Cryptocurrency

Cryptocurrency , also known as crypto money , is the name given to digital means of payment that are based on cryptographic tools such as blockchains and digital signatures . As a payment system , they should be independent, distributed and secure. They are not actually currencies . In 2009, Bitcoin was the first crypto currency to be publicly traded. In 2018, over 4,500 cryptocurrencies were in use (see also list of cryptocurrencies ). Approximately 1000 reached a daily trading turnover of more than 10,000 US dollars . Due to the comparatively large market share of Bitcoin, all other cryptocurrencies are also referred to as "Altcoins" (where Alt- stands for "alternative to Bitcoin"). Crypto currencies are only non-state- scooped , a supposedly introduced in 2018 state Venezuelan Petro also came months after the launch of no known transactions.

overview

Thanks to cryptographically secured protocols and decentralized data storage, cryptocurrencies enable digital payment transactions without central authorities such as banks. The possession of a cryptological key represents the ownership of credit, which is also cryptologically signed, in a joint accounting in the form of a separate storage form ( blockchain ). As a rule, a predetermined number of currency units is generated jointly by the entire system, the rate being predetermined and published or limited by the cryptographic mode of generation.

A key difference between most cryptocurrencies and everyday money is that a single party is not in a position to accelerate, impair or in any way significantly abuse the production of currency units. Cryptocurrencies do not need any central banks and are therefore not subject to any authority or other organization. Due to their decentralized structure, in contrast to central bank money, crypto currencies usually do not have a single point of failure that could endanger or even manipulate the currency. However, this has to be put into perspective in that some cryptocurrencies are produced quasi-centrally by owner-managed, private companies, such as B. Ripple , in which the profit-oriented company Ripple Labs holds 80 percent of the new issues and distributes them according to its own rules.

Cryptocurrencies, like the central bank money that dominates today , are fiat money . That is, they are created out of nothing and apart from their use value they have no particular intrinsic or intrinsic value. This only arises through the acceptance between trading partners (payers, recipients), which results from the possible uses and the resulting advantages.

In Germany so far only Bitcoin 2013 has been legally and tax recognized by the federal government as a " unit of account" and a type of " private money " that can be used in "multilateral clearing circles" . The German Federal Financial Supervisory Authority (BaFin) classifies Bitcoin as a unit of value comparable to foreign exchange . The relatively new recognized crypto money is therefore neither legal tender nor e-money , foreign exchange or sorts . In Switzerland, cryptocurrencies have not yet been recognized as a state-recognized means of payment; From a tax point of view, established cryptocurrencies are often treated like securities.

According to a note from the Austrian Financial Market Supervisory Board member Helmut Ettl, there is a lot of ploy when it comes to crypto currencies. In addition to the experience in Austria, Ettl refers to a US study according to which 80 percent of all Initial Coin Offerings (ICOs) are activities with a fraudulent background.

Working method

A currency with no intrinsic value can only work if there is a sufficient level of trust among those involved. In the case of conventional fiat money, the central bank must be trusted, or the central bank or the respective state enforce the use of the currency regardless of the trust or mistrust of the population through coercion, monopoly of force and state power. In the case of cryptographic currencies, new issues and transactions are confirmed by a majority of participants who generally mistrust and control each other.

Since binary information can be reproduced almost at will, it must be ensured - as with any other cashless payment system - that the amount in circulation does not increase in an unregulated manner. A transaction is therefore only valid if the sum of the inputs (accounts from which an amount is deducted) is equal to the sum of the outputs (accounts to which an amount is added). The only exceptions are new issues, which in turn have to follow rules that have been laid down in advance and are understandable for everyone in order to achieve the necessary trust.

With ordinary cashless payment transactions, the participant must trust an operating entity (bank, credit card company, etc.) to monitor and enforce compliance with the rules. In the case of cryptocurrencies, this task is assigned to the community of all parties involved. Corrections to the system are only possible if the majority of those involved approve them through application. For example, with Bitcoin on August 15, 2010 a non-compliant transaction was mostly automatically accepted due to a software error. This transaction resulted in a credit of 184 billion BTC (bitcoins) in two accounts. This corresponded to a sudden multiplication of the money supply and thus a drastic inflation of the existing assets. This error was corrected by bringing new, corrected software into circulation, which rejected this transaction as not compliant with the rules. However, since nobody can correct the distributed database of all transactions, the error was only resolved when a majority of those involved used the new software long enough to build a new, longer and therefore higher priority blockchain with transaction confirmations.

With the exception of the privately operated cryptocurrencies mentioned above, in which a company grants itself a special role, the jointly operated grassroots work. In doing so, however, one comes across the next fundamental problem. Democracies in the traditional sense are based on the equal distribution of voting rights over a specified group of people. People cannot be clearly identified on the Internet. For reasons of discretion, identification is also not desired. So cryptocurrencies have to distribute voting rights in a different way. Detection of work (in English: Here mainly find two principles application Proof of Work and proof of Shares) (English Proof of Stake ). In the case of proof through work, the participant has more influence on the overall system by solving arithmetic tasks and thus proving the computing power used. By solving as large a number of tasks as possible, the participant not only has more influence on the system, but also increases his chances of benefiting from new issues and transaction fees. This incentive to provide computing power also ensures that a sufficient number of participants always use sufficient computing power to keep the system in operation. The tasks are therefore designed in such a way that they also take care of the system's bookkeeping in their entirety .

With proof of shares, the person who already holds large shares of the credit receives more influence and benefits. Not only the credit, but partly also its age is evaluated. One example of this is the peercoin. Jointly operated cryptocurrencies are based on a special understanding of democracy - which differs greatly from the everyday idea.

Hardware for calculating hash values (Bitcoin Mining Rig)

The use of the highest possible computing power in order to have a greater chance of benefiting from new issues is also known as mining . Translated into German, one also speaks of mining crypto currencies. Since real goods have been traded with crypto currencies and they have also been exchanged for conventional currencies, there has been a real economic incentive to solve the arithmetic tasks set for mining as efficiently as possible. This led to the use of increasingly specialized hardware. Initially, normal processors , as they work in PCs, were used, and soon thereafter there were implementations that used graphics processors . In the meantime, devices based on FPGAs and ASICs are traded, which were specially developed for this purpose. This resulted in a massive increase in computing power. As an example, with Bitcoin the computing power used increased 660 times from January 2013 to January 2014. For the individual user of an ordinary PC, it has become almost impossible to participate in new issues or transaction fees with attractive cryptocurrencies, where there is competition between computing power.

In order to do justice to this effect, the increasing number of participants and Moore's Law , cryptocurrencies have adjustable degrees of difficulty (English difficulty ) for the arithmetic tasks. Only those solved tasks are accepted by the participants that correspond to a previously determined and regularly adjusted level of difficulty. This means that emission rates can be kept constant and the effort involved in possible manipulation can be increased. The principles of proof-of-work and holding shares can also be combined. Holders of large, as old as possible credit balances at Peercoin solutions with a reduced degree of difficulty are allowed to submit. The resulting higher chance of allocation of new issues or transaction fees is viewed by the creators of this crypto currency as a kind of interest on these credits.

realization

There are dozens of specifications for realizing cryptocurrencies. Most of them work on similar principles to Bitcoin and have a common structure, in which usually only the design varies in detail. Another approach is followed in the patent with the designation WO2020060606 cryptocurrency system using body activity data .

Signed P2P networking of the participants

All participants communicate with one another via a peer-to-peer network. Every message that a subscriber sends into this network is available to everyone else. However, it is not sent as a broadcast but, as is usual with P2P networks, passed on gradually. A message that is sent in this network corresponds to a publication to all participants.

First of all, each new participant generates a key pair for an asymmetric cryptosystem . The public key is published via the P2P network and, if necessary, elsewhere. The private key, which is kept secret, now allows the participant to cryptographically sign orders for transactions. Every user can open an account in this way. As a newly created account, the account has zero credit. The published key is practically the account number and is called the Account Address in English . The private key secures the power of disposal over the account. Since each participant can in principle generate any number of such key pairs, these are stored in a file called a wallet .

If another participant wants to transfer an amount to the account that has just been set up, he creates a transfer order with the amount and the public key of the target account and signs this order with his secret key. This order is published on the P2P network. It now has to be checked and certified and archived as a transaction in the joint accounting.

Each participant can use the public key to check whether the transfer order was actually created by the legitimate sender. This prevents theft of other accounts. You can then use the previously archived bookkeeping to check whether the sending account also has the necessary credit. This avoids overdrawing an account or spending the credit twice. Only when the transfer order has been accepted as compliant with the rules will a participant try to enter it in the bookkeeping.

accounting

Up to this point, the cryptocurrency only consists of a P2P network in which messages signed with asymmetric cryptography are published. The essential part is then the special form of bookkeeping. This consists of data blocks, each reference its predecessors and thus form a chain, the block chain, block chain . Each block of data forms a new page in the joint accounting. Each participant who would like to add a new block to this bookkeeping may, in addition to the newly incurred transactions to be confirmed, also enter a transaction from scratch on his own account. He thus receives the partial amount of the new issue tied to this block and specified by the rules. Because of this, many participants are eager to create and publish such new blocks.

In order to limit the new issues involved, this creation of new blocks is associated with a difficulty. For this purpose, a one-way function implemented as a cryptological hash function must be calculated from the block . This hash value must meet a generally recognized condition in order to be recognized as a valid new block. In the simplest case, the value must be below a specified limit value. The smaller this limit value, the lower the probability that the newly calculated hash value will be below it. It is correspondingly more difficult to create such a block. The participant must now change the block until he has created a valid block whose hash value is below the limit value. For this purpose, each block contains a value called a nonce , the only function of which is to be changed until the hash value of the entire block fulfills the condition. Since this is a one-way function, it is not possible to calculate the required nonce directly. The difficulty is therefore to calculate the hash value of changed blocks until a value below the specified threshold value is reached by chance. Various crypto currencies are used as a hash function. a. SHA-2 (Bitcoin, Peercoin), SHA-3 (Copperlark, Maxcoin), Scrypt (Litecoin, Worldcoin) and POW (Protoshares) are used.

Tree with the only valid block chain in black and the Genesis block in green.

In order to document the seamless sequence of the blocks in a tamper-proof manner, each new block must also contain the hash value of its predecessor. As a result, the blocks later form a chain, whose uninterrupted, unchanged relationship can easily be checked by anyone. The high cost of creating new blocks that conform to the rules not only limits the rate of new issues, but also increases the cost of creating a forgery. If a participant is the first to create a valid new block, he can publish it in the P2P network. The other participants can check it, and if it complies with the agreed rules, it is added to the current blockchain and accepted as the new last block in the chain.

The transactions contained in the new block are thus initially only confirmed by this one participant who generated the block. You are only partially credible. However, if the block was also accepted as valid by the other participants, they will enter its hash value in their new blocks to be created. If the majority of participants consider the block to be valid, the chain will continue to grow fastest starting from this block. If it does not consider it valid, the chain will continue to grow starting from the previous block. The blocks do not form a simple chain, but a tree . Only the longest chain contained in the tree from the first block (root) is considered valid. As a result, this form of accounting automatically consists of those blocks that the majority accepted as valid. This first block, with which a cryptocurrency is also started, is called Genesis block called. In many cases, it is already included in the operating software of the cryptocurrency and is the only block that does not contain a hash value of a predecessor.

Every participant who creates a new one based on a block accepts and confirms the previous blocks as conforming to the rules. The more new blocks are generated based on an existing block, the better the transactions contained therein are collectively confirmed and thus irrevocably documented in the network. By adapting the level of difficulty to the computing power used by the participants, the rate at which new blocks are successfully created can be adjusted. With Bitcoin, this value will be adjusted after 2016 blocks so that on average one new block can be expected every 10 minutes. So the adjustment takes place roughly every two weeks. If you want to carry out a transaction and need it to be confirmed by the network of the participants, you have to wait an average of 10 minutes until it has been entered in a new block. After about an hour, five more were added to this block. Anyone who wanted to question these transactions now would have to use six times as much computing power as the rest of all participants worldwide in order to establish an alternative valid branch in the blockchain . This makes it almost impossible to delete or change transactions once entered.

Transaction fees

In order to avoid attacks on the operation of a cryptocurrency through overload ( denial-of-service attacks), transaction fees are charged to avoid senseless transfers of small amounts. These transaction fees are charged in that the creator of a new block is allowed to enter the transfer of the agreed amount to his own account. In addition to the new issues, the transaction fees thus provide an incentive to participate in the creation of new blocks. They form an economic incentive to participate even if there are no more profitable new issues.

Since block sizes are limited, transactions may have to wait longer to be included in a new block. If the initiator of the transaction wants to accelerate this process, he can voluntarily enter an increased transaction fee in his transfer order. The other participants will then preferentially incorporate this transaction into their new blocks in order to book this increased transaction fee for themselves.

Summary

The steps in the operation of a decentralized cryptocurrency are:

New transactions are signed and sent to all nodes.
Each node collects new transactions in a block.
Each node looks for the nonce that validates its block.
When a node finds a valid block, it sends the block to all other nodes.
The nodes only accept the block if it is valid according to the rules:
1. The hash value of the block must correspond to the current level of difficulty.
2. All transactions must be correctly signed.
3. The transactions must be covered in accordance with the previous blocks (no double spending).
4. New issue and transaction fees must conform to the accepted rules.
The nodes express their acceptance of the block by adopting its hash value in their new blocks.

The steps are overlapping. New blocks are continuously searched for, and new transactions are created just as continuously. For the individual node, the probability of finding a new block does not change when a new transaction is inserted. Since each node prefers to enter its own public key for receiving the new issue, the blocks that are being worked on simultaneously worldwide are all different.

Scalability

problem

The use of current cryptocurrencies of the type described here comes up against limitations in practice with regard to time behavior as well as communication and storage requirements. If you want to check the credibility of a transfer or an account balance yourself, you have to know the current blockchain back to the Genesis block. To do this, each participant in the currency's P2P network must save a complete copy of the previous global accounting. The practical application of a cryptocurrency with the same matter of course as z. B. a credit card would quickly drive bookkeeping to unmanageable proportions.

For comparison: Bitcoin, the top-selling crypto currency, had an average of around 30 transactions per minute in December 2013. Visa Inc. compared around 200,000 with a booking system that was tested for 47,000 transactions per second in August 2013. Despite the comparatively low booking volume, the storage requirements of the Bitcoin blockchain increased by approx. 8.8 GB to 12.6 GB in 2013. Every participant would have to load around 24.7 Mbytes daily from the network and make them available to others in accordance with the P2P concept.

The limited rate for generating new blocks and the indeterminism of the process lead to unpredictably long confirmation times. With Bitcoin, for example, the level of difficulty is only adjusted every two weeks in order to then generate a new block as precisely as possible every 10 minutes. Fluctuations in the computing power actually operated and the scatter inherent in the principle lead to waiting times for transaction confirmations of 5 to 20 minutes. Newer cryptocurrencies therefore work with changed adjustments to the level of difficulty and sometimes increased rates for block generation.

Solution approach

In order to achieve workable rates for a widely used everyday payment method, the P2P approach, according to which everyone does the same, must be abandoned. The immense storage requirement could then be realized with archive servers, which are the only ones to store the entire blockchain . Based on this, fully validating servers work by initially loading the blockchain from the archive servers, but only work with part of it during operation. You take on the actual burden of the bookings. Participants could then operate software for simplified payment verification ( SPV ) and receive only partial information from the servers.

In practice, service providers would also be conceivable who, similar to insurance, carry out checks on a transfer order and insure the residual risk. A customer only needs to know their account balance and can use their private crypto keys (the wallet ) to create and digitally sign a transfer order without a copy of the blockchain. The retailer could send it to his service provider for verification and would have a result just as quickly as with other cashless means of payment. Immediate payment, for example with a smartphone at a retailer's checkout, is conceivable. Accordingly, POS terminals are to be upgraded in the near future.

However, these approaches lead again to the introduction of a service layer and would abandon the original idea of a currency that exists without a trusted third party . However, in contrast to banks, the entire process would still be transparent for everyone. As before, everyone could also access the full scope of an archive server if necessary, if they saw a reason to do so. With the concept of divisible blocks described below, individual bookings can be checked with SPV applications without having to trust a service layer.

Divisible blocks

If the hash value for the complete predecessor is stored in each block, the complete block is also required in order to check that the chain is complete. So you need the entire bookkeeping, even if you are not interested in every single booking. Hash trees are used to prevent this . Instead of determining a hash value for the entire block, you can also calculate hash values for individual transactions and organize them as a hash tree. At the root of the tree, you get a hash value that secures all transactions in a summarized manner. This enables a block header to be created that only contains the hash value of the predecessor, the nonce and the root hash value of the tree itself.

The individual block becomes larger as a result, but the continuity of the chain can now be checked solely on the basis of the comparatively small block headers. These headers can therefore be saved easily and their storage requirements do not depend on the number of transactions carried out. With Bitcoin, that's 80 bytes every 10 minutes, i.e. about 4 MB per year.

Chain of block headers. The subtree of a transaction is represented by a hash tree.

The blockchain is thus a series of hash trees in which only the roots and their chaining are of interest at first. If an SPV application wants to check an individual transaction, it only needs the relevant subtree in order to be able to check the hash value of the transaction using the values of this subtree down to the root. The fully validating server or the archive servers from which the subtree is obtained need not be trusted. With its hash values, the subtree represents the verifiable connection between the individual transaction and the block header of the block in which it was booked. This method allows the validity of a booking to be checked with very little effort without having to do the rest of the accounting know. An SPV application is therefore the minimal solution for receiving payments.

The relatively small block headers are one of the reasons that specialized hardware can be used extremely efficiently for mining. For each new nonce, only the hash value of the small block header and not the entire block is calculated. The memory requirement is therefore very low. This is exactly what newer hash functions such as scrypt try to avoid by artificially increasing the memory requirement and thus reducing the influence of special hardware on the currency.

Mining pools

With increasing interest in a crypto currency, the number of those who want to be involved in the new issues naturally increases. The individual participant competes with the growing computing power of all other participants. In addition, as interest grows, so does the exchange value of the currency. This leads to the situation that the new issues for new blocks are becoming more and more valuable and at the same time it is becoming increasingly unlikely to get them as a single participant.

Mining pools are similar to the motivation gaming communities in the lottery. Several participants invest together to increase the chance of a profit and then share it among themselves. In the case of crypto currencies, computing power is combined in order to later share the profit (new issues, transaction fees).

A central service provider allows participants to register with him. With special applications, the participants make their own computing power available to the service provider. This determines a new block and allocates the nonce intervals to be searched to individual participants. As a result, everyone works in parallel on the same problem that a single node would normally try to solve. If a participant finds a nonce that leads to a valid block, the block can be published and the profit divided.

Since all participants work on the same block with different values of the nonce, the search space is distributed over the participants, and the search is thus successful much faster on average. As the target account for the winnings is already contained in the block and the hash value would inevitably change if the address were changed, it is impossible for a participant to book a successful new block for himself. If divisible blocks with hash trees are used (see above), the transactions of the new block are usually not known to the individual participants either. It only receives the template for the new block header and searches for the matching nonce.

If each participant (regularly or after a new block has been found) reports their own best nonce, the operator of the mining pool can use this to estimate the computing power actually performed by the respective participant. To do this, it inserts the nonce in the collectively processed block header and calculates the hash value. The smaller this is or the closer it comes to the current level of difficulty, the higher the computing power used. Due to the statistical spread of the proof-of-work task, this estimated computing power has to be averaged over several processed new blocks. A fraudulent pretense of actually not performed computing power is largely excluded. The profit can be divided among the participants in proportion to the computing power performed.

Mining pools become problematic when participants lose control. The API of many pools does not allow the participant to check the transactions that the operator confirms for the general public with the new block. In particular, if the participants only receive templates of the block header, a check is not possible. This means that the operator of the pool receives not only their computing power from the participants, but also their majority voting rights. The principle of democracy based on computing power is thus undermined. In a figurative sense, the participant in a mining pool makes his voting slip available to the operator (see Risks, majority decision by computing power ).

Informational self-determination

Cryptocurrencies work with public accounting. Every participant has unhindered access to all transactions since the currency was introduced. There is no bank and therefore no banking secrecy. However, without a bank, there is no instance that registers a participant as a person. Anyone can generate a key pair and use the public key to participate in payment transactions. This public key is the participant's pseudonym . Cryptocurrencies in the form described here are therefore already pseudonymized by their nature . In Germany, service providers are obliged to "enable the use of telemedia and its payment anonymously or under a pseudonym" in accordance with Section 13 (6) of the Telemedia Act . A cryptocurrency already meets this requirement through its construction.

However, pseudonyms do not protect against the assignment to a person in another way. By their very nature, payment transactions are often associated with the specification of further information such as a delivery address, an e-mail address or similar information. In order to avoid that the entire history of all bookings of this person is exposed in such a case, each participant can generate any number of key pairs and thus pseudonyms. What is undesirable as a sock puppet here in Wikipedia and other network services and is sometimes even systematically pursued is the normal case for cryptocurrencies. However, anonymity cannot be achieved with this.

Anonymization

In order to prevent the traceability of payments, accounts are offered as a service that allow transactions to be processed through them in such a way that the identification of a connection between incoming and outgoing transactions is made as difficult as possible. This is achieved on the one hand because many participants process payment orders using the same account and only the operator knows the connection between the incoming and outgoing transactions. In order to avoid correlations , the service user can order additional measures. The payment can e.g. B. delayed, broken down into partial amounts and / or distributed to several recipient accounts (which in turn can belong to the same person). Such services are referred to as mixing service or, based on the facts of money laundering, also as laundry service .

The main disadvantage is that the operators of these services must be trusted, both in terms of anonymization and the actual execution of the payment. There is again a central service that must be trusted, similar to a bank. This runs counter to the basic concept of a cryptocurrency. Also laundry services can be implemented as a decentralized service of the community of participants in a crypto currency. With commitment procedures , cryptographic accumulators and zero-knowledge evidence , a kind of digital bulletin board can be created on which amounts can be deposited and collected anonymously. In order to prevent deposited amounts from being removed from the bulletin board, it must be self-organized in the same way as the accounting of the crypto currency. The bulletin board can therefore be viewed as a kind of anonymous parallel currency to the original cryptocurrency and integrated into its accounting.

Zerocoin

The Zerocoin concept, originally intended as an extension of the Bitcoin protocol, pursues the approach of a digital notice board as an anonymous parallel currency. After this extension was not accepted by the Bitcoin community for months, the developers decided to run it as an independent cryptocurrency , probably in ^[outdated] May 2014.

Participants can anonymously deposit amounts as credit on the bulletin board. They keep a secret that makes it possible to withdraw this amount from the bulletin board later, just as anonymously. The result is a transaction from one account to another without any recognizable connection between them. The process of an anonymous transaction:

Generation of a random serial number S and cryptographic determination of this with the help of a commitment procedure. A commitment C is obtained that reveals the stored serial number S only to those who have the matching random number z .

The newly created Commitment C is now placed on the bulletin board along with the corresponding amount.

If you want to post the amount from the notice board back to an account, you first look at the amount of all committed commitments and generate a non-interactive zero-knowledge proof for the following statement:

I know a C in the set of all C 's and know the secret value z to this commitment to the serial number S to open.

This zero-knowledge proof is published together with the serial number S (preferably via an anonymous communication channel such as Tor ) .

The other participants review the evidence and check that the value of S has not yet been used.

If the test is positive, the participants allow the person who has provided the evidence to transfer the relevant amount from any position on the notice board to their account.

By using a zero-knowledge proof, neither the relevant commitment C nor the corresponding value z is known.

Dangers and criticism

Software error

Like all software-operated systems, cryptocurrencies are not safe from software errors. Examples:

The transfer of 184 billion BTC (there should never be more than 21 million BTC) on August 15, 2010 was based on an arithmetic overflow .
On March 11, 2013, the Bitcoin blockchain split into two branches that were deemed valid by different groups of participants. So there was inconsistent accounting. The cause was an unwanted incompatibility of a new software version. Blocks were generated that rejected older versions as non-compliant. The incident is also evidence of the particular influence of the operators of mining pools or powerful hardware on the currency. You were requested to downgrade at short notice until a corrected version was available.

So far, all incidents with Bitcoin could be resolved through software corrections and cooperative behavior of those involved. However, there is no guarantee that this will be the case for all cryptocurrencies and for all time. Seen in this way, the statement made at the beginning about the non-existence of a single point of failure must also be put into perspective. If a cryptocurrency is operated almost exclusively with software from a single source code and there are no independent implementations , then this source code represents a single point of failure.

Specialized hardware

The massive use of specialized hardware to acquire new issues has a strong distorting effect on the general competition for these. For Bitcoin, the global hash rate is currently around 1.3 E H / s, i.e. 1.3 trillion calculations of the hash function per second. The exact value is subject to strong fluctuations. Since BTC mining is becoming increasingly unprofitable, resourceful business people are now offering their hardware as rentable mining computing power. With newly designed cryptocurrencies, attempts are increasingly being made to reduce the influence of specialized hardware. Hash functions are used for this, which increase hardware costs due to high memory requirements ( scrypt ), or attempts are made to design them so that they are as unsuitable as possible for GPUs and FPGAs and cause the highest possible costs for ASICs ( POW ).

Majority decision by computing power

Due to the majority vote on computing power, such cryptocurrencies are exposed to the risk of being manipulated by organizations that manage to raise 51 percent of the computing power. In this context, one speaks of a 51% attack. The mining pool GHash.IO briefly reached 42 percent in Bitcoin mining in January 2014. The two mining pools GHash.IO (approx. 34 percent) and BTC Guild (approx. 24 percent) with a combined total of approx. 58 percent would currently be able to control Bitcoin (as of January 19, 2014). The original idea of the proof-of-work concept of distributing control of the currency evenly over the multitude of CPUs worldwide has therefore not succeeded.

Data loss and data theft

Since the power of disposal over a credit balance in a crypto currency exists exclusively through the secret private key, credit balances have already been irretrievably lost in the past due to data loss. A reimbursement by other means is usually not possible, since lost credit cannot be distinguished from parked and currently unused assets. This also means that the amount of money that can actually be traded is not known.

The keys, which are comparatively small in terms of storage requirements, are also an easy target for computer criminals . Similar to passwords, they can be spied on with malware . Due to the worldwide operation with pseudonyms , a criminal prosecution of such theft of crypto credit is hardly promising. As a consequence, companies are already offering the secure storage of crypto assets as a service.

distribution

Some cryptocurrencies are unfair to the general public in that substantial parts of the new issues have already been made by the founders (English pre-mined) or the start with the highest yields has not been sufficiently publicized for a long time. Often even rules are included that give participants in the start-up phase, so-called early adopters , particularly favorable conditions. If the founders are accused of self-serving intent, then such crypto currencies are also referred to as scamcoins (dt. Fraud coins). However, pre-mining can also be an openly documented part of the concept, as in the case of Ripple, which is planned as a pure exchange currency.

Even with Bitcoin, which was initially considered experimentally, there are imbalances from the start time. Bitcoin is designed in such a way that half of all Bitcoins (i.e. 10.5 million) are issued with the first 210,000 blocks (i.e. within approx. Four years). Since reaching this block on November 28, 2012, the new issue has been halved and is halved every four years in the same way. On that day there was a single account with a balance of 111,111 BTC, a little over 1 percent of all bitcoins.

A year later, in December 2013, it was found that 47 accounts hold 28.9 percent of the 12 million BTC issued. Another 880 accounts hold 21.5 percent. Half of all Bitcoins mined up to then are therefore in a maximum of 927 accounts. Another 10,000 accounts hold another 25 percent, so that the remaining approximately 1,000,000 accounts share the remaining quarter.

Price fluctuations and price manipulation

Comparatively few of the cryptocurrencies operated worldwide can be traded in regular currencies. Often they can only be traded in other crypto currencies. As a rule, banks do not offer exchanges.

Those crypto currencies that are convertible can be risky due to their high volatility and represent a potential target for pump and dump attacks. As large distributed machines without the possibility (given with central bank money) of the market they are to serve as a means of payment to react, they are hardly suitable for providing a stable currency. Particularly in the case of a comparatively low volume, cryptocurrencies represent an object of speculation in which stable exchange rate systems with conventional currencies are seen as unlikely.

The often very uneven distributions (see above) also pose a threat to the stability of the exchange rate to established currencies in this context. If very few people have very large parts of the currency (with Bitcoin, around 1,000 people have half of it Currency), the exchange rate is significantly influenced as soon as only part of this group of people becomes active with it. These people can use it to perform a “ dump ” without a previous “ pump ”, but with the same effect.

The cryptocurrency only secures its own existence. It documents which credit belongs to which key, limits and regulates new issues and prevents double spending. The exchange rates arise entirely outside of this system. The exchange rate information against other (in particular conventional) currencies is information from traders or stock exchanges and can generally be manipulated. In particular, they do not represent a guarantee that the cryptocurrency will actually be exchanged at this rate.

Resource consumption

Some cryptocurrencies (such as Bitcoin ) use a so-called proof-of-work procedure, in which network participants are rewarded with currency units for providing computing power. This can e.g. B. be newly created units or "payment" for processing a transaction. The greater the computing power of a participant, the more likely it will be a reward. This creates a competition among the participants in which they try to increase their share of the total computing power of the network in order to receive more rewards. The higher computing power leads to a higher consumption of resources (e.g. electricity or additional hardware); In 2018 it was calculated that the power consumption of mining Bitcoins alone is far higher than the power consumption of the whole of Denmark.

Bitcoin, for example, is based on the fact that the transaction chain is updated at approximately constant time intervals. A proof-of-work must be provided for this, in this case the solution of a cryptographic problem, which is chosen so that the solution takes as long as the desired time interval on average. Since the overall computing power of the network increases due to the competition - and also due to new entrants - the difficulty of the problem must be continuously increased so that the time it takes to find a solution remains the same. This increase in computing power continues as long as the reward still appears to be economical compared to the additional expenditure for more computing power.

Cryptocurrencies that are used instead of the proof-of-work process e.g. For example, using the proof-of-stake method and avoiding "mining" altogether have a much lower energy consumption. These include, for example, Ripple ( XRP ), but also (measured by market capitalization ) "smaller" cryptocurrencies such as B. NANO and EverGreenCoin (EGC), for whose user communities the protection of natural resources is an express goal.

Others

Cryptological security : The security of a cryptocurrency is essentially determined by the security of the procedures used in it. For example, SHA-2 was developed in response to known attacks against SHA-1. Should something similar be repeated with SHA-2 or another hash function, cryptocurrencies based on it could be manipulated.

Credibility : Many crypto currencies are only slightly varied duplicates of already existing currencies without any notable technical progress. In some cases they are not meant seriously at all, as the example of “Coinye West” shows, in which the rapper Kanye West was alluded to .

Regulatory authorities : In some countries, regulatory authorities have spoken out against the use of cryptocurrencies and in some cases have already taken specific regulatory measures to prevent their use. At the G20 summit in Buenos Aires in 2018 , it was decided to regulate crypto assets for combating money laundering and terrorist financing in line with FATF standards and to consider further measures if necessary. In Germany, crypto custody transactions will be subject to supervision from 2020 and thus the supervisory authorization requirement of BaFin. Further information can be found in the article on the implementation of the term crypto value in the Banking Act and in the overview article on crypto custody .

Chargeback : Since transactions are irreversible, when exchanging for chargeback payment methods ( direct debit , credit card , PayPal, etc.), cryptocurrency traders run the risk of losing money after a chargeback.

Advertising bans : Google (from March 2018) and Facebook (from January 2018) ban advertising for cryptocurrencies. It was about the speculative nature and fraudulent websites. This means that advertising for cryptocurrencies is excluded from the two largest advertising platforms on the Internet. In autumn 2018, however, Google's ban was partially lifted again. Since then, certified advertisers have been able to advertise cryptocurrencies and crypto-related financial services in certain countries again. Advertisements for ICOs are still excluded.

Cryptocurrency as state currency : State propaganda portrayed Venezuela as "the world leader" when the state cryptocurrency Petro was supposedly introduced. During the de facto bankruptcy of the country, the Venezuelan bolívar , the national currency, had lost all confidence. It may have been an attempt by the government to displace other cryptocurrencies; these were the obvious possibility for the Venezuelans, on the one hand, to escape their national currency and its hyperinflation , on the other hand, to receive remittances from the Venezuelans who had fled abroad, while freely convertible currencies were forbidden in the country .

Other countries are discussing the issue of a state cryptocurrency. These include the USA with FedCoin, Russia, Turkey and the tech-savvy Estonia, which is working ambitiously on the adaptation.

Russia was toying with the introduction of a cryptocurrency to avoid sanctions, but the Russian central bank found the introduction of a cryptocurrency to the ruble too risky for the stability of the ruble. Instead, Russia encouraged Venezuela to take the step that Venezuela had nothing to lose.

Learning Coin from the World Bank and IMF: The first own cryptocurrency of the two specialized agencies of the United Nations is not designed as a means of payment, but the Learning Coin was developed for internal learning and research purposes. However, the advance is further proof that traditional actors from politics and society ascribe great potential to digital currencies.

Ransom demands : Internationally, as of the beginning of 2019, there were "already more" ransom demands via cryptocurrencies. On January 9, 2019, one was known for the first time in Norway - in the currency Monero .

literature

Anka Hakert: Correct tax: Crypto money millionaire, what now? - heise online. In: heise.de. February 19, 2018, accessed February 19, 2018 .

Web links

Wiktionary: cryptocurrency - explanations of meanings, word origins, synonyms, translations

Commons : cryptocurrency - collection of images, videos and audio files

Individual evidence

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↑ Crypto-money regulation in Germany: "Treat Bitcoins fairly" , Heise Zeitschriften verlag. September 27, 2014. Retrieved October 9, 2014.

↑ ^a ^b Anka Hakert: Bitcoin tax secret What the tax office says about crypto money . In: c't . No. 22/2014, October 2, 2014, p. 48 ff. Accessed October 29, 2014.

↑ Bitcoin Party: Bit-Drop-Projekt gives away crypto money , CHIP Digital GmbH. August 28, 2014. Archived from the original on October 29, 2014. Retrieved on October 29, 2014.

↑ See List of all traded alternative cryptocurrencies with blocks, difficulty, hashrate and marketcap (Crypto Coins List). Retrieved January 9, 2018.

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↑ Special Report: In Venezuela, new cryptocurrency is nowhere to be found , Reuters, August 30, 2018.

↑ Ripple credits. XRP is a bridge currency. In: Ripple Wiki .

↑ Germany recognizes Bitcoins as private money , Frankfurter Allgemeine Zeitung GmbH. August 16, 2013. Retrieved October 29, 2014.

↑ The artificial currency Bitcoin is considered "private money" , Neue Osnabrücker Zeitung GmbH & Co. KG. August 16, 2013. Retrieved October 29, 2014.

↑ Germany recognizes Bitcoin as "private money" , Axel Springer SE. August 16, 2013. Retrieved October 29, 2014.

↑ See Lukas Müller / Malik Ong, Current Issues on the Law of Cryptocurrencies, Current Legal Practice, 29 (2020) 198 ff .

↑ See "Financial Market Authority wants to put Bitcoin on a leash" in Die Presse on June 29, 2018.

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↑ Exclusive: Russia Secretly Helped Venezuela Launch a Cryptocurrency to Evade US Sanctions .; "So instead of putting the ruble at risk, Russia encouraged its ally in Latin America to run the experiment on itself, the banker says. Venezuela has nothing to lose."

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↑ Kidnapping: Norwegian police are looking for millionaire's wife orf.at, January 9, 2019, accessed January 9, 2019.

[1] Julian Dörr, Olaf Kowalski: Digitization and currency order: challenges and perspectives of the regulation of cryptocurrencies. In: Journal for Foreign and Security Policy. University of Cologne, 2018, accessed on December 19, 2018 .

[Heise-BitcoinKeineWaehrung-2] US tax authorities: Bitcoins are not a currency , Heise Zeitschriften Verlag. March 26, 2014. Retrieved October 9, 2014.

[Heise-BitcoinStaatlicheRegulierungen-3] Crypto-money regulation in Germany: "Treat Bitcoins fairly" , Heise Zeitschriften verlag. September 27, 2014. Retrieved October 9, 2014.