- What is cryptocurrency
- Decentralization and centralization
- Will someone be able to fake my bitcoins?
- Risks with cryptocurrency
Virtual money evokes mixed feelings. Crypto enthusiasts see them as a panacea and the salvation of the economy. Skeptics claim it is a bubble. Some fear that crypto money is a weapon of criminals. And there is often a perception that since digital money is just a record of code on the net, it is easy to counterfeit. Much easier than paper bills. Let’s try to understand if this is true, if it is possible to counterfeit cryptocurrency.
Cryptocurrency is a record in the blockchain, due to which the internal settlement transactions are recorded. It has no physical embodiment, except in the form of mementos. When a blockchain forms, it records transaction data between two addresses on the network.
The addresses belong to cryptocurrency wallets – software applications that have unique identifiers (addresses) and are protected by the owner’s private key. A cryptocurrency is simply a record that a given address owns coins in a certain amount.
When a transaction takes place, a block of the network records information about the transfer of a certain amount of coins from one address to another. Accordingly, the entry in the wallets changes.
Cryptocurrency turnover is similar to the turnover of money using electronic cards. When you make a transfer from an online banking interface you are not transferring real money. The banking system changes the record that there is less in your account and more in the recipient’s account. At the same time, your bank branch does not send an urgent cash machine to the branch of the recipient’s bank. The turnover of fiat money in electronic payment systems is also just a record. The bank’s job is to provide its branches with enough cash to cover people’s need for it in the event that a “record” in the system is converted into cash.
However, there are big differences in the implementation of this system.
Banks are centralized structures. This means that there is a single control center, which is responsible for all transactions and keeps information about them. However, the data on the movement of funds can only be seen by the bank and their owner. This information is not available to others.
Besides, the bank requires full identification of its client. You show your passport, report your place of work, the bank knows your salary, family, friends – how reliable and solvent they are. This allows to solve crimes, if not fight them. The bank can block your account, report your information to law enforcement, or provide information to the tax agency. From the perspective of a law-abiding citizen there is nothing wrong with this, and this ensures protection, which is very good.
However, the downside is the human factor – errors of bank employees, excessive suspicion or mistakes of investigation can put a completely innocent person in an extremely unpleasant situation.
The bureaucratic system is far from perfect. For example, a mistake by bailiffs can lead to the blocking of accounts or a ban on leaving the country. Not all people are willing to put up with that. And not everyone likes to live “under the glass” even for their own safety.
However, today’s financial system leaves us no choice.
The situation with cryptocurrency is different. It is supposed to function in a decentralized environment, without a single data storage and management center. So far, decentralization is just beginning to develop and many exchanges centrally manage their clients’ accounts. However, the number of decentralized platforms is growing every day, as is the number of their users. We are considering the option of decentralized storage.
Cryptocurrency in a decentralized version is like cash in our wallet. No one controls it, save the owner. There is no passport attached to the wallet, so if you lose it, there is not much chance of getting it back – its ownership is hard to identify. So, if you do not have your identity tied to a crypto wallet anywhere, you are assured of anonymity. The tricky part is withdrawing cryptocurrency into fiat. Transactions with electronic accounts of traditional finance are always tied to identity.
Blockchain’s transparency lies in the ability to view all transactions in blocks. On any transaction with any coin. However, you will only see wallet addresses in the list, which are not secret at all. And as long as they are not tied to your identity, you are anonymous.
The downside of this approach is a complete lack of protection against fraud, forgetfulness, and absent-mindedness. Only the owner of cryptocurrency is responsible for the result of operations. From this point of view, digital money is a sign of “maturity” of humanity – adults are responsible for themselves, their actions and their lives. From the point of view of the state, it looks like anarchy, but blockchain is limited by much stricter rules, which are written in code and are therefore virtually inviolable. Common sense, mindfulness, and a responsible attitude to money remove a lot of the problems associated with the lack of bodies protecting us from our own mistakes in crypto space.
Cryptocurrency belongs to a specific blockchain and works based on software code. All transactions are written to a distributed database that is stored on multiple nodes. A transaction is written to the block after it has been verified and approved by the nodes in the network. That is, it is impossible to write into this database information about the transfer of non-existent digital money from one address to another. You will have to forge all nodes in the network, and this is insane power and hacking on a universal scale. The cost of such an operation would not cover all the bitcoins at their peak price. It just makes no sense.
Cryptocurrency cannot be counterfeited because it does not exist! What does exist is a blockchain algorithm that governs how it works. Changing this algorithm would be even more expensive than rewriting all the blocks on all the nodes.
To fake an abstraction, you have to fake its entire environment. It is like repainting Mars green for every single person. Either you paint all the surfaces through which people observe the planet, or you fly to Mars and repaint it on the spot. There are no other options.
There are other risks to blockchain. For example, the risk of double spending. When two transactions with the same coins are sent simultaneously from the same address. For the average user, when acting from an ordinary computer or smartphone, one of the transactions will be rejected by the blockchain – it simply will not pass validation. For a “double-spend” attack to be successful, you need to own the power of 51% of the network. Even for a bitcoin blockchain that is weak in terms of implementation, this is a huge resource. Which will not pay off.
The second type of attack is a race attack, where two transactions using the same bitcoin are sent during a purchase. The first spending transaction is sent to an address controlled by the attacker, but announced only to the miner nodes. At about the same time (milliseconds), the second spend attempt is sent to the seller’s bitcoin address and announced to a wide range of nodes. The attacker’s hope is that the second transaction outperforms the first in transmission to the seller’s node. When this happens, the seller accepting the unconfirmed bitcoin will consider the payment received, but the transaction will never be confirmed later because the mining nodes that saw the first transaction will reject it and confirm the first expenditure instead. According to unconfirmed reports, this still happens on rare occasions.
Cryptocurrency cannot be counterfeited because to do so you would either have to rewrite the blockchain code or hack into all the nodes of the network. A decentralized network in general is quite secure in its structure. It is not for nothing that the military invented ArpaNet, which has now become the Internet. You can attack a node, three, a thousand. But it is very expensive and time-consuming to take out the whole Internet at the same time. If you believe Hollywood movies, only the elements and aliens can do that.
If someone really needs their own fake bitcoin, it is easier to create their own blockchain and call their cryptocurrency bitcoin. It will be a good fake, but useless until your bitcoin gets its own value.
The personal conviction of the author of this article is in the thought already expressed. Cryptocurrency is the future of mature humanity. When people learn to take responsibility for their actions and stop shifting the responsibility for their own financial security to regulators, they will go fully into decentralized finance with its possibilities. This will happen when each individual’s personal conflict between “the banks are shoveling money” and “you are responsible for me mixing up my transfer account, losing my card, entering the wrong pin code three times” is resolved.
The value of cryptocurrency (something that does not actually exist) is made by the people who use it. Which means it has the highest value – consumer value. As long as cryptocurrency is needed, it is used. That leaves only the money needed by users, not the financial system.