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Cryptocurrency

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A crypto currency (or cryptocurrency) is a medium of exchange using cryptography to secure the transactions and to control the creation of new units.[1] The first cryptocurrency to be created was Bitcoin in 2009. Since then, numerous cryptocurrencies have been created.

Overview

Cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is prior defined and publicly known. In centralized banking and economic systems such as the Federal Reserve System, governments control the value of currency by printing units of fiat money or demanding additions to digital banking ledgers. However, governments cannot produce units of cryptocurrency and as such, governments cannot provide backing for firms, banks or corporate entities which hold asset value measured in a decentralized cryptocurrency. The underlying technical system upon which all cryptocurrencies are now based was created by the group or individual known as Satoshi Nakamoto.[2][3][4]

Hundreds of cryptocurrency specifications now exist; most are similar to and derived from the first fully implemented cryptocurrency, Bitcoin.[5][6] Similar protocols include Proof-of-stake, a common authentication protocol forked from the Proof-of-work authentication protocol used by Bitcoin. Within cryptocurrency systems the safety, integrity and balance of all ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public who allow their idle computers to help validate and process transactions.[citation needed]

The underlying security of cryptocurrency systems comes from the difficulty of finding hash set intersections a task which generally takes a computer O(2^n/2) number of iterations to complete where n is the hash functions output size in bits. Bitcoins hashing function, 'SHA-2' has an output size of 512 bits, therefore a collision would take O(2^256) iterations to find -- a little less than one thousandth the number of atoms in the observable universe (~2^266). A type of cryptocurrency security subversion far more likely to succeed is the so-called "51%" attack; in this scenario an extremely powerful attacker attempts to take control of the global block-chain ledger by generating an alternate block-chain faster than the honest one being produced by all other miners, this attack is very expensive and ineffective as payee wallet-nodes are not going to accept references to invalid transactions as payment, and honest Mining nodes will never accept a block containing them. An attacker using the "51%" technique can only hope to undo one of his own transactions.[7]

Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This can mimic the scarcity (and value) of precious metals and avoid hyperinflation.[1][8] Compared with ordinary currencies held by financial institutions or kept as cash on hand, crypto currencies are less susceptible to seizure by law enforcement.[1][9][failed verification] Existing cryptocurrencies are all pseudo-anonymous, though additions such as Zerocoin and its distributed laundry[10] feature have been suggested, which would allow for anonymity.[11][12][13]

History

The first cryptocurrency, Bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme.[14][15][16] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid.[17] Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation. On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.[18]

Publicity

Central bank representatives have stated that the adoption of cryptocurrencies such as Bitcoin pose a significant challenge to central banks' ability to influence the price of credit for the whole economy, they've also stated that as trade using cryptocurrencies become more popular, there is bound to be a loss of consumer confidence in fiat currencies. Gareth Murphy, a senior central banking officer has stated "widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy". He cautioned that virtual currencies pose a new challenge to central banks' control over the important functions of monetary and exchange rate policy.[19]

Jordan Kelley, founder of Robocoin launched the first Bitcoin ATM in the United States on February 20, 2014. The kiosk installed in Austin, Texas is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.[20]

The Dogecoin Foundation, a charitable organization centered around Dogecoin and co-founded by Dogecoin co-creator Jackson Palmer, donated more than $30,000 worth of Dogecoin to help fund the Jamaican bobsled team's trip to the 2014 Olympic games in Sochi, Russia.[21] The growing community around Dogecoin is looking to cement its charitable credentials by raising funds to sponsor service dogs for children with special needs.[22]

Legality

Cryptocurrencies are legal in all countries except Iceland, due primarily to Iceland's freeze on foreign exchange.[23] Controversy over the misuse of cryptocurrency has also led to restrictions in certain countries – regulators in China banned the handling of Bitcoins by financial institutions during an extremely fast adoption period in early 2014.[24] In Russia, though cryptocurrencies are perfectly legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.[25]

On March 25, 2014 the IRS ruled that Bitcoin will be treated as property for tax purposes as opposed to currency. This means Bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of Bitcoin. No longer do investors need to worry that investments in or profit made from Bitcoins are illegal or how to report them to the IRS.[26]

Some cryptocurrency have legal issues such as Coinye, an altcoin that used, without permission, rapper Kanye West as its logo. This altcoin has been compared to the popular Dogecoin. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, whose name remains unknown. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.[27]

Arrests

There have been very few arrests in the United States related to Bitcoin. This is primarily due to the difficulty of tracking Bitcoin payments. The arrests that have been made are all on charges of using Bitcoin to launder money. The most notable case was the arrest of Charlie Shrem, the CEO of BitInstant, a Bitcoin exchange backed by the Winklevoss twins.[28]

Florida has taken a firm stance against money laundering through Bitcoin with its recent arrest of three money launderers. The launderers were purportedly using the website localbitcoins.com to launder hundreds of thousands of dollars worth in Bitcoin. They were apprehended after an undercover agent asked to purchase Bitcoin with the intent of buying stolen credit cards online.[29]

Though not directly related to cryptocurrency, Ross Ulbricht was arrested in October 2013 for running an illegal drug trafficking website, The Silk Road, that used Bitcoin as the only payment option. Ross William Ulbricht was arrested on charges of alleged murder-for-hire and narcotics trafficking violations and identified as the founder and chief operator "Dread Pirate Roberts." Bitcoins are the only currency accepted on the site, because they are traded electronically and are difficult to trace to individuals. But Bitcoin accounts also lack protections that most bank accounts have, including government-backed insurance.[30][31]

Fraud

On August 6, 2013 Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because crypto currency (expressly Bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchanged for conventional currencies), it is a currency or form of money. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.[32]

GBL, a Chinese Bitcoin trading platform suddenly shut down, and up to $5 million worth of Bitcoin disappeared with it.[33] Subscribers were unable to log into the Chinese bitcoin platform on October 26, 2013 and as much as $5 million disappeared.

In February 2014 crypto currency made national headlines due to the world's largest Bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer's Bitcoins likely due to theft. This was equivalent to approximately 750,000 Bitcoin, or about 7% of all the Bitcoins in existence. Due to this crisis, the price of a Bitcoin fell from a high of about $1,160 in December to under $400 in February.[34]

Timestamping

To not need a trusted third party to timestamp transactions added to the block chain ledger crypto currencies use various timestaping schemes.

Proof-of-work schemes

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are SHA-256, which was introduced by Bitcoin, and scrypt, which is used by currencies such as Litecoin.[17] The latter now dominates over the world of crypto currencies, with at least 480 confirmed implementations.[35]

Some other hashing algorithms that are used for proof-of-work include Blake-256, CryptoNight,[36] HEFTY1, Quark, SHA-3 (Keccak), scrypt-jane, scrypt-n, X11, and X13.

Proof-of-stake and combined schemes

Some crypto currencies, such as Peercoin, use a combined proof-of-work/proof-of-stake scheme,[17][37] while others such as Nxt[38] exclusively use proof-of-stake.

List of crypto currencies

This is a list of crypto currencies. By May 2014 there were more than 275 crypto currencies available for trade in online markets.[39]

Release Currency Symbol Founder Hash Algorithm Timestamping Website
2009 Bitcoin[nt 1] BTC[40][41] Satoshi Nakamoto[nt 2][42] SHA-256d[43][44] POW[44][45] bitcoin.org
2011 Namecoin[nt 3] NMC Vincent Durham[46][47] SHA-256 POS —
2011[44] Litecoin[nt 4] LTC Charles Lee[42] scrypt[44] POW litecoin.org[44]
2012[44] Peercoin PPC Sunny King
(pseudonym)[48] 		SHA-256[49] POW & POS peercoin.net[44]
2013 Ripple[nt 5][50][51][52] XRP[52] Chris Larsen &
Jed McCaleb[53] 		ECDSA[54] "Consensus" ripple.com
2013 Mastercoin MSC J. R. Willett [55] SHA-256d[56] — mastercoin.org
2013 Primecoin XPM Sunny King
(pseudonym)[48] 		1CC/2CC/TWN[57] POW[57] primecoin.org
2013 Dogecoin[nt 6] DOGE Jackson Palmer
& Billy Markus[58] 		scrypt[59] POW dogecoin.com
2014[60] Darkcoin[nt 7] DRK Evan Duffield &
Kyle Hagan[61] 		X11 POW & POS[nt 8] darkcoin.io
2014 Auroracoin AUR Baldur Odinsson
(pseudonym)[62] 		scrypt POW auroracoin.org

Notes

  1. ^ The first widely known decentralized ledger currency.
  2. ^ It is not known whether the name "Satoshi Nakamoto" is real or a pseudonym, or whether it represents one person or a group of people.
  3. ^ A crypto currency that also acts as an alternative, decentralized DNS.
  4. ^ The first successful scrypt crypto currency.
  5. ^ A unique crypto currency based on peer to peer debt transfer. The term Ripple can also refer to both the digital currency (also known as XRP), or to the payment network on which it and other digital currencies can be traded.
  6. ^ A crypto currency to be based on an internet meme.
  7. ^ A crypto currency that adds privacy to transactions through a system called Darksend, an implementation of CoinJoin.
  8. ^ Via Masternodes containing 1000 DRK as "Proof of Service". Through an automated voting mechanism, one Masternode is selected per block and receives 20% of mining rewards.

Criticism

  • Some have expressed concern that cryptocurrencies are extremely risky due to their very high volatility[63] and potential for pump and dump schemes[64]
  • Some cryptocurrency systems are pre-mined, have hidden launches, or have extreme rewards for the first miners.[65][better source needed] Pre-mining means currency is generated by the currency's founders prior to mining code being released to the public.[66] It often refers to a deceptive practice, but can also be used as an inherent part of a digital cryptocurrency's design, as in the case of Ripple or Nxt.[67]
  • Most cryptocurrencies are duplicates of existing cryptocurrencies with minor changes and no novel technical developments. One such, "Coinye West", a comedy cryptocurrency alluding to the rapper Kanye West, was served a cease-and-desist letter on January 7, 2014.[68]
  • Very few cryptocurrencies can be exchanged for fiat currencies and instead can only be traded for other cryptocurrencies. Banks generally do not offer services for them and sometimes refuse to offer services to virtual-currency companies.[69]
  • There are ways to permanently lose cryptocurrency “from local storage due to malware or data loss. This can also happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets.[70]
  • There are many perceived criteria that cryptocurrencies must reach before they can become a mainstream currency. Because cryptocurrencies do not fully meet some features of fiat currency, few merchants accept them, weakening the value of cryptocurrency.[71]
  • With technological advancement in some cryptocurrencies, there has risen a too high of cost of entry for a casual miner (one who “mines” or produces cryptocurrency coins through specialized hardware and software).[72]
  • Cryptocurrency transactions are irreversible. One of the features cryptocurrency lacks in comparison to conventional methods of payment is consumer protection against fraud, such as chargebacks to credit cards.[73]
  • Some coins may be a project with little to no community backing and no visible developer.[74]
  • While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security.[75]
  • Environmentally conscious people are concerned with the enormous amount of energy that goes into mining cryptocurrency with little to show in return.[76]
  • Traditional financial products have strong consumer protections. However, if Bitcoins are lost or stolen, there is no intermediary with the power to limit consumer losses.[77]
  • Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.[78]

See also

References

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  3. ^ Deflation and Banking, http://www.econlib.org, 19 December 2006
  4. ^ Bitcoin Creation Mechanism, https://en.bitcoin.it, 12 January 2014
  5. ^ Listing of active coins, http://cryptocoincharts.info, 27 February 2014
  6. ^ another authentication protocol forked from P.O.S., https://en.bitcoin.it, 7 June 2013
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