Cryptocurrency is a digital currency that can be used for payments or held as an investment similar to the stock market. Cryptocurrency is not a government currency and doesn’t have a central bank, interstate rates or a long history of exchange rates against other currencies.
Cryptocurrencies are stored in virtual wallets such as Klever, a multi-cryptocurrency wallet.
Cryptocurrency can be purchased and sold on exchanges, and each cryptocurrency system is separate and not interchangeable other than through these exchanges.
The benefits of cryptocurrency include eliminating or reducing transaction fees, cross-border transactions and having no central government authority, said Jonathan Katz, professor of computer science at the University of Maryland.
Credit cards are used with purchases over the internet, but credit card companies take 5% to 10% off the transaction and charge it to merchants which eventually gets passed down to the consumer, Katz said.
He said cryptocurrency can be an international standard because anybody in any country can use it, which eliminates an exchange fee.
“If I take $100, change it to Euros, and change it back to dollars, I probably end up with $80,” Katz said. “They take about 10% off the top every time they change money.”
Katz said cryptocurrencies have no central authority and no one has the ability to produce anymore. With the U.S. dollar, the government has the ability to print more at any time, which could devalue the currency, he said.
“With Bitcoin in particular, there is a fixed amount of how many Bitcoin will ever be in existence,” he said. “So people think this might provide some kind of a hedge against inflation or things of that sort.”
The fluctuation of cryptocurrencies on the exchange is what attracts people to invest in them, but for the long term, Katz said that’s not the reason why cryptocurrency will survive.
“That is actually in practice a big negative for cryptocurrency because right now nobody wants to actually spend Bitcoin on buying items because they think the value is going to increase by 10% tomorrow,” he said.
What is blockchain?
Cryptocurrency transactions are recorded and kept through a ledger called blockchain. Each block is connected to those before and behind it, making it more difficult for hackers to tamper with the blockchain because the block containing the record and all other blocks linked to it would need to be changed to avoid detection.
Katz said blockchain has the ability to maintain a tamper-proof, pen-to-only log.
“That (blockchain) means you just have a sequence of values or entries, and nobody can tamper them retroactively,” Katz said. “I have the first 10 transactions, and once they are committed to the blockchain nobody can tamper with them. The only thing that anybody can do is add to the blockchain.”
He said potential uses of blockchain would be for security of documents. For example, real estate records get stored in a database somewhere in the county where a person resides. He said taking the record and adding it on a blockchain would allow anyone to look at the records but it would ensure nobody can change them.
“So it would basically give you both better availability and the guarantee that they couldn’t be changed,” he said.
Types of mining
There are two commonly used consensus mechanisms to mine cryptocurrency – proof of work and proof of stake. Katz said a cryptocurrency designer can design a protocol for the cryptocurrency that is being created.
Proof-of-work mining uses computers as mining machines to solve complex mathematical problems to secure transactions on a cryptocurrency network and ensures that invalid transactions such as double-spends are removed, according to cointelegraph.com. A double-spend attack is one of the biggest risks to a blockchain and is when someone spends the same money twice.
Bitcoin, Ethereum and Dogecoin rely on proof-of-work mining.
The proof-of-stake protocol uses validators instead of miners, does not use processing power to secure blocks and “stake” funds on blocks that are believed to be valid, according to cointelegraph.com.
With the proof-of-stake protocol the ability to mine is chosen randomly based on the amount of stake or amount of cryptocurrency coins that are owned on a particular network, Katz said.
“That gives everyone an equal chance but rather than being weighted by your computational effort, it is being weighted by the amount of coins that you own,” he said.
Ethereum and Dogecoin use the proof-of-work system but will transition to a proof-of-stake protocol. Algorand and Cardano both use a proof-of-stake system.
Katz said the goal of both mining mechanisms is to try to ensure that the mining of cryptocurrency is being done by multiple parties instead of just one party.
“You want to basically distribute the ability to mine across all these different parties,” he said.
Jason Zhang, member of Applied Blockchain’s board of directors, said a blockchain or cryptocurrency network like Bitcoin is a permissionless and global network that anyone can participate in.
“If they want to buy a machine that will allow them to do computations they can do that and plug it into the network and they compete for the rewards within the network,” he said.
Katz said the network refers to the different computers that are all running a Bitcoin protocol — proof of work — and they are all communicating with each other as part of the protocol.
A computer used as a mining machine is seen on the University of Jamestown campus.
Masaki Ova / The Jamestown Sun
Bitcoin uses the proof-of-work protocol to mine cryptocurrency, and computers used as mining machines around the world compete to solve complex mathematical problems in order to secure transactions on the Bitcoin network, Zhang said.
Whoever solves the mathematical problem is rewarded with Bitcoin that is generated in the network itself, he said. He said the mining machines randomly guess a string of numbers and the output needs to match the answer to the mathematical problem to win the reward of Bitcoin.
“How they are solving it is by trial and error,” Zhang said. “They are trying many different combinations and whichever one ends up working is the one that wins the reward. The more things you can try the higher the chance of getting the right answer.”
An individual or company with more machines can attempt more trials per minute to solve the complex mathematical problems, he said.
“It’s a competition for who is doing more work to get to the answer,” he said.
Katz said anyone who is working on the mathematical problem has the ability to solve it, but it is random on which party is going to solve it first. He said the first one to find the solution has the ability to mine that particular cryptocurrency that has the proof-of-work protocol built in.
“It depends on the amount of work and the amount of computational power you are going to invest,” he said. “Everybody who is investing the same amount of work has an equal shot in being the next one to solve the puzzle and therefore the next one to mine.”
Mining software and hardware
Applied Blockchain will use two types of different, dedicated, specialized processors used for mining — application-specific integrated circuit (ASIC) and general processing unit (GPU).
ASICs are tailored for one particular computation, Katz said.
“So if you tailor them to the exact computation that is done to solve a particular puzzle, then that would be very fast,” he said.
He said GPUs are faster than a regular central processing unit in a laptop but are still used for general purposes rather than being tailored specifically to one particular function.
Anyone can download software on a computer and mine cryptocurrency, but the problem is the chances of getting to mine will be very low and not worth it if someone is not willing to invest $10,000 for a mining machine, Katz said. He said the chances of anybody getting an opportunity to mine cryptocurrency are proportional to the amount of computational power.
“For the average person, unless you are just doing it for fun, there is not really any economic benefit to doing that,” he said. “If you want Bitcoin, you can just buy Bitcoin on an exchange. If you want to seriously mine it, you have to invest in one (mining machine).
“Because you have these specialized facilities that are investing a huge amount of computational power into the mining, the chances that your machine is going to win are like one in a million or something like that so it is not likely to happen,” he said.