Unit-4 Cryptocurrency

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UNIT –IV CRYPTOCURRENCY

History of Cryptocurrency
The history of cryptocurrency can be traced back to early concepts of digital cash in the
1980s. Here's a timeline of some key milestones:
 1980s: David Chaum, a cryptographer, proposes the idea of ecash, a form of
anonymous digital money.
 1990s: Several theoretical proposals for digital cash systems emerge, including Wei
Dai's b-money and Nick Szabo's bit gold.
 2008: Satoshi Nakamoto publishes a white paper outlining the concept of Bitcoin,
the irst decentralized cryptocurrency.
 2009: Bitcoin's software is released, and mining of the irst bitcoins begins.
 2010s: Bitcoin gains popularity, but also faces challenges like volatility and use in
illegal activities. Other cryptocurrencies, often called altcoins, are created.
 2020s: Cryptocurrency continues to evolve, with increasing institutional investment
and growing adoption for payments and decentralized inance (DeFi).
Here are some additional details:
 Satoshi Nakamoto is the pseudonym of the unknown creator(s) of Bitcoin. Their
true identity remains a mystery.
 Blockchain technology is the foundation of cryptocurrencies. It's a distributed
ledger system that securely records transactions without a central authority.
 Cryptocurrency has a volatile history with periods of rapid price increases
followed by crashes.
Overall, cryptocurrency is a relatively new and rapidly developing technology. Its future
remains uncertain, but it has the potential to signi icantly impact the global inancial
system.

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UNIT –IV CRYPTOCURRENCY

DISTRIBUTED LEDGER
A distributed ledger is a database that is synchronized and accessible across
different sites and geographies by multiple participants.
 The need for a central authority to keep a check against manipulation is eliminated
by the use of a distributed ledger.
 Underlying distributed ledgers is the same technology that is used by blockchain,
which bitcoin uses as its distributed ledger.
 A distributed ledger can be described as a ledger of any transactions or contracts
maintained in decentralized form across different locations and people.
 Cyber attacks and inancial fraud are reduced by the use of distributed ledgers.
Uses of Distributed Ledgers
1. While centralized ledgers are prone to cyber attacks, distributed ledgers are
inherently harder to attack because all of the distributed copies need to be attacked
simultaneously for an attack to be successful. Furthermore, these records are
resistant to malicious changes by a single party. By being dif icult to manipulate and
attack, distributed ledgers allow for extensive transparency.
2. Distributed ledgers also reduce operational inef iciencies, speed up the amount of
time a transaction takes to complete, and are automated, and therefore function
24/7, all of which reduce overall costs for the entities that use them.
3. Distributed ledger technology has great potential to revolutionize the way
governments, institutions, and corporations work. It can help governments collect
tax, issue passports, and record land registries, licenses, and the outlay of Social
Security bene its, as well as voting procedures.
The technology is making waves in several industries, including:
 Finance
 Music and entertainment
 Diamond and precious assets
 Artwork
 Supply chains of various commodities

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UNIT –IV CRYPTOCURRENCY

Pros
 Spreads systematic risk around, minimizing the risk of a single point of failure
 Has greater security due to cryptographic algorithms
 Allows for transparency and visibility into operations
 May prove to be more ef icient due to smart contract automation
 Offers individuals with limited access to traditional systems potentially greater
capabilities
Cons
 Is more complex compared to more traditional ledger solutions
 Often requires higher energy consumption for operation
 May have dif icult scaling as more users/transactions occur
 Still remains risky due to lack of regulation
 May prove to be dif icult to reverse fraudulent or erroneous activity

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UNIT –IV CRYPTOCURRENCY

Blockchain Protocols -Mining strategy and rewards


A Blockchain is basically a database containing all the important information about the
transactions of cryptocurrency, which is very dif icult to manipulate. It can be called a
Digital Ledger that contains all the information which is decentralized and distributed all
across the nodes in the blockchain.
Bitcoin is a digital cryptocurrency that uses peer-to-peer network technology for
transactions across the computers in the blockchain.
Bitcoin Mining is the process of adding important transaction details of Bitcoin to the
Blockchain, like sender address, hash value, etc. The Blockchain contains all the history of
the transactions that have taken place in the past for record purposes and it is stored in
such a manner that, it can’t be manipulated.
1. Transactions are grouped into blocks: When you buy a coffee with bitcoin, that
transaction is bundled together with other recent transactions into a block.
2. Miners compete to solve a complex math puzzle: Miners use powerful computers to
solve a cryptographic puzzle for each block. This puzzle is designed to be dif icult, and the
irst miner to solve it wins the right to add the block to the blockchain.
3. The winning miner gets rewarded: As a reward for their work, the winning miner
receives a set amount of new bitcoins. This reward amount is halved roughly every four
years.
4. The block is added to the blockchain: Once a miner solves the puzzle, the block is
added to the blockchain, which is a public record of all Bitcoin transactions. This makes the
transactions permanent and veri iable.
Block Rewards
 A Block Reward is basically a reward given to a Bitcoin Miner for every Block for
which he has solved the complex mathematical algorithm, and thus, the transaction
records are added to the Blockchain.
 Halving Process is associated with Bitcoin that the Block Reward just halves itself
once every 2016 Blocks are mined, every 4 years.
 Bitcoin every 4 years-
 2012- 25.00 BTC.
 2016- 12.50 BTC.
 2020- 6.25 BTC.
Incentive Pools

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UNIT –IV CRYPTOCURRENCY

An Incentive Pool for Blockchain works in the following ways :


 A group of Miners tends to form an Incentive Pool so that, they can create blocks
together for validating transactions, and then share the Incentives among all the
Miners with equality.
 When a Pool Miner inds out the solution of the block header, he cannot mess with
that transaction without removing the validation from it.

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UNIT –IV CRYPTOCURRENCY

Ethereum - Construction
Ethereum's construction differs from Bitcoin in some key ways. Unlike Bitcoin's focus on
transactions, Ethereum is designed to be a platform for decentralized applications (dApps)
through the use of smart contracts. Here's a breakdown of Ethereum's construction:
History of Ethereum
 2013: Ethereum was irst described in Vitalik Buterin’s white paper in 2013 with
the goal of developing decentralized applications.
 2014: In 2014, EVM was speci ied in a paper by Gavin Wood, and the formal
development of the software also began.
 2015: In 2015, Ethereum created its genesis block marking the of icial launch of the
platform.
 2018: In 2018, Ethereum took second place in Bitcoin in terms of market
capitalization.
 2021: In 2021, a major network upgrade named London included Ethereum
improvement proposal 1559 and introduced a mechanism for reducing transaction
fee volatility.
 2022: In 2022, Ethereum has shifted from PoW( Proof-of-Work ) to PoS( Proof-of-
State ) consensus mechanism, which is also known as Ethereum Merge. It has
reduced Ethereum’s energy consumption by ~ 99.95%.

Core Components:
 Blockchain: Similar to Bitcoin, Ethereum uses a blockchain to store data securely
and transparently. Each block contains transaction information and smart contract
code.
 Ether (ETH): Ether is the native cryptocurrency of Ethereum. It's used to pay for
transaction fees and computational power needed to run smart contracts.
 Nodes: A network of computers maintains the Ethereum blockchain. These nodes
validate transactions and ensure the network runs smoothly.
 Ethereum Virtual Machine (EVM): The EVM is a software platform that acts like a
virtual computer. It executes smart contracts and ensures they run consistently
across different computer systems.

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Key Differences from Bitcoin:


 Proof-of-Work vs. Proof-of-Stake (future): Currently, Ethereum uses a Proof-of-
Work (PoW) system similar to Bitcoin for mining. However, Ethereum is
transitioning to a Proof-of-Stake (PoS) system which is designed to be more energy-
ef icient.
 Smart Contracts: This is the key innovation of Ethereum. Smart contracts are self-
executing programs stored on the blockchain. They can automate agreements and
facilitate decentralized applications (dApps) in various ields like inance, supply
chain, and gaming.

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UNIT –IV CRYPTOCURRENCY

DAO (Decentralized Autonomous Organizations)


Absolutely, DAOs (Decentralized Autonomous Organizations) are intricately linked to
blockchain technology. Here's a breakdown of how they work together:
What is a DAO?
Imagine an organization that runs itself without a central leader. That's a DAO in essence.
Decisions are made collectively by its members, and rules are enforced through code. Here
are some key characteristics of DAOs:
 Decentralized: There's no single entity in control. Power is distributed among
members.
 Autonomous: Decisions are made through voting on proposals, often using a token
system.
 Transparent: All actions and votes are recorded on a blockchain, making everything
publicly veri iable.
How Blockchain Makes DAOs Possible
Blockchain provides the foundation for DAOs to function by offering:
 Smart Contracts: These self-executing contracts written in code dictate the DAO's
rules and automate processes. They ensure fair and transparent decision-making.
 Distributed Ledger: A blockchain acts as a secure and transparent record of all DAO
activity, including votes, proposals, and transactions.
Examples of DAO Uses
DAOs offer a novel way to structure organizations across various ields. Here are some
examples:
 Investment DAOs: Pool funds for collective investments based on community
voting.
 Philanthropy DAOs: Contribute to charitable causes in a transparent and
democratic manner.
 Social DAOs: Build online communities with shared interests and goals.
The Future of DAOs
DAOs are a relatively new concept with immense potential to change how organizations
operate. As the technology matures, we can expect to see even wider adoption across
different sectors. However, there are also challenges to address, such as legal frameworks
and potential security risks.

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UNIT –IV CRYPTOCURRENCY

Smart Contract
Think of a smart contract as a digital agreement stored on a blockchain. It's essentially a
program that automatically executes the terms of a contract when predetermined
conditions are met. This eliminates the need for intermediaries like lawyers or brokers,
saving time and cost.
How Smart Contracts Work
Here's a simpli ied breakdown of how smart contracts function:
1. Coding the Agreement: The contract's terms are written in a speci ic programming
language designed for blockchains (e.g., Solidity for Ethereum). This code outlines
the conditions that need to be ful illed for the contract to execute.
2. Deployment on Blockchain: The code is deployed on a blockchain network, making
it visible to all participants.
3. Execution based on Conditions: Once deployed, the contract constantly monitors
the blockchain for the prede ined conditions to be met. These conditions can involve
things like receiving a speci ic payment, verifying the delivery of goods, or the lapse
of a certain amount of time.
4. Automatic Actions: When the conditions are satis ied, the smart contract
automatically executes the actions programmed into the code. This might involve
transferring funds, releasing ownership of an asset, or triggering another smart
contract.
Bene its of Smart Contracts
Smart contracts offer several advantages over traditional contracts:
 Security: Stored on a tamper-proof blockchain, they are highly secure and resistant
to fraud.
 Trustless: No need for a trusted third party to enforce the contract.
 Ef iciency: Automate processes, saving time and resources.
 Transparency: All actions are recorded on the blockchain for everyone to see.
Examples of Smart Contract Uses
Smart contracts have a wide range of potential applications, including:
 Supply Chain Management: Track the movement of goods and automate payments
upon delivery.
 Escrow Services: Securely hold funds until speci ic conditions are met.

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 Decentralized Finance (DeFi): Enable peer-to-peer lending and borrowing without


banks.
 Voting Systems: Facilitate secure and transparent voting processes.
Limitations of Smart Contracts
While powerful, smart contracts also have limitations:
 Code vulnerabilities: Bugs in the code can lead to unintended consequences.
 Irreversible actions: Once executed, the terms cannot be easily changed.
 Limited functionality: They can only execute tasks that are explicitly programmed.
Despite these limitations, smart contracts are a revolutionary technology with the
potential to transform many industries. As the technology evolves and matures, we can
expect to see even more innovative use cases emerge.

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UNIT –IV CRYPTOCURRENCY

GHOST
1. GHOST Protocol: This is a speci ic protocol related to block selection and validation,
primarily used in the Ethereum blockchain.
Here's how GHOST Protocol works:
 Block Selection: Miners can propose new blocks to the blockchain concurrently.
 Orphaned Blocks: Due to this concurrency, sometimes multiple valid blocks are
created within a short time frame. These extra blocks, not included in the main
chain, are called orphaned blocks.
 GHOST's Role: Instead of discarding orphaned blocks entirely, GHOST assigns them
a partial weight based on how many other blocks reference them. This means blocks
with more references are considered more "valuable" even if they aren't part of the
main chain.
 Bene its: GHOST improves ef iciency by incorporating some information from
orphaned blocks, potentially leading to faster transaction processing. It also
discourages centralization of mining power by rewarding miners who contribute to
the overall network health, not just the winner who adds the latest block.
2. Ghost Blocks/Transactions (Informal): This is a more informal term that can refer
to any data blocks or transactions that are not successfully added to the main
blockchain. There can be a few reasons for this:
 Orphaned Blocks (as explained above): These are valid blocks but not included in
the main chain due to the GHOST Protocol or similar mechanisms.
 Failed Transactions: Transactions that don't meet the network's validation rules or
encounter errors during processing might not be added.
It's important to note that the speci ic meaning of "ghost" in blockchain depends on the
context. If you encounter the term, consider the surrounding discussion to understand
whether it refers to the GHOST Protocol or simply a block/transaction not included in the
main chain.

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UNIT –IV CRYPTOCURRENCY

VULNERABILITIES
Cryptocurrencies, despite their growing popularity, are susceptible to various
vulnerabilities. These vulnerabilities can be broadly categorized into two main areas:
 Technical Vulnerabilities: These weaknesses stem from the underlying technology
behind cryptocurrencies, such as blockchains and smart contracts. Here are some
examples:
o Weak Smart Contracts: Smart contracts are essentially self-executing code on
a blockchain. Bugs or loopholes in these contracts can be exploited by hackers
to steal cryptocurrency.
o 51% Attacks: In proof-of-work blockchains, like Bitcoin, miners validate
transactions. If a malicious actor gains control over 51% of the mining power,
they could theoretically manipulate transactions. While unlikely for major
currencies, this is a risk for smaller ones.
 Investor Vulnerabilities: These vulnerabilities arise from human error or malicious
intent directed at investors. Here are some examples:
o Phishing Attacks: Just like any online system, crypto investors can be
targeted by phishing scams designed to steal their login credentials or private
keys.
o Fraudulent Platforms: Some cryptocurrency exchanges or platforms may be
fraudulent and disappear with investors' funds.

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UNIT –IV CRYPTOCURRENCY

ATTACKS
Cryptocurrencies face a number of security threats, and these attacks can target different
parts of the ecosystem. Here's a breakdown of some common attacks:
 Exchange Hacks: These are some of the most frequent and newsworthy attacks.
Hackers target cryptocurrency exchanges, which hold large amounts of digital assets
for their users. They exploit weaknesses in the exchange's security to steal these
assets.
 Phishing Attacks: These classic cyberattacks target individual investors. Phishers
try to trick users into revealing their login credentials or private keys to crypto
wallets through deceptive emails or fake websites.
 51% Attacks: This is an attack on the blockchain itself. If a miner or group controls
more than 50% of the mining power on a proof-of-work blockchain, they can disrupt
transactions and potentially steal coins. This is more of a threat for smaller
cryptocurrencies.
 Wallet Attacks: Hackers can target individual crypto wallets by infecting devices
with malware that steals private keys. Weak passwords on wallets can also be
exploited.
 Rug Pulls: This is a scam speci ic to Decentralized Finance (DeFi). Developers create
a new cryptocurrency or DeFi project, hype it up, and then suddenly abandon the
project after investors buy in, taking their money with them.
By understanding these different attack methods, you can be more vigilant and take steps
to protect your cryptocurrency holdings.

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UNIT –IV CRYPTOCURRENCY

SIDECHAIN
In the world of cryptocurrency, a sidechain is essentially a separate blockchain that runs
alongside an existing main blockchain (also called the parent chain or mainnet). They are
connected through a special mechanism called a two-way peg.
Here's how sidechains work:
 Think of it as a highway bypass: The main blockchain can get congested due to
high transaction volume, leading to slow transaction speeds and rising fees. A
sidechain acts like a separate lane that can handle more traf ic, alleviating
congestion on the mainnet.
 Two-way peg for asset movement: The two-way peg between the sidechain and
mainchain allows users to move assets back and forth. To move assets to the
sidechain, users typically lock up a corresponding amount on the mainchain. This
locked asset is then released when the user moves their funds back.
 Independent operation: Each sidechain has its own set of rules, consensus
mechanism (how transactions are validated), and security measures. This allows for
more lexibility and experimentation compared to the mainchain.
Bene its of sidechains:
 Scalability: Sidechains help reduce transaction load on the mainchain, leading to
faster and cheaper transactions.
 Innovation: They provide a platform to test new features and functionalities
without affecting the stability of the mainchain.
 Privacy: Some sidechains offer enhanced privacy features for transactions compared
to the mainchain.
Drawbacks of sidechains:
 Security: The security of a sidechain ultimately relies on the security of the
mainchain and the peg mechanism.
 Complexity: Having multiple blockchains adds complexity to the overall
cryptocurrency ecosystem.
 Centralization: Depending on the design, some sidechains may be less
decentralized than the mainchain.
Examples of sidechains:
 Liquid Network (connected to Bitcoin): Enables faster and more con idential
Bitcoin transactions.

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 RSK (connected to Bitcoin): Allows for smart contract functionality on the Bitcoin
network.
 Polygon (connected to Ethereum): Provides a scalable and interoperable platform
for decentralized applications (dApps).

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NAME COIN
Yes, Namecoin (NMC) is a cryptocurrency. It is the irst altcoin, a cryptocurrency other than
Bitcoin, created in 2011. It was designed to be a decentralized domain name system (DNS)
on top of the Bitcoin blockchain.

NAME COIN LOGO (nmc)


Advantages:
 Decentralized: Namecoin is a decentralized domain name system, which means that
it is not controlled by any central authority. This can be seen as an advantage, as it
makes it more resistant to censorship and fraud.
 Secure: Namecoin uses the Bitcoin blockchain, which is a very secure blockchain.
This means that domain names registered on the Namecoin blockchain are very
secure.
 Transparent: All transactions on the Namecoin blockchain are public and
transparent. This can be seen as an advantage, as it makes it dif icult for fraud to
occur.
Disadvantages:
 Less popular: Namecoin is not as popular as the traditional domain name system.
This means that there are fewer websites that use Namecoin domain names.
 More dif icult to use: Registering a domain name on the Namecoin blockchain is
more dif icult than registering a domain name with a traditional domain name
registrar.
 Not integrated with web browsers: Web browsers are not currently integrated with
Namecoin. This means that users need to use special software to access websites
that use Namecoin domain names.

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