By Muskaan Aggarwal and Shruti Jhawar
The world is continuously undergoing revolutionary technological innovations, and the concepts of cryptocurrency and Blockchain have become an integral part of this advancement. Both cryptocurrency and Blockchain, work together in providing us with a new future. There are multiple types of cryptocurrencies competing in the market today, such as Bitcoin, Ethereum, Namecoin, Ripple, etc., which, when empowered by Blockchain, operate without the need for a central authority. However, not everything is good with these concepts, and many governments across the world have come forward, against cryptocurrency and Blockchain. Many have gone ahead further in banning the entire process and making it illegal for anyone to be related to them.
This paper aims to introduce the concepts of cryptocurrency and Blockchain, along with providing information on their working and relation to each other. The paper also analyses the controversial nature of cryptocurrencies and Blockchain.
Cryptocurrency, unlike any other medium of exchange, is a digital medium of commerce commencement. It is similar to the real-world currency, however it does not have any physical embodiment or central issuing or regulating authority that means it is used to make payments without any fees, as no bank or government authorises it. Cryptocurrency uses cryptographic functions to administer financial transactions and prevent them from fraudulent and counterfeiting transactions as the legible information in such codes is almost un-crack-able. Its existence is based on the Blockchain technology which leverages decentralised peer-to-peer networked ledger of all transactions and thus helps in gaining decentralisation, transparency, and immutability.
Cryptography evolved in the digital era to become a system to secure information, communications, and money online while it was born way back during World War II as a way to secure communications. During the 90’s technological advancements, many attempted to create a digital currency with the help of emerging markets such as Flooz, Beena, and Digi Cash but inevitably failed. Eventually, in 2009, Satoshi Nakamoto with a group of his programmers introduced ‘Bitcoin’ as a peer-to-peer electronic cash system. There has been a proliferation of cryptocurrencies since then, and currently, there are around 2000 cryptocurrencies available in the market.
How Cryptocurrency Works?
Cryptocurrencies allow users to make secure payments and store money using decentralised technology while being anonymous about the user’s identity and without going through the centralised banking procedures. They run on Blockchain, which is a distributed public ledger. Cryptocurrency units are made through a process called mining. Mining involves solving complicated math problems using computers that generate coins. The currencies can also be bought from brokers and can be stored and spent by using cryptographic wallets. Cryptographic wallets are digital wallets that allow the currency to move from one owner to the next.
In cryptography, every transaction is recorded when the amount is transferred by the sender to the receiver, and then a hash of previous transactions and the public keys (wallet address) of the next owner is signed with individual private keys of both the parties in the transaction. Finally, the transaction is confirmed and then broadcasted in the network, adding the transaction to the end of the cryptocurrency. Thus, every transaction is recorded and a public ledger is maintained which contains the record of all previous owners. Thus, by maintaining a public ledger, everyone in the network can scan everyone’s account balance.
This decentralised network of maintaining a public ledger through Blockchain was introduced by bitcoin. This process also eliminates the problem of double spending. Double spending is a fraudulent technique in which the same amount is spent twice. It very important monetary issue faced by digital payment networks around the globe. In traditional ways, it was solved by a third-party involvement, a central server, which helps in maintaining the records of the transactions, which entails an authority in control of funds and personal details. However, with bitcoin it is not an issue anymore as there is a record of every bitcoin transaction ever made.
All the legitimate transactions can only be marked by the miners and transported across the network because only miners can solve a cryptographic puzzle to confirm the transaction. Once the transaction is marked legitimate and spread across the network, every network connection is added to its database, which is further confirmed by the miners. After the confirmation, the data becomes un-forge-able and irreversible. Thus, by doing so, the miners receive a transaction fee as a reward. Strong cryptography ensures consensus-keeping processes in cryptocurrencies.
Types of Cryptocurrencies
The most common cryptocurrencies are:
It is the first and most commonly traded cryptocurrency to date. Started by Satoshi Nakamoto, it sets and serves as a digital gold standard in the entire cryptocurrency market and is used as a global means of exchange. Currently, it is limited to 21 million coins.
This cryptocurrency has ascended to second place in the hierarchy of cryptocurrency. Ethereum can not only process transactions but can process complex contracts and programs. It is the perfect instrument for Blockchain, launched in 2015. With a turbulent past journey, it is proved to be a hugely popular cryptocurrency launchpad in 2017, which provide a base for decentralised cryptocurrency applications (more like an app store for cryptocurrency).
Founded in 2012, Ripple is used by large companies instead of individual users because it allows the movement of money in larger amounts across the globe. It is not a Blockchain based system, therefore it allows variety of transactions, and not just cryptocurrency. As a lot of banks have joined Ripple, it has immense value in the financial world. Unlike other cryptocurrencies, it has pre-mined coins which require no mining thereafter.
Litecoin currency was the first cryptocurrency after bitcoin. Famous for its innovations, including faster payments and processes to allow many more transactions, it is tagged as the silver to the digital gold bitcoin.
Mined with bitcoin software as a bonus, Namecoin is a cryptocurrency. Based on the code of bitcoin which uses a similar proof-of-work algorithm. As similar to the bitcoin, it is also limited to 21 million coins. However, unlike bitcoin, Namecoin has its Blockchain transaction database storage.
How Blockchain Relates to Cryptocurrency
Cryptocurrency and Blockchain are often confused to being synonymous with each other. While they both are intertwined in multiple ways, it is important to note that the two are different technologies. Cryptocurrency, as discussed above, is a digitised currency that is either used as a store of value or used as an exchange of value which falls under the umbrella of Blockchain. The cryptocurrency was the first use case of Blockchain. Blockchain can be defined as any system which keeps “records by cryptographic-ally linking ‘blocks’ of transaction data together into a ledger” (Braun, 2018). It writes accounts in a specific sequence and makes it impossible for the accounts to be put out of that sequence.
Every transaction in Blockchain technology is endorsed through a “consensus algorithm”, and involves three parties, namely: the sender, the receipt, and the miner (Kulkarni, 2018). While senders and recipients are the participants of the Blockchain transaction, the miners are the people that validate such transactions and make the next block in the Blockchain. In return, such members are given compensation through the different types of cryptocurrencies, like bitcoin, etc.
Blockchain, Bitcoin, and Ether
Bitcoin is the first example of Blockchain, and it is not difficult to say that without Blockchain, there would have been no existence of bitcoin. In bitcoin’s Blockchain database, the ledger is stored and revised collectively with the use of multiple computers attached to the original bitcoin network. As this is a collective process, no one computer or institution is in charge of the process, as a result even if one of the many computers is hacked or face technical issues, the other computers are capable of going on without it.
However, bitcoin is not all that Blockchain is tied to. After the successful operation of bitcoin for a few years, many programmers and developers replicated the concept of bitcoin, and after adding new features, created other kinds of ledgers for storing data securely. After bitcoin, ether is the most valuable virtual currency in existence. Ether runs on the concept of ‘Ethereum Blockchain’, where in addition to recording the virtual currency transactions, the program can execute simple programs as well. For example, it has become possible to move the virtual currency of ether between different wallets, after an event through the Ethereum Blockchain.
Problems with the Old System
One of the several limitations of the old way of storing data was the maintenance being handled by a single authority. If the database is being maintained by a single authority, it becomes more prone to cyber-attacks, and it becomes easier for people to lose their access to the data provided. However, with the introduction of Blockchain, people can now maintain and update their own individual copy of the data. Through Blockchain, it has become easier for people to separate and maintain their own records, which makes the process more efficient and less time-consuming.
Limitations to Blockchain
It would not be correct to say that Blockchain is completely safe, as there have been virtual currency thefts in existence. Most theft cases are a result of hacking or stolen passwords or private keys, that make the currency accessible to the users. This is where Blockchain gets problematic, as once the currency is moved out of the virtual wallet, it is not possible for the currency to be moved back due to the absence of any central authority. Therefore, for virtual wallets, the burden lies on the user to keep his passwords safe and be as cyber-secure as possible.
Moreover, Blockchain experiences limitations in the quantity of data that it is capable to process. As all the computers record every transaction, it is not possible for any of the computers to store more or less, as compared to the others, which puts a limit on the quantity. This situation often makes Blockchain technology unattractive and prone to questions and challenges.
According to the International Data Corp., it has been predicted that the worldwide annual spending on Blockchain and Cryptocurrency would reach $11.7 billion by the year 2022 (Seth, 2019). The figures clearly indicate that these concepts are expected to be our future and something that would keep evolving and expanding in the long run. Therefore, it has become important for people to understand the concepts with both its pros and cons and to make the correct choice.
Braun, A. (2018, September 4). Cryptocurrency vs. Blockchain – What’s the Difference? Retrieved from maketecheasier: https://www.maketecheasier.com/cryptocurrency-vs-blockchain/
Kulkarni, A. (2018, November 20). Retrieved from medium: https://medium.com/datadriveninvestor/blockchain-vs-cryptocurrency-how-the-two-relate-to-each-other-edf7632fe9de
Seth, S. (2019, June 25). Retrieved from Investopedia.com: https://www.investopedia.com/news/blockchain-solutions-grow-75-through-2022-idc/
Ameer Rosic. (2016, November 14). Retrieved from blockgeeks: https://blockgeeks.com/guides/what-is-cryptocurrency/
About the Author
Muskaan Aggarwal is a second year student at Jindal Global Law School, pursuing B.A. L.L.B (Hons.). She is also an in-house researcher with The Digital Future – Blockchain and Cryptocurrency Team.
Shruti Jhawar is a second year student at Jindal Global Law School, pursuing B.B.A. L.L.B (Hons.). She is also an in-house researcher with The Digital Future – Blockchain and Cryptocurrency Team.