CRYPTO CURRENCY

Module-02
Crypto currency
Birth of Bitcoin
• Banks acted as the ultimate gatekeepers of the financial world and charged fees for the
services that they provided. This monopoly, however, had its disadvantages, especially for
people in lower-income groups who did not have accounts or IDs or instances where the
transaction fees took a toll on their earnings.
• Financial institutions incur significant costs related to back-office expenses,
reconciliations, legalities, secure data storage, prevention measures for security breaches,
and potentially fraudulent activities. These costs are passed down to the end-users as fixed
transaction fees irrespective of the size of the transaction.
• There was also the question of transparency. People deposit money, trusting the banks to
keep them safe. However, these deposits are used by banks to find opportunities for
additional financial returns like extending mortgage and other loans, and investments.
When people defaulted on loan payments and the investments the banks made did not pay
off, the banks declared bankruptcy. The result was that while the Government bailed out
many of the financial institutions, the depositors lost all the money that they trusted the
banks to keep safe, as was seen during the financial crisis of 2008.
Birth of Bitcoin
Three key requirements eventually brought about the birth
of the Bitcoin. The need was felt for a monetary system

• where one can directly transact with another person

without involving a third party, like a bank, to verify and
validate the transaction and thus avoiding the cost of
mediation.

• that is not backed and controlled by a central authority

and can assure the value of the money is maintained

• where there is transparency in transactions, while still

maintaining the users' privacy
What is Crypto currency?
• A cryptocurrency is a digital asset that is used as a
medium of exchange on the blockchain.
• The most popular cryptocurrency is Bitcoin, followed by
Ether of Ethereum and Ripples XRP tokens.

• Since the creation of the first decentralized cryptocurrency

Bitcoin, thousands of alternative digital currencies have
emerged that are referred to as altcoins or coins (used for
buying or selling products or services) and tokens (used
as a utility or security).
• According to CoinMarketCap, there are over 3000 active
cryptocurrencies as of October 2019.
Fork
• A fork creates an alternative version of a blockchain. It is typically
done to apply upgrades or new governance rules to a network. A fork
can be of 2 types:

• Hard Fork: A hard fork occurs when the protocol upgrade results in a
split in the blockchain that is not backward compatible, i.e., the
software validating according to the old protocol will see the new
protocol as invalid and vice versa. Hence all clients need to upgrade
to the new version if they want to continue participating in the
network.

• Soft Fork: A soft fork is a protocol upgrade that is backward

compatible. Here the old software will recognize the blocks made by
the new protocol as valid. Hence it does not require all the nodes in
the network to upgrade to maintain consensus as the soft-forked
chain follows both the old as well as the new set of protocol rules.
Characteristics of Crypto Currency
• Decentralized

• Form of existence

• Limited supply

• Global Access

• Anonymity & transparency

• Impossible to duplicate

• Irreversible
Cryptocurrency Wallets
• Bitcoin or any other cryptocurrency transaction can be
done only using a digital wallet.
• 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 is a management system that interacts with various
blockchains to enable users to send and receive digital
currency and monitor their balance.
• Cryptocurrencies are stored immutably on the blockchain
using your public key, i.e., your public key is used by other
wallets to send funds to your wallet’s address. However,
the private key is required if you want to spend
cryptocurrency from your address.
 Types of Wallets
CRYPTOCURRENCY WALLETS

HOT WALLETS COLD WALLETS

ONLINE/WE SOFTWARE PAPER HARDWARE

B WALLET WALLET WALLET WALLET
E.g.
MyEtherWallet E.g. Ledger,
Trezor
MOBILE DESKTOP
WALLET WALLET

E.g. Coinomi, E.g. Electrum, Armory

Mycelium
Types of Wallets
• A hot wallet is designed for online day-to-day transactions. It
is always connected to the internet and hence it is a strong
candidate for hackers.
• A cold wallet is a digital wallet that is not connected to the
internet. They are not free. Being offline, they are more secure
and used for storing cryptocurrencies long term
 Cryptocurrency Types
CRYPTOCURRENCY TYPES

Utility
Token

Security
BITCOIN ALTCOIN TOKEN Token

DERIVED DERIVED FROM

FROM ORIGINAL
BITCOIN BLOCKCHAIN
E.g. Litecoin, Dogecoin E.g. Ether, NXT
Altcoin
• Altcoins are considered to be alternatives to Bitcoin.
Altcoin
• Main features:
• 1) They are peer-to-peer digital currencies that involve a
mining process.
• 2) They possess their independent blockchain.
• 3) They possess the characteristics of money.
Parameters Altcoin Bitcoin
Altcoins emerged in 2011
Bitcoin was introduced in
Origin and continue to be
2009.
developed.
Although Bitcoin is
volatile, it has already
Altcoins, aside from
gained significant value
stablecoins, typically offer
and dominates the
Risk higher risk and reward
market. Altcoins have
potential compared to
more room for growth,
Bitcoin.
but their failure rate is
also higher.
Bitcoins were created
Altcoins are more before Altcoins and lack
Technological
technologically advanced some technological
Advancement
than bitcoin. features which many
Altcoins have.
Tokens
• A cryptographic token is a digital unit that has a value and does not have its
own native blockchain.

• Cryptographic tokens exist on the existing blockchain infrastructure of another

cryptocurrency.

• Features of Cryptographic Tokens

 Cryptographic Tokens operate on existing blockchain infrastructure,
therefore Cryptographic Tokens are secure.
 It makes payments easier and more secure.
 Cryptographic Tokens are used in a wide range of fields such as trading and
investment.
 A cryptographic Token is a crypto currency that represents an asset.
 Tokenization is less expensive and time-consuming.
Tokens
Tokens
• 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.
• Top Cryptographic Token in the Market
• Below are some top cryptographic tokens in the market with
their market cap according to the year 2022:
• Tether: Market cap of Tether is $83,149,403,092
• USD Coin: Market cap of USD Coin is $49,044,062,431
• Binance USD: Market cap of Binance USD is $17,876,805,072
• Shiba Inu: Market cap of Shiba Inu is $11,533,509,510
• Wrapped Bitcoin: Market cap of Wrapped Bitcoin is
$10,996,787,602 and More.
Types of Cryptographic tokens

• Utility tokens: Utility tokens are user tokens that grant

access to users for specific services or applications within
a blockchain ecosystem.
• Ex- ETH-ERC20, CVC token used by civic
• Security Tokens: These are crypto currencies that
represent ownership of an asset or a business and are
regulated by securities laws. These tokens can represent
anything from company shares to real estate.
• Security tokens are issued during STO or Security Token
Offering.
• Security Tokens:
• Criteria for security Tokens:
1) There is an investment of money or assets.
2) There is an expectation of profits from the investment.
3) The investment is in a common enterprise.
4) The expectation of profit is solely from the efforts of a
promoter or third party.

Ex- Ripple’s XRP

Popular Coins and Tokens
• Ethereum

• Ripple(XRP)

• Bitcoin Cash(BCH)

• Litecoin(LTC)

• Eos(EOS)

• Monero(XMR)

• Stellar(XLM)
Cryptocurrency Eco-system Players
1) Programmers/Developers: Develop, deploy and maintain the
blockchain protocols, applications and interfaces.
2) Miners: Contribute their effort and computing power for
solving the cryptographic problem.
3) Users: Ex- doctors and patients using Veris Foundation BC
Traders or investors using Kraken exchange.
4) Merchants: Retail or other business entities that accept
cryptocurrencies.
5) Traders: buy/sell cryptos based on price movements via a
decentralized exchange.
Crypto Mining
• Miners generate wealth through mining. A miner needs to
have some level of technical knowledge and expertise in
setting up computing software and equipment.

• Ex- Bitcoin gives 6.25BTC as a block reward

• Ethereum gives 2ETH+ additional fees

• There are two types of miners: those who go solo called
solo miners and those who collaborate with others,
referred to as pool miners.
• There are different types of mining based on the
processors or equipment used by the miner:
• CPU Mining:
- slow, consuming large amounts of electricity, cooling, other resources
• GPU Mining:
- more efficient, cost effective, higher processing power
• ASIC Mining:
• - Application Specific Integrated Circuit(ASIC)
• Cloud Mining:
• -miner or a cloud mining company rents out cloud mining services to other
miners for pre-assigned period.
• -more cost-effective for the miners
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 create a buzz among investors.

• The various benefits of airdrops to the blockchain enterprise

are:

• Marketing and Hype

• Rewarding Loyalty Supporters and Investors
• Wider and Even Distribution of Tokens
• Lead Database Generation
Types of Airdrop
• Cryptocurrency airdrops are done in two ways –
• a surprise airdrop
• a planned airdrop.
Coin Burning
• Token or Coin Burning is a process of permanently removing
coins out of circulation to reduce the total supply.
• The coin is considered to be burned when it is sent to an
unspendable public address, known as an eater address,
which does not have an operable private key associated with it.

• The key purpose of burning coins:

• To Reward Investors
• To destroy unsold ICO tokens
• To decentralize mining opportunity (Proof-of-Burn)
Cryptocurrency Safety
• Best practice in using Exchanges
• Choose regulated exchanges that have safety and security measures
in place. Binance, Bittrex, and Coinbase are popular crypto
exchanges.

• Storing Cryptocurrency
• Store your crypto in desktop or mobile wallets if short-term and in
paper and hardware wallets if long-term.
• Use wallets from reputable sources.

• Transaction Safety
• Study the transaction requirements of a cryptocurrency carefully as
they may indicate the security precautions to be taken.
•
• Enable Security Measures
• Protect wallets and backups with strong passwords.
Cryptocurrency Regulations
COUNTRIES

Canada, Estonia, Gibraltar, Lithuania, Luxembourg, Malta,

Cryptocurrency not Singapore (treated as goods & hence taxable), South Korea,
considered as a legal tender United States, UK
Note: Bitcoin is legal in the US
Cryptocurrency accepted as Argentina, Belarus, Brazil, Canada, Chile, Germany, Holland,
payment, exchanges and Japan, Malta, Mexico, New Zealand, South Korea,
may or may not be regulated Switzerland, Venezuela

Legal crypto-exchanges Australia, Canada, Estonia, Gibraltar, Lithuania, Luxembourg

regulated by financial Malta, Singapore, South Korea, Switzerland, United States,
regulators United Kingdom,

Cryptocurrency & crypto

exchanges in effect illegal
China, India (banned by banks), Kyrgyzstan, Russia, UAE
but global/federal regulations
being considered

Cryptocurrency & crypto Algeria, Bangladesh, Bolivia, Equador, Macedonia, Morocco,

exchanges banned Nepal, Pakistan

Table 3.1
The Bitcoin Blockchain
• 10 Crore Satoshi = 1 BTC
Bitcoin Common Terminologies
• Mining – a 64-digit hexadecimal number
• Block frequency – Transactions are being registered
once in 10 mins.
• Industrial mining – connect to a massive set of
computers, use complicated software
• Halving policy- Block frequency and halving are the
monetary policies of bitcoin.
The rewards will be reduced to half for every four years.
Bitcoin Reward Value over the Years
Year Reward Value ($)
2009-2012 50
2013-2016 25
2017-2020 12.5
2021-2024 6.25
2025-2028 3.125
2029-2032 1.5625
2033-2036 0.78125
2037-2040 0.390625
2041-2044 0.1953125
2045-2048 0.09765625
2049-2052 0.048828125
2053-2056 0.024414063
2057-2060 0.012207031
2061-2064 0.006103516
2065-2068 0.003051758
2069-2072 0.001525879
2073-2076 0.000762939
2137-2140 0
• Orphaned block – are valid blocks, which are not part of the
main chain.
• Mempool- Transactions are first added to the Mempool
attached to each node.
• Block propagation-
• SEGWIT – Size (signature + public key) occupies more than
60% of transaction size.
• In bitcoin protocol this portion is kept out of the block and
distributed separately.
• This segregation of the signature from the block is called as
Segregated Witness(SegWit).
Contents of Bitcoin Block Header

Split up details Block Header Contents (80 Byte)

4 Byte Bitcoin Version number
32 Byte previous block hash
32 Byte Merkle Root
4 Byte Time Stamp
4 Byte Difficulty Target
4 Byte Nonce used by miners.
80 Byte Total
Transaction in Bitcoin
• The Bitcoin transaction process ensures that transactions are legitimate,
secure, and transparent.

• Creating a Transaction: When you send bitcoin, you create a

transaction from your digital wallet. This transaction includes the sender's
address (public key), the recipient's address (public key), the amount of
Bitcoin to be sent, and a transaction fee that you’re willing to pay to the
miners.

• Digital Signatures: To prove that you are the owner of the bitcoin you
want to send, the transaction must be signed using your private key
through a cryptographic process.

• Broadcasting and confirmations: Once signed, the transaction is

broadcasted to the Bitcoin network and goes into the mempool, which is
like a waiting room for transactions that are waiting to be confirmed.
Miners can pick transactions from the mempool to form new blocks.
• Transaction Finalization: Once confirmed, the new block is added
to each network participant’s copy of the blockchain.

• The transactions in the new block are considered to be confirmed. However,

it's common practice to wait for at least six confirmations (six more blocks
to be added after the block containing your transaction) to consider the
transaction final.

• This is to ensure that the transaction won't be reversed or double-spent in

case of a temporary fork in the blockchain.
Transaction in the Bitcoin Network

• A simple transaction block

Version Inputs Outputs Lock time

 • A simple transaction block: Outputs as Inputs

• Outputs indicate Unspent Transaction Output(UTXO) from previous

transactions.
•s
Transaction 0
Version Inputs Outputs Lock time

Transaction 1 Version Inputs Outputs Lock time

Transaction Input
• Input Creation from previous transactions

TX (0)

TX (1)
TX (INPUT)

TX (2)

TX (3)
Transaction Output

TX (OUTPUT)

TX (INPUT)

CHANGE
(Left over)

• For valid transaction, TX(Input)>TX(Output)

• Transaction fees(bitcoin)=TX(Input)-TX(Output)+change(Leftover)
Transaction inputs and outputs

• Mark wants to send 1 BTC to Jessica.

• To do this, he uses his private key to 'sign' a message
with the transaction-specific details.
• This message, which must be broadcast to the network.
• Inputs. This contains information about the bitcoin
previously sent to Mark's address.
• For example, imagine Mark previously received 0.6 BTC
from Alice and 0.6 BTC from Bob.
• Now, in order to send 1 BTC to Jessica, there might be
two inputs: one input of 0.6 BTC previously from Alice
and one input of 0.6 BTC previously from Bob.
• Amount. In this case, the amount Mark wants to send is 1
BTC.
• Outputs. There are two outputs. The first is 1 BTC to
Jessica’s address. The second is 0.2 BTC returned as
'change' to Mark. This second output is calculated as the
total of the inputs [0.6 + 0.6 = 1.2], minus the amount
Mark wants to send [1 BTC].
Broadcasting and confirmations
• Mark (via his wallet software) will broadcast his proposed transaction
to the Bitcoin network.
• A special group of participants in the network known as 'miners' verify
that Mark's keys are able to access the inputs (i.e. the address(s)
from where he previously received the bitcoin he claims to control.
• Miners also gather together a list of other transactions that were
broadcast to the network around the same time as Mark's and form
them into a block.
• Any miner who has completed the 'Proof of Work' is permitted to
propose a new block that will be added or 'attached' to the chain and
by referencing the last block.
• That new block is then broadcast to the network. If other network
participants (nodes) agree it's a valid block they will pass it along.
• Eventually, another miner will build on top of it by referencing it as the
previous block when proposing the next block.
• Any transactions that were in the previous block will now have been
'confirmed' by the next miner. As blocks are added to the chain, the
number of confirmations of Mark's transaction increases.
Some bitcoin transaction
confirmations take so long
• Each block can only contain a certain number of
transactions, and that number is determined largely by the
space available in each block, or the 'block size,' which is
1MB.
• The limited space gives rise to the fee market, where
miners, who collect fees, choose to include in the next
block only those transactions which have included a high
enough fee.
• Thus higher fees act as incentive for miners to prioritize
your transactions.
Bitcoin transaction fees
• Fees for sending bitcoin could be anywhere from a few
cents all the way up to $100.
• The reason for the big variation is that Bitcoin fees
depend on both supply and demand (ie. how congested
the network is at a given time) and the "size" of your
transaction.
• Size is affected primarily by inputs, so if your transaction
has many inputs, it will take up more block space, and
demand a higher fee.