Cybercurrency

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Bitcoin, a popular cyber-currency that peaked in valuation at over $19,000 in December 2017.

C

ybercurrency, commonly referred to as a cryptocurrency, describes a digital medium of exchange that uses cryptography for anonymity and security of online transactions. Cyber-currency is decentralized due to its digital and unregulated nature and does not rely on central banking institutions and their services. The value of cyber-currency comes from people willing to trade goods and services for it.

Background

The first "attempts" at foundational principals of cryptocurrency date back to the late 1980s. David Chaum created a "binding" algorithm that became the foundation for web-based encryption. When Chaum saw the potential for digital e-commerce involving this "binding" algorithm, he moved to the Netherlands to start a profitable company called Digicash. Digcash was not a decentralized online currency but a monopoly for electronic secure payments. Digcash eventually went bankrupt in the 1990s. While fiat currencies have dominated the exchange market, these currencies are highly susceptible to manipulation motivated by “economic and political gain” . This notion led individuals to search for a more trustworthy way to attain financial solidarity through a decentralized medium of exchange which had the power to throw the presumed ambiguous, centralized economic central banking system out of the equation..

In 2009 after a mysterious, anonymous paper was written in 2008 about an “Electronic Cash System” called Bitcoin, a new version of decentralized currency online had started to form and adopted the name "cryptocurrency". . The identity of the author is still unknown, but this paper initially sparked the creation after many people had attempted to create online currencies, such as B-Money and Bit Gold, in prior years but failed. Bitcoin was the first cyber-currency to become available to the public, and then in 2011 many alternative, rival cyber-currencies came about as improved versions of Bitcoin’s source code. Cyber-currency then began to run into issues as the value of one Bitcoin fell to nearly $300 shortly after hitting $1000 in 2013. Since then, cyber-currencies have been subject to a large amount of scams due to the nature of the online market .

How it works

The decentralized nature of cryptocurrencies and their security of user transaction is achieved through signing the key protocol and the public ledger based blockchain technology. To send money, the user broadcasts to the cyber-currency network the amount of money they want to send from their account to another user’s account. Both ledgers are updated with the new amount in a public infosphere. The order must be authenticated before the transaction can be processed. The authentication happens with a digital signature. Each account comes with a private key and a transaction message, and with that, the digital signature is created. A new digital signature is created every time a transaction goes through in order to strengthen security. New transactions go into a pool of public transactions and then are moved into a chain to select the order in which they are processed. The order is selected in a somewhat mathematical lottery . In fact, avid users spend many hours trying to figure out the system behind the lottery.

Trading Vs. Mining

The two main interactions individuals have with any form of cryptocurrency is through trading the currency online or mining the currency themselves.

Trading

Cryptocurrency trading is exchanging one cryptocurrency for another and buying and selling coins. There are two types of trading – margin and leverage . Margin trading is when a user makes a transaction with funds that have been borrowed from another user. Therefore, in simpler terms, it is similar to taking out a loan from a bank. In order to borrow from another user, a certain amount of funding must be allocated that will be taken from the user buying and will not be given back until the funds borrowed are returned in full . There are two types of leverage trading – short term and long term. For example, leveraging in the long term means that the user believes the value of their cyber-currency will rise over time. On the other hand, leveraging in the short term means that a user believes the value of their cyber-currency will drop and therefore they sell their coins and buy them back for less than they sold them

Mining

Cyber-currency mining is adding transactions to the blockchain ledger and releasing new currency. The reason this is done is to validate transactions. Each time a transaction is made, the miner must secure and verify the transactions to the blockchain ledger. In order to mine, people must have a computer with a special program, and significant computer resources overall. Mining is encouraged because those who participate obtain portions of the new cybercurrency. This makes the price of mining more than the reward. . Since cyber-currency usage is increasing, so is the mining associated with it.

Approaches

In his article, Possible State approaches to Cryptocurrency, Jane Lansky describes cryptocurrency as a system that must meet the following criteria:

• The system does not require a central authority.
• The system keeps an overview of cryptocurrency along with it's ownership.
• The system decides whether new cryptocurrency can be created and who receives ownership of the new currency.
• Ownership of cryptocurrency is proved through cryptography.
• The system allows transactions in which the ownership of cryptocurrency is changed.
• The system can perform at most one update at any given time, even when two updates on the same cryptocurrency occur simultaneously.

Technology

Blockchain

Blockchain was originally created solely for cyber-currency but is now used in several different aspects of technology. It works like a digital spreadsheet that is duplicated to thousands of computers within the cyber-currency network. The design allows the technology to be regularly updated which allows it to automatically check the database every ten minutes and update the spreadsheet. In a sense, blockchain promotes privacy because it protects individual’s personal data by decentralizing control Information shared on the blockchain exists as a shared and regulated database and it cannot be copied. Blockchain makes sure that people are not using the same cyber-currency for more than one transaction. Blockchain essentially eliminates the middle man and allows consumers to connect directly . It allows for transactions to be public, but the user still has a right to a private identity as discussed by Floridi . Blockchain creates legitimacy by enforcing authenticity because it creates a sense of security within the users .

Types

With the explosion of so many new cybercurrencies, it’s important to recognize the differences between coins and tokens.

Coins

Cybercurrencies that are built from their own platform represent the value of the currency with a coin. They are the main unit of transaction for their currency, and can be subdivided to a certain point, at which point you have the atomic unit for a currency. For example, Bitcoin, the most well known crypto currency has a main unit called the Bitcoin, and an atomic unit known as the Satoshi, which has the value of one hundred millionth of a single bitcoin. The market capitalization of a particular cryptocurrency can be determined by finding the fiat value of its main token, and multiplying it by the number of current issued coins.

Symbol	Name	Ticker	Units	Description
	Bitcoins	BTC	Bitcoin/Satoshi	Bitcoin, created in 2009, was the first cyber-currency, but the creator is still anonymous. The creator went by the pseudonym Satoshi Nakamoto, however, this is not his real identity. Nakamoto mined the first Bitcoin and embedded in the Bitcoin was the date, January 3, 2009, which is now believed to be the date of the first ever mined bitcoin. In May 2010 that bitcoin was used to make a purchase by Laszlo Hanyecz. Hanyecz paid for a pizza with 10,000 bitcoins. That day is now known within the bitcoin community as Bitcoin Pizza Day.
	Litecoin	LTC	Litecoin/Photon	Modeled after Bitcoin, Litecoin is similar but still presents very slight differences. It is supposed to have faster processing speeds due to advanced technology . Litecoin was created by Charlie Lee in 2011, who designed Litecoin as an open source tool available to the public. Litecoin has advertised that it can produce a new block in its blockchain in 2.5 minutes, which is comparably faster than Bitcoin's speed to add a new block. Litecoin also has a higher max supply of coins in circulation, 84,000,000.
	Ethereum	ETH	Ether/Wei	Defined, on its website, as a blockchain app platform with an "enormously powerful shared global infrastructure that can move value around and represent the ownership of property." Ethereum is similar to Bitcoin but with a faster processing speed due to updated programming using if-then statements. Although Ethereum is newer than Bitcoin and Litecoin, it is more popular than Litecoin and follows closely behind Bitcoin .
	Monero	XRM	Monero/Tacoshi	Monero is another cryptocurrency originally forked from Bitcoin, created in April 2014. Its key differences are that it scrambles its public transaction book. Unlike Bitcoin, and many of its other derivatives, you are unable to tell the sending account(s), receiving account(s), or the transaction amount. This has made it widely used in illegal activity as it is harder to blacklist accounts and stolen funds in the same manner as one can on other blockchains.
	Ripple	XRP	Ripple/Drop	Ripple is a real-time token settlement system created by Ripple Labs officially launched in 2012. Using a distributed open source network Ripple allows the the trading of tokens representing anything from currency, both crypto and fiat, commodities and more. Its native token is known as XRP which has one of the largest market capitalizations outside of Bitcoin.

Tokens

Tokens are an indicator, or representation, of the currency. The token is commonly the value of the currency, but can represent anything, such as data storage. Tokens and coins are commonly used interchangeably, however tokens are built off the platforms that coins represent. A token can be obtained through an Initial Coin Offering, or ICO as an exchange for an investment into a company. The process is similar to an Initial Public Offering, or IPO, where one receives stock for their investment.

Utility Tokens

Utility tokens serve as future access to the products or services of the company. While many utility tokens aren't designed as an investment, they are sold at an ICO in order to fund the project of the company. Since cybercurrency is still new, these coins are commonly held for speculation and later used or sold when the product or service of the company is fully developed.

Security Tokens

Security tokens serve as a representation of an external asset that can be traded and recorded on a ledger. For example, a security token can be a digital representation of the stock's of a company and can benefit from a secure and protected decentralized ledger.

Advantages

Privacy

As Luciano Floridi explained, the value of privacy lies in the fact that users are allowed to control their own use to a larger extent. As society evolves, the issue of privacy online becomes more prominent which is prevalent in the foundation of cyber-currency. Similarly, cyber-currency promotes authenticity due to the way that users must hold one another reliable for their actions. While banking institutions suffer from cyber attacks quite often, cyber-currencies do not, due to strong security through technologies such as blockchain.

Decentralization

Decentralization in cybercurrency describes the control over the ledger of the coin transactions. It gives control to all participants in the system and removes one central authority that may act selfishly against the participants. Decentralization prevents price manipulation and fraud. By have a distributed ledger, faulty transactions can be detectable through the peer-to-peer network. Through history, a central power, such as a government system or business leader, can abuse their power and cause harm to those part of the system. The current framework of the internet is centralized which enables governments to remove content deemed unsuitable to its internet users. However, centralization leaves vulnerability as data is stored locally on a server. The server acts as a central point that can malfunction and lose the data or information that its consumers relied on. In a decentralized system, information is stored by every participant of the network and can allow data recovery if one node of the network is lost.

Lower Transaction Fees

Cybercurrency avoids typical transaction fees that occur with most credit card companies. While credit card companies have fees for writing checks, or even transferring funds, cybercurrency avoids this process since the data miners that are in charge of number-crunching are incentivized in other ways. Since data mining allows individuals to take a portion of the new cybercurrency that is generated, transaction fees are no longer required since jobs do not depend on the income. Although a fee can be involved with the use of a third-party management service, the fee is likely to be much smaller since cybercurrency already brings in funds when managed.

Disadvantages

Cyber-currencies can be a very risky investment since the price of a coin is volatile and can change drastically in a short span of time with trends in the financial market. This, along with a lack of centralized regulation, also create ethical issues such as price manipulation, privacy, currency protection, and illegal markets.

Ethical Issues

In his paper titled, "Anticipating Ethical Issues in Emerging IT", Phillip Brey argues that contemporary ICT ethics aren't equipped to deal with new and emerging technologies, especially those that are generally unregulated like cyber-currency. Although decentralization from the financial institutions is often seen as a very positive aspect of cyber-currency due to the privacy it brings to users, the lack of authority overseeing is a large concern. In these models, all of the responsibility and trust is placed on the user. Users have a responsibility to be truthful and work as a community which also enforces authenticity . Users have to keep their fellow users responsible for their actions. All transactions within the cyber-currency network are irreversible, therefore there must be some sort of trust between people involved.

Price Manipulation & Whales

The volatility in cyber-currency prices seems to be a growing issue due to the fact that some tradable assets have dropped by extremely large margins in very short timespans. Therefore, the cyber-currency market is known to be very risky and not completely trustworthy. A large part of this fluctuation in the market stems from whales. Whales refer to people who have a significant amount of cyber-currency capital, therefore gaining the ability to sway the cyber-currency market by manipulating the prices. Whales "buy and sell walls" in order to do this. Buying and selling walls occur when a person buys in on a cyber-currency that they expect the value to go up. Whales have a lot of power within a market since they have large amounts of capital, therefore they can cause the market to change significantly without even investing in it . They can also use the price fluctuation to buy things for cheaper prices, causing greater market capital.

Laat defines trust as reliance on others and social institutions. It had previously been argued that virtual trust was impossible. Laat provides evidence of several online communities which demonstrate virtual trust, including online markets. The presence of whales and their ability to disrupt the market at will requires bitcoin traders to have trust in the community of traders. They must trust that the whales will not use their large sums to negatively sway the market. A report by Chainalysis found that the whales, on the whole, stabilized the market more than they destabilized it, showing that the apparent trust is not unfounded.

Illegal Markets

A significant portion of cybercurrency users participate in illegal markets . Although there is a lot of illegal use in cyber-currencies, the way that blockchain works allow law enforcement officers to work backward due to the public manner of the market. Because of this, they are able to find out who is working in illegal markets. One of the largest illegal markets in the cyber-currency world was Silk Road (marketplace) created by Ulbricht. The Silk Road was a free market that was part of the dark web and unregulated by the government. Almost all of the purchases made on the Silk Road were drugs and weapons. The currency for Silk Road purchases was bitcoin. One of the main issues that arose Kathleen Wallace addresses in the "Concept of Anonymity," is that anonymity requires action that is not traceable, but people using the Silk Road wrongfully believed their actions were not traceable.

One can also compare the usage of these cryptocurrencies to the expressive values of the cryptocurrencies designers. It is clear to see that the designs of these currencies operate around decentralization and the movement toward a currency not controlled by a central authority that might be nefariously influenced by said authority. At a surface level, this is a very altruistic goal of these currencies to achieve. However, when the embedded values of the cryptocurrency system are examined, one can see that these illegal markets are instead promoting much more negative values in its users. That is, cryptocurrencies have given people the agency to perform illegal transactions that they couldn't otherwise with more traditional forms of currency, and in terms of embedded values, promoting these illegal values is a consequence of using said cryptocurrencies. This offers a unique challenge for these currencies, to balance achieving a secure and popular decentralized currency and a system that does not promote and enable illegal activities.

Security

Cryptocurrencies, being relatively new technologies, have become vulnerable to multiple different attacks and hacks. While more traditional financial institutions are also vulnerable to attackers, cryptocurrencies face a new challenge as their design is completely transparent and public to the world, whereas the implementations of a bank’s online platforms are highly guarded and heavily maintained by security engineers. As outlined in Mia Consavlo’s piece “Cheaters”, people will seek out numerous ways to exploit and gain an advantage in a system. The specific study in the piece was multiplayer games, a rather innocuous medium for cheating to take place. However, when this cheating happens with a system which holds incredibly large sums of money, the dangers and importance of keeping said system secure become imperatives. If society must expect cheaters in every form of system, cryptocurrencies need to keep up with its security or risk devastating attacks on peoples’ livelihoods. To give some examples of attacks already committed on cryptocurrencies, the storage tool BlackWallet had $400,000 in XLM coins stolen, Japan’s crypto exchange Coincheck had 530 million in coins stolen, and the Bitcoin Gold fork of Bitcoin was attacked by a 51 percent attack. Thinking back to Brey’s argument of ICT’s ability to handle these new technologies, it can be easily argued that cryptocurrencies need more oversight and proven security before being entrusted with these increasingly large sums of money, especially with such a number of cases of exposing vulnerabilities in cryptocurrencies already.

See Also

• Bitcoins
• Cryptocurrency
• Cybersecurity