How to Evaluate the Technology Behind Cryptocurrencies
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Everyone knows that blockchain is the underlying technology that powers cryptocurrencies. But where exactly should you look when assessing the tech behind a crypto project?
Some cryptocurrencies have more potential than others, depending on their technology, innovation, and adoption. You want to look for a cryptocurrency that has a strong technical foundation and is backed by innovative technology. A clear indicator in this sense is a cryptocurrency with a strong use case and one that’s actually being used in real-world applications.
In technical terms, you’ll have to evaluate crypto’s security, scalability, and functionality. This knowledge is crucial for identifying innovative projects with the potential to disrupt industries and drive long-term value.
Read below the key factors you need to consider.
A Cryptocurrency’s Security and Immutability
Security and immutability stand as paramount pillars in the realm of cryptocurrency technology. The significance of security lies in safeguarding transactions, digital assets, and the integrity of the entire blockchain network.
In terms of security architecture, three key elements must be considered to combat digital fraud:
- data privacy and security (both intertwined with social aspects)
- system security (encompassing technology and computing)
- operating system security
Cryptocurrency technology should ensure the security of each layer in the systems (infrastructure, network, and application layers), alongside maintaining the availability, integrity, and confidentiality of information and data.
The information security architecture aims to encrypt data on secure user devices, authenticate users, authorize access appropriately, audit logging, and ensure the secure decryption and storage of data in protected resources.
Encryption and hashing techniques also play a pivotal role in ensuring data security and confidentiality. Moreover, the irreversible nature of blockchain transactions, facilitated by cryptographic hashing, reinforces the immutability of recorded data, making it practically impossible to alter or manipulate historical transactions. This inherent feature not only instills trust and reliability but also underpins the foundational strength of cryptocurrency technology, enhancing its evaluation as a secure and tamper-resistant digital ecosystem.
The hash function used by cryptocurrencies should be one-way, and collision-resistant (no two inputs should generate the same hash output).
Popular cryptocurrencies use different hashing algorithms, for example:
- Bitcoin uses SHA-256
- Ethereum uses Keccak256
- Litecoin and Dogecoin use Scrypt
Scalability and Transaction Speed
The scalability and transaction speed of a cryptocurrency network pose substantial challenges, especially with the increasing volume of transactions and the need for swift, seamless processing. Efficient solutions geared towards addressing scalability issues and enhancing transaction speed are pivotal in evaluating cryptocurrency technology.
Scalability solutions like sharding, layer-two protocols, and consensus algorithm enhancements empower blockchain networks to handle a higher throughput of transactions, fostering scalability without compromising decentralization.
Likewise, optimizing transaction speed through protocol upgrades and innovative consensus mechanisms further enhances the efficiency and viability of cryptocurrency technology, offering a competitive edge in its evaluation.
Example:
For instance, Bitcoin’s architecture cannot currently ensure perfect privacy protection at high transaction rates. With a high throughput, the Bitcoin protocol becomes vulnerable to a double-spend attack. This is because attackers can alter the chain, potentially replacing it with one having a lower processing capacity.
Furthermore, Bitcoin records don’t guarantee absolute transactional privacy as bad actors can link users' data, like IP addresses, to their pseudonyms.
Zerocoin relies on Coinjoin services to unlink transactions and their origins. Similarly, Zerocash uses the same Coinjoin to conceal the values and amounts of coins.
Interoperability and Cross-Chain Compatibility
Interoperability plays a crucial role in enabling seamless interaction and data exchange between diverse blockchain networks. The ability of different blockchain platforms to communicate and transact with each other accentuates the significance of interoperability in evaluating cryptocurrency technology.
Cross-chain compatibility, which allows assets and data to be transferred across differing blockchain protocols, amplifies the utility and versatility of cryptocurrency technology, consequently elevating its evaluation as an integrated and interoperable digital ecosystem.
Some of the most advanced cryptocurrencies in terms of interoperability include:
- Stellar (XLM) – designed so that all the financial systems across the globe can work on a single network. Stellar can help you create and trade varied digital forms of money.
- Cardano (ADA) – the third-generation cryptocurrency, Cardano offers sustainability, scalability as well as multi-layered security.
- VerusCoin (VRSC) – working on providing Public Blockchains as a Service (PBaaS); it introduced Proof of Power, a new consensus algorithm that aims to address shortcomings in other PoS systems.
Peer Review and Expert Analysis
Seeking insights from industry experts and participating in technical discussions can provide invaluable perspectives on cryptocurrency technology. Industry experts and peers can offer critical analysis, share best practices, and highlight potential red flags that may not be immediately apparent.
Engaging in peer review processes and technical discussions enables a deeper understanding of the technology, allowing for informed investment decisions backed by diverse viewpoints and expertise.
Exploring Use Cases and Real-World Applications
Examining real-world use cases and practical applications of cryptocurrency technology is crucial when evaluating its potential impact and adoption in various industries.
Understanding how the technology is being used in real-world scenarios offers a practical lens through which to assess its viability and future prospects. This approach provides investors with a comprehensive view of the practical applications of the technology, shedding light on its potential for widespread adoption and real-world relevance.
For instance, just like Bitcoin, Ethereum is a public and permissionless blockchain, but it supports smart contracts and decentralized applications (DApps), which enable more functionality and innovation.
Another example is Solana:
Conclusion
When it comes to evaluating the technology behind cryptocurrencies, both technical and practical aspects offer valuable insights into the security, scalability, interoperability, and community support of cryptocurrency technology.
Consider a cryptocurrency’s overall features, how it differentiates from other cryptocurrencies, how it benefits its users and developers, and how it aligns with its vision and goals.