Bitcoin and other cryptocurrency

Bitcoin and other cryptocurrency

Many people associate virtual currencies like Bitcoin with criminals. However, they are not far from the monetary system or transactions that we’re used too. This article is meant to be a guide, not a technical analysis. Cryptocurrencies continue to play an important role in cyber-crime. They are used for everything from ransomware requests to online marketplace transactions. It’s worthwhile to be informed about cryptocurrency and its technologies, as a variety of legitimate organizations, including the Bank of England and EY, are also interested.

Virtual currencies

In the 2000s, there was a rise in the utility and number of completely virtual currencies (in contrast to digital currencies that are backed by legal tender).

There are many definitions of virtual currency, but the European Central Bank defines it as:

A type of unregulated digital money that is usually issued by its developers and then used and accepted by members of a particular virtual community

This broad definition means that many things can be considered virtual currencies. While some online games, such as World of Warcraft, prohibit the exchange of in-game currency for money, there is a black market for this. A number of online markets, especially in the gaming industry, require that legal tender can be exchanged for virtual currencies. Microsoft Points.

Obviously, a common characteristic of all currencies is their centralization: The Federal Reserve is the centralised authority for US dollars and repository, GS&R – which is responsible for E-Gold – has a centralised ledger tracking transactions and Microsoft naturally keeps track of Microsoft Points.

Although these currencies are not legal tender, their value is accepted and agreed upon by all parties. This is similar to how people accept the declared value for paper money or electronic bank transfers.

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The significant impact of Bitcoin’s 2009 arrival – the most well-known and decentralised virtual currency – was profound.

A brief history

Cryptocurrencies are named because they use cryptographic functions to protect transactions and limit the creation new currency units. Although Bitcoin is not the first cryptocurrency, it is undoubtedly the most well-known and widely used. It was also the first cryptocurrency to be “decentralised”.

Instead of a centralised ledger (as would be the case with traditional currencies/government central banks), Bitcoin uses a public ledger known as the ‘blockchain’. Bitcoin transactions are broadcasted to a network private-operated nodes that run Bitcoin software. A subset of these nodes verify and process transactions into blocks (known as miners). Once they are processed, all nodes keep a record (hence the ‘blockchain”). This allows them to share information about ownership and transactions.

Due to the distributed nature of blockchain, transactions can be viewed online at blockchain.info.

The supply of Bitcoins is steadily increasing as miners are rewarded with Bitcoins. This includes both newly created Bitcoins as well any transaction fees. To limit this flow, every new block must be accepted by the rest the network. This is a lengthy task, but it takes very little time to check.

Bitcoin’s proof-of-work relies on the SHA256 hashing algorithm. It is ultimately limited by CPU speed. This led to the creation of specialised mining farms’ like the one pictured below. (picture credit: Marco Krohn; CC BY-SA-4.0).

 

Alternatives

Bitcoin is not the only cryptocurrency. Although it’s most widely known and has the largest market capitalization, it’s far from the most popular. Below is a table that provides an overview of the five most threatening Bitcoins as of February 2017, [4].

For a quick description of domain-specific terminology, see the glossary below.

Bitcoin

  • BTC is the currency code
  • Blockchain is a public record that allows transactions to be viewed on multiple websites.
  • Based on SHA256 algorithm, proof-of-work currency.

Ethereum

  • Currency code: ETH
  • Blockchain is based on an decentralised virtual machine called “EVM”.
  • EVM can run scripts known as’smart contract’ and is Turing Complete.
  • Currently, a proof of work currency. But moving to proof-of stake.

Ripple

  • Currency code: XRP
  • A decentralised transaction network that is based on a fixed amount of XRP. This can be used with any commodity or currency to settle transactions.
  • International banks use this as settlement infrastructure. It is more secure than traditional systems and costs less.
  • Closed Source
  • No mining facility required for proof-of-work

Litecoin

  • LTC is the currency code
  • The technical aspects of Bitcoin are almost identical.
  • For proof-of-work, uses the memory-bound algorithm Scrypt

Monero

  • Currency code: XMR
  • Strong privacy with only approximate transaction amounts publicly available, and sender/recipient information remaining confidential.
  • Due to BitCoin’s extra privacy, major darknet markets such as AlphaBay adopted it in 2016.
  • For proof-of-work, uses the memory-bound CryptoNote algorithm.

Dash

  • DASH is the currency code
  • A second privacy-focused cryptocurrency offers two new services:
    • PrivateSend is a similar service to Bitcoin laundering. This conceals transactions by combining coins from multiple sources into one transaction.
    • InstantSend: Allows you to confirm and conduct transactions almost instantly

Glossary

Blockchain The public, distributed ledger of Bitcoin. Commonly used to refer to any cryptocurrency’s distributed ledger.

CPU Bound Refers to algorithms. In this case, it is related to the blockchain process/mining. For which CPU processing power is the limit.

Memory-Bound Refers to algorithms where available memory (RAM), is the limiting factor for processing speed.

Mining In proof-of-work cryptocurrency, the activity of processing transactions in order to verify their veracity or achieve distributed consensus. The reward for the first group or miner to meet the proof of work criteria for a block transaction is usually in the form of either new currency creation, transaction fees, and/or both.

Proof of Work A method to prove that work took place. This is usually done by performing computationally complex tasks that are easy to verify once completed. This generally refers to transaction processing and hashing. The methods can be either CPU-bound (or Memory-bound) in the case of cryptocurrency.

Proof of-Stake An alternative cryptocurrency in which the creator of the next block can be determined pseudo-randomly and weighted according to the amount of currency they have (i.e. Their’stake’.

[1] https://www.nytimes.com/2016/10/12/business/dealbook/central-banks-consider-bitcoins-technology-if-not-bitcoin.html

[2] https://cointelegraph.com/news/ernst-young-is-going-bitcoin-while-pwc-deloitte-and-kpmg-push-permissioned-blockchains

[3] http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

[4] https://coinmarketcap.com/

 

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source https://www.forcepoint.com/blog/x-labs/bitcoin-and-other-cryptocurrencies

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