The Winning Combo – Cryptocurrency
and Block Chain
ABSTRACT:
Commercial
transactions on the Internet have come to rely exclusively on third parties for
processing electronic payments. While the system works well for most
transactions, it still has the drawbacks emerging from the inherent weaknesses
of all trust based models.
Cryptocurrency presents a new perspective of monetary exchange. It is
digital money in which cryptography is used to control transactions and create
additional units. It allows peer-to-peer electronic cash transaction which has
cryptographic proof instead of trust.
The key characteristics based on which cryptocurrency functions are trustless, immutable, and decentralized. Though the evolution of the
concept of electronic cryptocurrency dates back to 1983, it became popular with
the introduction of Bitcoin in 2009. There are around 5051 cryptocurrencies as
on date [1]. Bitcoin, the one for which blockchain
technology was invented, is the best-known cryptocurrency with a current
dominance of around 65.7% [1].
Blockchain is the heart of cryptocurrency which provides validity of each
cryptocurrency’s coins. It is a time-stamped series of
immutable records of data that is managed in a network of computers not owned
by any single entity. Each of these blocks of data is secured and bound to each
other. It works on an advanced type
of distributed ledger technology that
aids in creating a chain of digital signatures using hash functions. Individuals
maintain and update the Blockchain, and are called “miners”. They process
transactions by solving complex mathematical problems, thereby creating the
block and send details of the transactions to other nodes which creates the
chain. Miners use the concept of proof-of-work in
order to process and validate transactions on the network. Everyone on the network can see what each one
has and also determine whether a particular transaction is valid or invalid.
There are a number of sites which aid in cryptocurrency transactions.
These sites are similar to stock markets and give the trend of each currency,
the conversion rates, portals for exchange etc. A cryptocurrency wallet is a
service or a program, which stores the cryptographic keys. It aids in spending
or receiving cryptocurrencies, monitor the balance and manage the transaction
details. With more number of currencies entering the market and potential
investors
Decentralization, immutability, security are
some of the features which makes cryptocurrency attractive. Like any other
digital currency it has its own share of disadvantages, the prominent being
lack of knowledge and strong volatility. All cryptocurrencies
originate from unregulated companies, some of which are likely to be
susceptible to fraud. Hence reliability becomes a big drawback. Even with encryption to protect cryptocurrency transactions have been hacked resulting in
substantial loss.
1.
INTRODUCTION
The
world that we live in, revolves around money and is witnessing a crypto
currency movement. With the world economies fluctuating rapidly, financial
services of different types have emerged to support organizations, deal with their
finances and other resources. These financial institutions are designed to
support economies of developing and developed countries with varied income
ranges. Radical change can be observed
in the manner in which these financial institutions and transactions have
matured over the years. Over generations the modes of financial transactions
have taken different façades – starting from exchange of goods to minting of
copper coins to currency system where transactions were held face-to-face. With
the advent of Internet, things changed overnight and everything went online.
The people involved were known but their physical presence was not necessary.
The new avathar is cryptocurrency where transactions are transparent, but
everyone involved remain anonymous. It presents
a new perspective of monetary exchange and revolves around blockchain, miners,
cryptography and wallets.
2.
A LITTLE OF HISTORY - THE
ASCENT OF MONEY
The
kings of the ancient world knew that ‘Money is power’ as it gave them absolute
monopoly. That is the reason why, they minted copper coins and asked people to
buy things and pay their taxes using coins.
When kingdoms were reorganized as nation-states, the power to print money
passed to the state and anyone who tried to create their own money got crushed.
The reason is one centralized enemy can easily be destroyed with a
“decapitation attack” as per the saying “Cut off the head of the snake and
that’s the end “Therefore no one would dare challenge the power of the single
authority and its divine right to create coins.
This was witnessed when e-gold was
introduced in an attempt to create an alternative currency. It had over a
million accounts at its peak in 2008, and was processing over $2 billion
dollars’ worth of transactions. The US government attacked the four leaders of
the system, bringing charges against them for running an “unlicensed money
transmitting” business. It destroyed the company by bankrupting the founders
and the game was over. “Unlicensed” is the key word in the attack and the cache
phrase is “Control the money and you control the world”.
In decentralized systems, there is
no head of the snake. Decentralized systems are a hydra –‘Cut off one head and
two more would pop-in to take its place’ [2]. That
is the reason why Satoshi, the founder of Bitcoin, the first decentralized
cryptocurrency, wisely remained anonymous. He termed Bitcoin as a “Peer-to-Peer
Electronic Cash System”.
3.
MONEY AND ITS PROPERTIES
Assume
that you would like to credit a few dollars in your bank account. Let’s say
that you take one of the following items, such as your home grown organic
vegetables, or a brand new Kashmiri carpet or your child’s favourite toy and
try depositing them in a bank for an equivalent value. The bank would not
accept this as it does not fall under the basic description of money. The
vegetables are perishable and its value depreciates with time. Economists call
this as ‘store of value’. If you want
to buy any item which costs one-fourth the price of the Kashmiri carpet, you
cannot exchange it with a quarter piece of the carpet. This concept is called ‘unit of account’. Your child’s favourite
toy is valuable to you and your child, but not to anybody else. Nobody would
exchange it for any goods or service as it does not serve as a ‘standard medium of exchange’. But a
dollar bill is accepted by one and all, as it satisfies the above said
qualities. The dollar bill is accepted based on the trust that its value today
will hold good for tomorrow.
Money is defined as any item or verifiable record that is
generally acceptable by the people in exchange of goods and services or in
repayment of debts. Conventionally money performs the following four main
functions, the primary being ‘medium of
exchange’ and ‘measure of value’.
‘Standard of deferred payment’ and ‘store of value’ are called secondary
functions because they are derived from the primary functions. Another function
which economists stress these days is ‘Liquidity
of Money’ which enables convertibility into cash. The ability to convert an
asset into money quickly without loss of value is called liquidity of asset.
Economists
differentiate money into three different types: commodity money, fiat money, and bank money. Commodity
money is a good whose value serves as the value of money [3]. . Gold coins are an example
of commodity money. Modern day currency is a fiat currency, which means that the
paper on which it is printed is worthless. Value addition is because of the
promissory note which says “I
promise to pay the bearer a sum of -----" signed by
the Reserve Bank Governor of the country. E.g. Indian Rupee, Dollar bill. Bank
money consists of the book
credit that banks extend to their
depositors. Transactions are made using cheques, net banking or credit and debit
cards on the deposit held by the person.
[3].
4.
TYPES OF CURRENCIES
Money in any
form typically bank notes and coins, which are used or in circulation as
a medium of exchange is referred to as ‘Currency’. [4,
5]. In other words it is ‘a system of money which is commonly used
by the people of a nation’. E.g. Indian Rupee (INR or ₹), US dollar (USD
or US$), Euro (€), Japanese yen (¥), and Pounds Sterling (£)
are some currencies which are used across the globe. These currencies are used
for trading between nations in foreign exchange markets. The magnitude of
this trading has limited boundaries of acceptance as defined by the relative
value of the currency.
Digital currency is
a generic term for all electronic money, and encompasses regulated and
unregulated, virtual currency and cryptocurrency. They are used in electronic
wallets or designated transaction networks. All virtual currencies are digital,
but not all digital currencies are virtual. Virtual
currencies are controlled by its creators and are usually used for transactions
among the members of a closed virtual community for peer-to-peer payments. [6]. Most virtual currencies are
in the form of tokens and are subjected to heavy price swings as they are
unregulated.
Another form of
currency is cryptocurrency. The word ‘crypto’ conjectures
that cryptographic techniques and encryption algorithms ensure security in the
transactions performed. They probability of creating a counterfeit
cruptocurrency is very low as they operate as blockchain-based
decentralized systems without the need for a trusted third-party such as a
central bank, or credit card company. In this instance, peer-to-peer transfers
are facilitated through the use of private and public keys. Currently Bitcoin
is the most well-known and widely used blockchain-based cryptocurrency. There
are many alternatives, or altcoins, such as Ethereum, XRP, Tether, Litecoin,
Tezos, Monero etc. [1]. Some of these simulate Bitcoin technology, while others
are slight variants, or new cryptocurrencies that have been split or derived
from existing ones.
Cryptocurrencies such as Bitcoin and
Ethereum are categorized as virtual currencies. This implies that in contrast
to digital currency, it carries some monetary value in
electronic form but remains outside the purview of any regulatory body. Due
to their virtual nature, cryptocurrencies do not have a central repository,
which indicates that they can be destroyed by a computer crash if there is no
backup copy of the holdings or if the user misplaces their private key. Unlike
cash transactions which are entirely anonymous, transactions carried out with cryptocurrencies
can be traced on the blockchain without initially knowing the identity of the
transactor. Some cryptocurrencies such as Dash, ZCash, and Monero are less
private than others and are far more difficult to trace than Bitcoin. Price volatility is a prominent character of
cryptocurrency as its value is based solely on supply and demand.
The
framework which defines any cryptocurrency sets it apart from the rest. Any
cruptocurrency can be identified by the prominent key features which are
described below.
5.1
DECENTRALIZATION
The
concept of decentralization is to take power off from one source and sharing it
with everyone involved. The true power of cryptocurrencies is the authority to create and distribute money without a
central power. In traditional fiat currencies there is a central authority
such as banks, controlling all the financial transactions for which a sizable
amount is to be paid as fees. However, with cryptocurrencies, these
transactions are processed and validated by a distributed and open network, in
which everyone is a part. Hence transaction costs are close to nothing. Every
person in possession of a cryptocurrency is called as a node and all the
transactions performed by the nodes are updated and recorded in a public
distributed ledger. This data is encrypted and can be accessed and verified by
all the nodes. The transaction is
propagated across the entire network, replicated by every node and reaches a
large number of the nodes within a few seconds. Thus there is no single node
which has the authority to control the network.
5.2
IRREVERSIBLE
The irreversible and immutable feature of cryptocurrency
implies that transactions cannot be changed, once it is recorded on the distributed
ledger. It is impossible for anyone, but the node which has the respective
private key to move its digital assets. In order to prevent fraudulent
transactions (that cannot be reversed), all transactions are transparently
recorded on the blockchain and open to the public. While it is not impossible
to modify the transaction, secure cryptography makes it very difficult for
modification, because it requires you to compromise all the nodes in the
blockchain. Once the transaction is confirmed, no
one can help you, if you have sent funds to a scammer or made a wrong
transaction.
5.3
PSEUDONYMOUS
Pseudonymity
is a term coined from the words pseudo and anonymity. Hence pseudonymity exhibits the anonymity
property in the sense that anyone can purchase or possess a cryptocurrency
without revealing their real identity. For example Bitcoin uses public key
hashes as address which act as pseudo identities and do not
reveal the real identities. But this can be broken and the identity revelaed if
an adversary is able to create a pattern of the transactions made by a person.
Hence pseudonymity also mirrors the unlinkability
property, in the context that, different transactions of the
same user cannot be linkable to each other. In
a clearer sense, when a user interacts with the system repeatedly these
different interactions should not be able to be tied to each other from the
point of view of an adversary.
5.4
FAST AND GLOBAL
Transactions
are broadcast instantly to the entire network and are confirmed within a few
minutes. Since they happen in a global network of computers they are completely
indifferent of the physical location. Hence the speed of transaction is the
speed of the Internet itself. There are no hard and fast rules for buying
cryptocurrencies. Anyone living in any part of the globe can become a member of
the network.
5.5
SECURITY
Cryptocurrencies are built on cryptography
and appear as entries in decentralized consensus-databases. They are called CRYPTO-currencies
because the consensus-keeping process is secured by strong cryptography. They are not secured by people or by trust, but by math [7].
The probability of a cryptocurrency address being compromised is very remote.
6.
TYPES OF CRYPTOCURRENCY
6.1
BITCOIN
The first
blockchain-based cryptocurrency is Bitcoin, and still remains the most
popular and most valuable. Bitcoin is a combination of several
novel technologies (cryptography, peer-to-peer networks, distributed
databases). The unit of account of the bitcoin system is a bitcoin.
Symbols used to represent bitcoin are BTC and XBT. Small amounts of bitcoin are
millibitcoin (mBTC), and satoshi (sat). Bitcoin was launched in 2009 by
an individual or group known by the pseudonym "Satoshi Nakamoto." As
of Nov. 2019, there were over 18.2 million bitcoins in circulation with a total
market value of around $157 billion. [8]. Just
as US Dollar is divisible to two decimals, Bitcoin is divisible down to eight
decimals. Bitcoin has an anonymous nature which is imparted by the
crypto-algorithms and at the same time transparent. The transparency is brought
about by the visibility of the structure of the transactions and the coding
which anyone in the network can use to build the blocks.
Today, there are
thousands of alternate cryptocurrencies with various functions and
specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that
were built from scratch. Some of the competing cryptocurrencies spawned by
Bitcoin’s success, known as "altcoins," include Litecoin,
Peercoin, and Namecoin, as well as Ethereum, Cardano and EOS. Today, the aggregate value of all the cryptocurrencies
in existence is around $214 billion—Bitcoin currently represents more than 68%
of the total value [9].
6.2 ETHEREUM
Launched in 2015, Ethereum is the world’s leading programmable
blockchain and its cryptocurrency is called Ether (ETH). ETH replicates most features of Bitcoin and is purely digital Transactions
are instant and is generally used to make payments, as a store of value, or as
collateral. Unlike other blockchains, Ethereum is
programmable, which means that developers can use it to build new kinds of
applications.
Some of the financial applications of Etnereum are:
· Cryptocurrency wallets that aids in instant payments with ETH
· Financial applications that serves to borrow, lend, or
invest in digital assets
· Decentralized markets, which facilitate trade of digital
assets and predictions about events in the real world [10].
6.3 LITECOIN
Litecoin is a peer-to-peer Internet currency that enables instant,
near-zero cost payments to anyone in the world. Litecoin is an open source,
global payment network that is fully decentralized and the security features
empowers individuals to control their own finances. Compared to Bitcoin,
Litecoin performs faster transaction (average confirmation time of 2.5 minutes)
and improved storage efficiency. With substantial industry support, trade
volume, and liquidity, Litecoin is a proven medium of commerce complementary to
Bitcoin. Litecoin is the second most popular cryptocurrency [11].
6.4 ZCASH
Zcash allows transparent transactions, to accommodate
for wallets and exchanges that does not support private transactions. Zcash
addresses are either private (z-addresses) or transparent (t-addresses).
Z-addresses start with a “z,” and t-addresses start with a "t." A
z-to-z transaction appears on the public blockchain, so it is known to have
occurred and that the fee has been paid. But the addresses, transaction amount
and the memo field are all encrypted and not publicly visible. The owner of an
address may choose to disclose z-address and transaction details with trusted
third parties through the use of view keys and payment disclosure.
Transactions between two transparent
addresses (t-addresses) work just like Bitcoin: The sender, receiver and
transaction value are publicly visible. While many wallets and exchanges
exclusively use t-addressees, many are moving to shielded addresses for better
user privacy. The two Zcash address types are interoperable. Funds can be
transferred between z-addresses and t-addresses. Zcash is endorsed by the
community and the most important exchanges. Zcash can be shifted from Zcash to
other cryptocurrencies and into cash whereas many off-blockchain-systems do not
easily allow people to withdraw and redeem it in the real world.
6.5 RIPPLE
Ripple enables
banks, payment providers, digital asset exchanges and corporates to send money
globally using advanced blockchain technology. RippleNet offers the most advanced blockchain technology
for global payments which makes it easy for financial institutions to reach a
trusted, growing network of more than 300 provides around 40 countries and six
continents. The team at Ripple
hopes to enable the world to move value like it already moves information on
the web today [1].
6.6 TETHER
Tether is a controversial
cryptocurrency with tokens issued by Tether Limited. Tether Limited and the
tether cryptocurrency are controversial because of the company's failure to
provide a promised audit showing adequate reserves backing tether, and its
alleged role in manipulating the price of bitcoin. Tether was originally
designed to be a stablecoin because it worth would always be $1.00. However on
30 April 2019 Tether Limited's lawyer claimed that each tether was backed by
only $0.74 in cash and cash equivalents [12, 13, 14].
7.
TRANSACTION PROCESS USING BLOCK CHAIN
Crypto
currency is one of several hundred applications that use blockchain technology.
Earlier blockchain applications required a complex coding, cryptography,
mathematics as well as significant resources. In recent days tools have been
developed to build decentralized applications, such as electronic voting,
digitally recorded property assets, regulatory compliance and trading. All
these applications are developed and deployed faster than ever before.
Electronic coin is a chain of digital signatures. Each owner transfers the coin
to another person by digitally signing a hash of the previous transaction and the
public key of the next owner and adding these to the end of the coin. A payee
can check the signatures to verify the chain of ownership. This scenario is
reflected in figure 1.
The
cryptocurrency industry makes it possible for individuals to perform transactions
over a secure platform, without having to reveal their identities. It is an
incorruptible technology which is decentralized by nature and aims to enable,
sanction, and register cryptocurrency transfers. Blockchain technology greatly
simplifies the direct transfer of trade assets and increases confidence in the
participants of the transaction. This is achieved by providing unique,
non-forgeable identities for assets, along with an inviolable record of the
ownership.
Figure 1 –Digital Signature
Digital
ledger is the tool behind blockchain, which performs the financial
transactions, by recording all the transactions that cannot be corrupted. The
ledger creates a viable, decentralised record of transactions which allows the
substitution of a single master database. It keeps an immutable record of all
transactions, back to the originating point of a transaction. This is also
known as the provenance, which is essential in trade finance, allowing
financial institutions to review all transaction steps and reduce the risk of
fraud.
A
blockchain ,from the cryptocurrency perspective can be defined as a
time-stamped series of immutable records of data that is managed by a cluster
of computers not owned by any single entity. Each of these transactions (i.e.
block) is secured and bound to each other using cryptographic principles (i.e.
chain). A blockchain carries no transaction cost but has a minuscule infrastructure
cost. The blockchain is a simple yet ingenious way of passing information from
peer-to-peer in a fully automated and safe manner. One party to a transaction
initiates the process by creating a block. This block is verified by thousands,
perhaps millions of computers distributed around the net. The verified block is
added to a chain, which is stored across the net, creating not just a unique
record, but a unique record with a unique history. Falsifying a single record
would mean falsifying the entire chain in millions of instances, which has a
remote possibility. Bitcoin uses this model for monetary transactions, but it
can be deployed in many other ways. Blockchain is out to replace all
centralized processes and business models that run on commissions charged for
transactions.
Blockchain enables transfer of digital coins from one
individual to another. If Alice wants to transfer money to Bob, from India to
Japan, this is typically done using a third trusted party usually in most cases
financial institutions like banks. It works as follows: Alice says “ I want to
transfer money to Bob in London” and gives the responsibility to the trusted
third party. The trusted third party identifies Bob in London and transfers the
money to Bob’s account after collecting a fee for the service as shown in
figure 2.
Figure -2 Transaction using Third Party
7.1
OPEN LEDGER
If
Alice wants to move fifty dollars to Bob, the transaction is effected and is
linked to the already existing transactions. A
transaction is a file that says, “Alice gives $ 50 to Bob” and is signed by
Alice’s private key. It is basic public key cryptographic technique. If Bob wants to move to Diana $30 the
transaction is effected and is linked to the previous transaction. Now these
transactions and links from the ledger. The same procedure is followed if Diana
wants to transfer $ 10 to Charles. As the transactions are visible to everyone in the network, it is
said to be an 
open ledger. Figure 3 shows the
structure of an open ledger which is essentially a chain of transactions. For
this reason, it is called as a blockchain. It is a chain of transactions that
is open and public to everyone. Everyone
owns the network and can see where the
money is, how much money each one has and everyone can decide whether a
transaction is valid or not.
Figure -3 Open Ledger
. For example let’s say that Alice now attempts to move $ 80 to Charles. As everyone owns the network, they can immediately see that this is not a valid transaction as Alice has only $ 50 in her account. This transaction will not be added to the open ledger and will not be part of the chain. In this case the ledger is centralized with everyone in the network having access to it. But the goal of blockchain is decentralization, which works only when we have a distributed ledger.
7.2 DISTRIBUTED LEDGER
The
concept is to distribute the ledger across various nodes in the network and
everyone in the network can see these ledgers as they are open. The nodes thus have a record of the complete
history of all transactions and the balance of every account. Figure 4 demonstrates a distributed
ledger where Alice and Diana have a copy of the ledger. There is no restriction
as to who can have a copy of the ledger as everyone can see the ledger. This
means that all the nodes, Alice , Bob, Charles , Diana and anyone else who are
part of the network will either have a copy of the ledger or can have access to
the ledger. Once this is done we can do
away with the centralised ledger as it is no longer required.
Figure -4 Distributed Ledger
But this brings in a new problem and leads to the third principle
of blockchain which is probably the most
interesting one. When there are multiple copies of the ledger in the network,
we need to ensure that all these copies are synchronized and that all the
participants in the network see the same copy and the same version of the
ledger. Consider the transaction where Bob wants to transfer $ 30 to Diana.
Once this transaction is intended, Bob broadcasts the intention as a message to
everyone in the network. It uses the
basic p2p-technology and message is sent from one peer to every other peer.
This is still an unvalidated transaction and is not entered in the ledger. Confirmation is a critical concept in cryptocurrencies. As
long as a transaction is not validated it is in an unconfirmed state. As
confirmation is still pending , the transaction
can be forged. When a transaction is confirmed, it becomes part of an
immutable record of historical transactions also called blockchain. It is no
longer forgeable and cannot be reversed.
7.3 CRYPTOCURRENCY MINING
To understand the mechanism of confirming the transaction and making an entry in the
ledger, we need to understand the concept of miners. Miners are special nodes
which hold the ledger. Principally
everybody can be a miner. Since a decentralized network has no authority to
delegate this task, some kind of mechanism is required to prevent one node from
abusing or dominating another. If someone takes advantage of the openness of
the ledger and create thousands of peers and spreads forged transactions, the
entire system would collapse immediately.
. In figure 5 Alice and Diana are miners as they have a copy of the
ledger.
Figure -5 Synchronisation of Ledgers
To
synchronise the ledgers across the network, miners will compete among
themselves as to who would be the first to take up the new transaction and
validate it. The first miner that is
able to validate and put it into the ledger will get a financial reward. To win the competition in order to add the
transaction to the ledger, a miner needs to do two things:
(i)
It needs to validate the new transaction: This is easy as
the ledger is open and immediately calculating whether Bob has sufficient funds
in order to make the transfer is just a mathematical calculation.
(ii)
The miner should find a special key that will enable it to
take the previous transaction and lock the new transaction with it. For this miners need to invest their computational power and time because
this search for the key is random.
The
miner has to repeatedly keep guessing new keys until it finds the one that
matches a kind of a random puzzle.
In case of Bitcoin, they have to find a hash value– a solution of a
cryptographic function, which connects the new block with its predecessor.
This is called the Proof-of-Work. [15]. The difficulty of this work is
selected, so as to limit the rate of generation of new blocks by the network,
to one every 10 minutes. Due to the very low probability of successful
generation, this makes it unpredictable which miner in the network will be able
to generate the next block. In Bitcoin, it is based on the SHA 256 Hash
algorithm. The miner that succeeds will get
the financial reward usually in terms of cryptocurrency involved. This
is the only way to create valid Bitcoins. Bitcoins can only be created
if miners solve the cryptographic puzzle. As the difficulty of the puzzle
increases, time and computer power invested by the miner’s increases. As a
result there is only a specific amount of cryptocurrency token that can be
created in a given amount of time. This is a part of the consensus no peer in
the network can break. Litecoin miners are currently awarded with 25 new
litecoins per block, an amount which gets halved roughly every 4 years (every
840,000 blocks) [11].
7.4 SYNCHRONISATION OF LEDGERS
Figure -6 Synchronised Ledger
Only
miners can confirm transactions. If a miner is able to solve the puzzle, it
edits its own ledger first, by linking the current transaction to the previous
transaction. It then publishes the solution to the entire network through
broadcast. The solution indicates that the transaction is validated and the key
that enables everyone on the network to take it and add it to the copy of their
ledger. All the other miners suspend the
validation process and immediately take this broadcast message and add the
transaction to its own ledger. Figure 6 shows that Diana and Alice have a copy
of the same ledger. The transaction is now complete and the miners move on to
look for another transaction to work on, hopefully to get the reward next
time.
7.5
DOUBLE SPENDING PROBLEM SOLVED BY BLOCKCHAIN
The
inherent drawback with digital money is the double spending problem, which
because of the centralized ledger arrangement. Double spending indicates
‘spending the same money twice’, If Alice has physical cash, once the cash is
handed over to Bob in exchange of goods, the money goes to the Bob and cannot
be used by Alice again. Digital money is easy to copy as it is a string of
alphanumeric characters. This means that it is possible to copy the transaction
details and rebroadcast it such that the same money could be spent multiple
times by a single owner.
Let us assume that Alice has $ 50, and is
attempting to transfer the $ 50 to the wallets of both Bob and Charles
simultaneously. Both these transactions would go into the pool of unconfirmed
transactions. The miners now get into action and if the transaction to Bob is
confirmed first, then the transaction is verified, confirmed and linked to the
previous block. However the
transaction to Charles would be recognized as invalid by the confirmation
process and would be rejected. If both transactions are pulled from the pool
for confirmation simultaneously, the transaction that gets the highest number
of confirmations will be included in the blockchain, while the other one will
be discarded.
Figure -7 Solution to Double Spending problem.
The general recommendation is to wait for a minimum of 6 confirmations to ensure that the
transaction is valid. Here, “6 confirmations” implies that after
a transaction has been added to the blockchain, 6 more blocks containing
several other transactions are to be added after it. All these confirmations
and transactions are time-stamped and linked with the previous block, making
them irreversible and impossible to tamper with. To compromise with a single transaction, an
attacker has to reverse all the previous transactions, which in case of bitcoin
dates back to 2009. This is next to impossible as it requires a powerful
computational power to alter the entire ledger and communicate the same to all
the nodes.
8.
REAL-TIME TRANSACTION OF BITCOINS
9.
Merchants love crypto-currency
transactions as it can be easily moved between two people for a very less
transaction fees. The demand for crypto-currencies have increased over the
years because of the trust. The transaction is similar to those of banks, where
if someone gives you a cheque and you deposit it in your account, the money is
reflected in your account. The equivalent to bank account in cryptocurrency
transactions is a ‘wallet’. In
bitcoin if someone gives you a bitcoin, it is stored in your wallet. The
transaction is reflected in the ledger and it is there for everyone to see.
There are different kinds of wallets - online, mobile, desktop, hardware and paper wallets.
With these types of wallets, money can dwell on one’s own computer, on paper or
on online in wallets hosted by different companies.
10. There are two parts to the bitcoin address the first
being the public key, which is a series of 27 to 34 alphanumeric characters and
appears as follows:
11. M2810Gjs3001XsMrInr0204MatZg2a .
12. This can
be thought of something similar to an e-mail address, which can be shared with
anyone who wants to send crypto currencies to one’s account. Security comes in
the form of private key which is analogous to the password. Private key is
required to access the account and view the chain of blocks from the public
ledger. There are three methods to purchase bitcoins, the first method being
direct purchase in exchange of fiat currencies. There are websites such as
coinbase, Robinhood, Binance, Cash App, GDAX, Coin Exchange, Coinmama, bitstamp
to name a few. These are the locations similar to stock market, where people
buy and sell bitcoins. The second way to acquire bitcoins is through exchange
of goods or services for bitcoins. Irresistable discounts are offered if the
purchase is through bitcoins. This is through the understanding that due to its
limited edition, the value of bitcoin is bound to have a steep increase when
compared to fiat currencies. For example a dealer would be ready to trade off a
mobile phone worth $ 80 for bitcoins worth $ 50 as he is bound to strike a
better deal in using bitcoins. People have started buying homes, Lamborghinis and Ferraris using
bitcoin. The last method is earning bitcoins for free, through mining. Bitcoins
are released every ten minutes and there are lots of miners, who are on the
lookout for a new block to be created, solve the puzzle and get rewarded with
bitcoins. This depends mainly on the CPU power and the Internet speed of the
miner. Though it sounds easy, it is getting more difficult with the increasing
number of miners. To succeed one has to invest in expensive hardware and
electricity consumption.
9. Cryptocurrency Market
Cryptocurrency market is similar to share market,
where the statistics of all the crypto coins are presented. The
overall cryptocurrency market is projected to reach USD 1.40
billion by 2024, at a CAGR of 6.18% during the forecast period [16].
Create Coinbase account
Convert your money to bitcoin
Create Bittrex Account
Trade your bitcoin
for other cryptocurrrencies
10.
PITFALLS IN CRYPTOCURRENCY
Cryptocurrencies have a big risk in the form of governments or
political intervention. But an even
bigger risk is bugs in the code or problems with the protocol that leads to a
complete lack of confidence. Though it is structured
to overcome the weaknesses of trust based models, the entire network is built
on mutual trust among the peers. If trust
is lost then the entire network would crash to almost zero.
11.
RISK AND FUTURE OF CRYPTOCURRENCY
Bitcoin was just an experiment, which turned out to
be successful.As of now crypto currencies hold a high value, but it also has
been quoted as “the big bubble”. This happens when people flock up to a new
investment vehicle that drive prices up like a ‘tulip mania’ . The biggest
question is ‘Will Bitcoin
become widely accepted as a form of payment and a store of value ?’. In other
words will the mass majority of people in the world use Bitcoin as a means of
exchange over other currencies. The first bubble was witnessed in June 2011,
when the price of Bitcoin soared from 50
cents to 32 dollars in about 60 days and then over the course of a few months
back to $2. Another big bubble was observed between April 2013 and November
2013, when the rates went up from $ 35 to $ 266 and crashed back to $ 50. All
these are small blips on a map as the exchange rate of bitcoin as on date is $8,725.77
(according to coinbase accessed on 21.1.2020).n The future market is
unpredictable, but there's
an old cliché of Warren Buffett that
says ‘when people are scared, be greedy and when people are greedy be scared’
It applies to every market and especially crypto currencies. Investing in
crypto currencies using money which we cannot afford to loose brings in
significant risks.
12.
CASE STUDIES
12.1 Currency Crisis
ZWD is the currency abbreviation
for the Zimbabwe dollar, which was the official currency for the Republic of
Zimbabwe from 1980 to 2009. In 2007-2008, ZWD experienced one of the worst
episodes of hyperinflation ever recorded. By printing too much money in the
span of two years the Zimbabwe government essentially devalued their currency
to nothing. This led to a currency crisis which
brought about a sharp decline in the value of the currency. Such decline in
value causes people to withdraw all their money and convert it into foreign
currency. This is referred to as capital flight. As a result the exchange
rates get even worse, resulting in a run on the currency. Two other popular
currency crises are Latin American
Crisis of 1994 and Asian Crisis of 1997. After years of hyperinflation,
the government of Zimbabwe announced the demonetization of the ZWD in 2009
which became final in 2015. Demonetization is the process of officially
removing the legal status of a currency unit. Central banks are the first line
of defense in maintaining the stability of a currency. Bitcoin is inherently designed to be
deflationary to control inflation. It handles this problem by predetermining
and controlling the amount of bitcoins
that are going to be released over the years.
12.2 Scenario after mining all the bitcoins
Assuming that there are no changes to the existing Bitcoin protocol,
the Bitcoin cap of 21 million BTC will be reached by 2140. As on December 2019, a total of 18,105,438 BTC’s have been mined.
[https://www.blockchain.com/en/charts/total-bitcoins]. This number
changes about every 10 minutes when new blocks are mined. Right now, each new
block adds 12.5 bitcoins into circulation. Right now, miners earn most
of their income via the block reward. When all 21 million bitcoins are mined,
there won't be a block reward to pay to miners. When a Bitcoin user sends a BTC
transaction, a small fee is attached. These fees go to miners and this is what
will be used to pay miners instead of the block reward [17]. During this time
inflation will go down to 0%.
12.3
OneCoin scam is still alive
OneCoin was promoted
by Ignatova, a Bulgarian national, as a cryptocoin with
a private blockchain. OneCoins are generated through mining and could be used
to make payments for products promoted by OneCoin. The coin also came with a cryptocurrency wallet
and was estimated that a total of 120
billion coins would be available on the OneCoin network. Organizers sold
educational materials, including promotional and discounted packages to network
participants. In true multi-level-marketing style, participants were also
enticed with referral rewards to urge
more users to join.
Several reports
suggest OneCoin was a Ponzi scheme and is facing legal action in several nations around the globe. Several competent
authorities of European Union countries warn of the risks that may arise from
OneCoin. For instance, UK's Financial Conduct Authority (FCA) suggests that
OneCoin is being investigated by the police, the Financial Services and Markets
Authority (FSMA warns that neither OneCoin nor the persons promoting OneCoin
have been recognised or authorised by the FSMA). The Hungarian central bank
(Magyar Nemzeti Bank, MNB) suggests that this might be a pyramid scheme and
warns of the possible risks that may be associated with it. Konstantin Ignatov
was arrested March 2019, on charges of a wire fraud conspiracy stemming from
his role as the leader of an international pyramid scheme that involved the
marketing of “OneCoin.” An indictment charging Ignatov’s sister, the founder and original leader of OneCoin – with
wire fraud, securities fraud, and money laundering offenses has been
registered. . As a result of misrepresentations made about OneCoin,
victims have lost billions of dollars worldwide in the fraudulent
cryptocurrency. Even though OneCoin is widely known to be a scam,
the scheme said it denies any wrongdoing and is not responsible for its
“independent contractors” who sell on its products.
Glossary:
Unit of Account : Money should be divisible or broken down into smaller parts. Eg. Dollar-Penny –cents, Rupee –paise etc.
Store of Value: Money
should be durable
be able to stand the test of time. For example if I have a $ 100 bill in my
desk, it will not evaporate or disappear into thin air with time.
Standard medium of exchange: Money is to be fungible or interchangeable, in the sense that the currency can be exchanged for another equivalent value. One Canadian Dollar is equal to Rupees 59.56
Wallet :A wallet is a software program that stores private and public keys and interacts with various blockchain to enable users to send and receive digital currency and monitor their balance
REFERENCE
[1] https://coinmarketcap.com
[2] https://hackernoon.com/why-everyone-missed-the-most-mind-blowing-feature-of-cryptocurrency-860c3f25f1fb
[3]
John Duffy,
‘Cliffs Quick Review Economics’ Wiley Publication Inc,2007, pp.63
[4] "Currency". The Free Dictionary
[5] Bernstein, Peter (2008)
[1965]. "4–5". A Primer on Money, Banking and Gold (3rd ed.).
Hoboken, NJ: Wiley. ISBN 978-0-470-28758-3. OCLC 233484849
[6] https://thenextweb.com/hardfork/2019/02/19/the-differences-between-cryptocurrencies-virtual-and-digital-currencies
[7] https://appiqotechnologies.wordpress.com/2018/02/12/why-should-you-invest-in-cryptocurrency
[8]
https://www.coinbase.com,
accessed Jan. 22, 2020
[9] https://www.investopedia.com/terms/c/cryptocurrency
[10] https://ethereum.org
[11]
https://litecoin.org
[12] Markovich, Sarit. "Commentary: The Overlooked
Actor That Could Crash Bitcoin". Fortune. Archived from the original on 5 December 2017.
[13] Popper, Nathaniel (13 June 2018). "Bitcoin's Price Was
Artificially Inflated Last Year, Researchers Say". New York Times. Retrieved 13 June 2018.
[14] Vigna, Paul; Russolillo, Steven (12 August 2018). "The Mystery Behind
Tether, the Crypto World's Digital Dollar". Wall Street Journal. Retrieved 17 August 2018.
[15] https://en.bitcoin.it/wiki
[16] https://www.marketsandmarkets.com
[17] https://en.bitcoin.it/
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