Is Cryptocurrencies Winning to Stay?
According to wikipedia, a cryptocurrency (or crypto currency) “is a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies”. In the coming years, crytocurrencies like bitcoin might just become one of the major means of payment.
The digital currency Bitcoin came to life in January 2009, conceived the previous year by a still-mysterious person or group known only by the alias Satoshi Nakamoto1. Bitcoin was to be a ‘cryptocurrency’, in which strong encryption algorithms were exploited in a new way to carry out transactions with identities of users shielded by aliases for security purposes with complete decentralization of operations, i.e. no one would be in charge — not governments, not banks, not even the creator, Nakamoto.
There are close to 14.6 million, if not more, Bitcoin units in circulationcollective market value of about 3.4 billion United States Dollar.
What fascinates academics and entrepreneurs alike is the innovation at Bitcoin’s core. Known as the block chain, it serves as the official online ledger of every Bitcoin transaction, dating back to the beginning. It is also the data structure that allows those records to be updated with minimal risk of hacking or tampering — even though the block chain is copied across the entire network of computers running Bitcoin software, and the owners of those computers do not necessarily know or trust one another.
Many people see this block-chain architecture as the template for a host of other applications, including self-enforcing contracts and secure systems for online voting and crowdfunding. This is the goal of Ethereum, a block-chain-based system launched in July by the non-profit Ethereum Foundation, based in Baar, Switzerland. And it is the research agenda of the Initiative for CryptoCurrencies and Contracts (IC3), an academic consortium also launched in July, and led by Cornell University in Ithaca, New York.
Nicolas Courtois, a cryptographer at University College London, says that the Bitcoin block chain could be “the most important invention of the twenty-first century” — if only Bitcoin were not constantly shooting itself in the foot.
Several shortcomings have become apparent in Bitcoin’s implementation of the block-chain idea. Security, for example, is far from perfect: there have been more than 40 known thefts and seizures of bitcoins, several incurring losses of more than $1 million apiece.
Cryptocurrency firms and researchers are attacking the problem with tools such as game theory and advanced cryptographic methods. “Cryptocurrencies are unlike many other systems, in that extremely subtle mathematical bugs can have catastrophic consequences,” says Ari Juels, co-director of IC3. “And I think when weaknesses surface there will be a need to appeal to the academic community where the relevant expertise resides.”
Academic interest in cryptocurrencies and their predecessors goes back at least two decades, with much of the early work spearheaded by cryptographer David Chaum. While working at the National Research Institute for Mathematics and Computer Science in Amsterdam, the Netherlands, Chaum wanted to give buyers privacy and safety. So in 1990 he founded one of the earliest digital currencies, DigiCash, which offered users anonymity through cryptographic protocols of his own devising.
DigiCash went bankrupt in 1998 — partly because it had a centralized organization akin to a traditional bank, yet never managed to fit in with the financial industry and its regulations. But aspects of its philosophy re-emerged ten years later in Nakamoto’s design for Bitcoin. That design also incorporated crowdsourcing and peer-to-peer networking — both of which help to avoid centralized control. Anyone is welcome to participate: it is just a matter of going online and running the open-source Bitcoin software. Users’ computers form a network in which each machine is home to one constantly updated copy of the block chain.
Nakamoto’s central challenge with this wide-open system was the need to make sure that no one could find a way to rewrite the ledger and spend the same bitcoins twice — in effect, stealing bitcoins. His solution was to turn the addition of new transactions to the ledger into a competition: an activity that has come to be known as mining.
Adapted from: www.nature.com