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A cryptocurrency or crypto currency is a controversial [1] [2] digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies use decentralized control [6] as opposed to centralized electronic money and central banking systems. Bitcoin , created in , was the first decentralized cryptocurrency. According to Jan Lansky, a cryptocurrency is a system that meets six conditions: In March , the word " cryptocurrency " was added to the Merriam-Webster Dictionary.
Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System , corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers.
In case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.
As of May [update] , over 1, cryptocurrency specifications existed. Most cryptocurrencies are designed to gradually decrease production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.
The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records , called blocks , which are linked and secured using cryptography.
It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way". Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. The block time is the average time it takes for the network to generate one extra block in the blockchain.
This is practically when the money transaction takes place, so a shorter block time means faster transactions. Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger. The first timestamping scheme invented was the proof-of-work scheme.
The most widely used proof-of-work schemes are based on SHA and scrypt. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network.
Thus the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the enormous amount of heat they produce, and the electricity required to run them. Some miners pool resources , sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block.
A "share" is awarded to members of the mining pool who present a valid partial proof-of-work. One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices.
Given the economic and environmental concerns associated with mining, various "minerless" cryptocurrencies are undergoing active development. Other cryptocurrencies like Nano utilise a block-lattice structure whereby each individual account has its own blockchain. With each account controlling its own transactions, no traditional proof-of-work mining is required, allowing for feeless, instantaneous transactions. Some Chinese miners have since relocated to Canada. However, the cryptocurrency mania might have gone a little too far in Iceland.
In March , a town in Upstate New York put an 18 month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city. A cryptocurrency wallet stores the public and private "keys" or "addresses" which can be used to receive or spend the cryptocurrency.
With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet. Bitcoin is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys or "addresses". Additions such as Zerocoin have been suggested, which would allow for true anonymity. Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.
While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments. Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest.
Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time. For ether , transaction fees differ by computational complexity, bandwidth use and storage needs, while bitcoin transactions compete equally with each other. The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them.
While some countries have explicitly allowed their use and trade, [41] others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently.
China Central Bank banned the handling of bitcoins by financial institutions in China in early This means bitcoin will be subject to capital gains tax. Legal issues not dealing with governments have also arisen for cryptocurrencies. Coinye , for example, is an altcoin that used rapper Kanye West as its logo without permission. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, David P.
The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West. A primary example of this new challenge for law enforcement comes from the Silk Road case, where Ulbricht's bitcoin stash "was held separately and As the popularity of and demand for online currencies has increased since the inception of bitcoin in , [48] [49] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society.
Concerns abound that altcoins may become tools for anonymous web criminals. Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions. GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, In February the world's largest bitcoin exchange, Mt. Gox , declaring bankruptcy. Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in , acknowledged in a plea agreement that the companies were part of a pyramid scheme , and pleaded guilty to wire fraud in The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.
Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used.
Cryptocurrency is also used in controversial settings in the form of online black markets , such as Silk Road. The original Silk Road was shut down in October and there have been two more versions in use since then.
In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18, to 32, Darknet markets present challenges in regard to legality.
Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets. An initial coin offering ICO is a controversial means of raising funds for a new cryptocurrency venture.
An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U. In an ICO campaign, a percentage of the cryptocurrency usually in the form of "tokens" is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often bitcoin or ether.
It covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh. Authors are also asked to include a personal bitcoin address in the first page of their papers. Cryptocurrencies have been compared to Ponzi schemes , pyramid schemes [69] and economic bubbles , [70] such as housing market bubbles.
While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security.
An enormous amount of energy goes into proof-of-work cryptocurrency mining, although cryptocurrency proponents claim it is important to compare it to the consumption of the traditional financial system. There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as bitcoin result in high up-front costs to miners in the form of specialized hardware and software.
Additionally, cryptocurrency can be permanently lost from local storage due to malware or data loss. This can also happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets. The cryptocurrency community refers to pre-mining, hidden launches, ICO or extreme rewards for the altcoin founders as a deceptive practice. Paul Krugman , Nobel Memorial Prize in Economic Sciences winner does not like bitcoin, has repeated numerous times that it is a bubble that will not last [84] and links it to Tulip mania.
American business magnate Warren Buffett thinks that cryptocurrency will come to a bad ending. The sudden increase in cryptocurrency mining increased the demand of graphics cards GPU in Miners regularly buy up the entire stock of new GPU's as soon as they are available, further driving prices up.
Nvidia is reportedly asking retailers to do what they can when it comes to selling GPUs to gamers instead of miners. In the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash. This allowed the digital currency to be untraceable by the issuing bank, the government, or a third party.
In , Wei Dai published a description of "b-money", an anonymous, distributed electronic cash system.