Abstract: a complex process and money is required

Abstract:

The internet today will provide an
abundant resource for study on Bitcoins as cryptocurrency. Cryptocurrency is an
industry and Bitcoin is only the leading player in this industry, not the
industry itself. Although Bitcoin is the flag bearer of this industry, it is
not the only options for cryptocurrencies. The available resources about the
cryptocurrency industry online is scarce. This paper reviews the concept, highlights
the important participants, and explains the mechanics behind cryptocurrencies.
Discussion on pricing of these currencies and their limitations have also been
presented. In the end, the recommendations for increasing the market visibility
of cryptocurrencies have been presented. This paper reviews the findings of
various online articles to present an integrated approach about the
cryptocurrency industry.

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1.    
Introduction:

Cryptocurrency is defined as a
technology which fundamentally influences the way that our economy, governance,
and business functions, and could change the conceptual understanding of trade,
ownership, and trust 15.

Trade is a complex process and
money is required for its facilitation. Trade records are isolated from the
public. Thus, trusted third parties such as the Government, notaries, or the
paper currency act as middleman to approve our transaction 1. 

Fig:1 Working of
Blockchain

Image Courtesy:
http://vip.insperante.kz/class/935-bitcoin-blockchain-explained.html

 

Cryptocurrency enables a network of
computers to maintain a collective database via the internet. This database is
public and available in one digital ledger, distributed across the network,
called blockchain 2. In the blockchain, all the transactions of
cryptocurrency till date has been recorded. The transaction record or block,
includes basic information such as the time, account, and amount of each
transaction. Each peer in the network owns a full copy of the blockchain. Each
transaction is verified by a group of people, who themselves are a part of
blockchain, based on principles of cryptography. These people maintaining the
ledger are known as Miners 2. These miners agree on each transaction in the
blockchain. If the nodes or miners in the network will not agree on any
transaction, the transaction will not be incorporated in the blockchain and
will be regarded as corrupt. In this way, everyone unanimously agrees on a
transaction and millions of people have access to a trustable source.
Cryptocurrency is not a representation of money or a form of payment. It can be
programmed per user to represent cash, property, shares of a company, etc.,
making it smart.

1.1 Popular Cryptocurrencies in the Market:

1.1.1
Bitcoin:

The
first ever digital currency, created in 2009 by an unknown person using the
alias Satoshi Nakamoto 12. International payments and transfers are easy with
Bitcoins, without any interference from government or any authority. Small
Business particularly like them as there are no credit fees 12. Coinradar
states, “Currently trading at more than $4,000, the market capitalization of
the world’s first decentralized cryptocurrency is more than $67 billion” 11.

1.1.2
Ethereum:

Ethereum
is an open-source, blockchain distributed platform featuring smart contracts on
Ethereum network 13. Miners in Ethereum earn Ether, a crypto token which
fuels the network 13. The current market of Ethereum is $28 billion, and its
nearly trading at $300 11.

1.1.3
Litecoin:

Litecoin
is an open-source, peer-to-peer Internet currency that enables instant,
near-zero cost payments to anyone in the world 15. The current trade rate is $55,
market capitalization of Litecoin is approximately $3 billion 11.

1.1.4
Ripple:

According
to Coinradar, “Ripple claims to be the world’s only enterprise blockchain
solution for global payments, connecting banks, payment providers, digital
asset exchanges and corporates via RippleNet to provide a frictionless
experience to send money globally” 11. Ripple is trading at just $0.19, its
market capitalization is at more than $9 billion 11.

2.     Mechanics of Cryptocurrency:

For every transaction, we need to
announce our account number, the account number we are sending to, and the number
of bitcoins we are sending. All the users keeping track of this transaction
will update this in their blocks. With Bitcoin, there is no central bank to
notice a fraud and shut down transaction, so sending bitcoins with couple of
account numbers becomes a security issue. Bitcoin are kept safe through
cryptography, so it is also called cryptocurrency. It is kept safe through
keys, which are chunks of information that can be used to make mathematical
guarantee about transactions 2. When we make an account on the Bitcoin
network, that account is linked to two unique keys: a private key and a public
key 2. The private key can take some data and sign it. Suppose we send a
transaction in the bitcoin network, we can sign it using our private key, which
can only be accessed by us. When that message is sent in the network, other
people in the network can use our public key and verify our signature. That
way, everyone keeping track of all the bitcoin trading can mark our transaction
on their copy of the block chain. In other words, if the public key works,
that’s the proof that message was signed by our private key and transaction is
legal.

There is check built in the bitcoin
system which checks if we have enough bitcoins to start a transaction. Both the
bitcoin network and our wallet, automatically check our previous transactions
to make sure we have enough bitcoins to send in the first place. A significant
problem of Network Delay can arise at this point. These delays refer that we
won’t receive the transaction requests in the same order, as lot of people over
the world as maintaining the block chain. There might be a situation where
bunch of people with bunch of slightly different blocks to pick from and none
of them are wrong. This is solved by solving Math Problems 3. To add a
transaction block to the chain, each minor must solve a special kind of math
problem created by a cryptographic Hash function 2.

2.1 Hash Function in Cryptocurrency:

A hash function is an algorithm
which takes an input of any size, and produces an output with a fixed size. For
example, if we have a string of numbers 7, 2, 1 as input and hash function says
to add the numbers together. The output in this case will be 10 4. In case of
Hash functions, it is figure out an output when inputs are given, but it
becomes really hard to figure out the original inputs from the output. In the
above examples there can different combinations such as 2,2,2,2,2; 3,3,3,1; 5,5
etc. to get our output. The Hash function that Bitcoin uses is SHA256 stands
for Secure Hash Algorithm 256-bits, originally developed by the United States
National Security Agency 2. Computers are specifically designed to solve
SHA256 Hash Problems, take on an average 10 minutes to guess the solution of
each problem. There will be millions of guesses before getting an answer right.
Whoever solves the blocks first gets to add their transactions to the
blockchain, which then generates a new math problem to be solved. If multiple
people solve the problems at roughly the same time, the network picks one to
keep building upon which becomes the longest and most trusted chain and any
transactions in those alternate branches of the chain get put back into a pool
to be added on to later blocks. Bitcoin has a built-in system to reward these
miners, to verify these transactions. Miners are also tipped a small amount for
every transaction they add to the ledger.

3.     What defines price of cryptocurrency:

3.1 Supply & Demand:

The value of any cryptocurrency
cannot be limited upon few factors, but there can be main drivers. The
perceived value of any commodity in the world is dependent on its utility and
limited demand. In case of cryptocurrencies, it can be casted as object, currency,
or assets at different locations. Bitcoin, for example has a maximum of 21
million whole units, divisible 100 million times 6. This makes the supply
limited and people tend to pay more to acquire these currencies.

3.2 Blockchain Difficulty Level:

Blockchain is public, but very
secured digital ledger, which real people (miners) verify. The security of
blockchain is directly proportional to the mining difficulty. With increased
mining difficulty, the perceived value of these currency increases, and it
becomes harder to mint these coins.

3.3 Utility:

Utility defines pricing of any
article in the world. If an article is not usable, no one will be willing to
pay for it. Cryptocurrency falls in the same line. If these currencies can’t be
used as an investment or as a form of payment, these will be rendered
worthless.

3.4 Public Perception:

There has been a positive reaction
from the masses about cryptocurrency, that drives the higher price of these
coins. Cryptocurrencies and their blockchain are secured using complex
algorithms, which creates a trust value in the mind of people. The innovation
of these currencies presents a potential threat for the current banking systems
but are values by the common people.

3.5 Media:

Generally, media reports become
acceptable facts for the public. The reports on cryptocurrency, either positive
or negative, highly affects its value. Few media outlets, specially the ones
owned by a few people, can be used as source to manipulate the value of certain
cryptocurrency, and present a positive review in public.

3.6 Investors:

Investors can cause high
fluctuations in the price of less commonly known cryptocurrencies. They can buy
many coins with a huge investment, later promote their investment in media and
among share holders to create a hike in the price of those invested coins.
People will develop trust and invest in those currencies, which will create
higher demand for that currency, thus yielding high price.

3.7 Innovation:

Bitcoin was the first form of
cryptocurrency. Many new cryptocurrencies just amended a few minor changes in
the Bitcoin blockchain. New ideas of blockchain will also affect the prices as
it will create newer blockchains with better perceived values.

4.     Challenges in the Cryptocurrency
Industry:

4.1 Scalability:

The cryptocurrency industry has its
mechanics in the blockchain. Since there is no third party involved, every
transaction is verified by all the nodes, which increases the average time of
each transaction. For example, “the Bitcoin network’s throughput maxes around
three transactions per second (TPS)?—?far below the throughput of current
dominant payment systems. As a benchmark, bitcoin’s current throughput pales in
comparison to the Visa network’s ~2,000 TPS 7”. There has been proposed
solutions to this problem, but none of them have been implemented as of today.
8

4.2 User acceptance:

The blockchain technology can’t
handle millions of users at once. According to University of Cambridge, “the
current number of unique active users of cryptocurrency wallets is estimated to
be between 2.9 million and 5.8 million”. 9 Public awareness is also one of
the factors which relates to acceptance. The common masses prefer to invest in
a source which they can physically see, rather than trusting a decentralized
network.  

4.3 Lack of Blockchain Developers:

The blockchain industry is about 8
years old (from the time when Bitcoin was announced, Jan 2009) 10. The
technology has been in the market and rapidly increasing. Still, there is a
lack of specialized blockchain developers in the industry. The user count of
cryptocurrency industry is still very small and there is a lot of scope for
development in the blockchain network.

 

 

4.4 Lack of Specialists:

The cryptocurrency and blockchain
are more of an ecosystem rather than just names. This ecosystem requires
specialists to contribute and grow this system. Specialists in cryptocurrency
can help solving the scalability issue with newer ideas. This technology is
emerging and need of Blockchain/ Cryptocurrency specialists is plentiful.

5.     Conclusion:

Cryptocurrency
industry has been there for 8 years and counting. Even in 8 years, this
industry hasn’t been accepted completely and there is a long way to go. Many
financial institutions see blockchains as potential threats to replace
traditional banking systems. Also, there is no control over the transactions in
the digital ledger once few blocks approve the transaction. If a data or
malware loss occurs, cryptocurrency can be completely lost. Loss in
cryptocurrency can also happen from physical damage to the source systems 16.
All these issues raise a trust factor over investments in cryptocurrency.
Future of cryptocurrency is very uncertain. There has been no literary proof
about rise or downfall of cryptocurrency in the future. This is an innovative technology
with divided opinion over its existence in the future. There is a high need for
education and awareness about this industry. It is also facing the dooms of
scalability, which makes it less popular. Still, cryptocurrencies haven’t
stopped since its birth in 2009, and newer forms keep hitting the market with
better technology. A consideration about an investment in cryptocurrency at
present is encouraged, but is certainly debatable.

6.     Recommendations:

In the world of cryptocurrency,
there is a need for awareness. There are various new cryptocurrencies in the
world apart from just Bitcoin, but 1 out of 5 people know what none out of 10
will know what Litecoin or Ethereum is 11. There are different online
resources such as Blockgeeks, which provide training on development of
blockchains and coding courses specific to blockchain. But these online
resources are scarce. Also, we lack specialists in this industry, which limits
the resources to learn about cryptocurrency.

Top universities should draft
courses in their curriculum about Cryptocurrency and Blockchain development.
This will in turn produce higher number of technical professionals in these
focused areas, who can use their proficiency at solving different challenges
faced by the industry. We will have developers who can target them problem of
scalability and try to solve it or propose feasible solutions at minimum. Having
a study curriculum in any top ranked university of the world will develop a
trust for the technology among the common people. They will take cryptocurrency
seriously, which will increase the current number of cryptocurrency users. An
increase in investment and users will also affect the value of cryptocurrency
in a positive manner, increase the demand which will result in increased value
of these cryptocurrencies.

Although there are few people who know
and develop cryptocurrencies, these experts can help in spreading awareness
about the technology among the common masses. These experts can host shows on
television channels, write articles on national and local magazines and
journals, collaborate with people on social media, and spread the information
about cryptocurrency through word of mouth. This will compliment the above idea
and improve the ecosystem of cryptocurrency.