I think everyone has heard and read about the recent revelations of bitcoin and dogecoin, courtesy of Mr. Musk. But some of us might be thinking what is cryptocurrency all about? Why is it all over the news right now? Well, we are here to talk all things cryptocurrency to get you up to speed!
An Overview of Cryptocurrency:
Firstly, it is worth our time looking at the beginning of time for cryptocurrencies. Cryptocurrency can be traced back to the idea of digital money. Before cryptocurrency came to light, other forms of exchanges existed such as:
- Commodity money;
- Coined money;
- Paper money; and
- Fiat money.
The ideas of cryptocurrency began in the 1980s and 1990s (when you think about it, that’s not that long ago!). One of the first sightings of a cryptocurrency company was Digicash, which began operations in 1990 by using ‘e-cash’ in exchange for electronic payments.
Fun Fact: PayPal was actually created to become a digital currency, but the company changed routes and now works on the basis of an electronic payment system, which coincided with credit card companies (instead of going against them, which is what digital cash intended to do).
The easiest way to define cryptocurrency is money exists (by tokens or ‘coins’) and trust is placed into a cryptographic ledger (this essentially means a decentralised system) instead of a centralised system (which would be your normal banks).At the beginning, there was a slight problem known as the ‘double spending’ problem. This literally means that it was easy to copy and reuse digital currencies to ultimately buy more items with one token or coin. You could compare this to someone forging a bank note. So, in terms of digital money (bitcoin, dogecoin, etc.), cryptocurrency platforms needed to address the double spending problem.
How Did They Avoid the Double Spending Problem?
The problem was avoided in three ways:
- The decentralised ledger: avoided the double-spending problem, as it is a means of confirmation of orders. (This is also known as the blockchain: this is how the decentralised ledger uses a type of database on servers like bitcoin, but instead of storing your typical information, it stores blocks of data and links all that data together to form a ‘chain’. This data is irreversible, which is intended to make sure no one person can control the decentralised ledger).
- Public Key-Encryption: ensures that the data and transactions are secure. This ties in with cryptography: which can be defined as the study and practice of taking ordinary text (i.e a text message) and converting that message into a coded message (which turns the text message into a code by using maths and computer science technology).
- Hashing: another form of preserving the decentralised ledger. Using Bitcoin as an example, we can compare hashing with Public Key Encryption, whereby, the algorithm of Bitcoin actually converts a text message (that can be any length) which then turns into a 64-length coded message. (Here letters and numbers will be used as the coded message – e.g. 24D9).
However, there are two questions that come to light with these systems…
What makes it so sure that users of bitcoin won’t take advantage of the decentralised ledger? (By taking advantage we mean using Bitcoin for illegal activities and trying to take sole control over the platform). The answer is simple: the whole basis of cryptocurrency is having control over your money. Therefore, this is technically an incentive for cryptocurrency users.
Will security problems arise, such as tampering with the blockchain? To what extent could this impact the blockchain? This is where cryptography comes into play, by providing the platform with encrypted messages deterring tampering and fraudulent. If cryptography was not used, then this would give rise to the double-spending problem mentioned above, meaning Bitcoin users could use the same token or coin for the same goods/services).
How Does Bitcoin Work?
There are 8 steps in creating and obtaining bitcoin.
- Obtain a bitcoin wallet to set up bitcoin addresses.
- Purchase bitcoin from an exchange.
- Transaction stage: here is where people will use encrypted messages to begin exchanging.
- Bitcoin transaction is then broadcasted to the decentralised ledger (that transaction is now irreversible). This stage is also known as a competitive stage, as there is a competition as to who gets the bitcoin at the end of the transaction.
- Cryptography stage: hashing begins after the transaction information is acquired. This repeats at ten-minute intervals. Then forms the part of the blockchain that will be processed into the ‘block’ of data.
- Getting your block to the blockchain: this stage is a somewhat complicated stage, as now the bitcoin users are in competition to get their specific block added to the blockchain that will form part of the decentralised ledger.
- This stage is the winners stage. Whichever bitcoin user ultimately formed the correct encryption that matched the block from bitcoins own algorithm, wins the bitcoin to add to their wallet.
- But lastly, it is to the broadcasted network to ensure that the bitcoin user who won with their identical block, is the correct match to the original transaction information (Stage 3) which formed the blockchain. This in-turn stops the double spending problem, ultimately maintaining the decentralised ledger.
|Exchange||Described in stage 2, ‘exchange’ refers to the place where Bitcoin users ultimately buy and sell their cryptocurrencies. When choosing your specified cryptocurrency exchange, as a result of the decentralised ledger, some of these platforms allow Bitcoin users to stay anonymous.|
|Encrypted Messages||Relating back to the Public Key Encryption and Hashing, here is where Bitcoin users will use coded messages to exchange information.|
|Broadcast Network||Broadcasting to the network essentially refers to the decentralised ledger. The decentralised ledger holds all the correct information of the original blockchain, which is where Bitcoin users try to get their block to fit. Within this network, it tries to maintain date efficiently, to ensure the prevention of fraud.|
It is quite the process to obtain bitcoin, and even more strenuous this happens every ten minutes! Now to current day news on cryptocurrencies…
Bitcoins Rise to Stardom:
After the announcement of Tesla Inc. investing $1.5 billion into the cryptocurrency platform, bitcoin rose to a record high of $48,000. (It is now continuing to rise, hitting as high as $50,000). Now, Tesla Inc. is accepting buyers who want to used bitcoin as a form of payment. This ultimately pushes bitcoin into the ‘mainstream global finance’.
Some implications arising from this…
- As a result of Bitcoin receiving as much as the limelight, ultimately gaining entrance into mainstream global finance, a future implication of the rise of cryptocurrencies is the rise of price of these cryptocurrencies. Ultimately, this ties in with the concern of Cryptocurrency Price Volatility (simple definition: price fluctuations.) There are many reasons for price fluctuations, and for Bitcoin, this can include the news people are exposed to about Bitcoin. A very fitting example, which is why we are talking about Bitcoin right now, is because Elon Musk has essentially hyped up the cryptocurrency, which impacted its market price. This can have short and long-term impacts, as you will never be quite sure when the price will go up or down.
- Another impact of Bitcoin entering the mainstream global finance, is, will ordinary people (who may not have the tech knowledge to understand exactly how Bitcoin works) be able to use it? We must be able to trust the platform in order for it to be as successful as it has been highlighted in the last month. Cybersecurity ties in with the trust of Bitcoin and other cryptocurrencies. Consumers will want to be reminded that the use of this platform will be safeguarded, with regards to their information.
It is extremely interesting to see how the influence of the rich and the famous can have on such a high-tech area of finance. After a filling with the Security Exchange Commission, Elon Musk has provided us with information on how Tesla is working on Bitcoin being a form of payment for their products. Musk has described Bitcoin as being more flexible ‘to further diversify and maximize returns on our cash’. Basically, as a result of Elon Musk’s ‘meme-tweets’ and his enormous investments, bitcoin is now being accepted as a payment method by other organisations such as Visa and PayPal. While it may take some time to get the wheels in motion for the widespread acceptance of the cryptocurrency, this is certainly a key milestone of the 21stCentury.
The Rise of Other Cryptocurrencies:
Dogecoin: this is the pivotal example of the ‘meme-tweets’ by Elon Musk that drove dogecoin into the orbit of fame. A key difference between dogecoin and bitcoin, is how there is no limitation on the amount of dogecoin that can be created at given time, whereas, we have seen above in the bitcoin stages, there is a restricted amount of bitcoins that can be created at any given time. As a result of these tweets, dogecoin has earned a market capital of $9.1 billion. A beginning for another cryptocurrency to gain access to the mainstream global finance.
XRP: While some of you may have heard of the rise of XRP due to the GameStop controversy, XRP is actually the cryptocurrency of Ripple. Ripple is actually a US based company that offers technological services such as currency exchange and settlement issues. Therefore, Ripple works on a different basis to bitcoin, where Ripple acts more as a currency exchange, and a means of direct transfer of big transactions, which acts as a more secure and cheaper substitute to direct transfers through banks. As a result of the GameStop and Wall Street bet situation, XRP rose to a 56% jump in price. The price of XRP continues to fluctuate.
Are Cryptocurrencies Actually Safe and Useful?
At the beginning of its inception, early supporters of cryptocurrency were classified as ‘cypherpunks’ (a term coined by a 1992 group of crypto enthusiasts) and mandated the cryptocurrency philosophy. They believed that in order to understand and appreciate this new ‘cyber-liberalisation’ you had to understand the philosophy behind it: they felt at the time, there was a need for a break in the control over governments and banks within the monetary system.
Even during its beginning, there was always going to be legal challenges within the legal systems of different jurisdictions. Certainly, a couple of years ago, the law was certainly not going to be up to speed with the regulation of this, essentially, new tech development.
However, even with all the tech-centred prevention of fraud (such as the encrypted messages, public keys and hashing) there were findings that $76 billion, of illegal trading is accounted for every year on the bitcoin platform. This clearly is not a good light on bitcoin.
It may be certain that the debate over cryptocurrency value and the ease of the use of certain cryptocurrencies will continue. But it is clear to see the evolution of the acceptance of cryptocurrencies within mainstream global finance, and will hopefully become a new era of financial payments. The regulation of bitcoin will more than likely be unstable while the law comes to grips with its ever-growing acceptance.
This article was written by Sarah Barry. Sarah is a BCL Graduate from the National University of Galway, Ireland, and a current Masters student in the University of Limerick, Ireland. Sarah is a Content Writer for According To A Law Student (ATALS), and an an aspiring Commercial Law Solicitor. Sarah has a keen interest in international commercial law, especially in Intellectual Property and Mergers and Acquisitions.