An Introduction to Cryptocurrency

We've had a number of people asking about Bitcoin and other cryptocurrencies lately; how they work, where you can obtain them and more. So, this week, we're jumping into the cryptic world of cyptocurrency.

What is cryptocurrency?

Cryptocurrency refers to a medium of trade, designed for the purpose of exchanging digital information using the principles of cryptography to secure the transaction. In layman’s terms, cryptocurrency is merely electricity converted into lines of code with monetary value that can then be used to purchase digital goods or services.  Or, even more simply, cryptocurrency is a form of digital currency. 

The first and arguably most well-known type of cryptocurrency is the bitcoin. Bitcoin was first developed in 2009 by a pseudonymous developer, or group of developers, named Satoshi Nakamoto. Nakamoto utilized a set of cryptographic hash functions that were initially developed by the U.S. National Security Agency (NSA), known as the Secure Hash Standard (SHA-256).  

Table depicting SHA-256 initial hash derivation and resulting values in hexadecimal form. In technical speak, SHA-256 is much akin to its algorithmic cousin, SHA-224. The algorithm for SHA-256 uses the same sequence of 64 constant 32-bit words, which represent the first 32 bits of the fractional parts of the cube roots of the first 64 prime numbers, to parse the signal and computationally transform it into a 256-bit message digest, representing the value of the currency. (Source)

Table depicting SHA-256 initial hash derivation and resulting values in hexadecimal form. In technical speak, SHA-256 is much akin to its algorithmic cousin, SHA-224. The algorithm for SHA-256 uses the same sequence of 64 constant 32-bit words, which represent the first 32 bits of the fractional parts of the cube roots of the first 64 prime numbers, to parse the signal and computationally transform it into a 256-bit message digest, representing the value of the currency. (Source)

Not only is all of this rather "cryptic" and difficult to understand, but it is also computationally intensive, which is why different types of “mining” or hashing have evolved so extensively, and why new digital currency sets continue to emerge. For example, newer forms of cryptocurrency include Litecoin, NEMstake and Monero. 

Of highest importance is the concept that cryptocurrencies are a decentralized form of money. In other words, there is no single governing body overseeing and/or verifying cryptocurrency transactions.

Decentralized Money

Of highest importance is the concept that cryptocurrencies are a decentralized form of money. In other words, there is no single governing body overseeing and/or verifying cryptocurrency transactions. Among the many other implications of this notion is the fact that this makes it the perfect go-to currency for darknet marketplace users.

However, while some find the darkness of the currency intriguing, it is not completely anonymous. A public ledger of sorts exists, called the "block chain," where all virtual transactions are recorded. While no personally identifiable information (PII) is recorded in a block chain, the transaction is captured in the ledger. These transaction logs are traceable to a degree, as they are stored on every computer node that has a bitcoin wallet and partakes in the cryptocurrency network.

To further increase anonymity in this space, regular users of cryptocurrency often invest time into “mixing” their bitcoins. Bitcoin mixing, or digital currency laundering, is the process of using a third party service to scramble the connection between the originating bitcoin address (the identifiable marker of the person sending bitcoins), and the recipient party's bitcoin address by mixing numerous bitcoins together from multiple sources. The resulting originating bitcoin address becomes a combination of several addresses, obfuscating the true origin of the transaction and skewing the information that is recorded in the block chain.  

For those interested in learning more about bitcoin mixing, the most popular service is currently Helix.

With the popular bitcoin mixing service Helix, users enter the bitcoin address of their desired recipient, and Helix provides an alternate bitcoin address. While the bitcoins will ultimately reach the intended destination, Helix scrambles the bitcoins while in route.

With the popular bitcoin mixing service Helix, users enter the bitcoin address of their desired recipient, and Helix provides an alternate bitcoin address. While the bitcoins will ultimately reach the intended destination, Helix scrambles the bitcoins while in route.

How to obtain cryptocurrency

Now that you have a better understanding of the formation of the digital “coin” – it's time to look at how one might go about acquiring such currency in their digital "wallet".

  1. Exchange Service: The easiest way to get started is to use an exchange service that sells bitcoins (BTC) in exchange for U.S. dollars (USD), or your preferred regional currency. This method often requires providing a proof of address and/or legal identification (i.e. drivers license). However, many Bitcoin ATMs, which will exchange paper currency for bitcoins, are now available in markets, airports, casinos and convenience stores. Coin ATM Radar contains a map of Bitcoin ATMs, allowing users to search for a Bitcoin ATM closest to them.
     
  2. Marketplaces: The second most straightforward approach to acquiring digital cryptocurrency is to sell goods and/or services through a marketplace that uses bitcoin as currency. While you may choose to create a vendor account on a darknet marketplace, there are several surface net ecommerce websites that exclusively utilize bitcoins for transactions. For example, Glyde.
     
  3. Mining: Lastly, you can “mine” for bitcoins, which involves procuring and using specialized hardware called “ASIC miners.” This hardware is used to compile a few hundred transactions from the block chain ledger and turn them into a mathematical puzzle. "Miners" then have the opportunity to try to solve this puzzle once it is released back to the network. The first participant to solve the puzzle gets to place the next block on the block chain and claim a reward called a “block reward,” which can equal upwards of 100 BTC (~$113,097 USD).

What does the cryptocurrency market look like?

Bitcoin dominates the market, as it was the first cryptocurrency and is now the most well-known used for digital transactions. While its value has fluctuated over time, the past year has proven especially strong for the currency, with its value increasing steadily over the last six months.

The current price for 1 BTC is over $1,200.00 USD, and bitcoin holds a market volume of over $263 million USD.

While bitcoin is the clear frontrunner in the cryptocurrency market, there are hundreds of alternative cryptocurrencies. CoinMarketCap tracks over 600 active digital currencies in the market with a total market cap at $24,814,920,123 billion USD.  Some of these were developed due to security concerns over Bitcoin’s SHA-256 algorithm, while others require less computational power to “mine.” Still others entered the market to capitalize on the shift to digital currency.  

Cryptocurrency Front Runners

The top cryptocurrencies in the current market include: 

  1. Litecoin – 1 Litecoin (LTC) = $6.42 USD
    Set up as the “silver to Bitcoin’s gold,” transactions are purportedly processed more quickly with Litecoin than Bitcoin.
     
  2. Ethereum – 1 Ethereum (ETH) = $52.15 USD
    Discovered by Vitalik Buterin in 2014, this currency is the first Turing-complete cryptocurrency that uses Ether as fuel to incentivize its network.
     
  3. Monero – 1 Monero (XMR) = $20.72 USD
    This cryptocurrency uses the cryptographic method of ring signatures to conceal sender identities.
     
  4. Ripple – 1 Ripple (XRP) = $0.01143 USD
    Using a custom cryptographic protocol, this currency leverages an iterative consensus process, which allows for automation scripts and plays well with other currencies. The price of the Ripple is very low in comparison to other bitcoin alternatives, but the trading volume is significant, currently over $11 million USD.
     
  5. Dash 1 DASH (DASH) = $81.87 USD
    Nine rounds of encryption ensure security and anonymity in its transactions via the X11 hashing algorithm. 

The future of the cryptocurrency market

Since the beginning of 2017, there has been a significant shift in the cryptocurrency market. While Bitcoin, Dash, Monero and Ethereum have all witnessed substantial increases in value and market share, Dash has experienced the greatest increase overall over the past 30 days.

OWL Cybersecurity will continue to watch the ever-changing climate cryptocurrency and the darknet.  Join us for our upcoming discussion in which we will explore how these currencies are used in buyer-seller transactions in darknet markets, including how AlphaBay is now using "multi-sig escrow" and "finalize early" options for cryptocurrency transactions.


Curious about something you've read on our blog? Want to learn more? Please reach out! We're more than happy to have a conversation.