Crypto Definition.docx

Distributed System

AMBO UNIVERSITY INISTITUTE OF TECHNOLOGY Department of computer science Assignment of Distributed System Title: Crypto currency

Prepared By: ID No Abay Mulisa ------------------------------------------------------------------------MET/201/12

Submitted to: Dr.Vel

Date 1/18/2020

Ambo University Department of Computer Science

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Distributed System Contents

Page no

1.

Crypto Definition...........................................................................................................................2

2.

The Origin of Cryptocurrency......................................................................................................4

2.1.

The Story of Bitcoin...................................................................................................................4

3.

What is Blockchain?......................................................................................................................5

4.

What Is a Cryptocurrency?..........................................................................................................6

4.1.

KEY TAKEAWAYS..................................................................................................................6

4.2.

Understanding Cryptocurrencies.............................................................................................7

4.3.

Types of Cryptocurrency..........................................................................................................7

4.4.

Special Considerations..............................................................................................................8

5.

6.

Advantages and Disadvantages of Cryptocurrency....................................................................8 5.1.

Advantages.............................................................................................................................8

5.2.

Disadvantages.........................................................................................................................8

Criticism of Cryptocurrency.........................................................................................................9

Ambo University Department of Computer Science

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Distributed System 1. Crypto Definition Below is a list of six things that every cryptocurrency must be in order for it to be called a cryptocurrency; 1.1.

Digital: Cryptocurrency only exists on computers. There are no coins and no notes. There are no reserves for crypto in Fort Knox or the Bank of England!

1.2.

Decentralized: Cryptocurrencies don’t have a central computer or server. They are distributed across a network of (typically) thousands of computers. Networks without a central server are called decentralized networks.

1.3.

Peer-to-Peer: Cryptocurrencies are passed from person to person online. Users don’t deal with each other through banks, PayPal or Facebook. They deal with each other directly. Banks, PayPal and Facebook are all trusted third parties. There are no trusted third parties in cryptocurrency! Note: They are called trusted third parties because users have to trust them with their personal information in order to use their services. For example, we trust the bank with our money and we trust Facebook with our holiday photos!

1.4.

Pseudonymous: This means that you don’t have to give any personal information to own and use cryptocurrency. There are no rules about who can own or use cryptocurrencies.

1.5.

Trustless: No trusted third parties means that users don’t have to trust the system for it to work. Users are in complete control of their money and information at all times.

1.6.

Encrypted: Each user has special codes that stop their information from being accessed by other users. This is called cryptography and it’s nearly impossible to hack. It’s also where the crypto part of the crypto definition comes from. Crypto means hidden. When information is hidden with cryptography, it is encrypted.

1.7.

Global: Countries have their own currencies called fiat currencies. Sending fiat currencies around the world is difficult. Cryptocurrencies can be sent all over the world easily. Cryptocurrencies are currencies without borders!

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Distributed System This crypto definition is a great start but you’re still a long way from understanding cryptocurrency. Next, I want to tell you when cryptocurrency was created and why. I’ll also answer the question ‘what is cryptocurrency trying to achieve?’ 2. The Origin of Cryptocurrency In the early 1990s, most people were still struggling to understand the internet. However, there were some very clever folks who had already realized what a powerful tool it is. Some of these clever folks, called cypherpunks, thought that governments and corporations had too much power over our lives. They wanted to use the internet to give the people of the world more freely. Using cryptography, cypherpunks wanted to allow users of the internet to have more control over their money and information. As you can tell, the cypherpunks didn’t like trusted third parties at all! At the top of the cypherpunks, the to-do list was digital cash. DigiCash and Cybercash were both attempts to create a digital money system. They both had some of the six things needed to be cryptocurrencies but neither had all of them. By the end of the nineties, both had failed. The world would have to wait until 2009 before the first fully decentralized digital cash system was created. Its creator had seen the failure of the cypherpunks and thought that they could do better. Their name was Satoshi Nakamoto and their creation was called Bitcoin. Understanding cryptocurrency means first understanding Bitcoin… 2.1.

The Story of Bitcoin

No one knows who Satoshi Nakamoto is. It could be a man, a woman or even a group of people. Satoshi Nakamoto only ever spoke on crypto forums and through emails. In late 2008, Nakamoto published the Bitcoin whitepaper. This was a description of what Bitcoin is and how it works. It became the model for how other cryptocurrencies were designed in the future.

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Distributed System On January 12, 2009, Satoshi Nakamoto made the first Bitcoin transaction. They sent 10 BTC to a coder named Hal Finney. By 2011, Satoshi Nakamoto was gone. What they left behind was the world’s first cryptocurrency. Bitcoin became more popular amongst users who saw how important it could become. In April 2011, one Bitcoin was worth one US Dollar (USD). By December 2017, one Bitcoin was worth more than twenty thousand US Dollars! Today, the price of a single Bitcoin is 7,576.24 US Dollars. Which is still a pretty good return, right? 2.1.1. INTERESTING FACT In 2010, a programmer bought two pizzas for 10,000 BTC in one of the first real-world bitcoin transactions. Today, 10,000 BTC is equal to roughly $38.1 million – a big price to pay for satisfying hunger pangs. So, Bitcoin has succeeded where other digital cash systems failed. But why? What is cryptocurrency doing differently? The thing that makes cryptocurrency different from fiat currencies and other attempts at digital cash is blockchain technology. Let’s find out how it works… 3. What is Blockchain? All cryptocurrencies use distributed ledger technology (DLT) to remove third parties from their systems. DLTs are shared databases where transaction information is recorded. The DLT that most cryptocurrencies use is called blockchain technology. The first blockchain was designed by Satoshi Nakamoto for Bitcoin. A blockchain is a database of every transaction that has ever happened using a particular cryptocurrency. Groups of information called blocks are added to the database one by one and form a very long list. So, a blockchain is a linear chain of blocks! Once information is added to the blockchain, it can’t be deleted or changed. It stays on the blockchain forever and everyone can see it.

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Distributed System The whole database is stored on a network of thousands of computers called nodes. New information can only be added to the blockchain if more than half of the nodes agree that it is valid and correct. This is called consensus. The idea of consensus is one of the big differences between cryptocurrency and normal banking. At a normal bank, transaction data is stored inside the bank. Bank staff makes sure that no invalid transactions are made. This is called verification. Let’s use an example; George owes 10 USD to both Michael and Jackson. Unfortunately, George only has 10 USD in his account. He decides to try to send 10 USD to Michael and 10 USD to Jackson at the same time. The bank’s staff notice that George is trying to send money that he doesn’t have. They stop the transaction from happening. The bank stopped George from double spending which is a kind of fraud. Banks spend millions of dollars to stop double spending from happening. What is cryptocurrency doing about double spending and how do cryptocurrencies verify transactions? Remember, they don’t have stuff as the bank does! 4. What Is a Cryptocurrency? A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. 4.1. 

KEY TAKEAWAYS

A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.

Ambo University Department of Computer Science

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Distributed System 

The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.



Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.



Many experts believe that blockchain and related technology will disrupt many industries, including finance and law. 



Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency. 4.2.

Understanding Cryptocurrencies

Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual "tokens," which are represented by ledger entries internal to the system. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. 4.3.

Types of Cryptocurrency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. Bitcoin was launched in 2009 by an individual or group known by the pseudonym "Satoshi Nakamoto." As of Nov. 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion. Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as "altcoins," include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion Bitcoin currently represents more than 68% of the total value. Ambo University Department of Computer Science

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Distributed System   Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.  4.4. Central

to

Special Considerations the

appeal

and

functionality

of

Bitcoin

and

other

cryptocurrencies

is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.  Many experts see blockchain technology as having serious potential for uses like online voting and crowd funding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing. However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information. 5. Advantages and Disadvantages of Cryptocurrency

5.1.

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

Ambo University Department of Computer Science

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Distributed System  In modern cryptocurrency systems, a user's "wallet," or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers. 5.2.

Disadvantages 

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.  Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace. 6. Criticism of Cryptocurrency  Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.  Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2017 before dropping to around $7,000 in the following months. Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.  There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.

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Distributed System Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin's 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of "coins" stolen. Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being easier to transport and divide than precious metals and existing outside the influence of central banks and governments.

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Distributed System References 

https://www.bitdegree.org/tutorials/what-is-cryptocurrency/



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