What is cryptocurrency: what you need to know about digital currency

0 55

If you want to know what is cryptocurrency, how to get it, where to store it and how to use it without going into technical details, this guide is for you. Cryptocurrency for beginners is a non-volatile amount of information not always understandable to an ordinary user. We tried to answer the very questions that arise for beginners.

Digital currency is the money of the future and it is not worth it to ignore them. There are a lot of skeptics in the world who claim that cryptocurrency is fraud but trust me, when the first credit cards appeared, a noise was even greater!

how to cryptocurrency work

Cryptocurrency architecture

The main feature of the cryptocurrency is the complete lack of external or internal control. The tax service, banks, and other public services are not able to influence the transactions of participants in the payment system.

An interesting feature is also that the transfer of cryptocurrency is irreversible, not who cannot block or cancel the transaction. In turn, participants in the transaction at their discretion may temporarily block their cryptocurrencies.

Blockchain

The technology of cryptocurrency is based on the fact that the network does not have a trusted node – the one whose actions are guaranteed to be true and who can confirm the correctness of other people’s transactions. To make a decision on the reliability of transactions in conditions of disbelief, any message on the network uses blocking technology, which first appeared in the Bitcoin system. To store data, transactions are combined into blocks, from which a continuous chain is formed. Continuity is provided not so much by numbering as by including the hash of the previous block in the current block – so there is no way to change the block without changing hashes in all subsequent blocks. Only the longest chain is considered true, all hashes in which meet certain requirements, which are difficult or expensive to perform. In different cryptocurrencies, the Proof-of-work Proof-of-stake methods or their combination are used to verify the blocks.

As a rule, the developers initially specify the upper limit of the total amount of emission in cryptocurrencies. However, some crypto-currencies, such as PPCoin, Novacoin, Sifcoin, and others, do not have a fixed upper limit of the total volume of emissions, and both emission and issue (by the mandatory destruction of a fixed amount in of each transaction).

Most crypto-currencies provide pseudonymity – all transactions between all addresses (purses) are public, but there is no data about address owners. However, the identity of the owner can be established if the necessary additional information becomes known. The concept ZeroCash outlined the possibility to replace the pseudonym for anonymity

blockchain

Timestamping

A reliable temporary binding is a process of securely tracking the time of creation and modification of a document. Security here means that no one, even the owner of the document, will be able to change it once it has been written, provided that the integrity of the timestamper will never be compromised.

  • Proof-of-work schemes – the first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256 and scrypt. The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations. Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.
  • Proof-of-stake and combined schemes – some cryptocurrencies use a combined proof-of-work/proof-of-stake scheme. The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there’s currently no standard form of it.

What is cryptocurrency

Mining

In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and Scrypt.This arms race for cheaper-yet-efficient machines has been on since the day the first cryptocurrency, bitcoin, was introduced in 2009. However, with more people venturing into the world of virtual currency, generating hashes for this validation has become far more complex over the years, with miners having to invest large sums of money on employing multiple high performance ASICs. Thus the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the enormous amount of heat they produce, and the electricity required to run them.

cryptocurrency Mining

Wallets

A cryptocurrency wallet stores the public and private “keys” or “addresses” which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

crypto wallet

Anonymity

Cryptocurrency is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys (or “addresses”). Thereby, cryptocurrency owners are not identifiable, but all transactions are publicly available in the blockchain.Still, cryptocurrency exchanges are often required by law to collect the personal information of their users.

Additions such as Zerocoin have been suggested, which would allow for true anonymity. In recent years, anonymizing technologies like zero-knowledge proofs and ring signatures have been employed in the cryptocurrencies Zcash and Monero, respectively.

Anonymity, crypto

Legality

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.

U.S. tax status

On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes. This means bitcoin will be subject to capital gains tax. In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.

Cryptocurrency Alliance Super PAC The Cryptocurrency Alliance Super PAC. One of the many groups formed to protect consumer interests in cryptocurrencies.

In response to the IRS ruling, numerous organizations have been created to advocate for consumers. One of the most prominent examples is the Washington, D.C. based Cryptocurrency Alliance, an independent expenditure-only committee (Super PAC), created to raise awareness about cryptocurrencies and blockchain technology.

U.S. tax status crypto

The legal concern of an unregulated global economy

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.

Cryptocurrency networks display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency; however, the very same lack of regulations has been critiqued as potentially enabling criminals who seek to evade taxes and launder money.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and (in some cases) impossible to track.

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.

The legal concern of an unregulated global economy

Loss, theft, and fraud

GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, 2013. Subscribers, unable to log in, lost up to $5 million worth of bitcoin.

In February 2014, cryptocurrency made headlines due to the world’s largest bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer’s bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. Due to this crisis, among other news, the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.

Two members of the Silk Road Task Force—a multi-agency federal task force that carried out the U.S. investigation of Silk Road—seized bitcoins for their own use in the course of the investigation. DEA agent Carl Mark Force IV, who attempted to extort Silk Road founder Ross Ulbricht (“Dread Pirate Roberts”), pleaded guilty to money laundering, obstruction of justice, and extortion under color of official right, and was sentenced to 6.5 years in federal prison. U.S. Secret Service agent Shaun Bridges pleaded guilty to crimes relating to his diversion of $800,000 worth of bitcoins to his personal account during the investigation, and also separately pleaded guilty to money laundering in connection with another cryptocurrency theft; he was sentenced to nearly eight years in federal prison.

Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC’s complaint stated that Garza, through his companies, had fraudulently sold “investment contracts representing shares in the profits they claimed would be generated” from mining.

On November 21, 2017, the Tether cryptocurrency announced they were hacked, losing $31 million in USTD from their primary wallet.The company has ‘tagged’ the stolen currency, hoping to ‘lock’ them in the hacker’s wallet (making them unspendable). Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used.

On December 6, 2017, more than $60 million worth of bitcoin was stolen after a cyber attack hit the cryptocurrency mining platform NiceHash (Slovenia-based company). According to the CEO Marko Kobal and co-founder Sasa Coh, bitcoin worth $64 million USD was stolen, although users have pointed to a bitcoin wallet which holds 4,736.42 bitcoins, equivalent to $67 million.

Fraud

Darknet markets

Cryptocurrency is also used in controversial settings in the form of online black markets, such as Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then; the current version being Silk Road 3.0. The successful format of Silk Road has been widely used in online dark markets, which has led to a subsequent decentralization of the online dark market. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.

Darknet markets present growing challenges in regard to legality. Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labeled as “virtual assets”. This type of ambiguous classification puts mounting pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.

Since most darknet markets run through Tor, they can be found with relative ease on public domains. This means that their addresses can be found, as well as customer reviews and open forums pertaining to the drugs being sold on the market, all without incriminating any form of user. This kind of anonymity enables users on both sides of dark markets to escape the reaches of law enforcement. The result is that law enforcement adheres to a campaign of singling out individual markets and drug dealers to cut down supply. However, dealers and suppliers are able to stay one step ahead of law enforcement, who cannot keep up with the rapidly expanding and anonymous marketplaces of dark markets.

Darknet markets

Fundings – ICOs

An initial coin offering (ICO) is a means by which funds are raised for a new cryptocurrency venture. An ICO may be used by startups with the intention of bypassing rigorous and regulated capital-raising processes required by venture capitalists or banks. However, securities regulators in many jurisdictions, including in the U.S., and Canada have indicated that if a coin or token is an “investment contract” (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of “tokens”) is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ether. The coins may ultimately be intended to be used as a medium of payment on a platform or serve some other purpose such as identity verification within an ecosystem.Russian President Vladimir Putin has approved a timeline for a framework that will regulate initial coin offerings (ICO) and cryptocurrency mining operations.

Our team hoped that in a comprehensive form explained what is the cryptocurrency and how to get it and use it. If you still have any questions, please reply in the comments.

Leave A Reply

Your email address will not be published.