Final

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 regulation or large-scale corruption to name a few examples. Even if one has or hasn’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. Right now, Crypto is really a medium of investment, but is pegged to complement or replace traditional currencies. Some of the advantages of Crypto itself is that one can pick which currency one wants to use based on their benefits as easy as if someone goes into the supermarket, and buys an orange. It can be as public or private as the needs for each individual person require.

Based on the responses of an in-class survey that was taken, 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 lots of increased popularity in the recent months. 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.

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 on 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 in Crypto mining is a computer. According to Mcintosh (2018), "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." This leads to stories in the news such as, ‘Bitcoin miner makes millions.’ or something of the sort. These are the people who have massive facilities with millions of dollars worth of equipment inside of them. They also consume a bunch of electricity. This is the most important part of Bitcoin as without miners, you can’t have any transactions.

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 taken 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. If people were to do this, they can certainly expect that their value they put in won’t stay the same the next day. It might be 5% down one day and 10% up the next. What’s important is that it’s on an upward trend, and a very steep one at that.

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. According to Delisle (2018), “ 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.” Ethereum is really the future that can be seen for Crypto as the coin has an active development community backing it 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. Rosic (2017)

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. According to Dale (2017), “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, because at the rate that the climate in our planet is changing, this would only add fuel to the fire.

This change comes in the flavor of Casper. According to Dale (2017), "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 on that, it severely cuts down on the amount of electricity used by gigantic amounts, and this also prevents 51% or a takeover of the network by one or two large mining pools (collection of miners). Dale (2017)

PoS does make things a little more complicated though as it introduces an interesting problem. According to Rosic (2017), "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." 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 the ‘staker’ 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. Rosic (2017)

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. 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. Of course, this is an incredibly simplified version of how Monero works, but it gets the basics out there.

According to Rosic (2017), "One of the more confusing aspects of Monero is its multiple keys. In bitcoin, ethereum, etc. the user just has one public key and one private key. However, in a system like Monero, it is not quite as simple as that." Using Bitcoin’s system, a user needs 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, a generous patron can put money in, but they 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.

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 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 many fewer restrictions.

What’s Next?

Now that we have a better idea about Cryptocurrency, it’s important 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 the banks simply just can’t keep up. These banks are stuck in an older time with people still going inside of a bank to deposit/withdraw cash, Theft if a credit card is skimmed, accounts sometimes being locked for seemingly no reason, and pointless fees that just take money from people without it in the case of overdraft fees.

There are many out there who say that Cryptocurrency is just a bubble that is bound to pop. Those people have been saying that currencies such as Bitcoin would fail since it’s creation or when they first learned about it. 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 realize 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. The inflation at it’s highest was 79,600,000,000% An unbelievable 2,600,000% per day. Hanke et Kwok (2009) 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 conducted 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.

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. Whether it be from an investment in this ‘Digital Gold’ such as Bitcoin is pegged to be, or if it’s for a change in lifestyle such as Ethereum or Monero, everyone can get started today. 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. If people begin to move to Cryptocurrencies from traditional currency, then lots of those people may find a lot more peace of mind that they know that they control their money instead of someone else. Those people will know that their money is safe from someone trying to steal it, and that there is no government prying into it.

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/

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/

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/

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

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

Hanke, S. H., & Kwok, A. K. (2009, May & june). On the Measurements of Zimbabwe's Hyperinflation. Cato Journal. Retrieved March 6, 2018, from https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf