Today, currency is used as a medium for buying and selling goods and is used by people all over the world and can be found in the form of paper, metal and more recently, electronically stored in bank accounts.

Centralized and Decentralized Currencies

 Centralized currency, like the US dollar or USD, is the accepted form of currency in the United States. USD is regulated by the United States Government, which means they control the input of new bills and coins to keep the system steady and secure to avoid things like inflation. Other countries like China and France have adopted their own system of centralized currency.

  Decentralized currency works on a completely different system. Decentralized currencies are not regulated by a central “administrator”, but are intentionally designed to remain steady and secure. In a decentralized system, all participants are equal and share an equal amount of work. As of now, the only decentralized currencies come in the form of cryptocurrencies, a solely internet based currency that works through a peer-to-peer system (P2P) that uses cryptography to secure its transactions, control the introduction of new units and verify its agreements.

Bitcoin

 An original group founded by Eric Hughes upon a basis of cryptography in the 1990s called the “cyberphunks” highly influenced the foundation of the first cryptocurrency. The first and most famous cryptocurrency, Bitcoin, has received a lot of fame in the last couple months with its exponential rise in price. When it was released in 2009 by an unknown group or individual under the pen name Satoshi Nakamoto as a system with an initial 21 million Bitcoin, Bitcoin was created to be an anonymous peer-to-peer transaction system. At system launch, Bitcoin was worthless because the basis for trading, buying, and selling was very small and practically no one was mining because it was worthless and unknown. The first recorded bitcoin transaction was in late 2009, one Bitcoin was set at a price of $0.06 USD when the creator, Nakamoto send one Bitcoin to a member of the cyberpunks, Hal Finney, who had been closely working with Nakamoto, and some people theorize that they are the same person, although Finney has rejected this claim multiple times.

 Slowly garnering attention, Bitcoin gradually increased in price throughout the next three years and reached its 100 dollar mark in August of 2013. Bitcoin began to become commercialized with websites that will convert world currency into Bitcoin and vice versa, act as a bank account or “wallet”, an introduction of mining pools, and an increasingly growing system of users. Within another three years, in August of 2016, Bitcoin had risen to almost $600 dollars, 10,000 times its initial worth. With the beginning of 2017, at around $1000, Bitcoin began its exponential rise in price and in just under a year, December 4, 2017, Bitcoin hit $11,656 and just 4 days grew to 18,000 dollars, but has been fluctuating between 15K and 18K since its last peak.

 Bitcoins recent surge in price can be attributed to its recent growth in popularity along with its finite number, which can be simplified in simple economics: High demand, low supply leads to higher prices. With only 21 million Bitcoin created at the systems launch in 2009, 12 million have been mined and are in circulation. The glaring question that doesn’t have an answer as of now, is what will happen to Bitcoin when all of the currency is mined and in circulation? When the cap is reached, mining may become obsolete due since the only compensation miners would receive for validating transactions are the transaction fees, which account for a small percentage of a miners earnings. Although some argue that the price of Bitcoin may be so high, that transaction fees could hold a significant profit. With more and more popularity, and increasing mining pools, the cap should not be reached any sooner due to Bitcoins recent boom because the system was designed to compensate for an increasing pool of miners by lowering rewards that are paid out.

 With the recent surge in price, other than investing in Bitcoin to make some money, are there any other uses for it? Throughout its history, Bitcoin has been associated with some nefarious activity, due to its anonymity. Its initial gain in popularity can be attributed to the creation of an anonymous marketplace found on the deep web. In February of 2011, Ross Ulbricht, created the notorious online black market called the Silk Road. The website was much like Ebay because it served as a basis for anyone to buy and sell illegal narcotics anonymously using Bitcoin and a web browser called “Tor”, which is specifically designed to keep a user 100 percent anonymous on the internet, and is the reason why prosecutors cannot track people down who have ordered illegal substances over the internet, unless a package is intercepted. In 2013, Ulbricht was caught and sentenced to life in prison in the midst of his thriving marketplace which had gained more than 200 million dollars in profit since its launch.  

 Although Bitcoin has been becoming very popular, the only practical use as of now is buying some, and hoping to sell it for a profit. Most big businesses and online marketplaces like Amazon and Ebay have not accepted Bitcoin as a means for payment because especially recently, the price of Bitcoin is so unpredictable, they do not want lose any money. But also, no one knows what will happen to Bitcoin in the following years, because it’s hard to tell.

 The end of Bitcoin may not mean the end of cryptocurrency in general, because currencies like Zcash and Ethereum, less popular cryptocurrencies, that were created after Bitcoin, use Bitcoin’s basis to make an improved system. Although these currencies are already gaining in popularity, the termination of Bitcoin may allow for these cryptocurrencies to boom.

Full nodes, Lightweight nodes, and Wallets

 Cryptocurrencies can be converted to and from world currencies through “exchanges” like Cex.io, for a processing fee. Although 99% of these exchanges are found online, New York harbored the first physical Bitcoin exchange called Bitcoin Center founded in 2013 by Nick Spanos and Andrew Martin as a way to educate the general public about the Bitcoin system. Today, physical Bitcoin exchanges and ATMs can be found in some major cities across the U.S.

  When a Bitcoin is obtained it needs to be stored easily and securely. This is done with a cryptocurrency wallet. A wallet is like a bank account, but wallets only exist on computers, either online or locally stored, and usually only store one cryptocurrency, although some online wallets offer to store more than one.

 Most cryptocurrencies are introduced with a program called a “full node”  that can be downloaded to a computer. Full nodes serve as the backbone of the system because they act as a layer of security and validity. Full nodes can also serve as a wallet and are generally used for miners with enough hashing power to mine without a mining pool. Since Full nodes are helping to keep the system secure and are storing cryptocurrency, they will locally store a copy of the ledger to the host computer and will have to be update every time there is a change to the ledger, which can take up alot of space and processing power on a computer. Lightweight nodes are usually miners that don’t operate a full node, but instead store their cryptocurrency on in an online wallet. Full nodes are much more secure because all the cryptocurrency that is stored is stored locally and not on a server which can be attacked by hackers to steal large amounts of cryptocurrency.

 Online wallets, most commonly used for storing cryptocurrency on an offsite server, allows non-expert miners to not have to run a full node on their computer. Online wallets will charge a transaction fee for storing currency.

 The introduction of exchanges and online wallets somewhat defeat the purpose of the decentralized system, because they introduce large companies that handle large amounts of currency, and can be easily corrupted.

The blockchain system

 Without a central node regulating the system, all Cryptocurrencies work on a system called blockchain. Blockchain is a generalized system that works to verify and record peer-to-peer transactions to make them secure.

  The blockchain system can be explained in a simple example: Jack wants to send Jill a sum of money. This transaction is represented online as a “block”. This block is then sent to everyone else on the same network, and everyone in the network reviews the transaction to make sure it’s valid. If everyone varifies the transaction, the block is added to a chain of previous blocks in a ledger of all past transactions, hence the name blockchain.

 Keeping the system secure

 Today, communications between computers on a network need to be secure to ensure the security of everyone’s personal data. Hackers and data thieves find ways to get around standard encryptions like the Equifax data breach and the multiple data breaches into multi million dollar corporations like Target. Cryptographers and data encryption specialists work to prevent, mitigate, and solve these problems when they occur. Most cryptocurrencies like bitcoin were introduced to the public being very secure using the blockchain system, special algorithms, and protocols for establishing a link between two computers which makes its system very hard to exploit.

 Blockchain provides Cryptocurrencies a medium for validity and security. Each cryptocurrency uses a different “network” to validate its transactions. With cryptocurrency in mind, if Jack sends Jill 3.5 Ethereum, a popular cryptocurrency, “the other people on the network”, or the miners use computer software/hardware and hashing algorithms to determine the validity of the transactions in a block. In this case multiple transactions are compiled to make a block. If they all agree on the validity, the block is sent to a network node, or a Full node that add the transaction to its copy of the blockchain, or the public ledger, and the transaction goes through. This protocol works effectively to quickly rid the system of mishaps like fraud and double spending, both of which are left out by miners so they won’t be added to the ledger and therefore will not be completed. With an increasingly large pool of miners validating transactions, one full node would not be able to keep up, and would have to be in one physical place which could slow connection speeds for miners that are farther away from it. One full node can also be easily attacked and large amounts of data can be stolen, and could lead to corruption since only one person controls the node. These problems are fixed by having many full nodes to share the workload and prevent a centralized medium prone to attack and corruption.

 For keeping the system secure, miners are paid any transaction fee associated with a transaction along with a block reward. A block reward is payout that a miner receives for creating new blocks, and the creation of new blocks is the only way new bitcoin can be introduced into the system. Bitcoin mining was intentionally designed to be expensive and difficult so that the number of bitcoins found each day by miners will stay steady over time, making a very finite supply.

 Cryptocurrencies use algorithms, called hashing functions or proof-of-work algorithms, which are used to map arbitrary data using cryptography. Hash functions use hashes, or numeric values that identify a set of data to systematically store that data and maintain its security. Cryptocurrencies can fall under one of many hashing functions. Bitcoin falls under function SHA-256, which works by compiling a sum of functions in a block, hashing the block to make a 256 bit block hash value. If the block is verified, it will be sent into circulation with the hash value being the identifier for the block. This system remains secure because a simple algorithm can be used to convert a block into a hash value, but is virtually impossible to decrypt. Although data thieves may be able to swipe a hash value from the network, it’s useless to them because they would have to decrypt the hash value to reap any rewards.

 Although blockchain may solve some internet scandal, it doesn’t solve all of it. Anything sent over the web can be snatched by data thieves, but as long as it has good encryption, it is rendered useless. Like almost everything else sent over the internet, cryptocurrencies are sent using encryption and as of late 1990s, most big, reputable servers like Google started using an encryption protocol called SSL or secure socket layer. SSL works to add another layer of encryption to any data sent over the internet.

Mechanics of Mining

 To effectively mine cryptocurrency, a miner must have to drop a significant down payment, also they will need to factor in electricity use, because profitable miners use a significant amount of electricity. These expenses, including the price of electricity may take years to pay off. A traditional computer may be used to mine, but may take years to make even close to a significant amount of money, even running it 24/7. Miners will either invest in a mining rig, or an ASIC miner.

 Mining rigs are alot like traditional computers using most of the same components: CPU, motherboard, RAM, storage, cooling, but differs due to its number of GPUs. A GPU or a graphics processing unit, is responsible for creating and relaying graphics to a computer screen. Because of this, GPUs can process a lot of information really quickly, therefore making them very effective for cryptocurrency mining.

 ASIC, or application specific integrated circuit is a piece of hardware designed for a specific purpose, unlike a computer which is considered “general use” because it can used for a multitude of different processes. ASIC miners are designed to mine under a specific hashing algorithm and can only mine cryptocurrencies that use that algorithm. Since ASIC miners can only mine a small number of different cryptocurrencies, they can become useless if the algorithm used becomes obsolete, unlike a mining rig which can mine any cryptocurrency and can also serve other purposes.

Since mining cryptocurrency can be difficult, expensive, and can take awhile to get any significant payout depending on the computing hardware, mining pools are used to pull together a “pool” of miners, combing their computational power, greatly increasing the payouts. Pools work on two different payout systems, Pay-per-share (PPS) or Full-pay-per-share (FPPS). In PPS, a pool pays its miners an equal share for each cryptographic puzzle solved and the money is pulled from the pools existing balance. In FPPS, pools allow miners to collect transaction fees as well as block rewards. The transaction fees are factored into the block reward over time and is then paid out to the miner. Pool administrators will usually take a small amount of the cryptocurrency that is mined as payment for their service.

Bitcoin was the first cryptocurrency of its time and although it may have been an ingenious idea, it still had its flaws. With Bitcoin in mind, new cryptocurrencies are able to improve upon its to make a faster and more a productive system. Cryptocurrency can be seen to be in its primary stage of development and may continue to improve through the faults of its predecessors. Cryptocurrency may or may not be the wave of the future, but it definitely serves as an example of human ingenuity.