How a crypto currency works?

Introduction:

Bitcoin is money, digital cash, a way of buying and selling things over the

Intermet. The Bitcoin value chain is composed of several different constituencies:

software developers, miners, exchanges, merchant processing services, web

wallet companies, and users/consumers. From an individual user's perspective,

the important elements in transacting coin (T'Il use "coin" in the generic sense

here) are an address, a private key, and wallet sotware. The address is where

others can send Bitcoin to you, and the private key is the cryptographic secret by

which you can send Bitcoin to others. Wallet software is the software you run on

your own computer to manage your Bitcoin (see Figure 1-1). There is no

centralized "account" you need to register with another company; if you have the

private key to an address, you can use that private key to access the coin

associated with that address from any Internet-connected computer (including, of

course, smartphones). Wallet software can als0 keep a copy of the blockchain

the record of all the transactions that have occurred in that currency-as part of

the decentralized scheme by which coin transactions are verified. Appendix A

covers the practicalities of maintaining an altcoin wallet in more detail.

eWallet services and cryptosecurity:

As responsible consumers, we are not used to many of the new aspects of

blockchain technology and personal cryptosecurity; for example, having to back

up our money. Decentralized autonomy in the form of private keys stored.

securely in your ewallet means that there is no customer service number to call

for password recovery or private key backup. If your private key is gone, your

Bitcoin is gone. This could be an indication that blockchain technology is not yet.

mature enough for mainstream adoption; it's the kind of problem that consumer-

facing Bitcoin startups such as Circle Internet Financial and Xapo are trying to

solve. There is opportunity for some sort of standardized app or service for

ewallet backup (for example, for lost, stolen, bricked, or upgraded smartphones

or laptop/tablet-based wallets), with which users can confim exactly what is

happening with their private keys in the backup service, whether they self-

administer it or rely on external vendors. Personal cryptosecurity is a significant

new area for consumer.

literacy, because the stakes are quite high to ensure that

personal financial assets and transactions are protected in this new online venue

of digital cash. Another element of personal cryptosecurity that many experts.

recommend is coin mixing, pooling your coins with other transactions so that

they are more anonymous, using services like Dark Coin, Dark Wallet, and

BitMixers As the marketplace of alternative currencies grows, demand for a

unified ewallet will likely rise, because installing a new and separate wallet is

required for most blockchain-related services, and it is easy to have 20 different

ewallets crowding your smartphone.

Despite their current clunkiness in implementation, cryptocurrencies offer many

great benefits in personal cryptosecurity. One of the great advantages is that

blockchain is a push technology (the user initiates and pushes relevant

information to the network for this transaction only), not a pull technology (like

a credit card or bank for which the user's personal information is on file to be

pulled any time it is authorized). redit card technology was not developed to be

secure on the Internet the way that blockchain models are developing now. Pull

technology requires having datastores of customer personal information that are

essentially centralized honey pots, increasingly vulnerable to hacker identity

theft attacks (Target, Chase, and Dairy Queen are just a few recent examples of

large-scale identity-theft vendor database raids). Paying with Bitcoin at any of

the 30,000 vendors that accept it as of October 2014 (e-g., Overstock, New Egg,

and Dell Computer; see https://bitpay.com/directory#/) means not having to

entrust your personal financial information to centralized vendor databases. It

might also possibly entail a lower transaction fee (Bitcoin transaction fees are

much lower than merchant credit card processing fees).

At the time of writing, the main Bitcoin merchant processing solutions for

vendors to accept Bitcoin are BitPay and Coinbase in the United States, and

Coinify in Europe." However, it is difficult for vendors, like the local café, to

run two separate payment systems (traditional and Bitcoin), so a more expedient.

future solution would involve integrating Bitcoin payment into existing vendor

payment networks. Mobile payment functionality is also needed for quick point-

of-sale Bitcoin purchases (for example, a cup of coffee) via mobile phone.

CoinBeyond and other companies focus on mobile Bitcoin payments

specifically, and BitPay and CoinBase have solutions for mobile checkout. In

one notable step forward, Intuit's QuickBooks accounting software for small

businesses makes it possible for vendors to accept incoming Bitcoin payments

from CoinBase and BitPay with its PayByCoin module."

Summary: Blockchain 1.0 in Practical Use

Blockchain is already cash for the Internet, a digital payment system, and it may

become the "Internet of Money," connecting finances in the way that the Intemet

of Things (loT) connects machines. Currency and payments make up the first

and most Obvious application. Alternative currencies make sense based on an

economic argument alone: reducing worldwide credit card merchant payment

fees from as much as 3 percent to below 1 percent has obvious benefits for the

economy, especially in the $514 billion international remittances market, where

transaction fees can run from 7 to 30 percent." Furthermore, users can receive

funds immediately in digital walets instead of waiting days for transfers. Bitcoin

and its imitators could pave the way tor currency, trade, and commerce as we

know it to be completely redefined. More broadly, Bitcoin is not just a better

version of Visa-it could also allow us to do things we have not even thought of

yet. Currency and payments is just the first application. 1he core functionality

of blockchain currencies is that any transaction can be sourced and completed

directly between two individuals over the Internet. With altcoins, you can

allocate and trade resources between individuals in a completely decentralized,

distributed, and global way. With that ability, a cryptocurrency can be a

programmable open network for the decentralized trading of all resources, well

beyond currency and payments. Thus, Blockchain 1.0 for currency and payments

is already being extended into Blockchain 2.0 to take advantage of the more

robust functionality of Bitcoin as programmable money.

Relation to Fiat

Considering Bitcoin as the paradigm and most widely adopted case, the priceof

Bitcoin is $399.40 as of November 12, 2014. The price has ranged considerably

(as you can see in Figure 1-2), from S12 at the beginning of 2013 to a high of

S1,242 per coin on November 29, 2013 (trading higher than gold-$1,240 per

Ounce-that day)." That peak was the culmination of a few factors: the Cyprus

banking crisis (March 2013) drove a great deal of demand, for example. The

price was also driven up by heavy trading in China until December 5, 2013,

when the Chinese govemment banned institutions (but not individuals) from

handling Bitcoin, after which the price fell." In 2014, the price has declined

gradualy from s800 to IEs present value ot approximately $350 in December

2014. An oft-reported though d

are made up of Chinese Yuan." It is difficult to evaluate how much of that figure

indicates meaningful economic activity because the Chinese exchanges do not

charge trade fees, and therefore people can trade any amount of currency back

and forth for free, creating fake volume. Further, much of the Yuan-denominated

trade must be speculation (as is true for overall Bitcoin trade), as there are few

physical-world vendors accepting Bitcoin and few consumers using the currency

for the widespread consumption of goods and services

Some argue that volatility and price shifts are a barrier to the widespread

adoption of cryptocurrency, and some volatility-smoothing businesses have

launched to address this: Bitreserve, which locks Bitcoin deposits at fixed

exchange rates Realcoin's cryptocurrency, which is pegged to the US dollar.