IS CRYPTO SAFE? HERE IS ALL YOU NEED TO KNOW.

Crypto is probably most talked about topic these days. How safe and reliable is the crypto currency? Is it a currency or an asset? Can it replace the present day currencies? In this part of a series on ‘new technologies driving the future’, Dr. Manish Jha discusses these threadbare in this special article and explores possible answers for the readers of indiainput.com

A. IS IT CRYPTO CURRENCY?

Calling them a ‘currency’ is wrong, because a currency must have following 3 features.

(1)    Currency must be a unit-of-account. But crypto-currency is not a unit-of-account, for example, nothing is priced in a famous crypto-currency BITCOIN.

(2)     Currency is a means of payment. But crypto-currency is not a good means of payment. For example, crypto-currency BITCOIN network can only complete 7 transactions-per-second, whereas the VISA network can conduct 65,000 transactions-per-second.

(3)    Currency is a stable-store-of-value for goods and services. But crypto-currency is not a stable-store-of-value for goods and services. For example, at present days, even if a person will attend any conference-on-crypto; organizers of that conference do not accept any crypto-currency as a payment to attend that conference.

Calling them an ‘asset’ is also wrong.  

Assets have some cash-flow or service-able-ness that can be used to determine their fundamental-value. For examples, a stock provides ‘dividends’, bonds provide a ‘coupon’, loans provide ‘interest’, real-estate provides ‘rent’ or “housing services”, et cetera. Asset like ‘gold’ is used in industry, jewelry, and has been a stable-store-of-value against a variety of risks, such as financial crisis, which we really seen in COVID-19. But crypto-currency has no-income (thus no any cash-flow) or service-able-ness, so there is just no way to arrive at a fundamental-value of crypto-currency.

Many times, we listen that “crypto-currency is a bubble”. A bubble occurs when the price of something is moved-above its fundamental-value. But we cannot even determine the fundamental-value of crypto-currency, and yet their prices have moved-above greatly. In that sense, one can say that “crypto-currency is a bubble”.

Thus, the term ‘crypto-currency’, which most people take to mean that crypto-assets act as a digital-medium-of-exchange, like any authorized currency (like Indian Rupee), is basically misleading, because one cannot estimate or guess the value of these assets.

Actually, the block-chain that governs crypto-currency like BITCOIN was “not-designed to replace any authorized currency, like our Indian Rupees, or like US Dollar”. Fact is that “it is a trusted peer-to-peer payments network”.

Peer-to-peer computer network is designed so that computers can send information directly to one another without passing through a centralized server. In other simple words, peer-to-peer is a relationship between two computers on the same network such that they are able to share information without a third computer having to act as a server.

There is a crypto-graphic algorithm, which generates the proof that the payment was correctly done, so any third party is not needed to verify the transaction.

The block-chain and the coin generated by it are therefore designed to “replace the banking system and others like insurance that require a trusted intermediary today; and it is not designed to replace any authorized currency, like Indian Rupee or US Dollar”.

In that sense, the block-chain is different from other ‘digital’ transactional methods such as ‘PayPal’, which is dependent upon the banking system to prevent fraud like “double-spending”.

Double-spending is the risk that a crypto-currency can be spent twice. When we use physical money (like, Indian Rupees), we hand over the metal-coin or paper-money as proof of payment when we buy something. Since the money is given physically, we are not able to use that same coin or bank-note for another next purchase.

But some people think that “the same cannot always be said for crypto-currency”. And “due to the digital nature of crypto-currency, it can be very easy to reproduce”. And, thus, “it can lead to a problem where the same digital-coins are spent more than once”. But it is not true.

For crypto-currency, double-spending may sound shocking, but due to the use of block-chain technology, it happens extremely less now. When transactions get entered into account-books, verification and confirmation processes take place. After transactions are confirmed, they become public (or at least visible to everyone within the network) and unchangeable, which means that no one can ever change or delete them. For example, if we have 10 BITCOIN and try to spend it twice by sending them to two different BITCOIN wallets, only one would go through. Both transactions will be pooled together with other un-confirmed transactions. Only one transaction will be confirmed, verified, and, therefore, approved. The other transaction becomes invalid. So, we can say that crypto-currency is really safe from the risk of double-spending.

BITCOIN was the first digital-currency to use a block-chain technology, effectively lessening/eliminating the possibility of double-spending. At present, more and more digital currencies are using block-chain technology-enabled platforms. So, in a technical sense, crypto-currency is very safe.

Hence, crypto-currency is a peer-to-peer electronic-payment-system that transfers VALUE between digital-wallets. Wallets do not store currency, but rather interact with the block-chain by generating the necessary information to receive and send money via block-chain transactions.

Wallets are a mixture of a public-key and a private-key. And, based on these keys, an alpha-numeric identifier (that is, a thing that identifies something.) called a “public-address” is generated. Similar to an email-address, the public-address mention the “location to which coins can be sent” to the block-chain, and then it is shared among users. The private-key is used to access funds, and like a ‘password’, and it is not shared with anyone. This process makes a wallet safe and secure.

B. WHO ARE THE PLAYERS/ACTORS INVOLVED IN CRYPTO-CURRENCY MARKET?

In crypto-currency market, following are different players/actors, each play a particular role.

(B1)    Who can be called Crypto-currency Users ?

First player is the “crypto-currency user”. A crypto-currency user is a person or legal entity who obtains coins to use them, like (1) to purchase real/virtual goods/services from a set of particular seller; (2) to make peer-to-peer payments; or (3) to hold them for investment purposes, that is, in a theoretical manner.

How can these be obtained?

A crypto-currency user can obtain his coins in a number of ways:

• One can buy crypto-coin on a crypto-currency exchange using authorized-money or using another crypto-currency;

• One can buy crypto-coin directly from another crypto-currency user through a trading-platform. This form of exchange of crypto-currency is generally called “peer-to-peer exchange”;

• One can engage in the validation-of-transactions by solving of a “cryptographic-puzzle”. New crypto-coin is given in case he/she win;

• One can obtain his coins directly from the coin-offeror. This offer is either a part of a free initial offering of crypto-coins or in the scheme of a crowd-sale set-up by any coin-offeror;

• If one sells goods/services in exchange for crypto-currency, can also receive crypto-coins towards payment for those goods/services; and

• One can receive coins as a gift/donation from another crypto-currency user.

(B2) What are Miners ?

Second player is the “miner” who participates in the process of validating-transactions on the block-chain by solving a “crypto-graphic puzzle”. On winning the process, a miner is rewarded with newly mined coins. Miners can be crypto-currency users or, parties who have made a new business of mining crypto-coins to sell them for authorized currency (such as, Indian Rupees or US dollar or Euro).

(B3) What are Crypto-currency Exchanges ?

Third player is the “crypto-currency exchange”. It is a persons/entities who offer exchange-services to crypto-currency users, usually against payment of a certain fee (that is, a commission). They allow crypto-currency users to sell their coins for authorized-currency or buy new coins with authorized-currency. Examples of well-known crypto-currency exchanges are: BITFINEX, HITBTC, KRAKEN and COINBASE GDAX. Some exchanges are pure crypto-currency exchanges, which mean that they only accept payments in other crypto-currencies, at the same time others also accept payments in authorized-currencies such as Indian Rupees or US dollar or Euro.

(B4) What are Trading Platforms ?

Forth player is the “trading platforms”. It also plays an important role in the exchange of crypto-currencies and, allows crypto-currency users to buy coins with cash. Trading platforms are markets places that bring together different crypto-currency users that are either looking to buy/sell crypto-coins, providing them with a platform on which they can directly trade with each other. Trading platforms are called “peer-to-peer exchanges” or “decentralized exchanges”. They differ from crypto-currency exchanges in a number of ways. They do not buy/sell crypto-coins themselves. They are not run by an entity/company that oversees and processes all trades, but they are operated exclusively by software, that is, there is no central point of authority. Trading platforms simply connect a buyer with a seller, allowing them to conduct a deal, online, or even locally in-person, that is, a face-to-face trade, generally done in cash. A well-known example of a trading platform for BITCOIN is LOCALBITCOINS.

(B5) Who are Wallet Providers ?

Fifth player is the “wallet providers”. Wallet providers are those entities that provide crypto-currency users digital-wallets/e-wallets which are used for (1) holding; (2) storing; and (3) transferring crypto-coins. In simpler words, a wallet holds a crypto-currency user’s “crypto-graphic keys”. A wallet provider translates a crypto-currency user’s “transaction history” into an easily-readable-format, which looks much like a regular-bank-account. There are several types of wallet providers:

• Hardware-wallet-providers that provide crypto-currency users with “specific hardware solutions” to privately store their “crypto-graphic keys”, for example, LEDGER WALLET;

• Software-wallet-providers that provide crypto-currency users with “software applications” which allow them (1) to access the network; (2) send and receive crypto-coins; and (3) locally save their crypto-graphic keys, for example, JAXX;

• Custodian-wallet-providers that take “online custody” of a crypto-currency user’s “cryptographic keys” and takes care of its safety in behalf of crypto-currency user, for example, COINBASE.

(B6) Who are Coin Inventors ?

Sixth player is the “coin inventors”. Coin inventors are individuals/organizations who have developed the technical-foundations of a crypto-currency and set the basic rules for its use. In some cases their identity is known, for example, RIPPLE, LITECOIN, CARDANO, but generally they remain un-identified, for example, BITCOIN, MONERO. Some remain involved in maintaining and improving the crypto-currency’s code and underlying algorithm, at the same time others simply disappear, for example, BITCOIN.

(B7) Who are Coin Offerors?

Sixth player is the “coin offerors”. Coin offerors are individuals/organizations that offer crypto-coins to crypto-currency users upon the coin’s initial release, either against payment (i.e. through a crowd-sale) or at no charge (i.e. in the scheme of a sign-up program). A coin offeror can be the same person as the coin inventor, or another individual, or organization.

C. HOW SECURE IS THE BLOCK-CHAIN THAT GOVERNS DIFFERENT CRYPTO-CURRENCIES?

Following are the two main aspects of block-chain security:

(C1)    Software security: Most of the software that is running crypto-currency networks is very safe. Now the software running crypto-currency networks is relatively mature, so a lot of eyes have been interfering into it for a long time, which also help in making it very secure and safe-to-use. Apart from it, there is a frequent audit for source-code of software, thus always maintain it secure and safe-to-use.

(C2)     The security of how the distributed network is run: Beyond the software, it is the fact that the block-chains that govern crypto networks have “no central authority that controls them”. Note that on a crypto-currency block-chain, everyone on a block-chain has an economic-incentive to keep it going. Clearly mean that there is more money in a crypto-currency network that is running, than in a crypto-currency network that is not running. These clear concepts of crypto-currency block-chain make it very secure and safe-to-use.

D. CRYPTO-CURRENCY TRANSACTIONS ARE COMMONLY RECOGNIZED TO BE ASSOCIATED WITH ILLEGAL ACTIVITY; BUT WHAT DO VARIOUS ANALYSES SUGGEST REGARDING ITS SECURITY & SAFETY?

Crypto-currencies are by-design permission-less VALUE transfer networks that allow anyone in the world to access and transfer funds very easily. But, in the early days of crypto-currencies, this easy method of access, created an understanding that they were an undisclosed-global-money-system that everyone could use, and thus many criminals are interested in it.

But the interesting thing and fact about the block-chain is that every single transaction is (1) public; (2) unchangeable; and (3) never-disappears.

Due to this visibility & clarity, maps are created for the entire crypto network, “which are based on every transaction on the block-chain”, and “which are combined with high intelligence from the public and private sectors”, and thus provide a very secure & safe conditions for the entire crypto system.

By using this map, and looking at different patterns of behavior and the entities involved in transactions, one can track the “amount of funds” that are being used for various purposes, including valid & legal investment and illegal activity.

In year 2020 total illicit activity accounted for around 0.34% of all crypto transactions. That is very less from around 2% of all transactions in year 2019. Fact is that criminals abuse crypto. So, a very small share of all crypto transactions today is illegal, which is quite different from the general perception that crypto-currency activity is managed by criminals. By identifying certain entities that provide illegal services, it is possible to track all of the activity that touches those entities via the block-chain.

Additionally, most legal entities typically check the identity of their customers. For example, when a customer opens an account with a regulated-crypto-currency-exchange, they have to identify themselves in the same way as when opening a bank account. This usually includes a thorough “know your customer” (KYC) process. What KYC requires is not always standardized, and it could involve everything from “requiring a customer to upload their passport to jumping on a video call to confirm their identity”. For smaller transactions, KYC rules might only involve confirming a person’s phone number and location via a third party. And even though one cannot see the identities of private wallet owners, if a law-enforcement-agency (like, CID or CBI in India) sees criminal activity associated with a wallet, they can summon the crypto-exchange where the individual bought their crypto-currencies for the personal-information associated with the wallet, which allows them to identify the owner and investigate further.

So, we can say that crypto-currency is very secure and safe-to-use.

E. TOP CRYPTO-CURRENCY OPTIONS

BITCOIN (BTC) is top crypto-currency, with market cap of approx. $ 700 bn. Next is ETHEREUM (ETH) with market cap of approx. $ 285 bn. Next is TETHER (USDT) with market cap of approx. $ 58 bn. Next is BINANCE COIN (BNB) with market cap of approx. $ 52 bn. And there is a big list.

Dr. Manish Kumar Jha is founder, nuutan.com. The views expressed in the research based article here, are his  inferences or own views. He can be contacted on Email : info@nuutan.com

(All images: pexels.com)