Cryptocurrency – Bitcoin,

Altcoin and Token

Prof. J. Ujwala Rekha
Introduction
• The term ‘cryptocurrency’ evolved from the words
‘crypto’ meaning concealed or secret and ‘currency’
indicating a system of money.
• A cryptocurrency is a digital currency designed to work
through a computer network that is not reliant on any
central authority such as a government or bank, to
uphold or maintain it.
• Individual coin ownership records are stored in a digital
ledger or blockchain, which is a computerized database
using strong cryptography to secure transaction records,
control the creation of additional coins, and verify the
transfer of coin ownership.
Cryptocurrency as an Asset
• Cryptocurrencies are not considered to be
currencies in the traditional sense, and varying
legal treatments have been applied to them in
various jurisdictions, including classification
as commodities, securities, and currencies.
• Cryptocurrencies are generally viewed as a
distinct asset class in practice.
Bitcoin
• The three key requirements that eventually led to
the creation of Bitcoin are:
1. Directly transact with another person without
involving a third party, like a bank, to verify and
validate the transaction and thus avoid the cost of
mediation
2. Operate without being backed and controlled by a
central authority and assure the value of the money is
maintained
3. Preserve transparency in transactions, while still
maintaining the users’ privacy
Bitcoin
• Satoshi Nakamoto conceptualized a peer-to-peer
electronic cash system in 2008 and brought forth
the first cryptocurrency – the Bitcoin in 2009 as
open-source software.
• Using the Bitcoin system the willing parties
transact with one another using cryptography
directly.
• The hashing algorithm used in the Bitcoin system
is SHA-256.
• As a digital currency, it lives on the internet and
does not have any physical form.
Bitcoin
• Bitcoin transactions are done via the digital wallets where one can
store the bitcoins.
• With the bitcoin wallet, you are your banker and have sole control
of your money.
• Unlike the typical currency where the Government can print more
and thereby reduce the value of the money that is already in
circulation, the total number of bitcoins that can ever be in
circulation is fixed at 21 million.
• Bitcoins are released at a decreasing rate, i.e., as the number of
bitcoins in circulation increases, fewer the number of bitcoins that
can be created, thus appreciating its existing value.
• The value of the bitcoin is dependent only on the market supply
and demand and free of intervention from any central authority.
Bitcoin
• While a central authority backs fiat currencies, the Bitcoin is
backed by a widely distributed network of nodes or computers.
• Transactions are made in chronological order and non-reversible.
• The network does the verification and validation of the
transaction.
• Whenever a transaction is made, it is broadcasted to the whole
network and accepted only if it is accepted by the majority of the
network. This ensures security and prevents duplication of
bitcoins, i.e., doublespending and fraud.
• Also, user anonymity is maintained as a persons’ transaction is
not associated with his or her identity, unlike in traditional
databases where the transaction is associated with the customer
id.
Bitcoin
• Ever since Satoshi Nakamoto mined the first Bitcoin block
known as the Genesis Block in 2009, many developers have used
the opensource code and developed their variation of the
cryptocurrency, by a method called forking, to improve upon it,
e.g., Bitcoin XT, Segwit, Bitcoin Cash, etc.
• However, the original Bitcoin is still the most popular
cryptocurrency is usage and value.
• As of January 2020, there are over 2.8 million bitcoins left to
mine.
• The initial value of the Bitcoin was 0.0001 USD, and as of
January 2020 stands at over 8,000 USD.
• As bitcoins and other cryptocurrencies gain popularity among
the merchants, Governments are conscious of the need for
forming regulations around cryptocurrency trading.
Cryptocurrency Basics
• When parties are not in agreement, alternative chains may emerge. While
most forks are short-lived , some are permanent.
• Short-lived forks are due to the difficulty of reaching fast consensus in a
distributed system.
• Permanent forks have been used to add new features to a blockchain,
they can also be used to reverse the effects of hacking or avert
catastrophic bugs.
• Cryptocurrency and blockchain projects all have open-source code to
foster trust and safety.
• Developers can copy the open-source software and modify it to either
build compatible applications, e.g., wallets on the existing blockchain or
build a completely new cryptocurrency network, e.g., Litecoin.
• This process of duplication from an existing blockchain is called
forking.
• A fork creates an alternative version of a blockchain. It is typically done
to apply upgrades or new governance rules to a network.
Cryptocurrency Basics

• Forks can be classified as accidental or

intentional.
• Accidental fork happens when two or more
miners find a block at nearly the same time.
– The fork is resolved when subsequent blocks are added
and one of the chains becomes longer.
– The network abandons the blocks that are not in the
longest chain.
• Intentional forks modify the rules of a blockchain
and can be classified as hard fork and soft fork.
Hard Fork and Soft Fork
• A hard fork is a change to the blockchain protocol that is not backward
compatible and requires all users to upgrade their software in order to
continue participating in the network.
– In a hard fork, the network splits into two separate versions: one that
follows the new rules and one that follows the old rules.
• A soft fork is a backward-compatible change to the blockchain protocol
that allows new rules to be introduced without requiring all users to
upgrade their software.
• In a soft fork, a majority of the network’s miners implement the new rules
and begin following the updated version of the blockchain.
– The rest of the network can continue to follow the blockchain, but they
will be unable to validate the new blocks that follow the updated rules.
– Because a soft fork is backward-compatible, it does not result in the
creation of a new blockchain or the splitting of the network. Instead, it
allows the network to gradually transition to the new rules while still
maintaining compatibility with the old rules.
Hard Fork and Soft Fork
Characteristics of Cryptocurrency
• Decentralized: Not controlled by any bank or central
authority. All the nodes in the network work together in
mining or processing a transaction.
• Form of existence: They are not tangible and are developed
by software code and cryptographic algorithms.
• Limited supply: The maximum supply of cryptos that can
ever be generated or mined is defined when the genesis
block is created.
• Global access: Anyone can access and transact in
cryptocurrency irrespective of the geographical location.
• Anonymity: A transaction is linked to the person’s
cryptocurrency addresses and not the person’s name,
address or any personal details.
Characteristics of Cryptocurrency
• Transparency: Every transaction record is stored
in the blockchain ledger making it transparent,
verifiable and honest.
• Impossible to duplicate: Cryptographic encryption
and consensus protocols make fake
cryptocurrency impossible.
• Irreversible: Transactions are irreversible and
hence fosters trust, integrity and auditability.
Therefore, if a cryptocurrency is sent to the wrong
address, the coin is lost forever.
Cryptocurrency Wallets
• A digital wallet or cryptocurrency wallet is a software
program that stores the user’s private and public keys
enabling the user to transact crypto assets.
• It enables users to send and receive digital currency and
monitor their balance.
• Cryptocurrencies are stored immutably on the
blockchain using the user’s public key. This public key
is used by other wallets to send funds to the user’s
wallet address. However, the private key is required if
users want to spend cryptocurrency from their address.
Classifications of Cryptocurrency Wallets
• Hot Wallet: A hot wallet is designed for online day-to-day
transactions.
– It is connected to the internet at all times and hence a strong
candidate for hackers.
– Hot wallets are typically free, easy to set up, and convenient to
use.
– Based on their installation characteristics, they are differentiated
into three types:
• Desktop wallets: installed on desktop or laptop
• Mobile wallets: designed to operate on smart phone devices.
• Online wallets: they run on the cloud and can be accessed
from any computing device via a web browser. They are
hosted and controlled by a third party and hence are the most
vulnerable.
Classifications of Cryptocurrency Wallets

• Cold Wallet: A cold wallet is a digital wallet

that is not connected to the internet.
– Unlike hot wallets, they are not free.
– Being offline, they are more secure and used for
long-term storage of cryptocurrencies.
– Hardware wallets and paper wallets are the two
types of cold wallets.
Classifications of Cryptocurrency Wallets
• Hardware wallets: Hardware wallets are physical, electronic devices
that use Random Number Generator (RNG) to generate the
public/private key that is stored in the device.
– It connects to the internet whenever the user needs to send or
receive payments and disconnects once the transaction is executed.
– Transactions are confirmed through the private keys that are saved
offline.
– Hardware wallets have the facility to generate a PIN to protect the
device as well as a recovery phrase in case the wallet is lost.
– Though more secure than hot wallets, they are less user-friendly and
difficult to access.
• Paper wallets: Paper wallet is a piece of paper with crypto address and
its private key physically printed in the form of QR codes. These codes
can then be scanned to execute cryptocurrency transactions.
Types of Cryptocurrency
Altcoins
• Bitcoin is the original blockchain-based cryptocurrency.
• Since its induction, many variants of the bitcoin have arisen
using its open-source protocol, creating a new currency coin
with a different set of features that operates on its
blockchain.
• Namecoin, Peercoin and Litecoin are examples of Bitcoin-
derived blockchains.
• Some coins are not derived from Bitcoin but created as a
native currency of an original blockchain and protocol,
namely Monero, XRP (Ripple) and NxtCoin.
• These cryptocurrency alternatives to the Bitcoin are referred
to as ‘Alternative Cryptocurrency Coins,’ abbreviated as
Altcoins.
Altcoins
• Many of the altcoins come from a fork of
famous and durable cryptocurrencies like
Bitcoin, Litecoin, and Ethereum.
• While some altcoins are similar to their
predecessors, most attempt to improve or set
themselves apart by bringing in additional
features or security like improved block times,
different parameters, transaction management,
scripting language, consensus mechanism, etc.
Altcoins
• The main features that are common to all
altcoins are:
– They are peer-to-peer digital currencies that
involve a mining process.
– They possess their independent blockchain.
– They posses the characteristics of money, i.e., they
are fungible, divisible and have limited supply and
typically meant to operate only as a means of
payment.
Cryptographic Tokens
• Tokens is a digital unit that has a value and does not
have its own native blockchain but exists on top of an
existing blockchain infrastructure of another
cryptocurrency.
• In other words, token is a representation of an asset of
interest that has been tokenized on an existing
cryptocurrency’s blockchain.
• It facilitates the creation of decentralized applications.
• Tokens can be used to represent anything. For example,
digital or real-world asset such as property, art, goods
on a supply chain, etc.
Cryptographic Tokens
• Though a token can be used as a method of
payment within the project ecosystem, its primary
purpose is its usage as a utility or asset to give the
holder specific rights to participate in the
blockchain.
• A token can also be a tangible object like a house
or painting.
• For example, the WPR (WePower) token
represents electricity and allows the public to buy
and sell electricity on the blockchain using smart
contracts.
Tokens Vs. Coins
• They are digital assets that are built to perform a specific function(s)
within the project ecosystem and not operational as a typical
cryptocurrency.
– For ex, a dinner voucher will entitle you to dinner at a restaurant and a
cinema ticket to a movie. You cannot use the dinner voucher to watch a
movie and vice versa.
– Similarly, the token can be used to provide a service or right of product
used only for the specific project/blockchain.
• They do not have purchasing power, i.e., tokens can be bought with
coins but coins cannot be bought with tokens.
• They are built to interact with decentralized applications that sit on
an existing blockchain network like Ethereum, NEO, etc.
• They are easier to create than coins that need new coding or code
modification.
• Tokens are created and distributed to the public through a crowd-
funding method called Initial Coin Offering (ICO) where tokens are
issued in exchange for funding a potential blockchain project.
Types of Tokens
• Based on the function of the token, they are
divided into: utility and security tokens.
– Utility Tokens: they offer the holder the right or
license to use a product or service. For ex, voting
rights, ownership rights or content licensing.
– Security Tokens: They are also referred to as
equity tokens and entitle the holder to a share or
equity in the company.
Popular Coins and Tokens
• Bitcoin – Bitcoin still dominates the crypto market.
• Ethereum – It is the second-largest coin by market
captitalization. While Bitcoin functions only as a peer-
to-peer electronic cash payment system, Ethereum is a
smart contract platform that enables developers to build
decentralized applications.
• Ripple (XRP) - The Ripple platform is mainly used as
a global payment settlement, asset exchange, and
remittance system. It can seamlessly transfer any form
of currency, i.e., both cryptocurrency like BTC, LTC,
etc. as well as fiat currency like USD, YEN, EUR, etc.
Popular Coins and Tokens
• Bitcoin Cash (BCH) – Bitcoin Cash is the first
hard fork of the Bitcoin blockchain. The purpose
of forking was to increase the block size limit
from 1MB to 8 MB to improve transaction times
and scalability issues.
• Litecoin (LTC) – Litecoin is a fork of Bitcoin core
client. It uses ‘scrypt’ proof-of-work mining
algorithm rather than hashing algorith used for
PoW. The average time taken per transaction of
Litecoin is 2.5 minutes as compared to 10 minutes
for Bitcoins.
Popular Coins and Tokens
• EOS - EOS is a smart contract blockchain development
platform similar to Ethereum to develop decentralized
applications (DApps) and development tools.
• Monero (XMR) – It is a completely private, secure, and
untraceable cryptocurrency where no one is able to see
anyone else’s transaction or balances unless the person
makes it public, unlike in Bitcoin, where transactions
are public on the blockchain.
• Stellar (XLM) – Stellar is a cross-border payment
network system aimed at providing affordable financial
services to people of all income levels.
Ecosystem Players
• A blockchain is only as strong as its community. If the players in the
community are honest and engaged, it makes a sturdy and sustainable
cryptocurrency ecosystem.
• The different players or actors that directly or indirectly constitute the
blockchain ecosystem are:
– Programmers/Developers – they develop, deploy and maintain
blockchain protocols, applications and interfaces.
– Miners – they validate new transactions and record them on the
blockchain.
– Users – are the consumers who uses the blockchain or cryptocurrency
for the purpose it was designed for e.g., doctors and patients using Veris
Foundation Blockchain, and traders or investors using Kraken
exchange.
– Merchants – retail or other business entities that accept cryptocurrency
as a form of payment for their goods and services.
– Traders – they speculate and buy/sell cryptos based on the price
movements via a decentralized exchange.
Cryptomining
• Miners generate wealth through mining. A miner
needs to have some level of technical knowledge
and expertise in setting up computing software
and equipment.
• All mining systems have some form of a
consensus algorithm and an incentive system.
• Bitcoin uses Proof-of-Work consensus mining
algorithm
• Successful miner in Bitcoin gets a block reward
of 6.25 BTC, while in Ethereum, it is 2 ETH +
additional fees per block.
Types of Cryptominers

• Miners use computing power to validate and

produce a block.
• There are two types of miners: solo mining and
those that collaborate with others referred to as
pool mining.
• There are different types of mining based on the
processors or equipment used by the miner: CPU
mining (feasible in the early days but not viable
now), GPU mining, ASIC mining (Application
Specific Integrated Circuit), cloud mining, etc.
Airdrop
• Airdrop is a promotional activity aimed at
spreading awareness among the blockchain
community.
• It is a distribution event where a blockchain
project distributes free coins or tokens to
wallet addresses to create a market for the
project and a buzz among investors.
Token or Coin Burning
• Token or Coin burning is a process of
permanently removing coins out of circulation to
reduce the total supply and thus the increase the
value of remaining coins in circulation.
• The coin is considered to be burnt when it is sent
to a wallet address that can only receive coins.
These addresses are called “eater”, “burner”, or
“null” addresses.
• Proof-of-burn (PoB) is the consensus mechanism
to check and verify that the coins were legally
destroyed or burned.
Investing and Trading
• Any investor can purchase cryptocurrency from popular
crypto exchanges such as Coinbase, apps such as Cash App
or through brokers.
• Investors can also add new cryptocurrencies to their
portfolios by buying initial coin offering to own new token.
• Like an IPO, a company seeking to raise money can create a
new coin or service to launch an ICO as a way to raise
funds.
• Cryptocurrency trading is the act of speculating price
movements of the cryptocurrency, and buying or selling the
underlying coins via an exchange. You can buy if you think
a cryptocurrency will rise in value, or sell if you think it will
fall.
Cryptocurrency Safety
• Choose regulated exchanges for e.g., Binance, Bittrex , Coinbase,
etc.
• Do not store your cryptocurrencies on exchange for more than a day
or two.
• Conduct smaller trades instead of one large trade to avoid drawing
attention of malicious actors.
• Use a unique email not a regular email. Create a separate email for
every exchange you use.
• Store your crypto in desktop/mobile wallets for short-term and in
paper/hardware wallets for long-term.
• Use wallets from reputable sources.
• Carry only small amounts in your mobile or online wallets.
• Keep your crypto assets spread over several wallets to minimize the
impact of any loss.
Cryptocurrency Safety
• Enter the destination address correctly while
performing a transaction, otherwise you could
lose your coins.
• Be wary of phishing sites while doing a
transaction.
• Protect wallets and backups with strong
passwords.