CS-HU 398 Blog

A Crash Course in Cryptocurrency

Aidan VanLeuven -

If you haven't been living underneath a rock, you've probably heard about cryptocurrencies. Whether it's Elon Musk tweeting about DogeCoin or your "tech-savvy" investor friend trying to explaining Bitcoin, most people have at least some idea about what cryptocurrencies are. I'm here today to give a breakdown on some of the different cryptocurrencies, history, and a basic idea of how they work.

What are cryptocurrencies?

First, let's talk about how most transactions are handled online. Generally, when you want to place an order on the internet, you use a payment portal system like PayPal, which then processes the payment through one of the four major credit card companies in the world. These are Visa, MasterCard, American Express, and Discover. These transactions are linked to your real, personal identity, and cannot truly be non-reversible, since these financial institutions have to handle disputes. Making payments online requires that the customer trust the financial institutions that are ultimately processing the transactions.

Ever since the '90s, software engineers have wanted to change this model, and they tried. DigiCash and Cybercash were two attemps at making a digital currency, but they both had flaws and never really caught on. They say that in order to make it, you have to be the first, or you have to be the best. Well, Bitcoin was the first. The first "proper" cryptocurrency came about in 2009, going by the name of Bitcoin. Bitcoin was developed by a mysterious person or group going by the pseudonym Satoshi Nakamoto. Shortly following the release of a white paper explaining the ins and outs of a decentralized currency using blockchain technology, Bitcoin was released. As it turns out, the blockchain was the piece of the puzzle that earlier attempts at digital currencies didn't have. So what exactly is blockchain technology?

In order to make the currency decentralized, or not in the hands of any one entity, we have to make the list of transactions public. We should make sure that these transactions are valid, and then process them accordingly. To do this, we use a blockchain. The blockchain is essentially just a list of transactions that everyone on the network has access to. It's made up of blocks, which contain transaction information, and links between the previous and next block. As such, every transaction that has ever been fulfilled with Bitcoin is on the blockchain, and anyone can go take a look at any transfer of money since the beginning of Bitcoin! If you send Bitcoin to your friend to cover the cost of lunch, that transaction will be immortalized on the blockchain forever.

The blockchain is stored on many different computers that are part of a network. These computers are called nodes. A transaction is only added to the blockchain if over 50% of the nodes in the network agree that it should be added. Here's a basic diagram of how transactions move through the network, courtesy of bitdegree.org:

Normal banks verify their transactions to make sure that a customer doesn't double spend their money. How does Bitcoin handle this? Instead of automated systems or employees checking transactions, Bitcoin uses mining. So how does that work?

Cryptocurrency mining is performed by a kind of computer program, and ultimately verifies and confirms transactions on the blockchain. The miners take a bunch of transactions and encrypt them. They collect transactions until there are enough to form a block. Before the block can be added, miners race to determine the new block's hash. This hash is computationally expensive to compute, and as such, requires a lot of resources and time in order to figure out. Once a miner has figured out this hash, they can then add the block to the blockchain. Although hashing a block is computationally difficult, it is easy to check. Once the miner transmits the new block to the network, all of the nodes can easily check to make sure that it's valid, and then once there is 50% consensus that the block is good, the transactions are set in stone on the blockchain. Miners are rewarded for their computational effort in Bitcoin, which are paid for by transaction fees by the sender. In short, we use mathematic functions in order to verify the validity of every transaction on the blockchain network.

Other Cryptocurrencies

So Bitcoin was the cryptocurrency that started off the digital currency craze. So what's the difference between Bitcoin and other crypto?

  • Litecoin is a crypto that is very similar to Bitcoin, execpt that transactions are much faster. It uses a different hashing algorithm in order to make mining easier, and thereby reduce transaction confirmation time.
  • Etherium is a little bit different. Although it can be used as a cryptocurrency, Etherium's platform is more about creating decentralized applications on top of it's network. These applications could be things like a decentralized Facebook or Google, that isn't owned by any one company, but rather the joint effort of  thousands of people!
  • DogeCoin started out as a joke, since anyone can create any cryptocurrency they like with blockchain technology. After being propped up by the likes of Elon Musk, it has actually become a semi-viable cryptocurrency. It is similar in design to Bitcoin, but is also much faster and easier to mine.
  • Although Bitcoin is touted as private, it's actually only pseudo-anonymous. This means that since your public address never changes, someone could track all of the transactions you have made. Transaction information could be compared to crypto markets in order to de-anonymize users. Some cryptocurrencies, like Monero, anonymize every single transaction, making the network completely anonymous.
  • There are other cryptocurrencies like IOTA that have significantly different designs than Bitcoin. IOTA has the users themselves confirm other users' transactions, and actually doesn't even use a blockchain!

Pitfalls

So cryptocurrencies seem great! They take the power from the hands of the few and place it into the hands of the many. Seems pretty solid to me. But crypto is not without it's drawbacks.

Since cryptocurrencies are pseudo-anonymous, they have caught a lot of flak from being used for illicit activity. Scammers often deal in Bitcoin in order to avoid banking disputes, and the largest online underground illegal marketplaces mainly use Bitcoin for transactions.

Cryptocurrencies use signed keys for transactions. That means you have a private key (like a password) that is only known by you, and a private key that can be shared in order to make transactions. The problem with this, is that if you were to lose your private key, any crypto that you had is essentially gone, never to be used by anyone ever again. It's similar to forgetting your online banking password and then your bank shreds the money that was in your account. It's estimated that close to $140 billion worth of Bitcoin has been lost to locked accounts.

Mining, as discussed above, is very computationally difficult. In the case of Bitcoin, people have made special kinds of computers called ASICs (Application-specific integrated circuit), which are essentially extremely specialized computers that are only good at one thing, mining Bitcoin. Other cryptos like Etherium are resistant to ASICs, but can be easily mined using high-end graphics cards. This drives up the price of graphics cards, making them less obtainable for things like artifical intelligence research or for consumers in general. Mining crypto also effectively turns computing power (electricity) into cryptocurrency. With climate change looming, some have criticized cryptocurrencies for being a waste of electricity and contributing to climate change.

Conclusion

So what have we learned here? Cryptocurrencies started with Bitcoin, the blockchain is really just a list of transactions spread out across a lot of computers, and there are many different kinds of cryptocurrency. Also, that the power of the internet can turn a joke like DogeCoin into something viable just by meme-ing it. I personally am looking forward to see the developments in the cryptocurrency space, especially with transaction networks like Lightning and apps built on Etherium. Love it or hate it, the reality is that cryptocurrency is likely here to stay.  Thanks for reading!

Further reading