bitcoin crypto currency diagram
Despite being no longer so far away from the monetary system and transactions we’re used to, ‘virtual’ currencies like Bitcoin remain a mystery mostly associated with internet criminals. Rather than one of our more technical assessments, this post is designed to serve as a primer: cryptocurrencies continue to play a crucial part in many aspects of cybercrime, from online marketplace purchases to ransomware demands. However, given that a number of reputable institutions, like the Bank of England and EY, are interested in cryptocurrencies and the technology that underpin them, it’s good to be knowledgeable.
Virtual currencies
The quantity and utility of totally virtual currencies grew in the 2000s (as opposed to digital currencies backed by some form of legal tender).
There are several dry definitions of ‘virtual money,’ including this one from the European Central Bank:
“a sort of unregulated digital money created and typically controlled by its creators, and utilized and accepted by members of a specific virtual community”
While certain online games, such as World of Warcraft, prohibit the exchange of in-game cash for any other kind of currency, a black market exists that does exactly that. Similarly, many online marketplaces, particularly in the gaming world, demand the one-way exchange of legal money for virtual currencies, such as Microsoft Points.
Of course, the Federal Reserve is the centralized authority and repository for US dollars, GS&R – the corporation behind E-Gold – kept a centralized ledger monitoring transaction, and Microsoft naturally keeps track of Microsoft Points.
While digital currencies are not legal currency, their value is agreed upon and recognized by all parties involved, just like people accept the proclaimed value of paper money or an electronic bank transfer.
The advent of Bitcoin, the first and possibly most renowned decentralized virtual money, in 2009 had a tremendous influence.
A Brief History
Cryptocurrencies get their name from the fact that they utilize cryptographic functions to safeguard transactions and limit the generation of new currency units. While Bitcoin was not the first cryptocurrency, it was once the most well-known and was the first to be ‘decentralized.’
Bitcoin uses a public ledger known as the ‘blockchain’ instead of a centralized ledger (like traditional currencies/government central banks do). Bitcoin transactions are broadcast to a network of privately controlled Bitcoin nodes, a portion of which verifies and processes the transactions into blocks (these machines are known as miners). Once these blocks have been completed, all nodes retain a record of them (thus the term “blockchain”), creating a distributed record of transactions and ownership.
Alternatives
Although it’s the most well-known and has by far the highest market capitalization, Bitcoin is far from the only cryptocurrency. The table below provides some insight into the top five ‘challengers’ to Bitcoin as of February 2017[4].
See the glossary below for a brief description of any domain-specific terminology.
Bitcoin
- Blockchain transactions are public record and may be seen on various websites.
- BTC is Currency code.
- Cryptocurrency based on the SHA-256 algorithm.
Ethereum
- Blockchain based on the ‘EVM’ decentralized virtual machine.
- EVM is Turing Complete and can run ‘smart contracts’ scripts.
- ETH is currency code.
- Currently, it is a proof-of-work currency, but it is transitioning to proof-of-stake.
Ripple
- A decentralized transaction network based on a fixed amount of XRP that may be used to settle transactions with any currency or commodity.
- XRP is a currency code.
- Used as settlement infrastructure by multinational banks: more secure and less expensive than previous methods.
- Source is closed.
- There is no mining capability and proof-of-work is used.
Litecoin
- The technology is almost identical to Bitcoin.
- Proof of work is performed with the memory-bound Script algorithm.
- LTC is a currency code.
Monero
- Only the estimated transaction quantities are publicly disclosed, while the sender/recipient information are kept private.
- Because of the added secrecy it provides over Bitcoin, it was adopted by prominent darknet markets like Alpha Bay in 2016.
- XMR is a currency code.
- For proof-of-work, it employs the memory-bound Crypto Note algorithm.
Dash
- Another coin with a privacy focus that offers two unique services:
- Private Send: This obscures transactions by combining money from various sources into a single transaction, similar to Bitcoin laundering services.
- Instant Send: Allows you to conduct and confirm transactions very instantly.
Glossary
Blockchain Bitcoin’s public, distributed ledger. The phrase “distributed ledger” is commonly used to refer to any cryptocurrency’s distributed ledger.
CPU Bound Refers to algorithms for which available CPU processing power is the limiting element in processing speed — in this example, algorithms connected to blockchain process/mining.
Memory-Bound Algorithms for which available memory (RAM) is the processing speed limiting factor.
Mining Processing transactions to establish their authenticity and reach widespread consensus in proof-of-work cryptocurrencies. The first miner (or group) to achieve the proof-of-work criterion for a block of transactions is usually monetarily rewarded, either through the creation of new currency, transaction fees, or both.
Proof-of-Stake An alternate sort of cryptocurrency in which the next block’s creator is chosen pseudo-randomly, based on the amount of money they own (i.e., their ‘stake’).
Proof-of-Work A means of demonstrating that work has been done, usually through computationally complex activities that can be verified quickly after finished. This mainly refers to transaction processing and hashing in the context of cryptocurrencies, and the methods are either CPU-bound or Memory-bound.
