Draft

Cryptocurrency: The Way of the Future

Benjamin Weinhart

University of Cincinnati

02/27/18

Overview

While Cryptocurrencies such as Bitcoin or Ethereum can be seen as a bubble to some, people should understand that there are alternatives to the traditional financial system, ones that can be much better. Among the reasons are: Cryptocurrency is another medium of investment for potential investors, Blockchain technology provides increased security for the whole network, and Cryptocurrency provides for decentralization away from large institutions. This prevents too much regulation or large-scale corruption to name a few. Even if you have or haven’t heard about this new technology that is being used by millions today, it’s important to know what alternatives there are for people to take advantage of.

Based off of the responses of an survey that was taken at a midwestern college, most of the students at least know Cryptocurrency exists, but they really don’t know that much about it. For example, a lot of the responses said that they at least know about Bitcoin, which has seen a lot of increased popularity in the recent months. But, a lot of people stated, ‘I don’t really know what it is.’ To better understand how exactly Crypto can be used to help better people’s lives, it’s important to first know what exactly is the underlying foundation for them.

1.Bitcoin (BTC)

Perhaps the most iconic of all of them, Bitcoin is currently the largest currency with a current market cap of $177 Billion according to Coinmarketcap.com as of Feb 27, 2018. Bitcoin is also the first currency that was created based off of the then new blockchain technology. What blockchain technology is, is that every single transaction is recorded and verified, and then put on a shared ledger that holds all of the past transactions for public view. The whole idea that bitcoin is based upon is decentralization. The way it achieves this is through people called Cryptocurrency miners or “Bitcoin miners.” What they do, is they verify these transactions that are being sent using highly specialized computers. An individual transaction can have thousands of verifications done to it, as there can be hundreds of thousands of miners out there. All it takes to get started is a computer. "However, mining equations have gotten to be so complex that the only way to mine Bitcoin profitably is to have a roomful of expensive equipment – mom-and-pop miners have been priced out of the game." Mcintosh says. This leads to stories in the news such as, “Bitcoin miner makes millions.” or something of the sort.

Bitcoin has also been likened to gold by many in terms of it’s investment potential. Since it is the most valuable of all the currencies out there at the moment, many people have used it as a store of wealth and a measure on the health of the Crypto market. For the average person getting into Cryptocurrency, they may decide to put most, if not all of their investment into Bitcoin as it has a fairly easy to understand system behind it, and the most media attention out of any of the different currencies.

2.Ethereum (ETH)

Going off of the market cap of a coin, Ethereum currently holds the second largest at $86.4 Billion. Bitcoin and Ethereum really go hand in hand now when people talk about Cryptocurrency. In the past year, Ethereum has seen quite a rally in price, as the coin went from being worth just a few dollars to what it is today at $891 from a high of almost $1400 back in January 2018. Delisle states, “ Ethereum isn’t just a platform for itself. It’s a platform for everyone else to build their platforms as well, and that multiples Ethereum’s value and market presence.” Going off of this, Ethereum is really the future that can be seen for Crypto as the coin has an active development community backing, and they have been working on some great improvements.

Bitcoin uses something that is called PoW or Proof of Work. This is using the computing power of processors (CPU), graphics cards (GPU), or application specific integrated circuit (ASIC). Most Bitcoin miners today use ASICs as the algorithm is simple to run and is easy to develop an ASIC for it. Ethereum also currently uses PoW as it’s main method. Since Ethereum’s algorithm is more complex than Bitcoin’s, there isn’t really a financially viable method of developing an ASIC to mine the coin as the development cost would be in the tens of billions of dollars. Because of this, most Ethereum miners use consumer grade GPUs to run these tasks. All of this computing power causes a massive power draw as one may think, with huge warehouses dedicated to this task.

In fact, the power draw can be so great, that the development team is working on switching Ethereum over from it’s current PoW to Proof of Stake or PoS. As Dale states, “After Casper’s implemented, ether mining will die off, which means so, too, will ether miners’ growing energy consumption.” Casper is the codename for Ethereum’s PoS. More on that later. This is a much needed change as currently, Bitcoin miners ~52TWh of electricity per year. To put that in perspective, that is as much electricity as the entire country of Romania uses. While Ethereum uses a bit less energy than this, it’s still quite significant at ~14.8TWh or equivalent to Syria. Something needs to change

This change comes in the flavor of Casper. Dale says, "As opposed to the PoW consensus protocol, the PoS protocol achieves consensus through stakers—sometimes referred to as minters, too—who “stake” their coins by locking them down in specialized wallets." What this does for Ethereum is quite unique. It ties up the amount of available Ethereum and guarantees the network based off of that. It severely cuts down on the amount of electricity used by gigantic amounts, and this also prevents a '51%' or a takeover of the network by one or two large mining pools (collection of miners).

This does make things a little more complicated though as it introduces an interesting problem. "However, things look a little different when you bring in PoS. If you are a validator, then you can simply put your money in both the red chain and blue chain without any fear of repercussion at all." says Rosic. Also called “Nothing at Stake” this is one of the problems that Casper has to tackle before it gets implemented. Fortunately, the developer team has already done it. The proposed penalty for supporting both of these instances of the blockchain, instead of creating 2 variations of the blockchain, the amount of stake that you had invested gets slashed. This prevents a potentially malicious person, or group of people to take over the network. While this isn’t a fix-all solution, as a 51% can still happen with the network, it severely limits the ability for this to happen.

3. Monero (XMR)

Lastly, Monero should also be discussed as well. The whole idea behind Monero is an entirely private blockchain. Not necessarily in that the transactions aren’t public, they still are. But what those public transactions are, are actually one-time use keys created by both the sender and receiver of the transaction. What the receiving wallet then does, is it searches the blockchain pool until it finds that one-time use key and updates both wallets accordingly as it’s mined onto the blockchain. This is an incredibly simplified version of how Monero works, but it gets the basics out there.

"One of the more confusing aspects of Monero is its multiple keys. In bitcoin, ethereum, etc. you just have one public key and one private key. However, in a system like Monero, it is not quite as simple as that," Rosic states. Using Bitcoin’s system, you need the private key to unlock the wallet and gain the ability to send funds, whereas with the public key, it’s like the donation receptacle at McDonalds, you can put money in, but you can’t take it out. Using an entirely private system can attract some unfavorable types as well. It’s entirely possible, and almost guaranteed that people are using these systems for nefarious illegal activities, such as tax evasion, illicit trading, or dealing with illegal pharmaceuticals. Yes, while this a bad thing, one has to think, these people are just going to find another way, one that may be a little harder to swallow than this one.

On top of this, the whole idea for Cryptocurrency is less government regulation/interference. It should be seen as a positive that these people are allowed to enact their individual intent in their everyday lives. Some of these illegal activities are also getting around government banned websites/services. Take China for example, China has openly banned specific websites from their internal internet in order to help cover up the free speech of their citizens. Not only China, but other countries take this to a further extreme such as North Korea, where someone can be killed for even saying something negative about the North Korean regime. While Cryptocurrency does have illegal activity going through it, it’s really the price for a more open world, and a world with much less restrictions.

What’s Next?

Now that you have a better idea about Cryptocurrency, it’s important now to know why we should begin to start using it more and more as opposed to the traditional banking system that we have had for centuries now. While both of them have their benefits and downsides, the current banking system has served and will continue to serve as a hindrance to those who are wishing to do more. Combined with government regulation and internal corruption, today’s banking system is just not up to the task to deal with a more technologically advanced society. We have advanced into the age of computers and traditional currency has tried to as well, but it simply just can’t keep up.

There are many out there who say that Cryptocurrency is just a bubble that is bound to pop. Funny thing about that. Those people have been saying that currencies such as Bitcoin would fail since it’s creation. Since then, Bitcoin and others have gone from being worth fractions of a cent each, to hundreds or thousands of dollars each. Every time the Crypto market experiences a large dip, there are always articles that come out saying that now is time for the death of Bitcoin, Ethereum, Litecoin, ect… The reality of it all? Cryptocurrency is here to stay, and is just going to get bigger and bigger.

Then there are people who say that Cryptocurrency isn’t backed by anything. What those same people fail to realise is that their currency also isn’t backed by anything more than a government saying that they are backing it. That same government is also the one who issues, uses, and collects that same currency. To say that the government would back a currency if it would go under is the same as saying that Rockefeller would guarantee the world’s oil supply. It’s just not something that’s feasible. Take Zimbabwe for example, the government got so out of control with their problems, that inflation was just going rampant. What’s the price of bread today? Sorry, what is it this hour? It got so bad that prices were changing multiple times per day. Before the government adjusted the currency system, they got up to a physical banknote issued worth 100 Trillion Zimbabwean Dollars. This is just a recent example of how a government can not act in the best interests of the people, even when they think they are acting in such a manner.

The U.S. Senate committee on Banking, Housing, and Urban Affairs have recently done a hearing titled, “Virtual Currencies: The Oversight Role of the U.S. SEC and the U.S. Commodity Futures Trading Commission.” Senator Clapo starts out the hearing saying that the media in the past has been focusing on the negatives, and that the hearing is to talk about regulation of this emerging market. Senator Brown goes into discuss that Bitcoin’s rise over the past years, makes the drop from last december seem like a rounding error if compared to the DOW.

Given that governments are beginning to introduce regulation to better control the negative effects of Cryptocurrencies and how they can harm the public that is using them. The future is bright for a society that is reliant on Crypto to transact their daily lives. While this is quite a long way from coming to fruition, there isn’t a better time than the present to get into what will definately be a defining point for years to come.

References

Dale, O. (2017, November 07). Beginner's Guide to Ethereum Casper Hardfork: What You Need to Know. Blockonomi, Retrieved January 30, 2018, from https://blockonomi.com/ethereum-casper/

Oliver Dale’s perspective on Ethereum switching over to the Casper protocol is one with a bit more numbers and speculating in mind for what might actually take place in the transition. In his article, he states, "As opposed to the PoW consensus protocol, the PoS protocol achieves consensus through stakers—sometimes referred to as minters, too—who “stake” their coins by locking them down in specialized wallets." This does a few great things for the network. For one, it ties up the amount of available Ethereum in circulation, and locks it down to where it can't be touched or used for transactions. This makes each of the coins more scarce and hence, more valuable. The second thing that this does is that it puts up some collateral for the network to fall back on. Say that the "stakers" started supporting another variant of the blockchain. Doing it this way allows for a punishment (loss of coinage) to be handed down for not supporting the correct variant.

Another thing that Dale states is, "Ether miners currently consume approximately 2.5 TWh of electricity per year ." Now, this amount of power is equivalent to the amount that small countries use in a year. One can see how this might be a large cost. Not only financially in having to pay for the power, but also ecologically. These power plants have to output large amounts of electricity in order to keep up with the demand that mining is causing. Most of these power plants are not running on zero emissions such as nuclear or solar, but they are running on nonrenewable resources such as natural gas or coal. Switching over to Casper would allow for a lot less of an environmental impact and also reduce the strain that our power grids are experiencing because of this.

DeLisle, B. (2018, January 06). Ethereum Suprasses $1,000 On Strong Market and Launch of Casper Testnet. Cryptoslat Retrieved January 30, 2018, from https://cryptoslate.com/ethereum-suprasses-1000-strong-crypto-market-launch-casper-test-net/

DeLisle’s article focuses more on the financial side of crypto. Delisle states, "At the start of 2017, Bitcoin enjoyed around 80% of the entire cryptocurrency market cap. Today, Bitcoin’s dominance by market cap hovers around 35%." The reasoning behind all of this is that a lot of alternative cryptocurriencies are gaining steam on their own. it used to be that when someone said the word cryptocurrency, everyones minds would think to bitcoin. Now, a lot of those same people think of other currencies or blockchain technology as a whole. Bitcoin has still risen in price, increasing by a magnitude of hundreds of percents just in 2017 alone. The traction that these currencies are enjoying is due to discovery as well. More people being exposed to the market gives a greater chance for someone to invest in them.

Delisle also goes into how Ethereum's Casper will affect all of this, stating, "The recent price improvements follow Ethereum’s test launch for Casper, which will transition Ethereum from a proof of work (PoW) model to a proof of stake (PoS) algorithm." A cornerstone for cryptocurrency is decentralization, not relying on one large institution to take care of all that's happening in the world. Ethereum switching would cause ether to become more decentralized than it currently is. A lot of the mining power that is being contributed to the network constitutes in gigantic data farms with tens of thousands of computers running the bulk of the workload that is required. Switching over to PoS would move the network depending on miners to process transactions, to stakers to support the network. It will be exciting to see what happens with Casper as the technology develops and enters implementation to the network.

Mcintosh, R. (2018, January 03). Lightning Network For Ethereum? ETH Surges as 'Casper' Approaches | Finance Magnates, Retrieved January 30, 2018, from https://www.financemagnates.com/cryptocurrency/news/lightning-network-ethereum-eth-surges-casper-approaches/

Mcintosh states simply that the amount of users that have been using Ethereum has really skyrocketed. "Ethereum also reported that the 'number of accounts created per day passed 100,000' as well as an increase of nodes (computers that uphold a blockchain’s network) despite 'rising system requirements'. " This is a big milestone for the community as more users in the network provides for a larger network as a whole, therefore providing a more stable and secure network for everyone to use.

More users also comes with a larger network requirement as well as more transactions are being requested by the network each and every day. This introduces more miners into the equation. While most of those miners are in large data centers, there are also smaller miners who get into mining because of the increased profitability. Most of the newer miners, once they get a little bit of experience, will start to branch out and start mining other, smaller coins. The large players in the field can't really do this as easily since it would take a lot to move all of the infrastructure over to a new algorithem. Hence, smaller coins are also getting supported a great deal as well. "However, mining equations have gotten to be so complex that the only way to mine Bitcoin profitably is to have a roomful of expensive equipment – mom-and-pop miners have been priced out of the game." Mcintosh says.

Rosic, A. (2017, December 28). What is Ethereum Casper Protocol? Crash Course. Blockgeeks, Blockgeeks Retrieved January 30, 2018, from https://blockgeeks.com/guides/ethereum-casper/

Rosic provides an incredibly in depth article about the Casper protocol. He explains, "As you can see, ~65% of the hashrate is divided among five mining pools alone! Theoretically speaking, these big mining pools can simply team up with each other and launch a 51% on the bitcoin network. So, to solve these problems, Ethereum looked to Proof of Stake as a solution." This is just the start of his guide. A 51% is an idea where if a group has enough mining power and are looking to do something nefarious to the network, they can hijack the network and start mining on their own set of blocks. Effectively splitting up the original coin into 2 seperate forks. Now, sometimes these forks can be a good thing. Bitcoin Cash, which established a higher block size so more transactions could be fit in faster is a fork of bitcoin, but this hijacking of the network can also lead to the destruction of a coin value wise, as they could generate false transactions to be verified by them.

"However, things look a little different when you bring in POS. If you are a validator, then you can simply put your money in both the red chain and blue chain without any fear of repercussion at all." says Rosic. Called "Nothing at Stake" this problem introduces one of the solutions that Casper is looking to solve. The way that Casper has come up with is that if someone were to act maliciously towards the network, then they would get reprimanded and the stake getting subsequently deleted proportionate to the stake thrown at the malicious block.

Rosic, A. (2017, August 01). What is Monero? The Ultimate Beginners Guide. Blockgeeks, Retrieved January 30, 2018, from https://blockgeeks.com/guides/monero/

In this article, Rosic talks about Monero. Monero is a currency where all of the transactions are completely private. As opposed to bitcoin where each transaction can be traced back to it's origin on a public blockchain. Monero goes through quite a few steps to do this. "One of the more confusing aspects of Monero is its multiple keys. In bitcoin, ethereum, etc. you just have one public key and one private key. However, in a system like Monero, it is not quite as simple as that." What Monero does is for each individual transaction it generates a set of private keys for the individual wallet to access and retrieve/send funds to/from, then the network generates a set of public keys to be accessed only by the private keys for the actual entry into the blockchain. So it's still a public blockchain, but there isn't any way for a wallet address to be connected to a transaction without knowing the one-time private and public keys. This, as one might think, can add lots of data worth of encryption to transactions. As such, Monero's transactions are much larger than say, Bitcoin's for example.

SenateBanking(2018). Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. U.S. Senate Committee on Banking, Housing and Urban Affairs. Retrieved from https://www.banking.senate.gov/public/index.cfm/hearings?ID=D8EC44B1-F141-4778-A042-584E0F3B9D39

In this hearing, the committee talks about how Cryptocurrency is currently being regulated and how that regulation is impacting our current lives. Senator Clapo starts off by saying that these currencies, such as bitcoin, have taken off so much in recent years, and they are excited to be taking on this. Specifically, they are looking at what they hope to change in the future to help better regulate and stimulate this potential opportunity for Americans.