Cryptocurrency: Security Aspect
What is cryptocurrency?
A cryptocurrency (or cryptocurrency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies emerged as a side product of another invention. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Satoshi Nakamoto, the unknown inventor of Bitcoin, the first and still most important cryptocurrency, never intended to invent a currency.
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym, Satoshi Nakamoto. As of September 2015, there were over 14.6 million bitcoins in circulation with a total market value of $3.4 billion. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin.
Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history, the company has been subject to over 40 thefts, including a few that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
How is cryptocurrency secured?
It is actually a very hard and complex thing to explain, even though it seems very easy. The blockchain is just a huge amount of data, data containing every transaction ever made. And it is open to see for everyone. So if you receive a Bitcoin (for example) the transaction is registered in the Blockchain, everyone sees it. When you spend the Bitcoin the same thing happens. Now that you have spent it when you try spending it again, computers that check the reliability of transactions will flag your transaction as false or impossible. This will cause the transaction to stop and you will most likely receive an error message. Now, these computers aren’t state-owned or anything. It’s just computers people around the world have decided to use for a special type of Bitcoin mining.
The type where the computer uses it’s mathematical abilities to decide whether a transaction is true or false, real or fake. For every transaction, your computer signs/verifies/deny you will receive a teeny tiny amount of Bitcoins yourself. That is why you always have to pay a small number of Bitcoins when you make a transaction so that the system can pay the computers verifying your transaction. If the transaction is indeed verified and proven to be correct it will be registered in the Blockchain, making it official and acknowledging everyone that your Bitcoin address has lost the number of Bitcoins you sent, and that the other address has received that amount.
Now actually it is quite a bit more complicated than that but this is the simplified version.
If you want to look up parts of the Blockchain, please do so. There’s lot’s of websites out there that allow you to (for example: Bitcoin Block Explorer – Blockchain). If you download a wallet, chances are it will download at least parts of the Bitcoin Blockchain onto your computer (it is actually quite large so it is likely older parts will just be stored in a cloud the app has access to). Hope that answers your question. By the way, cryptocurrency isn’t the only system using Blockchains. Bitmessage for example uses it’s own Blockchain to send secure messages. But that’s a whole new story for some other time.
It depends on which cryptocurrencies you are talking about. Anyhow, picking a theoretical one, slightly based on the Bitcoin experience we could argue that there are two main factors focused on security: the blockchain and a consensus algorithm. Around these concepts there are a lot of misunderstanding, because are not really easy, I suppose. A lot of people think that cryptocurrencies are secure cause of the blockchain and this is not (completely) right. The blockchain is nothing else than a distributed transaction log (or distributed database/storage if you prefer), with every block digital signed and that leverage some hashing data structure (hash pointers and Merkle tree).
The blockchain helps to keep the data in order and it makes really difficult to temper them, highlighting every attempt to modify the information contained. As I just described, it’s easy to understand that the blockchain is actually helping you to have evidence if someone is tempering your data, but it’s not preventing or stopping them to do it.
The only way to do it, at least the most successfully (and I think the real brilliant trick behind Bitcoin) is adding a (distributed) consensus algo on top, that will protect the network, the protocol, the cryptocurrency from (almost) any attempt of malicious actions.
Bear in mind that the “security process” doesn’t have to be distributed and automated like the Bitcoin’s proof of work. It could be, for instance, a group of people with someone on charge to checking every time what is going on following some previously shared rules, it will work in the same way.
Surely, being distributed and not controlled by any big authorities is something that make me feel a “little” bit more safe and remove from my shoulders the burden to trust some (maybe greedy) guy. But this is me.
So I think, that the security comes from a combination of these two factors, but with a strong point.
Cryptocurrency security standard(CCSS)
CryptoCurrency Security Standard (CCSS) is a security standard that helps secure all information systems that make use of cryptocurrencies.
By standardizing the security techniques and methodologies used by cryptocurrency systems around the globe, end-users will be able to easily make educated decisions about which products and services to use and with which companies they wish to align.
In the wake of the recent hack of the Bitfinex bitcoin exchange in Hong Kong, the Ethereum hack earlier this year and the Mt. Gox hack in 2014, the stability and security of cryptocurrency is being questioned.
Cryptocurrency expert Robert Schwentker says these attacks could raise questions about whether regulatory oversight of bitcoin exchanges is needed.
Cryptocurrency Benefits and Drawbacks
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers. Central to the genius of Bitcoin is the block chain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software.
Many experts see this block chain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.
However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.