The Pros and Cons of Bitcoin (a cryptocurrency)

In general, a cryptocurrency is an electronic currency that is controlled by computer logic (software) that has highly complex algorithms to prevent unauthorized duplication (creation) of currency “units.” The underlying programmed principals, known as cryptography, are based on advanced math and computer engineering principals, making it hard to manipulate supply of the currency units.

There are several PROS to cryptocurrencies:

-      Political independence and decentralized control across many country borders – no government influence (everything is open source software based)

-      Known number of coins – no new “coins” of currency can be introduced into the system (unlike country based currencies, like USD, where new money can be printed anytime)

-      Strong anonymity – where buyers and sellers can trade freely without oversight

-      Low transaction fees – typically less than 1% (which is better than what current credit card exchanges provide)

-      Like PayPal of 15 years ago, this is a new currency which lowers transaction fees, making buying and selling more efficient for all parties

And there are several CONS to cryptocurrencies:

-      Today, it is considered the currency of the “dark web”, mainly because transactions are untraceable

-      Transaction times are long (between 2.5 and 10 minutes), there are no refunds, and transactions are not reversible – all transactions are final

-      It is like a highly unstable commodity – with daily / hourly “coin” value fluctuations

-      Today, cryptocurrencies are not mainstream – they are NOT recognized by main-stream governments as a form of payment (but are accepted at a growing number of retailers like overstock.com, expedia.com and more)

-      If private keys are lost, all coins are lost (and not retrievable without the private key)

As background, in 1998 Nick Szabo envisioned the concept of a digital currency, or cryptocurrency. According to Wikipedia, Szabo designed a mechanism for a decentralized digital currency he called "bit gold.” Bit gold was never formally implemented, but is considered to be the precursor to many of the cryptocurrency architectures in use today. In Szabo’s bit gold model, a participant (“miner”) would dedicate computer power to solving a cryptographic puzzle, taking a “challenge” and providing a “solution” – i.e. what is considered today to be a bitcoin transaction. Each solution becoming part of the next challenge, creating a growing chain of new property (transactions.) This aspect of the system provides a way for the network to verify and time-stamp new solutions (transactions), requiring a majority of the exchange “processing” parties to agree to accept new solutions (transactions) before moving on to the next challenge (transaction.)

According to Szabo, in a bit gold network, solved puzzles would be sent to what he phrased a Byzantine Fault-Tolerant public registry and assigned to the public key of the solver. The objective of Byzantine Fault-Tolerance is to be able to defend against catastrophic network, or Byzantine failures, in which components of a system (“processing units” or “servers”) fail with symptoms that prevent some components of the system from reaching agreement among themselves, where such agreement is needed for the correct operation of the system (e.g. for a transaction to be completed.) Correctly functioning components of a Byzantine Fault-Tolerant system will always be able to provide the system's service, assuming a “majority” of processing nodes are fully functional.

Szabo envisioned an anonymous cryptocurrency system, where a cryptocurrency recorded transaction would not reveal the identity of the individuals (or groups) trading. Also, a system where all user assets are identified by a “public key”, a numerical value between 1 and 78 digits in length. Since Szabo’s original architecture was defined many new capabilities have been introduced into currently available commercial systems. For example, certain cryptocurrency exchanges allow for “mixing” of transactions, privately swapping specific “coin” units with other units of identical value, obscuring the source of the owner even more than originally intended. As such, processing nodes of a cryptocurrency transaction require highly sophisticated CPUs (e.g. Field Programable Gate Arrays, or FPGAs.)

Today, cryptocurrencies are run by exchanges. During a transaction, the “exchange” takes a cut – up to 1%. Each cryptocurrency “coin” on an exchange has a value, which is highly volatile, and can go up or down without notice (depending on investor interest), to this extent, cryptocurrency coins are somewhat like gold – traded as a speculative commodity. Today, most cryptocurrency exchanges have “capped” the number of coins which can be traded, however, coins can be split (meaning, more coins, which when summed, equal the value of the original coin.)

A “block chain” is vital to the operation of a cryptocurrency exchange. It is the public, distributed ledger of all transactions that have occurred on an exchange. Each transaction is stored in a “block”, which is “chained” along with all other previous transactions. Cryptocurrencies take an enormous amount of computing power to execute the sophisticated “crypto” algorithms to keep things safe and secure. Cryptocurrency server farms are run by groups called “miners.” A “miners” job is to ensure distributed / local authentication of users during a transaction, and then record the transactions to the exchange– sending it to the main cryptocurrency block chain for “official” recoding and validation. The block chain grows with each transaction, with no official predetermination as to how big the block chain will grow to. A transaction is not officially completed until after the block chain has been published – which is usually between 2.5 minutes and 10 minutes (depending on the cryptocurrency exchange.)

About every two (2) weeks a cryptocurrency exchange will adjust to the amount of new total mining power on the exchange – to preserve the block chain publishing time. If the amount of mining processing power has increased over a readjustment period, it will be harder to create the block chain (because there are now more nodes to publish to.) If the amount of mining processing power has decreased it will be easier to create the block chain. The main exchange cryptocurrency block chain (that has built-in Byzantine Fault-Tolerance) is the sole arbiter for every transaction. One can consider the block chain to be the payment processing system (e.g. PayPal transaction engine), whereas, the miners function as the “system” employees that do the work. Once published every 2.5 – 10 minutes, all transactions are final – there are no reversals or refunds.

Every user has a “private key” or password. If this private key is lost all coin “holdings” associated with that private key go into limbo – staying there forever unless the private key is found. A cryptocurrency exchange will typically provide a “wallet” for electronically storing private keys, however, it has been proven that current cloud-based wallets are not safe (and have been hacked in the past.) In general, it’s best to store private keys offline on USB sticks, or printed on paper.

Today, Bitcoin (GBTC) is the best-known cryptocurrency exchange– it’s been around the longest. Bitcoin initiated from a white paper written by Satashi Nakamoto in October 2008. This was quickly followed by open source released in January 2009 (along with commercial service.) Other cryptocurrencies include:

-      Litecoin (LTC) – is technically identical to Bitcoin, but offers a block generation time of 2.5 minutes (vs 10 minutes), more coins (84M of which ~54M are in circulation as of 12/17 vs 21M of which ~16M are in circulation as of 12/17), a different hashing algorithm (scrypt vs SHA-256), and a slightly modified GUI. Litecoin was started by an ex-Google executive, Charlie Lee, in October 2011. In general, Litecoin requires more processing power to operate than Bitcoin

-      Ripple (XRP) – released in 2012, the Ripple consensus ledger -- its method of transaction conformation -- doesn’t need mining, a feature that deviates from Szabo’s original bit gold model. Since Ripple’s structure doesn't require mining, it reduces the need for computing power (which can be very expensive), and minimizes network latency. Ripple believes that ‘distributing value is a powerful way to incentivize certain behaviors’ and thus currently plans to distribute its platform primarily “through business development deals, incentives to liquidity providers who offer tighter spreads for payments, and selling to institutional buyers interested in monetizing value.”

-      Monero (XMR) – is a secure, private and untraceable currency. This open source cryptocurrency was launched in April 2014. The development of this cryptocurrency is completely donation-based and community-driven. Monero has been launched with a strong focus on decentralization and scalability, and enables complete privacy by using a special technique called ‘ring signatures.’ With the Monero platform, there appears a group of cryptographic ring signatures during transaction validation, including at least one real participant – but since all signatures appear valid, the real one cannot be isolated (helping to ensure a secure end-to-end solution.)

-      Ethereum (ETH) – was started in 2015, and allows for nodes on the Ethereum exchange to run its platform-specific cryptographic software token (called “ether”.) Ether is a mechanism for moving around on the Ethereum exchange, and is sought by developers looking to develop and run applications within the Ethereum exchange. According to Ethereum, its platform can be used to “codify, decentralize, secure and trade just about anything.” 

In summary, the world is becoming digital, and cryptocurrencies are a new infrastructure for allowing payment in the digital world.