Cryptocurrency:All You Need To Know

While 'virtual' currencies like Bitcoin are becoming more mainstream, many people still view them with suspicion because of their association with the shadowy world of internet criminals. This paper is meant as an introduction rather than a technical analysis since cryptocurrencies remain a central part of many types of cyber-crime, from black market transactions to ransomware demands. However, it pays to be knowledgeable about cryptocurrencies and the technology that underpins them since several reputable institutions, such as the Bank of England and EY, have shown an interest in the sector.

Digital Money: A Virtual Currency

Fully digital currencies witnessed a rise in popularity and adoption in the 2000s (as opposed to digital currencies backed by some form of legal tender).

There are many technical definitions of "virtual money," but the European Central Bank provides perhaps the most concise and accurate one:

Many items fit this expansive definition of virtual currency, including the black market for exchanging in-game cash for real-world currency, which persists even though some online games, like World of Warcraft, explicitly restrict such an exchange. Similarly, some online markets (often those catering to gamers) only accept real money in exchange for virtual currencies like Microsoft Points.

All the currencies we've discussed so far share the characteristic of being centralized: the Federal Reserve is the central authority and repository for US dollars, GS&R (the company behind E-Gold) maintains a centralized ledger to record all transactions, and Microsoft (the company behind Microsoft Points) does the same.

While the law does not recognize digital currencies as legal tender, their value is recognized and acknowledged by all parties involved, just as the value of paper currency or an electronic bank transfer is recognized and accepted by most.

Bitcoin, the first and possibly most renowned decentralized virtual currency, entered the market in 2009. This development has far-reaching consequences.

Explanation in Brief

Cryptocurrencies are digital currencies that use cryptographic techniques for added security during financial transactions and to control the issuance of more money. Bitcoin wasn't the first cryptocurrency, but it was the first to be wholly decentralized and hence the most well-known.

Bitcoin employs a public ledger called the 'blockchain' rather than a centralized ledger (as would be the case with conventional currencies/government central banks). The Bitcoin network consists of independently controlled computers running the Bitcoin software; a fraction of these computers verify and process the transactions, grouping them into blocks before they are broadcast to the network (these machines are known as miners). Once these blocks have been processed, they are stored in a distributed ledger called a blockchain, which is maintained by all participating nodes.

Because the blockchain is decentralized and publicly accessible, all past and present transactions and wallets can be seen by anybody on websites like blockchain.info.

The quantity of Bitcoins is rising slowly as miners get compensated in Bitcoins for their work in the form of freshly produced Bitcoins and any transaction fees contained inside the block. Each new block must be backed up by 'proof-of-work' before it can be accepted by the network, which helps control the inflation rate. In a nutshell, this is a lengthy process with a negligible margin for error.

Since the Bitcoin proof-of-work relies on the SHA-256 hashing algorithm, which is ultimately limited by CPU performance, specialized mining 'farms' have been developed.

Alternatives

Bitcoin may be the most well-known cryptocurrency with the largest market capitalization, but it is hardly unique. The top five Bitcoin "challengers" as of February 2017[4] are shown in the table below.

Please go to the glossary for definitions of any industry terminology used here.

Bitcoin

Bitcoin is the currency symbol and the currency's code.

In the blockchain, all transactions are recorded and can be seen by anybody on several platforms.

Currency is based on the SHA-256 proof-of-work algorithm.

Ethereum

The Ethereum blockchain runs on a distributed virtual computer known as EVM.

Intelligent contracts are executable programs that can be executed on EVM since it is a Turing Complete platform.

Proof-of-work money will soon switch to proof-of-stake.

Ripple

The symbol for this currency is XRP.

A decentralized payment network centred on XRP can be used to settle payments in any asset, including fiat currencies.

More reliable and cheaper than older systems, it is used by multinational banks as a settlement infrastructure.

Non-Transparent or Confidential.

Proof-of-work protocol with no mining support.

Litecoin

Shorthand for "Litecoin"

Identical to Bitcoin in everything except name.

The memory-constrained Scrypt algorithm is used for proof-of-work.

Monero

Money symbol: MXR

It offers high levels of anonymity by keeping the identities of both sender and receiver private while making only the round figures of transactions public.

AlphaBay and other significant darknet marketplaces started using it in 2016 because of its increased anonymity compared to BitCoin.

Utilizes the proof-of-work CryptoNote algorithm, which is memory intensive.

Dash

DASH is the currency designation. Yet another coin that prioritizes user privacy and provides two new features:

PrivateSend is a service that, like Bitcoin laundering services, hides the origins of Bitcoins by combining them into a single payment.

Incredibly rapid transaction processing and confirmation are made possible using InstantSend.