy
Fibonacci retracements are mainly used as technical zones like support areas and possible resistances. Indeed, when stakeholders draw their retracements, they are particularly attentive to the levels 23.6% – 38.2% – 50% – 78.6% (or 76.4) and sometimes even 14.6% and its reciprocal 85.4%.
These levels are used as technical areas for profit taking, position taking, etc….
These are therefore interesting areas because, graphically, they often produce price reactions: volume is executed on these levels.
To trace Fibonacci retracements, it is necessary to identify the peak and trough of the trend. Then we take this tool available on all technical analysis platforms and draw from the trough to the top for a bullish trend and from the top to the bottom for a bearish trend.
We get this kind of plot:
It is clear that during the BTC crash in 2018, the sharp downward trend was clearly stopped at the 78.6% level before rising to the 50% level and then falling again.
If we look a little more closely at this crash, we can obtain a rather interesting graphical reading of the retracements of fibonacci.
Indeed, if we extend our retracements from the high point to the low point, we easily realize that the upward corrective retracement was stopped on the 38.2% level twice. However, this technical level corresponds to the 50% retracement level of the entire ”bubble” at the end of 2017! (see previously)
If we trace our retracements from the low point to the high corrective point during the crash, we see that some levels are still respected.
On this graph, the 38.2% level was used as price support before a second attempt to raise prices. On the second failure (double top), prices found support on the 78.6% level.
How I use the Fibonacci retracements
–> Fibonacci levels are very useful, provided you don’t miss the information when it comes up. So, I recommend drawing all the main levels on his graph to avoid wrangles like 78.6% or 76.4%. Indeed, it will often happen that prices mark one level rather than another and vice versa depending on the markets. Knowing which level will work is not important. We simply have to be aware of what the prices tell us in order to benefit from them.
–> Retracements between 61.8% and 76.4% are quite interesting to buy (in a bullish trend) and sell (in a bearish trend), quite often they are significant retracements and prices like to start rising again after this kind of correction. If, for example, prices fail on the 76.4% retracement, the 78.6% level can be used to place a stop loss.
–> Finally, prices rarely fall below the 85.4% level, which is, in itself, a very deep retracement. If this is the case, it is probably not a retracement (which is normally only a temporary correction in a trend) and the trader will probably have to review his scenario.
–> Of course, it goes without saying that Fibonacci retracements should not be used as signals as such. They must be used with other techniques to allow the trader to obtain a better chance of winning when he enters the position: chartist figures, indicators, oscillators, price action (Japanese candlesticks) … the possibilities are endless, so let’s take advantage of them!
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The existence and democratization of Blockchain technology recently made a lot of noise. The first cryptocurrency of its kind, Bitcoin, officially launched in 2009, has enabled a large-scale democratization of the blockchain and its possibilities.
Over time, the importance and potential applications of this technology have grown and are now being considered in all sectors of activity. This would allow the financial and banking sector, for example, to reduce transaction costs, improve transparency and provide banking services to unbanked people. (It should be recalled that in Africa, 80% of the inhabitants do not have a bank account)
The “Popularity” of Blockchain Technology in Financial Sector
The blockchain is a kind of unique and advanced technology that brings many innovations. We are all aware of this, but it is probably in the financial sectors that the main technological innovations are to come.
Generally speaking, we all know that the banking sectors are strictly regulated and are of course centralised by default. This sector differs in its conservative attitude. Cryptocurrencies and the recent bubble have not, in general, pleased traditional finance. Aware that we are not fighting against technological progress, all the financial giants are rushing into the underlying technology of crypto-actives, the blockchain, while denigrating the crypto-currencies that obviously shade them.
How Can Blockchain Contributes to the Financial Sector?
Understanding the blockchain technology and its applications will influence how we treat this article and allow us to see the utility (or not) of this disruptive technology by the financial and banking sectors. The question is therefore whether this technology will be of great use and, above all, how.
In this article, we will try to show you how blockchain technology can positively contribute to and impact so-called “traditional” finance.
Blockchain offers faster financial transaction
Most of the time, the banking system needs time to process the transactions initiated on a daily basis by the world population.
In some cases, validations even take several days (compliance, identity check, amount limits, etc.). That’s where the blockchain comes in. This technology offers an alternative to the rigid and centralized structures of our old institutions.
Faster, the blockchain is validated by minors and does not require any intervention from a third party, the famous “trusted third party” (in this case, your bank that validates the transaction between you and the sender or recipient of the transfer).
Lower fees for financial transactions
We are often charged bank fees for making transfers or financial transactions. The interest of the blockchain also lies in its cost: it is much lower than that of traditional transactions (but not non-existent!). This is the main reason why banks are highly suspicious of this type of digital asset and it is even becoming increasingly difficult to acquire cryptocurrencies through certain banking groups (which is a desired internal choice and assumed by certain institutions, whose names we will keep silent here…).
Setting a Smart Contract
Blockchain has a great ability in storing a massive quantity of digital information. Therefore, establishing a smart contract in a certain transaction for the involved parties is a real advantage. Blockchain companies and bank sector can establish a great collaboration in order to create a certain smart contract for different kind of transactions.
Imagine for a moment: in the event of bad weather and heavy flooding, a farmer’s insurance must compensate him. It is necessary to declare the claim, that the claim is validated by a qualified person, that the transaction is validated internally, that the bank validates the payment… With a smart contract, no need for all this. Software detects that there has been bad weather (a mechanism connected to rainfall readings for example) and the smart contract automatically compensates the farmer, in a safe, inexpensive and fast way.
This simple example allows us to see the almost limitless possibilities of the disruptive technology represented by the blockchain and the applications that can be made of it, in all fields, by all sectors of activity.
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Blockchainis probably something familiar to you, especially you may know it was first applied to the cryptocurrency. All you know about blockchain is about the technology underlining the creation of cryptocurrency, as a digital currency that sees its popularity increase in some recent years. However, blockchain is more than that, it is often defined as a distributed ledger containing records of previous transactions made in the past.
The key to operate the distributed ledger is by ensuring the whole network agrees with the content. And this is where the consensus mechanism enters into action. We can also say that there’s supposed to be a consensus mechanism behind the existence of cryptoassets.
The Importance of Blockchain Consensus?
The consensus is known as the “general agreement” this is essential in blockchain technology. It aims at verifying the information that is being added into a ledger as absolutely valid. Indeed, the authority to keep the centralized account in one entity such as a centralized payment or bank system will be processed by the blockchain technology or distributed ledger in order to record the information.
The consensus mechanism has two objectives to reach a fair agreement delivered to all involved parties. First, it has to ensure there is a valid block in the blockchain. Second, to ensure that there won’t be anyone able to successfully fork the chain.
Two Types of Blockchain Consensus Mechanism
There are actually some common consensus mechanisms that you may not know. But here, we are going to talk about some of the most general types of consensus mechanisms : Proof of Work and Proof of Stake.
Consensus Mechanism 1: Proof of Work
This mechanism is the most commonly used and the oldest one introduced first by Cynthia Dwork and also Moni Naor in 1993. Then, in 1999, Markus Jakobsson coined its actual term of Proof of Work (PoW). In this mechanism, all computers in network miners will work in solving the cryptographic puzzle repeatedly, consisting of a mathematical hash or function. We can find the first invention of the protocol popularized by Bitcoin credited to Satoshi Nakamoto.
Transactions processed in the Bitcoin blockchain are concentrated in one memory pool. They call it “mempool” where a block is created every 10 minutes. It has to be verified to be accepted in the “mempool” for every transaction. Done by the miners, this process of transaction verification is called ‘mining’. PoW has a big responsibility for the whole mining process, operations, and power consumption.
The pros of PoW is that this is a proof the work was perfectly completed. The cons, it is criticized for its huge energy consumption and it is not well scaled with the big problem or issues in the transaction confirmation. Some coins using it are Ethereum Classic, ZCash, Monero Original, and some others.
Consensus Mechanism 2: Proof of Stake
This is a credible opponent to the PoW. In this case, Proof of Stake (PoS) will not require any computer in performing the repetitive computations. Therefore, it will be environmentally friendly. This consensus mechanism replaces the miners using validators in which they lock several of those coins as the stake. The group of validators is alternatively proposing and also voting for the next block. The weight of every validator voting will depend on the size of the stake.
Because this doesn’t require any miners, the validators will stake their own coins to bet which block will be valid in order to add it into the chain. When the fork happens, they will be consulted again on which fork is to be supported. In these fair conditions, the validator that chooses the wrong fork will lose the stake in the right fork.
The pros of this PoS lays on its efficient energy consumption and more decentralized system. But, it also has cons, in betting on the stake. Some coins apply this consensus mechanism such as DASH, Neo, PivX, and others.
Those are the two most common types of blockchain consensus mechanisms used so far. Understanding this information will help your researches about the different types of consensus mechanism in the blockchain.
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