Cryptocurrencies are digital or virtual currencies that appeal to many users for their independence from any central organization. The market cap for the cryptocurrencies has risen nearly 800 percent since conception, drawing in investors for their potential to become a global currency or for the chance to capitalize on the volatility of the market. Taking note of these developments, the new Cryptocurrency Club at the University aims to expand student involvement in the cryptocurrency field.
Cryptocurrencies depend primarily on innovations in cryptography and blockchain. Cryptography is a method of storing and transmitting data in way that enables only users with the proper codes to read or process it. Blockchain is a technology that serves as a public ledger, recording all transactions chronologically so that each user in the network gets a copy of the ledger.
Bitcoin, one of the first of these digital currencies, aims to be a decentralized way to manage transactions.
“Fundamentally, I think the innovation here is open-source, ownerless infrastructure,” said Chris Dannen, a University alumnus and founder and managing partner of Iterative Capital. Iterative Capital is an alternative investment management firm specializing in cryptocurrencies and blockchain technology.
Bitcoin relies on peer-to-peer transactions stored on its open-source, public network. Each transaction is managed collectively by the network, eliminating the need for centralized financial institutions, like banks or the government.
University Computer Science Prof. David Evans said that for cryptocurrency to have value, it must be trusted, and to be useful, it must be transferrable."
Fiat currencies employ coins or paper money that intrinsically have no value. Instead, they get their value from trust in the government and efforts to prevent and penalize counterfeiting, Evans said. However, counterfeiting cryptocurrency is akin to copying and pasting a string of bits, so the currency must be secured in a different way.
“It's trivial to copy bits,” Evans said. “To make a cryptocurrency work is to make it so you can’t spend the same coin more than once.”
Evans said this works through the use of asymmetric cryptography and a public ledger. The ledger records the transactions authorized through asymmetric cryptography and stores them in irreversible, connected blocks on the blockchain.
Asymmetric cryptography ensures that the person initiating the transaction is the coin’s owner through the use of a private and a public key. The private key encodes a digital signature that allows for the transfer of the coin. Evans said the public key is used by all members of the network to verify that the transaction is being initiated by the proper owner of the coin.
“You have a secret key, you can use it to produce a signature, but anyone who can see your public key can verify that it’s really your signature,” Evans said. “You need both the asymmetric crypto — to make it so that only the owner can transfer it — and you need the consensus that the ledger gives you, that everyone sees the transaction and knows if you tried to transfer it more than once.”
The ledger’s consensus is managed by users called miners, Evans said. The miners record the transactions by creating new blocks on the blockchain. The miner who finds the next block gets paid a small fee, incentivizing miners to keep recording transactions on the blockchain. To find a block, miners must solve a hash function, a one-way function that makes it difficult to find the input that yields a particular output. To solve a hash function, miners must make many guesses.
“You can buy mining equipment that makes trillions of guesses per second in one block,” Evans said. “The number of guesses needed to find the next block is an outrageously large number, and then whichever one finds it, they’re going to publish it to the network.”
While it is possible for miners to find multiple valid blocks, they will immediately start mining for new blocks off of the original one they see. The consensus with respect to which transactions are valid will be whichever transactions are stored in the longest chain, ensuring that coins are not being double spent, Evans said.
One application of blockchain technology is the use of Initial Coin Offerings, or ICOs, to fund start-ups using tokens built off of the blockchain platform Ethereum.
“Basically anyone who wants can invent a token and decide that they’re going to build some new service where the way you pay for that service is you use your token,” Evans said. “If you convince enough people that this service is going to be valuable, then the tokens are going to be valuable, and you can sell the tokens.”
However, this form of investment in cryptocurrencies has many risks.
“Almost all of these ICOs are half-baked schemes or scams,” Dannen said. “The bar is too low, its very, very easy to create one.”
Investment in Bitcoin itself entails risks as well, Evans said. Risks involve losing the private key that encodes the coin’s value as well as the volatility of the market.
Some of the value in Bitcoin comes from the small potential for it to become a global currency that could replace or complement fiat currencies worldwide, Evans said.
“The Bitcoin network does have intrinsic value,” Dannen said. “It's like a giant bean counter or an abacus, the beads by themselves are not worth anything, but the machine all together is the global counter, and there is fundamental value there.”
The possible futures for cryptocurrency and the ability to capitalize on the volatility of the market has drawn global investors and University students alike to the cryptocurrency community.
Tyler Marx, a second-year College student and Cryptocurrency Club president, was drawn to trading cryptocurrencies in high school when he found he was too young to trade stocks. After seeing interest grow among friends, he started the club as a place to teach about cryptocurrencies, share trading information and learn about blockchain technologies.
The Cryptocurrency Club was founded this year and is already at about 100 members. The format of the club is flexible — members can focus on what interests them most, whether that is trading, the technology or ICO development.
“It’s incredible how many people want to get into it but they just don't know how,” Marx said. “So now that we’ve got a place for them to get in, it's just going to get bigger.”
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