There are technologies and then there are technologies that, despite their initial rejections, are referred to as landmark developments in the history of technological advancements and innovations. If the PC’s introduction changed the way we used to manage our data and files, the Internet took it to another level by allowing us to transfer the data/information anywhere across the globe. Then came the Internet of Things (IoT) that changed the course of operation. The way things were getting managed at remote sites. IoT allowed the companies to monitor and control its remote operations in real time with literally having ‘no men at work’. These innovations and technologies have either changed or touched almost every human life. Similar to the ranks of IoT, there is another technology called ‘Internet of Money (IoM)’ or cryptocurrency (cryptos = secret) or Bitcoin, designed to change the way of transactions, the way we trade.
As most people still have no idea about the importance of IoM technology, speaking about how disruptive it could be, Charles Lee, also known as Coblee in Bitcoin world, creator of Litecoin and Ex-Director of Engineering at Coinbase opined, “Cryptocurrency is such a powerful concept that it can almost overturn governments.”
The concept of cryptocurrency or Internet of Money is difficult to understand, but easy to use. Difficult, mostly because it is entirely different from the conventional currencies that people are using since ages. What’s more interesting is that there is no central or mid-way authority like Central or Reserve Banks that control the flow of these currencies. It is completely decentralised.
When asked by many bitcoin cryptocurrency enthusiasts to help explain the bitcoin architecture, the founder of bitcoin cryptocurrency, a peer-to-peer electronic payment system, popularly known by his pseudonym Satoshi Nakamoto responded in his blog forum P2P Foundation, ‘Sorry to be a wet blanket. Writing a description for (bitcoin) for general audiences is bloody hard. There’s nothing to relate it to.’ In response, Rick Falkvinge, another bitcoin enthusiast and Founder of the Swedish pirate party, came back with an interesting analogy, “Bitcoin (BTC) will do to banks what email did to the postal industry.”
Whether it does or it does not, remains to be seen.
The Current Transaction System And The ‘Double Spending’ Problem
The first cryptocurrency ecash system was developed by a cryptographer at the University of California, David Chaum in 1983. The system, despite every effort, could not succeed. Its subscription hardly ever crossed 5,000.
In late 2008, Satoshi Nakamoto who was equally brilliant in mathematics published a research paper called Bitcoin: A Peer-to-Peer Electronic Cash System. In the paper, he introduced bitcoins as a virtual currency that could essentially work as online cash. The word – Bitcoin – is made up of ‘bit’ + ‘coin’ that literally stands for digital/virtual currency. Implemented as an open source code, the Bitcoin technology is the world’s first-ever completely decentralised digital payment system. The technology soon became an interesting affair for developers across the globe.
The idea of Bitcoins is based on the elimination of third-party gateway and regulation. For example, currently, if Ram is booking his IRCTC tickets under the ‘tatkal’ quota, in order to get one ticket, he would often end up spending two-three times more than the required ticket payments, owing to third-party gateway involvements – Paypal, bill-desk, Visa/Mastercard etc. It takes a week or two to get the surplus amount back. Third-party gateway also increases the total transaction timeline.
Authors of BITCOIN: A Primer for Policymakers, Jerry Brito and Andrea Castillo, explained the situation,
Intermediaries like PayPal keep a ledger of account holders’ balances; deduct the amount from the sender’s account and add it to the receiver’s account. In computer science, this is known as the “double-spending” problem.
Bitcoin cryptocurrency solve the double-spending issue by skipping third-party involvements and introducing peer-to-peer (P2P) transactions.
The Bitcoin Transaction
Bitcoin doesn’t work through email ids, physical addresses, or 16 bits encryption of online accounts. Instead, Bitcoin accounts are random QR codes of 160 bits. The accounts are made accessible through NFC (near field communication) chips. Since the system allows the peer-to-peer transfer, there is no gateway in between that could delay or control the transactions. The transaction uses public-key cryptography to halt malicious users’ attempts to manipulate the data. The verification of the transfer is done separately using the payee’s private key, another code. (However, it must be noted that all Bitcoin exchange platforms do ask for real identities like email ids for Bitcoin conversion.)
Hesham Rehman, CEO and co-founder, Indian Bitcoin startup Bitxoxo says, “International transactions involve currency transfers. The process not only costs 2.5% conversion tax but also takes much longer time to get the money transferred. In comparison, the Bitcoin technology hardly involves any transfer charge (INR 10-200). And, also the transfer of money takes place in real time; you will get the confirmation within 5-30 minutes.”
The transparency of BTC transfers is unprecedented, as far as currency transactions are concerned. Once a transaction takes place, the list that is in the public domain gets updated and everyone comes to know about the exact amount just transacted. Thus, the transparency guarantees the safety and security, as nobody can challenge the legitimacy of the transfer. This is one of the biggest reasons that make it harder for hackers to commit any fraud. “I think this is the first time we’re trying a decentralised, non-trust-based system,” said Satoshi while responding to a query at his Bitcoin forum, in 2009.
There are other benefits too. In contrast to the regular currencies where Central/Reserve Banks spend a huge chunk of money on their (currency) printing, transportation and regulation process, Bitcoin generation does not cost a penny; instead, a rewarding affair, as the miners get rewarded for generating Bitcoin cryptocurrency. Furthermore, steps like demonetisation won’t affect the market and users at all. This makes a huge difference overall.
Bitcoin Technology: Anonymous or Pseudonymous?
As explained, the Bitcoin accounts are QR codes. People are often wary over the transactions’ anonymity. Recent is the Ransomware Attack. Ransomware is a malicious crypto-worm that has been attacking Microsoft PCs worldwide since May 2017. The crypto-worm encrypts any users’ data and demands some ransom payment in Bitcoin cryptocurrency. This has been a genuine users’ and governments’ concern across the globe. Debating the issue, award-winning British author Charles Stross raised a number of concerns in his blog, “Bitcoin’s utter lack of regulation permits really hideous markets to emerge, in commodities like assassinations.” Governments, too, are suspicious over Silk Road and ISIS’ possible presence in the Bitcoin world. Heesham clarifies, “It is not an anonymous transaction. The IP addresses are trackable.”
Sandeep Goenka, co-founder & COO Zebpay questions the efficacy of conventional currency in that case, “I fail to understand the accusations. Neither the attacks have occurred for the first time nor have such markets emerged only because of Bitcoins. The hideous markets have been present and evolving for centuries despite all the regulating authorities. Why impute few years’ old Bitcoins as the real blemish behind their evolution?”
Since the launch, leading world dailies New York Times, Guardians, WSJ and other print and electronic media continued to debate over the anonymity concerns present in BTC. Finally, in 2014, Gavin Andresen, Chief Scientist Bitcoin Foundation, later appointed by Satoshi as the lead developer clarified the degree of the anonymity while speaking to Twit TV, “BTC transfers are anonymous to a certain degree. The degree of anonymity is more than that of current online transactions but still less than hard cash payments. This is because IP addresses of nodes can be easily tracked.”
The most worrisome point is the safety and security of currencies like the US dollar, Indian Rupee or any other conventional currency that we use. The credit/debit cards’ data could be hacked easily leading to the transfer of money to unknown accounts. Also, the very basic idea of these currencies’ regulations through Central or Reserve Banks, “security through obscurity” is debatable, as this makes way for duplicate currencies too. Enthusiasts at the Bitcoin Forum have addressed the safety and security of Bitcoins in detail. The currency is not foolproof and there are instances where private keys have been stolen. However, given that the entire technology has got no room for duplicate Bitcoins, storing personal information, the cryptocurrency is more safe and secure, compared to the conventional currencies.
Despite these great features, the very basic idea of P2P transaction worries many economists, who want everything to be regulated. Reacting to cryptocurrency technology, Nobel Laureate Economist Prof. Paul Krugman termed Bitcoin technology, as anti-social and evil. Debunking Krugman’s comments, Satoshi, at his Bitcoin forum, averred, “The root problem with conventional currency is all the trust that is required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Thus, Bitcoin technology, also raised an important question that was never asked before, “Why should a currency behave as some boogeyman to the government authorities?”
Bitcoins can be bought and sold by anyone through bitcoin wallets or exchange platforms such as Bitcoin Core, Zebpay, Unocoin or Bitxoxo and so on in India. However, in order to generate Bitcoins, a user/nodal computer needs to find numerical solutions to some specific mathematical operations (part of bitcoin mining script), and get it verified. These bitcoin mining scripts are based on US-NSA’s Secure Hash Algorithms (SHA256 algorithm) that involves a lot of computation and, hence, electricity. In other words, bitcoin mining scripts consist of some cryptographic problems that are recursive in nature. Once installed, the nodal computer keeps guessing and checking billions of times until it finds an answer. The verification/matching the solution is comparatively easier and fast, called Proof-of-Work.
However, unlike other digital currencies, Satoshi has already emulated the maximum Bitcoin cryptocurrency that could ever get generated, 21 Mn. The idea was to keep Bitcoins as valuable as the natural resources. Natural resources are found in limited quantities. The more humans dig; the less remains and, hence, their value rises with every unit being mined.
As of June 1 2017, 16,366,275BTC has been already mined. “However, the limitation will never affect the transaction, as can be denominated in smaller sub-units of a Bitcoin, such as bits – there are 1,000,000 bits in 1 Bitcoin. The smallest unit is called 1 Satoshi,” says Sandeep. To upkeep the mining work, Satoshi has introduced a function called halving. The bitcoin generation gets halved in every four years. The last block halving occurred on July 2016 and the next one will be in 2020. Currently, new bitcoins are getting generated roughly every 10 minutes in batches of 12.5 coins, with each coin worth around $3,500. Miners are required to maintain the blockchain – a list of validated transactions – the most crucial part of BTC technology.
A payee receives Bitcoins as a code digitally signed by the payer, called hash. Once payee confirms the payment receipt, and signs it; the transaction gets grouped with the hash called block. Once a block is formed, it gets recorded in the blockchain and becomes available for everyone who can see the new block. Only the ‘longest’ chain of blocks is accepted by the client as valid. Here, the ‘longest’ refers to the chain with the most-combined difficulty, not the one with the most blocks. According to bitcoin.org,
The idea is to prevent someone from forking the chain and creating a large number of low-difficulty blocks, and having it accepted by the network as ‘longest’.
Sandeep informs, “Miners get rewarded in two ways. One is bitcoin rewards once the PoW is done. The second is through transaction fees which are usually paid by senders to receive confirmation of successful transactions. Here, it is noted that besides the increasing electricity cost, miners don’t get affected from halving much, as in four years, the value of bitcoins goes up by tenfold. These days, as more and more transactions are happening, miners get more incentives.”
Bitcoin Volatility: A Bubble or A Good Thing?
Initially, when very few coins were generated, Satoshi encouraged developers and miners to donate more Bitcoins to help bring more users into the loop and raise the overall value. “Lost coins only make everyone else’s coins worth slightly more. Think of it as a donation to everyone,” said Satoshi while rolling out the open source code. Believing him, Gavin even donated 10,000 coins once, to raise the bitcoins value from then $0.3 to $3. However, trading at its maximum value – $4,233/Bitcoin on August 28, 2017 – it is highly unlikely that anyone would make big donations to the community to affect the cryptocurrency’s volatility and, even if one does, it would hardly affect the bit value, so the bubble game won’t be in play anymore.
In the case of usual currencies, neither demand nor supply meets real-time estimated value. As both demand and supply are completely market-dependent, Countries’ Reserve banks are left with a lot of work and the banks often take authoritarian decisions to bridge the gap. In contrast, Bitcoins’ supply is completely known. “The good thing about bitcoins is that everyone is aware of the supply rate. Currently, what’s less clear to us is that, how the demand would be. How many people would use it? So, based on supply and demand, the volatility is determined. However, unlike other currencies, the bitcoin market and government policies affect only the demand curve. Hence, as a chunk of the coins have been generated, the volatility is now as less as currencies like Brazilian Reais and US Dollar are. The current volatility index of bitcoins somewhere stands at 4. In 2-3 years, it will be more stable, as we expect more trades on a daily basis,” says Sandeep.
Recently, the Japanese government decided to lift transaction tax on Bitcoins. Such developments also help move the price up.
Sathvik Vishwanath, co-founder & CEO, Unocoin Technologies says, “This is a predetermined math regarding the supply of bitcoin. Whenever this has happened, we have seen that the price of bitcoin increases as the supply is significantly reducing. On the other hand, as of now, more than 80% of the bitcoin that could ever exist is already in circulation. So the halving event may have less impact in the future.”
Bitcoin Cryptocurrency: Technological Glitches
Symmetry And Performance Issues
Technology is like medicine that comes with an expiry date. And, the Bitcoin technology too, has several glitches that are still under removal phase or under research phases. In recent times, many cryptocurrencies including Ethereum and Bitcoin have undergone a hard fork, creating new cryptocurrencies. This adds more volatility to the Internet of Money.
As pointed out by Alex Biryukov, Professor of Cryptography and Information Security, University of Luxembourg and Dmitry Khovratovich, post-doctoral researcher, CryptoLUX cryptography research group-University of Luxembourg,
Proof-of-work is a central concept in modern cryptocurrencies and denial-of service (Sending lots of data to a node may make it so busy that it cannot process normal bitcoin transactions.) protection tools, but the requirement for fast verification so far has made it an easy prey for GPU-, ASIC-, and botnet-equipped users. The attempts to rely on memory-intensive computations in order to remedy the disparity between architectures have resulted in slow or broken schemes.
The researchers in their paper “Equihash: Asymmetric Proof-of-Work Based on the Generalized Birthday Problem” introduced algo binding as the ultimate solution, “Our scheme has tunable and steep time-space tradeoffs, which impose large computational penalties if less memory is used. Our solution is practical and ready to deploy: a reference implementation of a proof-of-work requiring 700MB of RAM runs in 15 seconds on a 2.1 GHz CPU, increases the computations by a factor of 1000 if memory is halved, and presents a proof of just 120 bytes long.”
Proof-of-Work or Proof-of-Waste?
Intuitively with the libertarian view – I want my free lunch and eat it too – Satoshi stated in his design, “The proof-of-work involves scanning for a value that, when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash.”
In the beginning, as the difficulty parameter ‘n’ was low and PoW rewards were 50 Bitcoins, PoW was nothing fun for developers. Later, while researching for ‘Can We Stabilise the Price of a Cryptocurrency?’ Mitsuru Iwamura-Waseda University; Yukinobu Kitamura-Institute of Economic Research; Tsutomu Matsumoto-Yokohama National University and Kenji Saito-Keio University observed, “The difficulty parameter ‘n’ for the proof of work was 32 in January 2009, raised to 40 in December 2009, raised to 62 in December 2013, and is 64 as of June 2014. These changes cannot be explained by increases in computational technological change but must reflect the fact that many new miners entered in mining competition by the end of 2013 and they almost stopped after 2014. However, difficulty parameter ‘n’ is nothing to do with the quality of validation of a block. That’s why ‘n’ can be raised and reduced flexibly without affecting a validation process.”
A blockchain grows linearly, as the number of blocks increases. According to bitinfocharts, the current size of Bitcoin blockchain is over 140GB. For an average user, thus, maintaining hard disks with large storage might be an issue. However, to reduce storage dependency, lightweight Bitcoin wallets have also been launched which do not store the entire chain.
Technology brings solutions, but hardly succeeds in driving the market. While some economists believe “Bitcoin is evil,” some others believe the quite opposite. This leaves investors in confusion. As the making of global laws and regulations is still under process for the cryptocurrency / Internet of Money, how should investors treat Bitcoins? Gavin kept it simple and grounded. “As of now, Bitcoins in every country should be treated like foreign currency notes. The bubbles and chaos have not settled down yet; but are slowly settling down. And, in the long-term, I am very optimistic.”
Currently, neither the developers nor the authorities could assure the 100% legitimacy of Bitcoins. Having said that, Indian cryptocurrency startups, investors and developers are definitely looking forward to the cryptocurrency as a gateway to the future market. Bitcoins happens to be the current one, the most popular Internet of Money.
Meanwhile, India’s Inter-Disciplinary Committee has submitted its report regarding cryptocurrency to the Finance Minister, Arun Jaitley. Based on the report, the next article would discuss Bitcoin’s future in India, either as an asset or currency; or what if, the government just decides to make it illegal?