There are a myriad metrics by which one may measure a crypto asset, but I would like to go back to the basics, what are cryptocurrencies made of? Well, a few key building blocks are common to pretty much all crypto assets:
1. A consensus layer: this is the part of the protocol which describes how the ledger will function and what rules will govern it.
2. A mining layer: this part of the protocol is concerned with extending the ledger and making sure it continues to be appended according to the rules of consensus.
3. A propagation layer: this part of the protocol is concerned with communication and how different parties keep track of changes to the ledger.
4. A programmable layer: part of the protocol that can execute arbitrary code and extend the functionality of the asset outside its hard coded functions.
There are a limitless number of traits that can be built on top of the general structure created by consensus, mining, propagation, and the programmable layer. For example, you can anonymize the propagation and mining layers and make transactions anonymous by default, such as in Monero, or keep them pseudonymous, as in Bitcoin. You might also wish to create a game that runs on the programmable layer, such as Crypto Kitties in Ethereum. I am sure there will come a time when attaching real world identities to blockchain addresses will become a thing for purposes of identifying ownership of virtual cats.
But for the purposes of investment, we are not interested in variations such as these, the building atop of crypto primitives, but rather in innovations to the primitives themselves. These innovations have the potential to bring order of magnitude improvements to the usability and function of assets, and thus turbo charge adoption.
Digital Currencies, Blockchain and the Future of Money | Data Driven Investor
I would like to provide a quick example of what I mean: mining on Bitcoin is both resource intensive and inefficient. It requires enormous amounts of electricity and demands ever increasing storage space to store a blockchain that will grow linearly in size as time passes and adoption increases; currently standing at 240GB, slow download speeds make it impractical for users around the world to become fully verifying nodes. They must rely on “trusted” third parties.
However, there is a revolutionary cryptocurrency being tested today that takes this problem and turns it on its head. Using a technology called Zero Knowledge Proofs (ZKP), Coda Protocol will do away with the need to store a complete history of all transactions and reduce the ENTIRE blockchain of Coda at ANY point in time and with ANY number of transactions into a chain of proofs that provides absolute security while NEVER exceeding about 22kB’s in size. Talk about innovating primitives! Coda is a revolution in mining and consensus, a fully verifying node running on my smartphone.
Coda will take Bitcoins mining protocol and split it in two. First there will be some form of proof of stake, to incentivize the mining layer to create blocks and aggregate transactions. But the secret sauce is in “SNARK” (Succinct Non-Interactive Arguments of Knowledge) technology. SNARKer’s compete to generate the proofs needed to compress and verify the ledger and keep it in a constant size. Once a correct proof is appended to a new state of the chain, one merely need follow a merkle path to any set of transactions of interest down to genesis and be able to have absolute trust in the finality and truth of the ledger.
Of course when you innovate the building blocks of crypto, the primitives, you may come out with some unintended benefits as well. Coda takes some of the problems Bitcoin has been struggling with for half a decade, mainly scaling and decentralization, and turns them on their ear in a unique way by using cutting edge tech. This is where we wanna be as investors, that place where the foundations of what we know today (“scaling is hard,” “you need a full copy of the blockchain to maintain integrity”), are turned upside down in one earth shattering fell swoop.
As an investor, if you find real innovation in any of the four layers that make up a cryptocurrency protocol, you need to pay attention. If you think about every great cryptocurrency, the ones that have stood the test of time, you are sure to find a revolution in the state of crypto primitives before and after the project; train yourself to look for this and you can not help but succeed.
Key Asset Features was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.