The Phenomenon of Bitcoin MixersBitcoin mixers work by shuffling your coins together with the coins of other users to obscure their origin. Crypto experts generally label the concept as "mixing" or "tumbling." It essentially breaks the link between the source of your funds and the destination address. By mixing your coins, you are essential "laundering" them and making it difficult for anyone to trace the original transaction.
What Happens After You Put Your Crypto in a Mixer?Once you deposit your crypto in a mixer, it combines with other funds to create a large pool of assets. This pool then goes through a series of automated transactions designed to obfuscate the origin and destination of the funds. At the end of this process, you will receive back newly mixed coins randomly selected from the large pool. By doing this, a crypto mixer can provide users with increased privacy and security. The strategy aims to make it difficult for external actors to track their transactions. In addition to greater privacy and security, crypto mixers also offer users the convenience of transferring funds quickly and anonymously. Crypto enthusiasts know that they often need a third-party intermediary to complete these operations without a mixer. Ultimately, crypto mixers provide users with an array of benefits that make them appealing to individual and business customers.
Reasons for Using Bitcoin MixersYou might want to use a Bitcoin mixer for several reasons, including privacy and security. If you're worried about someone tracing your cryptocurrency transactions, a Bitcoin mixer can help increase your protection. This is particularly useful if you don't want anyone to track your crypto funds. Another reason for using a Bitcoin mixer is to protect yourself from potential double-spending attacks. When you send cryptocurrency, it is possible for someone to duplicate their transaction and spend the same coins twice. By mixing your coins, you can reduce the chances of this happening. Another important reason for using Bitcoin mixers is to obscure the destination of your funds. If you're sending cryptocurrency to someone who wants to protect his/her identity, a mixer can help keep the transaction private. If you want to hide your activity from blockchain analytics services, you may find what you need with these platforms.
Pros and Cons of Using a Bitcoin MixerLooking at the Bitcoin Mixer niche from the outside, it can appear to be a shady concept. However, there are legitimate reasons for using them, and they offer some benefits that could be useful to certain users. On the plus side, using a Bitcoin Mixer allows you to hide your coins' origin and destination. This means that no one will know anything about your transaction, providing extra security and privacy. On the minus side, there's always a risk that Bitcoin Mixers won't do as they promise, compromising your data. This is why you should always use a highly reputable Bitcoin Mixer that you can trust. We included more information on this matter in the section below.
Finding the Right Bitcoin MixerThe market for Bitcoin mixers is growing rapidly, and many options exist. When it comes to finding the right one, you want to make sure that it satisfies several requirements. Specifically, you want the mixer you're using to be secure and reliable. At the same time, it should provide good customer service. We'd like to give you a head start with your search by introducing you to three well-known Bitcoin mixers. We’re talking about Yo!Mix, Unijoin, and Blindmixer, as explained below.
Yo!MixAt the top of our list, we decided to include Yo!Mix – a platform that promises to keep all your crypto transactions anonymous. It relies on zero-logging, meaning the platform does not store any information or data related to its users' activities. Therefore, you can rest assured your financial movements will remain private and secure. When dealing with a Bitcoin mixer, people generally worry about the involved costs. Yo!Mix has a 0.7% commission fee with a minimum amount of 0.001 BTC, making it an affordable option for those who want to remain anonymous in their crypto transactions. On the security side, the platform offers multi-transactions, making it impossible for anyone to track your coins' movements once mixed. The team also allows users to set up five outgoing addresses, with a maximum 72-hour delay. The platform supports multiple address types, including SegWit, Taproot, Legacy, and Bech32. This guarantees that you'll be able to mix your coins into these different addresses safely and securely.
UnijoinUnijoin is another popular Bitcoin mixer that is available on the market. This service combines your coins with other users' coins and breaks them into a single transaction. Doing this makes it difficult for anyone to trace back where your funds came from or where they go afterward. Unijoin also uses CoinJoin technology to ensure that all your transactions remain private. Additionally, the service provides users with an extra layer of protection by implementing time delay and distribution options. This ensures that your funds are untraceable and safe from being tracked or traced. Furthermore, Unijoin keeps no stored logs or records, which helps to guarantee complete privacy and anonymity when using its services. Finally, they also offer a Tor-based browser integration which helps make your transactions even more secure and private.
BlindmixerAnother common name in the Bitcoin Mixer world is Blindmixer. This is a decentralized mixing service using the Schnorr protocol, which helps increase security and privacy for users. The way it works is that when you deposit your coins, they are mixed up with other people's coins. This is the standard behavior of a crypto mixer, as mentioned above. This apparently simple mechanism makes it nearly impossible to trace back who sent what amount of money. Although this system works quite well, getting back some of your coins is still a risk. However, due to its decentralized nature and the Schnorr protocol, many see Blindmixer as a great choice on the market. When using a decentralized system, you will probably encounter more difficulties than with a centralized one. However, it is worth the extra effort to protect your privacy and keep your coins safe.
Why You Should Care About Crypto Mixer RegulationWhen we wrote this article, crypto regulation did not have a global stance on the mixers. However, with the rapid growth of digital assets, it is becoming increasingly important to have a comprehensive set of rules. There are three concepts you should keep in mind on this matter:
- Bitcoin mixer regulation differs from country to country.
- We cannot know whether a country will regulate or ban crypto mixers in the future.
- Crypto mixers should not be used for money laundering or other illegal activities. The fact that a few users does this should not be a justification for an entire industry to suffer.
A Look at Past Controversies Surrounding Crypto MixersOne of the most recent cases of legal controversy involving a crypto mixer came in August 2022. The Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned the virtual currency mixer Tornado Cash. Authorities claimed that the platform laundered more than $7 billion worth of cryptocurrency. It did not end here. OFAC accused the service of helping to launder over $455 million stolen by North Korea-backed hacking group Lazarus Group. We’re not detailing the matter, but it is clear that the topic turned political when it appeared in the news. Tornado Cash's story is too recent to be over, and more details will follow in the next months. The story serves as an important reminder that the legal landscape of digital currency is ever-changing. Therefore, those dealing with crypto should remain vigilant. Mixers like Tornado Cash have provided anonymity to cryptocurrency users. However, if used for nefarious ends, they can easily land individuals in hot water. Regulations such as those enforced by the FinCen are in place to combat money laundering and other illicit activities. Therefore, we should not look at international regulators as adversaries but as forces to keep the crypto space safe. It's in everyone's best interest that people use these tools responsibly.
Crypto Mixers Users Are Not Necessarily Working Against The LawThey say you should never blame the messenger, which is true regarding cryptocurrency mixers. People think that using a mixer is somehow abetting criminal activity. That's simply not the case. Crypto mixers provide an important service in preserving user privacy and protecting their financial assets from theft or fraud. At the same time, they should help investors remain compliant with applicable regulations. Anyone can use mixers to help protect their transaction history, reduce the risk of stolen funds, and maintain financial anonymity. They are not doing anything illegal or wrong by using these services. They are taking a proactive stance in protecting themselves from unwanted attention and potential harm without taking the proper precautions. So, don't be so quick to judge crypto mixer users as bad actors. They are just exercising their right to privacy and keeping their funds secure.
The Security Aspect of Bitcoin MixersWhen protecting your financial privacy, Bitcoin mixers are an appealing option. They offer enhanced security measures in comparison to traditional methods of transactions. Moreover, they provide an extra layer of anonymity by obfuscating the origin of funds and their destination address. They also help protect against external tracking by using multiple addresses in the mixing process. Hackers know that tracking a mixed transaction is a nearly impossible (hence, highly expensive) procedure. These services sometimes provide additional security by incorporating a two-factor authentication process to access their accounts. Some platforms also give an escrow service that protects customers from potential scams. Ultimately, Bitcoin mixers offer users the peace of mind that comes when their financial information is protected and secure.
Is It Legal to Use a Crypto Mixer?The legality of using a crypto mixer may vary from country to country. In most jurisdictions, using digital currency mixers is not illegal per se. However, some countries have taken issue with them due to their potential for abuse. For instance, FinCEN has issued warnings about the potential for mixers to be money laundering tools in the United States. The same goes for OFAC, which has included several crypto mixers on its Specially Designated Nationals (SDN) list. This choice seems to depend on their alleged use in terrorist financing and other illegal activities. Therefore, before using a mixer, it is important to ensure that the service complies with the laws of your jurisdiction. On the other hand, Europe has taken a different approach by not placing any restrictions on crypto mixers. This has led to an increase in their use as a financial privacy tool among European citizens. Regulation may easily change with time, so staying up to date with the latest developments on this matter is important.
Conclusion - Is It Worth Using a Bitcoin Mixer?Ultimately, the decision to use a virtual currency mixer is up to you. If you want to maintain your financial privacy and keep your funds secure, these services can be a great option. However, it is important to consider the potential legal limits of using crypto mixers in certain jurisdictions. While they may not necessarily be illegal, always ensure that you comply with applicable laws before using them. Crypto mixers can be a great way to stay safe and secure online when dealing with cryptocurrency transactions. So don't forget to do your research before opting for one of these services.
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Contrary to popular belief, cryptocurrency wallets don't store currency like traditional pocket wallets. Cryptocurrencies don't get stored in any single location or exist in physical form. Instead, these wallets keep the private and public keys required to interact with various blockchains. They generate information, in the form of public and private keys, to send and receive crypto via blockchain transactions.
The information on the wallets also includes an address (an alphanumeric identifier) that is generated based on the public and private keys. The address is essentially a location on the blockchain where other users can send coins to. Therefore, if a user wants to receive funds, they share this identifier with the recipient. In the event that the user loses that address, they lose control over their digital assets and digital money.
A person can also only execute transactions that transfer their digital assets or change them in some way through these keys. A user accesses their cryptocurrency through their private keys. This is regardless of whatever wallet they use, as long as they have the corresponding private key, which is why it's important never to disclose your private key to anyone.
Types of Wallets
Dependent on its working mechanism, there are two main types of crypto wallets; hardware and software (also known as hot and cold wallets respectively). Users rely on either for the ideal security of the funds in your wallets and transactions.
A hot wallet is any wallet that is accessible via the internet. They are a riskier environment to keep cryptocurrency compared to an offline wallet. This is because a connection to the internet makes the user vulnerable to hacking and malware. They are recommended for storing a small amount of cryptocurrency for daily transactions. Their ease of use makes them convenient for traders and frequent users.
These wallets come in many different forms with most being connected to the internet. However, due to hacking and malware threats, your software wallet is only as safe as your phone or computer is. The most common types of software wallets are desktop, mobile, and online wallets.
Online wallets allow a user to access blockchain through a browser website. The wallets run on a cloud, and the user can access them from any device that has an internet connection. These websites are managed by a third party that can hold and manage private keys on your behalf.
Admittedly cheap and easy to use in terms of access, they are less secure because of susceptibility to hacking. They are more appealing to inexperienced users who are still learning how to handle their assets.
These are software you download and execute locally on a PC or laptop. They give a user full access over their keys and funds. They also offer one of the highest levels of software security because the wallets are only accessible from a single device. The software is encrypted with a password that gives you access to your funds. However, desktops are still susceptible to viruses and malware, so as a user, you should ensure your device is clean before wallet installation.
They function similarly to desktop wallets but are designed as smartphone applications. They are convenient and enable the user to perform daily transactions and payments. They can even send and receive cryptocurrency through reading QR codes. However, they can still get malware infection or get lost, so the user is advised to encrypt the wallet with a password.
Cold wallets store cryptocurrency offline and have no active internet connection. They use a physical medium to store keys offline, making them less vulnerable to hacking. They are often used for long-term storage, making them ideal for storing more significant amounts of cryptocurrency. They are a safer alternative to storing user assets compared to hot wallets.
These are stand-alone, offline devices which use a random number generator (RNG) to generate public and private keys and store them. These wallets are downloaded and reside in hardware like a USB or smartphone. A user can purchase the hardware with the software already installed in them. It's safe from malware, and hacking attempts as the private keys never leave the device. However, it's important to purchase the hardware from a trusted source as some hackers sell wallets that are already corrupted.
It is essential to store it safely as hardware can get stolen or lost. They are less user friendly as funds take time to access compared to software wallets.
With this wallet, all you have to do is print or write out your private keys on paper. By definition, this is now a cryptocurrency wallet, and a user shouldn't make it susceptible to lose or ruin. It is safe from hacking, malware, or loss if stored securely like in a safe.
If you do not intend to send or receive bitcoin regularly, and you are merely holding your funds long-term, paper wallets are perfect for you. It is cheap, safe, and secure.
Tips on Picking the Right Wallet
If conducting numerous transactions, choose a wallet that enables fast transactions. The wallet you pick depends on the length of time you wish to store your assets and how much you are storing. Now, hardware wallets are highly recommended for handling significant sums. On the other hand, mobile wallets are more suitable for daily operations. For the latter, hot wallets are recommended due to easy access.
Safety and Security
It is essential to keep critical information personal. To ensure optimal security of your funds, for large sums, cold or deep cold storage are suitable and come highly recommended. They are less exposed to hacking and malware as opposed to the hot wallets that are always online. Pick a wallet that allows you to encrypt and set a password for added security.
Consider a cold storage wallet for your cryptocurrency. As opposed to hot wallets that are always online, cold wallets are more secure and ensure the safety of your private keys. You can easily access, transact, and unplug your hardware device.
Number of assets/funds
If you would like to deal with multiple assets or cryptocurrencies, you might want to consider multi-asset wallets. For example, a wallet with an inbuilt shapeshift means you can easily exchange different types of currencies while trading and transacting.
Consider getting a wallet whose pertinent information and details are not privy to a third-party. Some exchange wallets are controlled by the wallet web owner leaving the users exposed to hacking and, at worst, losing thousands worth of cryptocurrency. The wallets that require a third party like online wallets are a bit of a security risk as they give someone else access to your keys.
Whether you want to simply create a wallet for daily transactions or one to store the majority of the portion of your digital assets, remember these tips. Create a wallet with top-notch security that will spare you the loss or ruin that comes with possible malware or hacking. Enjoy trading and transacting by choosing the most suitable wallet.
Bitcoin is the first established cryptocurrency in the world. It was launched in January 2009 by a pseudonymous developer, Satoshi Nakamoto, whose true identity has yet to be verified. Everyone rumoured to be the real identity of BTC's creator publicly denied being Nakamoto. It was introduced with the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is operated by a decentralized authority.
What makes Bitcoin advantageous to a lot of people is that no authority can interfere with Bitcoin transactions, take people's money away, or impose transaction fees. It has full independence from world governments, banks, and corporations.
Besides, every Bitcoin transaction gets stored in a massively distributed ledger called the blockchain, which makes the BTC movement extremely transparent. It means that if someone attempts to fraud in a block – a combined digital record of the transaction - it can be easily spotted and corrected by anyone. Also, Bitcoin gives its users total control over their finances since it is not controlled as a network.
How Are Bitcoins Created?
In the traditional financial system, fiat money is usually created by having central banks print out the money. Since bitcoin is not controlled by any central authority and is not a physical money, it cannot be created through printing.
New bitcoins are created through a process called mining. The process involves solving complex mathematical computations using cryptography. Miners, also called nodes, use up a lot of electricity and computational power to create new bitcoins. As such, mining bitcoin isn't easy, and it takes an average of ten minutes to have one coin created.
Once a miner has solved the puzzle, they put up the solution in the network. Other miners have to be in consensus that the puzzle is solved, after which the miner adds a new block to the blockchain and they get a block reward. Currently, miners get 6.25 BTC for every block mined. This amount is usually reduced by half, after every halving event, which occurs after every four years.
Bitcoin Fun Fact: Satoshi left Bitcoin in the hands of a few prominent members of the BTC community around mid-2010 and named Gavin Anderson as a lead developer.
Acquiring and Storing Bitcoins
Seeing as bitcoin mining is a tedious process that needs a lot of computational power, not many people can mine bitcoins. So, how do you go about obtaining some bitcoins?
Your best bet would be to buy the coins in a cryptocurrency exchange. These are online platforms that allow users to exchange fiat money for bitcoin and other cryptocurrencies. There are several crypto exchanges that you can use. But, it would be best if you were careful to get one that is legitimate and won't end in you losing your money.
Coinbase, Etoro, and Bitfinex are some of the notable exchanges you can use to buy bitcoins. When choosing an exchange, be sure to do some diligent research since these platforms differ. They come with different features, have different requirements, and offer different trading opportunities.
When it comes to storing your bitcoins, you will need a digital wallet. The wallet contains a combination of addresses and keys to help secure the coins inside. It works similarly to a bank account, only that in this case, you are solely responsible for the safety of your funds.
Like exchanges, there are different types of digital wallets. When choosing one, bear in mind the different levels of security that each wallet provides. You can either have a web, paper, mobile, or hardware wallet. Of these options, the hardware wallet is the most secure one and is ideal if you are going to be storing large amounts of bitcoins.
Advantages of Bitcoin
Bitcoin gives everyone freedom from any intermediaries being in charge of your money. Cryptocurrencies are as legitimate as fiat currencies when it comes to buying things. With the existence of numerous deep-web markets that only accept Bitcoins in mind, you may be able to purchase some things more comfortable with BTC than with any other currency.
- Safety and Control
Bitcoin gives its users full control of their transactions. No one can steal your payment information from merchants or withdraw money from your account without you knowing and agreeing to it. Also, BTC allows its users to protect their money with backup copies and encryption.
- Can't be counterfeited
An excellent example of counterfeiting in the digital world is using the same money twice – also called a 'double spend' - interpreting both transactions fraudulent. Bitcoin counters this by using blockchain technology as well as the various consensus mechanisms built into all BTC algorithms.
Drawbacks of Bitcoin
- Legalization and level of recognition
The use and trade of Bitcoins is encouraged in some countries and banned and outlawed in others. The legal variation from country to country makes it hard for the mass adoption of Bitcoins.
Although a lot of countries have recognized and legalized Bitcoin, those countries that have not, have the majority of their businesses, whether big or small, utterly oblivious to it.
The cryptocurrency market is highly volatile, with its prices scurrying up and down, going through various bubbles and busts. Bitcoin's price is unpredictable, like, throughout its history, it has been conquering new heights, only to sustain a massive drop straight after. The rapid and drastic changes can cause significant financial damage to an imprudent investor.
Bitcoin has appeared as one of the most innovative technologies in modern times since it began in 2009. Although several other cryptocurrencies have emerged since then, Bitcoin remains to be the most popular one by market capitalization. If you are looking to delve into the world of cryptocurrencies, getting acquainted with Bitcoins would be the ideal place to get started.
Blockchain technology has risen in popularity in recent times and is getting more common by the day. While it may sound a little complicated depending on interest, blockchain technology is rather simple to understand and quite fascinating in how it works.
Simply put, blockchain is a decentralized, shared ledger, a digital database of financial transactions, saved on a cluster of computers in different places and is not owned by any single person or entity. The ledger is continuously growing as more transactions are carried out, each forming a block adding to the database, which creates a continuous chain of data containing records accessible to the public.
Pillars of Blockchain Technology
There are three main pillars of blockchain technology - decentralization, immutability, and transparency.
Decentralization is the one defining factor of blockchain technology. It refers to the fact that the financial transactions are stored in multiple locations and multiple computers. Therefore, no single entity has complete control over the data stored in the ledger. In the traditional financial system, everything is centralized, and the information is only in the hands of your bank – which is easy for unauthorized users to access.
Blockchain technology removes this risk through decentralization, where everyone has access to the data but cannot tamper with it. Using a decentralized system ensures that you do not have to go through a third party to interact with someone else. A centralized system will require that you go through an intermediary, like a bank, to complete a transaction. If something were to happen to a centralized system, services would grind to a halt, and the information would be corrupted. A decentralized system, on the other hand, ensures information is available in multiples rather than at a single source, which plays a crucial role in data security.
Once data has been entered into the digital database, it cannot be corrupted or tampered with, thanks to immutability. Cryptographic hashes, a technology that takes transactions as inputs, runs them through a hashing algorithm, and then produces an output of a fixed size and length, makes immutability possible.
Immutability secures the transactions and makes it impossible for anyone to get creative with the records in the ledger. Blockchain technology would, therefore, be ideal for preventing such things as embezzlement and other financial crimes.
A rather intriguing aspect of blockchain technology is its transparency while guaranteeing privacy to its users at the same time. The identity of any user is protected by complex cryptography protocols and are represented just by a public address that does not reflect their identity.
At the same time, every transaction made by a person, though their identity is secure. Transactions are recorded in the public ledger and displayed to the public for everyone to see. You can use the public address of a person, company, or organization to know every transaction they have made. This transparency forces companies to be honest in their spending, thus ensuring a high level of accountability which has not been seen before in other conventional methods.
How Does Blockchain Work?
To understand how blockchain technology works, we will use an example of two entities trying to complete a financial transaction. Take, for instance, two people A and B, with A wanting to send money to person B.
In blockchain technology, this transaction appears as a block which is then distributed across a network in various servers as opposed to a single one. Person A initiates a deal, and a network of computers works to prove that the owner and the transaction are authentic.
As soon as the transaction has been verified as valid, the block is then added to the digital ledger. This information is reconciled and updated across the servers and becomes a permanent record. The record of ownership for person A is now transferred on to person B, and the money becomes theirs.
The block must be given a hash after verification, a unique identifier for that particular transaction. This entire process is made to eliminate the middleman while ensuring that it is secure, private, and transparent.
Blockchain and Bitcoin
Tracing back to 2008, Bitcoin was created by a person or group of persons under the pseudonym Satoshi Nakamoto. It is a decentralized currency that is not issued or controlled by any central authority as opposed to money issued by a central bank. A network of computers called nodes or miners manages the blockchain behind bitcoin. These are computers built to run complex mathematical problems to allow a transaction to go through.
A person making a bitcoin transaction will do so from their digital currency wallet, which has a ‘private key’. This key is that specific person’s digital signature. It is mathematical proof that this particular transaction is coming from that person’s digital wallet. If multiple people are doing these transactions at the same time, they all get organized together into a block which is then sent out to the Blockchain network. Once the transactions have been verified, they are added onto former blocks creating a blockchain.
Uses of Blockchain in the Technology World
Blockchain technology has been fundamental in revolutionizing the financial scene. Thanks to the technology, we have seen several cryptocurrencies come up. However, blockchain’s unique features, such as decentralization provide leverage for the technology to disrupt several industries. Here are some of the uses of blockchain in the tech world.
- Smart Contracts
Blockchain can be used to facilitate, negotiate, and verify contract agreements under a specific set of conditions agreed to by the parties. Once everything is agreed to, the terms of said agreements are automatically executed.
With smart contracts, parties can get into agreements without intermediaries and have the transactions recorded in a public ledger. These contracts will help provide transparent transactions and minimize cases on involved parties going back on their word.
- Protection of Intellectual Property
Blockchain technology can be used to ensure that proprietary digital data is certified. The technology creates an indisputable record of ownership which can be used as proof of existence. Additionally, it helps avoid falsification of documents and counterfeiting of data such as certificates and copyrights.
- Payment Processing
Blockchain technology has been most influential in the financial system. Thanks to this technology, you can process payments from one party to another without an intermediary. By removing intermediaries such as banks, blockchain technology has helped to reduce transaction fees and minimize the time taken to complete transactions.
- Digital IDS
With blockchain technology, we can get rid of physical IDs and replace them with digital ones. Thanks to the multi-step and multi-factor identity verification process, blockchain technology ensures that digital IDs offer better security. Besides, third parties will not access your data, as is the case with the internet today, which results in too many adverts, especially in email inboxes.
Other sectors where blockchain technology could come in handy include governance, especially when trying to ensure full transparency in activities such as voting, supply chain management, healthcare systems, and so much more.
Blockchain technology is taking the world by storm since its creation several years ago. Its fundamental use-case is revolutionizing the financial world with the use of digital currency. But, blockchain technology can disrupt various sectors, thanks to its three pillars. Key players in the tech field are continually looking for ways through which the technology can help solve some of the global problems. While it is still not integrated into significant systems, it provides excellent opportunities for companies to conduct business, protect their data, and do so much more.
When Bitcoin Cash (BCH) hard forked away from Bitcoin in 2017, not many people were optimistic about its success. Fast forward three years to present-day, and we are looking at one of the highest-trading assets in the cryptocurrency market.
A lot of traders use BCH in their daily dealings, but few remember where the digital cash started, why it chose to break away from the omnipotent Bitcoin, and the rocky road that it traveled to get to its current status.
Today, we take a closer look at Bitcoin Cash and its remarkable evolution full of dramatic highs, lows, and karma-biting hard forks.
What is Bitcoin Cash?
Bitcoin Cash (BCH) is a peer-to-peer cryptocurrency that resulted from a hard fork in the Bitcoin community on August 1, 2017.
Similar to Bitcoin (BTC), Bitcoin Cash (BCH) is also a digital asset that anyone can transact directly anywhere in the world without the approval of a third-party intermediary or a central authority.
While it faced plenty of adversity in its early beginnings, Bitcoin Cash increased in popularity, and today it proudly ranks as the 6th-largest crypto by market capitalization.
Today, there are two big differences between Bitcoin Cash and Bitcoin:
- Bitcoin Cash transactions involve lower fees and faster transfers due to its larger block size
- Bitcoin is at least 35 times more valuable than Bitcoin Cash
There are many more differences between Bitcoin and Bitcoin Cash than these two ones. However, to better understand why a section of the Bitcoin community decided to fork away from the main protocol, we will have to recap the string of events leading to the 2017 schism. In this process, we will go over some of the well-known concepts related to Bitcoin and its evolution.
The Buildup to Bitcoin Cash
A little over three years have passed since the release of Bitcoin Cash. Today, the crypto is well-established, and few are those that still look behind in time to its conception.
However, if you are new to Bitcoin Cash, you should take a few minutes to explore the events that led to its birth. This brief introduction into Bitcoin Cash history will help you understand better the reasons why today we have more than one Bitcoin on the market.
The “apples of discord” that led to the creation of Bitcoin Cash
- Discontent over scalability issues
- Mining fees and waiting times
- The “Replace-by-Fee” system
- The 1 MB vs. 2 MB debate
- The Segwit proposal
- The BIP 148 plan
- The Bitcoin ABC Project
Discontent over scalability issues
Shortly after Bitcoin’s release in 2009, some of the developers in the newly-formed crypto community signaled the scalability problems that the digital asset presented. These voices grew louder with every passing year, and their concern was mainly with the size of the blocks on the blockchain, and which was limited to 1 MB.
The mutineers decided to fork their way out of the original Bitcoin and create a similar cryptocurrency, but with an upper limit of 8 MB. They intended to provide a system where larger blocks enable more transactions to take place at a faster speed.
That hard fork was the birth of Bitcoin Cash, which took place at block height 478559 in August 2017. However, before we get to that point, it is worthwhile revising some of the other Bitcoin features that set the stage for the breakup in the BTC community.
Mining fees and waiting times
Bitcoin provides a peer-to-peer decentralized, digital currency platform where users can transfer digital assets quickly, and without the necessary supervision of an all-powerful authority. However, the work that keeps this system up and running is done by a group of people called miners.
The miners are the backbone of the Bitcoin ledger, and while it seems valiant of them to do the dirty work for the rest of us, they don’t do it for free. They get their rewards in fees by mining for blocks or adding transactions to the blocks. Here’s how that works:
Mining for blocks
According to the proof-of-work (PoW) protocol, miners use high-performance computers to look for blocks that they can add to the blockchain. Once they discover them and solve the puzzle, they get a reward, which at the moment has a value of 6.25 BTC.
Adding transactions to the blocks
Every Bitcoin transaction between two users involves the addition of a new block to the blockchain. The miner that finds the block gets a reward. However, he will also ask for an extra fee to add it to the ledger.
At this point, the block enters a “waiting line,” and the more the users are willing to pay the miner, the faster the block will reach the blockchain, and the quicker the transaction will take place.
Since the Bitcoin block size limit is of only 1 MB, the waiting time increases considerably when there are numerous transactions in line. This Bitcoin feature wasn’t a problem in the early days of the crypto industry. However, as soon as it became globally famous, the waiting times have increased considerably, and so did the miners’ fees.
The “Replace-by-Fee” System
The 1 MB block size limit wasn’t a problem from the start. Bitcoin’s developers imposed it as a defensive system against spam transactions that could clog up the network. For many years, it was a celebrated protection measure.
Unfortunately, when Bitcoin became popular, the number of transactions skyrocketed. As a result, the blocks started filling up at an alarming rate, and many users had to wait for new blocks to be created before their transactions would go through.
For most traders, waiting was not an option. They started paying huge fees to miners to prioritize their transactions. This behavior led to the unofficial introduction of the "Replace-by-Fee" system, which made matters even worse for those users who would eventually fork their way out of the system.
The "Replace-by-Fee" system works when a user has a transaction waiting in line. At this point, the transaction cannot be deleted or returned, but it can be duplicated. So, the user pays miners a high fee to add the duplicate transaction to the block and thus overwriting (replacing) the initial one in the process.
The miners love the replace-by-fee system because it increases their rewards significantly. However, the users end up paying a lot of BTC in fees, and the network becomes overcrowded anyway.
The 1 MB vs. 2 MB debate
Before the hard fork that led to the creation of Bitcoin Cash took place, there was a fierce debate in the Bitcoin community regarding the block size limit. On one side, a group of users wants it to increase to 2 MB. However, they were facing stiff opposition from those who were fine with the original 1 MB size.
Each side had their arguments:
Pro 1 MB
- If the block size limit would increase, the miners’ fee would decrease, which would potentially discourage many of them from continuing their work.
- The change would rupture the Bitcoin community and weaken its stability.
- Bitcoin would get closer to becoming an everyday currency, which is something that many of the original users want to avoid.
- A change in block size limit would spell the end for small mining pools, which wouldn't have the necessary processing power to function. As a result, the larger mining pools would gain more control over the network and cause the platform to lose its initial decentralized feature.
Pro 2 MB
- By increasing the block size limit, miners would get better rewards from mining than from adding transactions to the block in return for high fees.
- Bitcoin has the purpose to offer people an alternative to the traditional banking system. If the block size doesn’t increase the fees paid to miners would become too high for most people interested in using BTC.
- An increase in block size limit would trigger several changes for Bitcoin. However, these changes would not be instant, but gradual over an extended period. So, users should not fear an instant transformation.
The debate raged on, and when a compromise was in sight, a new dilemma rose to the surface: if there were to make any changes to the blockchain, how would they be implemented?
The answer was: through a fork, which is an event that marks a divergence in the evolution of a blockchain. This condition is a fundamental change that divides the existing network into two parallel-evolving systems. A fork in a blockchain can take two forms - soft or hard.
What is a soft fork?
A soft fork enables the implementation of one or more changes to an existing system without making it incompatible with previous versions.
For example, if you have Microsoft Office (MSO) Word 2007 on your computer, you can open MSO Word 2013 files, because the program is backward compatible. You would not benefit from all the upgrades that took place between 2007 and 2013, but you could still view or edit the file according to its 2007 features.
When a soft fork appears in a blockchain, the two resulting systems are still partially compatible. The system that opted for upgrades maintains a small window of return in case of failure. Think of it as an update on your phone that can be annulled through the “reset to factory settings” option.
What is a hard fork?
A hard fork creates two different systems, and neither of them can benefit from the other one’s upgrades.
One real-life example of a hard fork is the development of gaming consoles. You cannot play a PS3 game on the PS4 console, and vice-versa. The release of PS4 does not make the previous version obsolete, but the two consoles' evolutionary features make the games unplayable on both machines.
After a hard fork in a blockchain, the two resulting systems are no longer compatible. They evolve in parallel ways, and there is no going back.
The Segwit Proposal
Whether it would be a soft one or a hard one, a fork was the appropriate solution for the scalability issue that had divided the Bitcoin community before 2017.
However, let’s not forget that the Bitcoin blockchain is a consensus-based mechanism. For major changes to take place, the miners and the users had to agree to them. In a centralized economy, the process would not be a problem since it would be organized and completed by a central authority, which on the BTC ledger does not exist.
Many of the Bitcoin Core developers came with solutions for the problem. The one that caught the most attention came from Dr. Pieter Wuille, who is one of the most active developers and responsible for some of Bitcoin's more significant upgrades.
Dr. Wuille’s solution is called SegWit, and to get a better understanding of what it is and what it does, first we need to revise the anatomy of a block and its contents.
Every block on the blockchain is made of:
- A block header
- A block body
The block header contains 6 elements:
- Previous block hash
- Transaction roots
- Epoch timestamp
- Difficulty target
The block body contains the details of the transaction, which in turn consist of 3 elements each:
- The input, which represents the sender’s details
- The output, which represents the receiver’s details
- The digital signature
Out of all the transaction elements, the signature is the most important one. This unique, digital imprint is proof that the sender possesses the necessary funds to make the transaction.
The problem appears when the body of the block has to contain multiple transactions, which in turn have to include more than a digital signature. Since the block size is limited to 1 MB, and the signature accounts for nearly 65% of this space, the existence of several blocks becomes crucial. As a result, the transaction time increases, and the network clogging exacerbates.
So, Dr. Wuille came with an interesting proposal called “the Segregated Witness.” Also known as SegWit, this solution would create an additional block, called “Extended Block,” which would hold all the digital signatures while the main block would keep the details of the sender and the receiver.
When activated, the SegWit would enhance the space in the blocks for more transactions. The immediate benefits of this solution would include:
- A larger amount of transactions that a block can take
- A decrease in transaction fees
- A size reduction for each transaction
- Faster confirmation of each transaction
- Alleviation of the Bitcoin scalability issue
Additionally, the miners would get more fees, in the long run, thanks to the increase in block capacity for transactions. However, not everyone was pleased with the SegWit proposal, and some pointed out the downsides of this solution, such as:
- Miners would get fewer transaction fees for each transaction
- All of the digital wallets would have to implement SegWit in their collection of features, which could take a lot of time
- Due to the increase in block capacity, bandwidth use would also increase, which would weigh heavily on the system’s resources and overall speed
The SegWit solution was praised by users and businesses trading on the Bitcoin blockchain. Unfortunately, they saw its implementation blocked by a part of the miners, who did not want to get fewer fees on the individual transactions.
The developers conditioned the SegWit implementation by the approval from at least 95% of the miners. So, the adoption of Segwit as a viable alternative to the hard fork that eventually led to the creation of Bitcoin Cash (BCH) did not go through.
The SegWit activation eventually happened on 24 August 2017, a little over three weeks after Bitcoin Cash was launched.
The BIP 148 Plan
Because the miners were stalling the SegWit integration, the developers came up with the plan of enforcing SegWit through a User Activated Soft Fork (UASF) called BIP 148.
Bitcoin Improvement Proposal (BIP) is a design document that implements a wide range of improvements to the Bitcoin network. There are three types of BIPs:
The Standards Track BIP
It makes changes to standard elements of the network, such as the protocol, transactions, and blocks.
The Informational BIP
It repairs design issues and improves general guidelines.
The Process BIP
It makes changes to the process.
The BIP 148 is a User Activated Soft Fork (UASF), which means that users implement it without the involvement of the miners. Through it, the developers aimed to impose that all the full nodes in the Bitcoin network would reject any block that is being created without SegWit ingrained in it.
The plan was to incentivize the miners to activate SegWit in the blocks that they mine. The chances of convincing at least 95% of the miners to adopt SegWit through BIP 148 were slim. But, that mattered very little since the only downside would be that less than 51% would agree to it. In this negative scenario, the blockchain would experience a chain split, and the hash rate would drop significantly.
E The possibility of a chain split, as small as it was, instilled fear in a part of the community. One of the mining companies, Bitmain, expressed its disagreement with BIP 148 and proposed a User Activated Hard Fork (UAHF) instead.
The Bitcoin ABC Project
As soon as Bitmain made their UAHF proposal public, the idea gained substantial support in the community. Through a hard fork, the nodes that would accept the increase of the block size limit would automatically follow the newly-formed blockchain without depending on the support of the previous one. Also, the UAHF would not require the majority of hash power to be enforced.
Those opposing the UAHF were in favor of the BIP 148 and did not want the signatures to remain separate from the rest of the transaction data, which in their opinion, made the process easier to hack.
The breakthrough came at the Future of Bitcoin Conference in 2017 when a developer named Amaury Séchet revealed the Bitcoin ABC (Adjustable Blocksize Cap) project and announced the upcoming hardfork. Shortly after, on August 1st, 2017, the project Bitcoin Cash was launched through the long-debated UAHF.
Differences between Bitcoin and Bitcoin Cash
From Day 1, Bitcoin Cash (BCH) showed why the community behind it chose to move away from the original Bitcoin blockchain. Because it is the result of a hard fork, all the BTC owners received an equivalent number of BCH tokens to their previous holdings on the old chain.
Some of the main differences between BTC and BCH include:
- BCH has a block size of 8 MB
- BCH does not have SegWit
- BCH does not use the “Replace-by-Fee” system
- BCH has enhanced protection against replay attacks and wipeouts
- BCH aims to adjust mining difficulty quicker than BTC
These are just a few of the features that convinced many members of the Bitcoin community to follow the Bitcoin Cash Project after the hard fork. Let’s break down and discuss the most important ones!
How Bitcoin Cash deals with replay attacks
Every cryptocurrency that results from a hard fork has to deal with the threat of replay attacks.
A replay attack occurs when a malicious intervention leads to the repetition or delay of a transaction on two separate blockchains, which are in the post-fork period. During the attack, a user may transfer 10 BTC to another user and inadvertently transfer 10 BCH as well.
One of the best features of Bitcoin Cash is how it circumnavigates one of the biggest problems that any cryptocurrency can face post-forking, the replay attack.
To prevent replay attacks, Bitcoin Cash uses a protection system in the form of a redefined sighash algorithm. This algorithm comes into effect only when the sighash flag has a bit 6 set. Thanks to it, the transactions become invalid on the previous, non-UAHF chain.
How Bitcoin Cash incentivizes miners
If you remember well, it was the Bitcoin users that were pushing for the hard fork more than the miners. So, when Bitcoin Cash finally released, it was no surprise that very few miners chose to fork away on the new chain. As a result, the difficulty in the BCH blockchain reduced significantly. Almost immediately, a large horde of BTC miners switched to mining BCH, which led to the hashing power of BTC halving.
However, Bitcoin Cash uses a different method to attract and incentivize miners in the long run. Their system is based on a Median Time Past formula.
The Median Time Past (MTP) is the median of the last 11 blocks that have been mined in a blockchain. If you were to line up the last 11 blocks, you could identify the median time as the time at which the middle block was mined. Next, you can use that figure to determine the time at which future blocks can be mined as well.
The formula for adjusting the mining difficulty on Bitcoin Cash goes like this:
If the Median Time Past of the current block and the Median Time Past of 6 blocks before is greater than 12 hours then the difficulty reduces by 20%.
Additionally, the difficulty adjusts according to the number of miners in the system. If there are fewer miners, then the difficulty rate goes down because the overall hashing power of the system goes down.
The Hash War of 2018
In November 2018, the Bitcoin Cash community was split in half by a conflict known as the “Hash War,” which led to irreversible splits and changes in the chain as well. The two factions that carried out the hostilities were:
- Bitcoin ABC, also known as Bitcoin Adjustable Blocksize Cap was the side led by Roger Ver and Bitmain CEO Jihan Wu.
- Bitcoin SV or Bitcoin Satoshi's Vision was the side led by Craig Wright (who often claimed to be Satoshi Nakamoto) and billionaire Calvin Ayre, the owner of the largest BCH pool, CoinGeek.
The reasons behind the Bitcoin Cash “civil war” included:
Bitcoin ABC wanted to increase the block size limit to 32 MB, while Bitcoin SV wanted it to reach as high as 128 MB.
Changes to the Script
Ever since their inception, Bitcoin transactions have been coded with a simple language referred to as the “Script.” This code is not as versatile as the one used to create smart contracts, and many developers consider it to be obsolete.
In August 2018, Bitcoin ABC introduced two new opcodes in the Bitcoin Cash script, with the use of a hard fork:
Through these changes, the Bitcoin Cash chain allowed for a trusted external source to check and validate signatures. They were inspired by smart contract functionalities that the Bitcoin idealists in the young BCH community did not like at all.
They wanted a Bitcoin Cash version that was as close to Satoshi Nakamoto’s original vision as possible. So, they disbanded into another faction, Bitcoin SV.
Plenty of threats, but no “bloodshed”
The “war” did not last as long as many expected it. In November 2018, Bitcoin Cash went through a hard-fork and split into Bitcoin Cash ABC and Bitcoin Cash SV.
Both chains were left utilizing their hash power to mine the longest chain. Whichever project had the longest and more efficient chain became the dominant Bitcoin Cash chain. At this point, the guns were locked and loaded.
The conflict took the moniker of "hash war" after Bitcoin SV threatened that miners would 51% attack a potential Bitcoin Cash ABC chain out of existence.
In response, Bitcoin Cash ABC brought in additional hash power to secure their chain and implemented checkpoints to minimize the chances of a 51% attack.
The two factions entered in a sort of “cold war,” threatening to attack each other as soon as a large group of miners would leave any of the chains.
However, as time passed by, it became more obvious that a full-on attack from any of the parts was highly unlikely to take place. About 10 days after the split, CoinGeek published a press release announcing support for a permanent split. As the publication is owned by online gambling tycoon and major Bitcoin SV miner Calvin Ayre, this declaration was considered an “official” end to the hash war.
Since then, the two coins have competed on the cryptocurrency market, experiencing slumps and surges just like any other crypto project in the industry.
At the time of this writing, Bitcoin Cash is the 6th-largest crypto by market cap, while Bitcoin SV is nipping at its heels in the 7th position.
Bitcoin Cash Today and Tomorrow
Nowadays, Bitcoin Cash is straying even further from the purpose of its parent blockchain, Bitcoin. Traders use it for many more actions than simply carrying BCH transactions.
Thanks to its large block size, users can run smart contract-type programs on the BCH blockchain. The process is not as simple as it is on blockchains like Ethereum, which were specifically designed for smart contracts, but the functionality remains.
Bitcoin Cash is a completely independent cryptocurrency, so its value does not depend on that of the original Bitcoin. However, since Bitcoin is still the world’s powerhouse cryptocurrency, the BCH price should fluctuate according to the BTC trend, just like the majority of the cryptocurrencies do. All in all, the industry expects Bitcoin Cash to grow exponentially in the long run. The upcoming Avalanche update should help it stabilize above $300, and even aim for a four-digit value next year.
Wait a minute! Another guide about Tether? Are you kidding me?!? What is there left to know about a crypto that was released in 2014?
These may very well be your first words when reading the title, and we wouldn’t blame you.
We know that we’ve talked before about what Tether is and how it works. The topic has been viewed and analyzed from all possible perspectives. Still, the world’s most popular stablecoin is also one of the most talked-about digital assets out there.
Many years have passed, and Tether still finds a way to make the headlines almost every day. Whether is the fantastic surge that made it the 3rd-largest crypto by market cap or its controversial banking connections, Tether is always in the spotlight. You blink, and a fresh story about Tether pops up.
So today, we dive deep into Tether's past, present, and future to get a clear view of what this stablecoin is all about. We do a short recap of its definition, then we list all the controversies surrounding Tether, including the incestuous liaison with its sibling, Bitfinex, and in the end, we try to guesstimate what the future of Tether will be like.
Lay back comfortably, put your reading glasses on, and enjoy the ride!
Understanding cryptocurrency volatility
To better understand the particular role that Tether plays in the crypto market, we first have to look at one of the main traits of cryptocurrency: volatility.
Volatility affects all types of currencies. Daily price fluctuations are as certain as the sun is to rise every day. Stability is a short-lived illusion and inflation is every asset’s worst enemy.
Cryptocurrencies do not make an exception from these financial realities. On the contrary, they have to deal with seesawing volatility, harrowing fluctuations, and defeating inflation periods. It is for this high level of instability, that we cannot use cryptos for everyday transactions, yet. It is not the only reason that delays global cryptocurrency adoption, but it is one of the most crucial ones.
For now, we still rely on well-known currencies like the USD, the Euro, and the Pound sterling among many others. These currencies also experience fluctuations, but at a much smaller level than cryptocurrencies.
The intense volatility that we see today in the cryptocurrency market is not something new. The speculative nature of digital assets dates back to their early and shady beginnings. Before Bitcoin became a global sensation, cryptos were fashionable on the Silk Road, an online black market that had a short, but eventful life.
Back in 2015, when Silk Road was nearing its final days, cryptocurrencies caught the eyes of bankers, financial institutions, and powerful investors. Their oscillations in value did not scare away large investments. On the contrary, they attracted a great deal of them, which eventually contributed to the infamous Bitcoin bubble burst from December 2017.
From that point on, any attempt to drag cryptos back into obscurity was futile. Cryptocurrencies became mainstream and carved a niche of their own in the financial industry.
What makes Tether different from other cryptos?
Cryptocurrencies have come a long way since the days when they were lurking in the murky waters of the dark web. Today, they enjoy a dedicated market, safe exchanges, and unabated support from a global community.
Still, the volatility issue remains, and it is far from reaching its demise. For now, a countermeasure would suffice, and it may come from Tether.
Tether is a centralized digital asset pegged to the US Dollar, and often referred to as USDT. It is a cryptocurrency that uses blockchain technology in similar ways that other cryptos do, but it maintains a stable value in direct correspondence with the value of fiat currency. For this reason, it is also known as a stablecoin.
The idea behind the development of Tether is to prevent owners from holding onto their assets. This practice is also known as “hodling.” Many investors, especially Bitcoin owners, prefer to keep their coins and sell them only when the price is surging and they can make a profit.
Since the price of Tether gets its measure from the US Dollar and the Euro, hodling it makes no difference. Its value is not subject to intense volatility for as long as the USD and the EUR don’t go through epic fluctuations. So, owners have extra incentives to spend their coins, and therefore reduce inflation.
What is Tether and what are its benefits?
Tether is a clear example of the value-for-value principle and makes it easy for investors to use cryptocurrency in everyday transactions.
According to its basic definition, Tether is a fiat-pegged cryptocurrency issued by Tether Limited. It was developed using the Omni Layer protocol – an open-source program that acts as layer software built on Bitcoin, and which allows the Tether community to track and validate the transfer of tokens.
In the autumn of 2017, Tether launched as an ERC-20 token on the Ethereum blockchain. Initially, they only created a limited supply of Dollar-backed tokens for contract developers to play with, and a plan to offer them as a wide-open service to exchange Omni-based tokens for ERC20-based tokens and vice versa.
At the beginning of 2018, Tether announced that Ethereum-based Tether was available for tokenized USD and EUR to be transferred over the Ethereum network. Almost three years later, Ethereum’s share of Tether’s total circulating supply has already surpassed the one on the Omni Layer.
When it comes to the most popular stablecoins in the world, Tether takes the first place by a large margin. On some well-known exchanges like Bitfinex, Binance, and Poloniex, traders even use it as a dollar replacement.
In theory, being backed by the USD means that for every Tether issued, there is an equivalent amount of dollars kept in reserve. Its value should not vary, as it ought to remain equivalent to $1 at all times.
Using Tether at the expense of other cryptocurrencies has exponential benefits, such as:
- Easy crypto conversion
Tether makes it easy to convert fiat money into digital currency. Due to its blockchain use, transactions are easy, quick, and secure. It is even faster to convert it to other cryptocurrencies than it is to transform real cash into digital coins.
- Far-reaching acceptance
Numerous exchanges and platforms have adopted Tether as a means of a transaction when the US Dollar option was not available. As a result, you can use it in various transactions on multiple markets without fearing incompatibility.
- A reliable safe net
You can count on Tether to represent most if not all of your investment in cryptocurrency. The amount of Tether that is in circulation at any moment is proportionate to the backup funds.
How does Tether work?
All the Tether coins are issued by Tether Limited, which is a Hong Kong-based company. According to the Tether whitepaper, Tether Ltd. holds fiat funds that correspond to the amount of Tether tokens in circulation. This way, the assets are backed by real-life money, and the transactions that take place on the blockchain are perfectly secure and transparent.
In theory, Tether sounds like the ideal immersion protocol into cryptocurrency for new traders everywhere. People can use exchanges to transfer fiat currency into Tether, and reverse the conversion at a later date without losing money. Meanwhile, they can be active on the blockchain and engage in crypto transactions.
However, it doesn't always work that easy. Several controversies surrounding the Tether Limited operations and audits have shaken the trust out of numerous investors. We will discuss these special cases in detail below.
One of the main issues that detractors tend to criticize Tether for is that it’s drifting away from one of the primary principles of cryptocurrency, decentralization.
Thanks to the Omni protocol, the Tether tokens are anchored on the Bitcoin blockchain. Still, the users depend on Tether Limited for issuance and consent to maintain Tether a pegged currency.
One event when this loophole in the roadmap affected owners took place on April 18, 2017. Back then, after a few days of continued delays in processing international wires to and from Tether users, Bitfinex witnessed a stop to wire transfer services from Taiwanese banking partners, resulting in congestion of pending transactions for international investors.
The impact on Tether and its users was a small tragedy at the time, as Tether value dropped below its pegged correspondent at $0.91. The future of USDT seemed bleak, to say the least. The most pessimistic voices were imagining a scenario where Tether funds would be frozen, and the owners could not redeem their money before the token would lose its pegged value.
All the Controversies Surrounding Tether and Bitfinex
Almost every cryptocurrency that has ever seen the light of day and made it past its first anniversary has been the subject of one or more controversies. Allegations of market manipulation, false promises, and Ponzi schemes seem to affect most of them.
While most cryptos shake off the accusations in time, Tether appears to add more to its name with every month going by. If there was a pageant for most controversies in the industry, Tether would win it by a landslide.
Here are all the major embroilments that Tether and Bitfinex have gotten into over the years!
The people behind Tether and Bitfinex
The biggest controversy surrounding Tether regards its connection with popular cryptocurrency exchange Bitfinex. Both companies function under the umbrella of the parent company, iFinex Inc. Throughout history, they shared the same people as CEO, CTO, CFO, CSO, and members of the general counsel.
The people who are allegedly pulling the strings backstage for both companies seem to be Philip Porter and Giancarlo Devasini, according to the Paradise Papers.
The documents leaked by the International Consortium of Investigative Journalists in November 2017 revealed that Phil Potter, a graduate of Yale University, and a former derivatives analyst for Morgan Stanley was the director of Tether and the chief strategy officer at Bitfinex.
According to the same files, Bitfinex incorporated in Hong Kong in 2013 but then changed its name to Renrenbee Ltd. a year later. Giancarlo Devasini, Tether's CFO appears as the CFO of Bitfinex as well in the Paradise Papers.
According to Tether and Bitfinex, these are their teams of executives at the time of this writing:
|Bitfinex Senior Team||Tether Senior Team|
|JL van der Velde (CEO)||JL van der Velde (CEO)|
|Giancarlo Devasini (CFO)||Giancarlo Devasini (CFO)|
|Philip Potter (CSO)||Philip Potter (CSO)|
|Stuart Hoegner (general counsel)||Stuart Hoegner (general counsel)|
|Matthew Tremblay (chief compliance officer)||Matthew Tremblay (chief compliance officer)|
|Paolo Ardoino (CTO)||Paolo Ardoino (CTO)|
|Chris Ellis (community manager)|
Tether & Bitfinex vs. Wells Fargo
The first suspicions concerning Tether and Bitfinex surfaced a few months earlier, in April 2017, in the wake of the scandal with the Taiwanese banks.
Back then, Bitfinex sued its U.S. banking correspondent, Wells Fargo for allegedly prohibiting the banks in Taiwan from completing outbound wire transfers. Tether was also part of the suit, again under the parental arm of iFinex Inc.
Only a week later, Bitfinex chose to withdraw the lawsuit against Wells Fargo and signaled that the exchange is seeking to look past the dispute.
The suit was gone, but the bad blood remained, and the exchange chose to cut its services for the U.S. customers due to the cost of operations.
Did Tether influence the Bitcoin Rise and Crash of 2017?
Soon after the Wells Fargo scandal, many observers in the community signaled that most of the new Tether accounts started flowing through Bitfinex only, and some of them argued that a surplus of Tether was issued to create artificial demand. The allegations went as far as to say that the spectacular surge in Bitcoin value throughout 2017 was the result of price manipulation by Bitfinex.
According to a paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student, the Bitcoin price was artificially inflated. The two researchers concluded that every increase in Bitcoin price can be traced to the hours immediately after Tether flowed to a limited number of other exchanges, usually when the value was declining.
Griffin and Shams questioned the way Bitfinex provides more Tether on the market whether there is a demand for it or not. In their opinion, this strategy leads to an artificial value increase for other cryptocurrencies, and especially for popular ones like Bitcoin. The practice is comparable to that of printing more money.
More Tether in circulation would convince owners to convert their tokens into BTC, which would subsequently increase Bitcoin’s trading value. When the prices would eventually follow a downtrend slope, they would default the “redeem Tether” option, or they would blame a “hack-attack” for the loss or disappearance of Tether and their pegged US Dollars.
Bitfinex takes up the “Master of Puppets” role
The two researchers argued that a considerable amount of Tether coins was issued and transferred to several exchanges. The tokens were then used to buy Bitcoin immediately after a market dip would take place. This way, the market would experience a false demand for BTC that would attract even more investors to buy Bitcoin and take part in an artificial bullish push that ultimately led to $19,783, its highest value in history.
The study went as far as to remap the transactions and identify the exchanges that were associated with Bitfinex throughout the massive, supply-driven issuance of Tether.
The most fascinating aspect of this alleged intervention is that Bitfinex did it in the open, and anyone could observe it if they were able to take their eyes off of Bitcoin's dazzling climb to never-before-seen heights.
In fact, one of the prominent voices in the industry that pointed out the fishy Tether issuance was that of Charlie Lee, creator of Litecoin. In a tweet dated November 30, 2017, he said "There's a fear going on that the recent price rise was helped by the printing of USDT (Tether) that is not backed by USD in a bank account. I urge @bitfinex and @Tether_to to perform a 3rd party audit to prove their reserves. Please do the right thing. Thanks."
Despite similar alarming inputs from other industry experts, the Tether show continued. As Griffin and Shams showed in their study, newly-issued Tether would appear directly in Bitfinex from where it would instantly ship to selected cryptocurrency exchanges that included:
The strangest thing about these transactions is that very few or almost no Tether tokens would return to Tether Ltd. to be redeemed for real USD.
The links with Poloniex and Bittrex
Griffin and Sham dug deep into the Bitfinex transactions while following the Tether trail. An interesting result of their study was the special connection with two other exchanges, Poloniex and Bittrex.
Their findings show that between February 2017 and January 2018, the Tether circulation increased by almost 9,000%. In token numbers, the USD-pegged coin exploded from $25 million to more than $2.8 billion units.
In December 2017 alone, Tether witnessed a 52.3% increase in its total supply after a massive issuance of 775 million tokens. Until February 2018, Bitfinex sent more than 2.99 billion Tether to Bittrex and Poloniex. In return, the two exchanges sent back only 1.89 billion Tether coins.
The Kraken connection
The two researchers at the University of Texas were not the only ones noticing something odd going on with the plethora of Tether tokens appearing suddenly on the market, and their subsequent, almost identical trail.
Bloomberg released a report titled Crypto Coin Tether Defies Logic on Kraken’s Market, Raising Red Flags on June 29, 2018. In it, investigation journalists showed that Tether issuance and price were not compatible with the cryptocurrency market economics of supply and demand. They chose to focus their attention on Tether’s activity on Kraken between May 1 and June 22, 2018.
The 56,000 trades concerning Tether that had taken place on Kraken during this period included small orders that managed to move the price as much as larger orders, and "oddly specific order sizes—many going out to five decimal points, with some repeating frequently.”
The transactions reminded of a form of market manipulation in which an investor simultaneously sells and buys the same financial assets to create misleading, artificial activity in the marketplace, which is also known as “wash trading.”
Two of the world’s most renowned economy experts, New York University Professor and principal at Global Economics Group Rosa Abrantes-Metz and former Federal Reserve Bank examiner Mark T. Williams agreed with Bloomberg and shared their opinions in the report.
Less than two days after the release of the Bloomberg report, Kraken published a blog post brazenly titled On Tether: Journalists Defy Logic, Raising Red Flags. In it, the Kraken writers went as far as to claim that the Bloomberg authors and their expert counselors failed to “comprehend basic market concepts.”
Kraken’s pleading was that Tether did not experience the same level of volatility as other cryptocurrencies thanks to its USD-pegged status.
Where are Tether's billion-worth USD reserves?
If the entire cryptocurrency community could demand just one thing from Tether for a clear and honest response, it would channel it through Cuba Gooding Jr.’s famous line from Jerry Maguire (1996): “Show me the money!”
Since its inception, Tether Limited claimed that it has the necessary funds of US dollars corresponding to the amount of Tether coins circulating on the market. They always make it quite clear that they can redeem any customer request of withdrawal upon demand.
However, that was not always proven true, as the case of entrepreneur Oguz Serdar shows it. In November 2017, he made a withdrawal request for $1 million that he had safeguarded in Tether for fear of a Bitcoin slump. Unfortunately, Tether refused to pay up citing “banking difficulties.”
Serdar let his anger known on Twitter, where he revealed that Tether would provide a limited list of exchanges where he could take out his money. The problem was that even the most advantageous rate on the list, which was from Kraken, would have had him dump 1 Tether for $0.3 in return.
The string of doubts regarding Tether's USD reserves continued, and journalist Jon Evans blatantly asked "Do we have any reason to believe those dollars actually exist?" in an article for TechCrunch from August 2018, titled "What the hell is the deal with Tether?”
Evans argued that, upon his research, he could not find a single purchase or redemption of newly-issued Tether between the end of 2017 and August 2018 that could be publicly verified. He also considered that Tether’s Transparency Report and their alleged connections with banks all over the world may offer a partly-reliable substitute for their failure to present an external audit report.
Tether’s Transparent External Audits that Do Not Exist
The U.S. Commodity Futures Trading Commission (CFTC) showed signs of looking into Tether towards the end of 2017 when it sent subpoenas to Tether, Bitfinex, and to Tether’s former auditor, Friedman LLP.
Tether replied that they would provide extensive and transparent external audits, but less than a month later the company said that it no longer had a relationship with their auditor. Instead, they delayed their hearing, and in June 2018, they published an attempt at a transparency audit on their website.
The document is a report by the law firm Freeh, Sporkin & Sullivan LLP (FSS) which appears to confirm that the issued tethers are fully backed by dollars. Instead of clearing the air, the report increased the suspicion regarding Tether’s alleged USD reserves.
Even the authors of the FSS report stated that "FSS is not an accounting firm and did not perform the above review and confirmations using Generally Accepted Accounting Principles." This fact is mentioned within the document, and it shows that while they audited Tether Limited, they did not do it using the instruments that would validate the report as an honest, transparent audit.
If Tether doesn’t want to reveal where its reserves are, we can only go on and ask the banks that the company flaunts around as its collaborators, if they know where the money is. The U.S. Federal regulators tried, but the answers did not surface that easily.
Tether’s short-term flings with the banks
If Tether was a real person, it would be that friend who can never hold a relationship for too long. In this case, its partners would have to be banking institutions, some of which may be just as flakey.
All jokes aside, Tether has reported links to several banks over the years. However, many of its connections have proven suspicious, to say the least. Unsurprisingly, these were its short-term flings that faded into obscurity.
After severing its ties to Wells Fargo, Tether refused to name the banks that store its precious, billion-worth reserves of USD. However, after receiving the CFTC subpoena in December 2017, the company named Noble Bank in Puerto Rico as the entity responsible for handling its USD transfers.
Noble Bank acted under the custody of the Bank of New York Mellon Corporation. Less than a year later, Noble Bank departed from its custodian and declared insolvency in October 2018. The event sparked public outcry as Tether owners could not redeem their money.
In the aftermath of the Noble Bank debacle, Tether and Bitfinex were quick to address any insolvency fears regarding their accounts. They went on to nominate a new banking link with the Bahamas-based Deltec Bank in November 2018.
According to an official announcement on their website, Tether had a $1.8 billion deposit in Deltec Bank. The blog also contained a letter that Tether had allegedly obtained from Deltec as a confirmation of the deposit. However, a spokesperson for Deltec refused to confirm or infirm the authenticity of the letter or of the connection between the bank and Tether Limited.
One of the most prestigious banks associated with Bitfinex and Tether is Dutch financial services company ING who confirmed that Bitfinex has an account with the bank in the Netherlands. However, very little is known about the nature of the connection between the two entities.
The ING representatives refused to give more details about the type of account that Bitfinex has with the bank or whether it represents a deposit for their Tether operations. While the bank does not engage in cryptocurrency transactions, it has no problem with serving “companies that are in the value chain of cryptocurrencies.”
Other banks and deposit institutions
To diminish the suspicion around Tether’s USD reserves, Bitfinex teamed up with at least six banks between 2017 and 2019. Among these institutions were:
The latter is a bank for Poland, and its connection with Bitfinex seemed like a shady one from the very beginning. Allegedly, the bank was storing nearly $814 million of Bitfinex money, but Wladyslaw Klazynski, the bank’s chief executive officer, wouldn’t confirm if any accounts have been opened by Bitfinex clients for Tether operations. That claim would return against them in 2019 when the Crypto Capital Scandal broke out.
All of these banks were used by Bitfinex as suggestions to direct Tether operators whenever they needed to deposit fiat funds.
The Crypto Capital Scandal
Crypto Capital used to be a fiat banking platform that enabled its users to deposit and withdraw fiat currency from any exchange that dealt with cryptocurrencies anywhere in the world. It started operating in 2013, and for a few years, it was one of the closest business partners of Bitfinex.
In 2017, after severing its ties with Wells Fargo, Bitfinex urged its clients to deposit funds and engage in fiat operations with Crypto Capital, and more specifically with the platform’s subsidiary in Poland, Crypto Sp. Z.O.O.
The CEO of both Crypto Capital and Crypto Sp. Z.O.O. was at the time Ivan Manuel Molina Lee, a citizen of Panama who may have acted as “filler” for many Panama-based companies in the past.
In April 2018, Polish authorities identified several ties between Colombian drug cartels and Crypto Sp. Z.O.O. As a result of their investigation, they seized $371 million from an account held by Crypto Sp. Z.O.O. with Bank Spółdzielczy w Skierniewicach in Poland.
The news did not seem to affect Bitfinex too much, and the exchange denied any connection with the accounts that were subject to the investigation.
In the meantime, Bitfinex gained some credibility by partnering with ING. It also increased its banking connections and directed customers to deposit fiat funds in accounts held by Swiss-based Global Trade Solutions via Portuguese bank Caixa Geral de Depositos.
Unknown to some of the clients at that moment, Global Trade Solutions was a subsidiary of Crypto Capital, which also facilitated other fiat transactions for Bitfinex through Citibank, HSBC, and Enterprise Bank & Trust.
Out of the blue, Crypto Capital dissolved and liquidated itself in June 2018. Global Trade Solutions overtook its entire set of operations almost immediately.
Trouble in Paradise
In August 2018, Bitfinex tried to access its funds that were in the custody of Crypto Capital. The latter refused their demand citing problems with the authorities in Poland and Portugal who were allegedly “holding” approximately $500 million of their capital.
The desperation of the exchange to retrieve funds from Crypto Capital transpires from the chat logs documenting communications between Bitfinex executive “Merlin” and Crypto Capital’s “Oz” that were provided to the New York State Office of the Attorney General for its investigations.
Finally, in October 2018, in the space of just five days, two of the top Crypto Capital executives were arrested. One was Ivan Manuel Molina Lee who was detained by Polish authorities under accusations of money laundering.
On the other side of the world, Oz Yosef, another executive of Crypto Capital, was indicted by the United States for conspiracy to commit bank fraud and to operate an unlicensed money transfer service.
Almost immediately after the events, Stuart Hoegner, general counsel to Bitfinex, issued a statement responding to the arrests and rejecting any accusations that would proceed from Crypto Capital’s ties with narcotics cartels or money laundering operations.
Bitfinex also motivated their inability to process customer withdrawals for redeemable Tether as a result of Crypto Capital withholding approximately $880 million worth of its funds. The allegation results from the subpoena that the exchange filed with a California court to the former vice president of TCA Bancorp, Rondell Clyde Monroe, who in their view held essential information about the funds.
When it fell, Crypto Capital took with it more than Bitfinex’s money and reputation. It also affected some of its other customers like Coinapult and the QuadrigaCX exchange, with the latter losing access to $190 million of its customers’ funds and being forced to shut down.
Businessman Reggie Fowler's name was also dragged into the case for his connections with Crypto Capital. Some sources point to his involvement in the disappearance of $850 million worth of client and corporate cash through the Panama-based platform.
Hacks that question Tether’s decentralization
In August 2016, Bitfinex reported a loss of up to $65 million in an attack. The exchange later stated that the users were to share 36% of Bitcoin losses after the hack that deprived them of 119,756 Bitcoins. The attack was just one of many blows that Bitfinex registered, and which included a 2015 hack of around 1,500 BTC.
These examples of poor security for Bitfinex spread to its sibling Tether, who reported a record hack of almost $31 million in November 2017. Apparently, $30,950,010 worth of Tether tokens were displaced from one of the company's cores "treasury wallets" and directed to an unauthorized Bitcoin address on 19 November.
Besides the substantial amount of stolen tokens, the hack did not seem too controversial at first. Cryptocurrencies, digital wallets, and exchanges are under attack all the time.
However, what raised many eyebrows was Tether’s statement immediately after the incident, which said that Tether would “flag” USDT in the hackers’ possession and prevent them from converting to USD.
Additionally, they would release a new version of the Omni Core software, which every client must upgrade to prevent the spending of the stolen funds, and which was essentially a hardfork of the Omni layer.
Later, Tether deleted the post and announced that they had “quarantined” the stolen funds to prevent them from being transacted on the market.
Several voices in the industry started questioning Tether’s claim of decentralization as it was obvious that the company could control the ledger, freeze funds, and reverse transactions. The “stolen” funds were still frozen at the time of this writing.
The New York vs. Bitfinex & Tether Lawsuit
In April 2019, Bitfinex found themselves on the wrong side of a suit filed by New York Attorney General (NYAG) Letitia James.
The U.S. prosecutors accuse Bitfinex of illegally moving Tether reserves to cover up a loss of $850 million. The lawsuit also states that when the exchange was unable to seal a solid relationship with a transparent banking institution, it deposited over $1 billion with a Panama-based payment processor, which was no other than Crypto Capital.
Allegedly, the funds in the cause were a mix of client deposits and corporate capital. However, there was never a written agreement between Bitfinex and Crypto Capital that would validate a legal transfer. Both Bitfinex and Tether are accused that they facilitated Crypto Capital into fleeing with the money without informing the investors of the loss.
James went on to obtain a court order against iFinex Inc. through which she ordered them to cease violating New York law and defrauding New York residents. Under the court order, iFinex directors, officers, principals, agents, employees, contractors, assignees, or any other affiliated individuals were to cease any claim or use of Tether USD reserves.
The filing did not impose a cease-and-desist order on Bitfinex. On the contrary, it allowed the exchange to continue its operations pending completion of the investigation.
Bitfinex responded quickly to the allegations in a post on their website, stating that “The New York Attorney General’s court filings were written in bad faith and are riddled with false assertions, including as to a purported $850 million “loss” at Crypto Capital. On the contrary, we have been informed that these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded. We are and have been actively working to exercise our rights and remedies and get those funds released.”
The plot thickens
In May 2019, iFinex went on the counterattack by filing a motion to dismiss the investigation, arguing that the authorities lack subject matter and personal jurisdiction.
The parent company of Bitfinex and Tether considers that since it is not based in The State of New York, it is not liable before the NY authorities. The Supreme Court denied iFinex’s motion, but the company went on to appeal it.
After more than a year’s wait, Bitfinex lost the appeal before the Appellate Divisions of the Supreme Court of the State of New York and must face trial in the case of the lost $850 million.
The Supreme Court ruling was welcomed as a decisive victory by NY Attorney General Letitia James who criticized the efforts of Bitfinex and Tether to halt her office’s investigation back in December 2019.
Back then, the defendants’ lawyers claimed that NYAG does not have the authority to investigate the companies because "tethers are not securities or commodities." However, in the latest ruling, the Supreme Court rejected the argument pointing to the Martin Act’s comparatively wide definition of those terms.
Losing the appeal leaves Bitfinex and Tether in hot water. Some of the immediate effects of the ruling also include:
- iFinex must now provide the Attorney General with all the requested documents
- The $900 million lines of credit between Bitfinex and Tether has been frozen
- The company’s executives must now testify before the NY court under oath
The $1 Trillion Lawsuit
Just when it seemed that things cannot get any worse for Bitfinex and Tether, they became potentially catastrophic.
In October 2019, the exchange and the crypto company were hit with a massive class-action lawsuit in New York. The two entities are accused of engaging in deceptive, anti-competitive, and market-manipulating practices, resulting in economic damages for the plaintiffs.
In this case, the plaintiffs are David Leibowitz, Benjamin Leibowitz, Jason Leibowitz, Aaron Leibowitz, and Pinchas Goldshtein. Besides Bitfinex and Tether, the other defendants include Poloniex, Digfinex, and Crypto Capital.
The filing states that “the crimes committed by Tether, Bitfinex, Crypto Capital, and their executives include Bank Fraud, Money Laundering; Monetary Transactions Derived From Specified Unlawful Activities, Operating an Unlicensed Money Transmitting Business, and Wire Fraud. Their liability to the putative class likely surpasses $1.4 trillion U.S. dollars.”
Bitfinex replied in another post on their website, saying that the lawsuit was baseless and that it was created with the sole purpose of undermining the cryptocurrency community.
The lawsuit was updated in June 2020, and it refers to USDT as a "fraudulently issued crypto-asset" while claiming that the iFinex subsidiaries "made massive, carefully timed purchases of crypto commodities to signal to the market that there was enormous demand and thus cause the price of those commodities to spike."
Further legal controversies
These are not the only legal troubles that iFinex and its subsidiaries are facing. An additional class-action lawsuit in which two crypto traders accused Bitfinex and Tether to artificially fuel the Bitcoin bull run of 2017 was launched on 22 November 2019 in Washington.
The two investors, Eric Young and Adam Kurtz are basing their claims on the study conducted by Professor John Griffin and Amin Shams.
Bitfinex immediately categorized it as a “mercenary and baseless complaint.” In their defense, the exchange accused greedy lawyers who were trying to profit from all the turmoil generated by the New York cases around it and its sister company, Tether.
Bitfinex went on to state “To be clear, there will be no nuisance settlements or settlements of any kind reached. Instead, all claims raised across both actions will be vigorously contested and ultimately disposed of in due course.”
On January 7, 2020, the two crypto traders suddenly revoked their lawsuit. What seemed to be the result of a silent agreement between the parts was soon disproved, as the two plaintiffs chose to merge their suit with two other class suits against Bitfinex, Tether, and co. in New York.
Now, Bitfinex and Tether are facing a difficult legal battle in the State of New York against the merger of three class-action lawsuits, David Leibowitz et al, Eric Young et al, and Bryan Faubus et al.
Tether’s Competitors - Other Stablecoin Alternatives
With so many controversies surrounding Tether, one would wonder why doesn’t another stablecoin step up and challenge its dominance.
Well, they already have. Tether is the most popular stablecoin in the cryptocurrency market, but it doesn't lack the competition. Some of the most renowned alternatives to Tether include:
- Gemini Dollar
Let’s break them down and see how much of a challenge they pose to Tether’s supremacy!
Gemini Dollar (GUSD) is a USD-pegged crypto that has been fully approved by the U.S. regulators, who did not waste the opportunity to give it as an example of transparency and regulatory compliance. It is the first regulated stable coin that was built on the ERC-20 Ethereum standard.
The coin was launched in October 2016 by Cameron and Tyler Winklevoss, who are the founders of Gemini Trust Co., one of the United State’s largest cryptocurrency exchanges.
At the moment, there are 11,854,823 GUSD, and Gemini claims that each of these units is backed by USD funds held at the State Street Bank and Trust Company.
With a market cap of nearly $12 million at the time of this writing, GUSD is very far behind Tether's massive market capitalization that borders $10 billion. Furthermore, Gemini's intense regulation takes it closer to the definition of a centralized currency than free-ruling crypto.
Another stablecoin that appeared on the cryptocurrency market in late 2018 is Paxos Standard (PAX). Similar to the Gemini Dollar, Paxos is pegged to the USD and regulated by the New York State Department of Financial Services (NYDFS).
PAX is an ERC-20 token issued on Ethereum blockchain that promises instant worldwide transactions and decentralized accountability. According to their website, customer funds are held in segregated accounts at FDIC-insured, U.S.-domiciled banks.
The Paxos team is led by co-founder and CEO Charles Cascarilla and consists of professional experts in cryptocurrency, accounting, cryptography, and other fields.
The current market capitalization of the Paxos Standard is $244,477,784. At the time of this writing, there were no less than 244,951,954 PAX in circulation out of a total supply of 249,952,065 PAX.
One of Tether’s most serious competitors is TrueUSD (TUSD), which is a stable ERC-20 token pegged to the US Dollar. It was launched in January 2018 by Trust Token, a San Francisco-based startup.
TUSD advocates for full transparency for all stablecoins, which is why it has no access and is not involved in the transfer of deposited funds. All the transactions of TrueUSD are monitored and handled by third-party trust companies. The assets that make the subject of each transaction are backed by US dollars, held in escrow accounts, and accessible by trusted third-party fiduciary partners.
According to its website, TrueUSD accepts "full collateral, regular auditing, and legal protections." The company also abides by "a code of ethics demonstrating our commitment to always being fully backed, redeemable, stable, and compliant."
Purchasing TUSD is not as easy as it seems. If you want to add TrueUSD to your crypto portfolio, you will have to provide your name, tax ID, address, date of birth, government ID, and address verification per the applicable BSA/AML regulations.
As of March 2020, Trust Token holds over $138 million in escrow for TrueUSD. At the time of this writing, TUSD had a market capitalization of $239,972,130, and a circulating supply of 239,847,530 units.
How safe is Tether now?
With so many controversies surrounding its name, and with an expanding market for stablecoins biting at its heels, it wouldn’t be unreasonable to ask:
- How safe is Tether at the moment?
- Is it worthwhile investing in a stablecoin that cannot hold a banking relationship to save its life?
- Can you hold Tether in your wallet knowing very well that the company has repeatedly failed to prove that it has reserves backing all the USDT in circulation?
The answer to these alarming questions is a surprising, but categorical YES!
Besides the obvious reasons why stablecoins have long-term benefits over other cryptos (indistinct volatility, low fees, etc.), investing in Tether has potentially huge advantages in 2020 and beyond, such as:
- Increasing market capitalization
- A high number of transactions
- Multi-blockchain asset
- Potential future on the Lightning Network
- Peaceful coexistence with CBDCs
Let’s break them down!
Increasing market cap
At the time of this writing, Tether has become the 3rd-largest cryptocurrency by market capitalization. It has surpassed Ripple’s XRP as the historical indweller of the last place on the podium, and just behind industry giants Bitcoin and Ethereum.
The current market cap of Tether is $10,004,960,260 USD. There are 9,998,221,723 USDT in circulation out of a total supply of 10,281,372,504 USDT.
In the first six months of 2020, Tether has printed over $5 billion USDT. While speaking as a guest on the “On The Brink With Castle Island” podcast, Tether CTO, Paolo Ardoino said that the reason behind the massive amount of USDT flooding the market is the desperate craving that exchanges have for cash.
Ardoino further elaborated on the topic saying that the mid-March market crash, partially induced by the COVID-19 outbreak, has instilled fear into exchanges and OTC desks, which started buying Tether heavily. From his point of view, if the trend continues, Tether may soon reach a market cap of $200 billion.
A high number of transactions
According to a recent tweet from Ardoino, Tether is the “most used product in the entire crypto ecosystem. It may sound like a bold statement, but the numbers are on the CTO’s side this time as well:
- Tether is one of the biggest gas consumers on Ethereum with over $6 billion USDT existing as an ERC-20 token
- Tether also “consumes” a large slice of the TRON chain where it reached figures as high as $2.8 billion USDT
- Tether is largely used by most arbitrageurs on centralized exchanges, and no Ethereum (ETH)-based Tether (USDT) tokens have ever been burned, according to this report
Ardoino also believes that a lot of the fuel behind Tether’s spectacular surge throughout 2020 is the company’s choice to invest in startups and scaling solutions that share its “values and vision,” which increase its visibility and credibility on the market.
Tether's expansion across the cryptocurrency market has been nothing short of remarkable. The stablecoin has tested no fewer than eight different protocols to date: Omni Layer, Ethereum, Litecoin, TRON, EOS, Algorand, Liquid Network, and Bitcoin Cash. All of them currently support Tether, except Litecoin.
In June 2020, Tether integrated with the OMG Network, a plasma-based Ethereum sidechain to reduce the congestion on Ethereum. Through this invasion-like strategy, the popular stablecoin aims to make itself available to as many blockchain communities in the crypto industry as possible.
Even if Ethereum will most likely continue to hold most of the USDT in circulation, Tether will strengthen its position as a multi-blockchain asset that ensures its accessibility, increase in use, and overall acceptance.
Potential future on the lightning network
Tether has set its sights for expansion on the Lightning Network for a long time. The confirmation for a likely future of USDT on the LN came in July 2020. In a short tweet, the company’s CTO, Paolo Ardoino stated that Tether is funding RGB, which is an L2 protocol for issuing assets on the LN.
According to its GitHub repository, the RGB project is “a completely free, open-source, non-profit and community-oriented effort, promoted by the BHB Network and aimed at the development of standards and best practices to issue, transmit and store Bitcoin-based non-bitcoin assets.”
The project goes in line with Bitfinex’s plans to contribute to the development of the Lightning Network, which the company also made public back in 2017.
Peaceful coexistence with CBDCs
Despite its numerous controversies regarding banking relationships, Tether has managed to keep itself free of governmental control. It may look like a disadvantage in its rivalry with other stablecoins, but it may prove to be huge leverage in the upcoming competition with Central Bank Digital Currencies (CBDCs).
Some of the most ambitious CBDCs, like China's Digital Yuan, aim to dethrone the U.S. Dollar, so they pay even less attention to its existing pegged cryptos like Tether. Still, according to industry experts, China’s digital currency will have a hard time displacing Tether in Asia, where the crypto’s borderless nature is especially useful for the local and regional traders.
While the surge of CBDCs is not a minor threat, Tether does not consider it as an end-game movement. The CTO of Bitfinex and Tether, Paolo Ardoino stated that USDT and Central Bank Digital Currencies will be able to live in peaceful coexistence.
In an interview for Coin Rivet, Ardoino said “Of course you could see governments issue digital versions of their native currencies like Euro or Dollar, it is obvious that with the snap of a figure they can create a market cap that is larger than Tether. I believe that is fine and I don’t believe it will represent an issue for Tether. It will be a great demonstration that Tether was right and that people need them.”[...]
[continued]"I think Tether will remain more agile in the sense that we can keep our hedge on technical innovation. It isn't just a stablecoin, it's using DeFi, it's looking at being launched on the Lightning Network. So although compared to a national stablecoin we will hardly be able to compete in terms of market capitalization, we will be able to compete in more use cases and faster adoption to the evolution of technology."
The Bottom Line
It’s not easy, and probably unwise to stamp a conclusion on Tether right now. The popular stablecoin has a Sisyphic task in dismantling all the controversies around its name and that of its sibling, Bitfinex. Some of the current lawsuits against both companies seem like lost causes for the defendants even before the first hearing takes place.
Still, Tether's most recent, exponential growth, far-reaching expansion on the market, and increased support from traders may be enough to shield its reputation and to fuel its continuation regardless of how all present and future trials end.
Even Paolo Ardoino confirmed on the "On The Brink With Castle Island" that Tether will have to get the backing of a tier-one bank if the stablecoin confirms its wide margins for scalability and goes above $100 billion in market capitalization.
So, despite all the dark clouds covering Tether's sky right now, there may still be a few silver linings shining through. Tether could suffer a huge blow from its encounters with the U.S. law, especially if it's a contribution to the 2017 Bitcoin Bubble Crash is proven. But, Tether could also be spearheading the stablecoin revolution that could reach a $1 trillion market cap by 2025, according to some optimistic cryptocurrency experts.
You might have heard about Web 3.0 and how it will revolutionize the internet. You might have scrolled over an infographic explaining how Web 3.0 works and its mind-blowing innovations. At least, you should have seen a short video explaining how Web 3.0 will change the world as we know it, forever.
If you haven’t done any of the above, and you don’t know what Web 3.0 is, you are missing out.
At this point, it is as if you didn't know what Google was in 1999, what Facebook was in 2004, or what Bitcoin was in 2010.
If you want to get a better grasp of how Web 3.0 will impact our future, try this short exercise:
Imagine how your life would have been like today if you had bought Google stocks during the early days of the company when people were still using Yahoo! and AskJeeves for search engines. Or, how about if you had bought Bitcoins when a token was trading for merely a few US dollars?
Similar to all these revolutionary landmarks in the internet’s timeline, Web 3.0 is a cornerstone that you have to be aware of from the very beginning. Otherwise, you will miss out on remarkable opportunities in the future.
With Web 3.0, the difference is that we are not talking about search engines, social media platforms, or cryptocurrencies. We are talking about an omnipresent, trustless, peer-to-peer network that will include all of these features along with technological innovations that we cannot even fathom at the moment.
Welcome to the Ultimate Guide on Web 3.0!
Before we start peeking into what the future may have in hold for us, let’s take a look back over our shoulder to the early dawn of the internet.
Web 1.0 - where it all began
For today's younger generations it is difficult to imagine the internet without Google, Facebook, or Instagram Stories. However, a Classical Age of the Internet existed, and it lasted from the mid-90s to the early 2000s.
Back then, people would refer to the internet by its original monikers "The World Wide Web" or "the Net." Users could not yet share photos of their lunch or blog about flat Earth conspiracies. Instead, most of the content was published by businesses, newspapers, and institutions.
It was the Web 1.0 era, as we later called it, and instead of Google, people used AltaVista, Netscape, or simply "asked Jeeves” for funny cat pictures. Most websites were in the “read-only” format since users could not upload content or leave comments.
The concept of video streaming did not exist. People would cram up in AOL chat rooms to “talk online.” It took a full day to download a single song. Hooking up to the internet through dial-up meant that you had to unplug your landline phone. And no, mobile phones didn’t exist either. You had to talk to others in person and without emojis. It was dreadful, kids, I tell you!
Web 2.0 - when sharing became caring, and also privacy breaching
In the early 2000s, the internet was at a make-it-or-break-it point in its history. It could remain as a one-way, boring library or choose to become an epic invention that would connect people from every corner of the world. Fortunately, it picked the second path.
With the advent of social media, people could finally have an immersive experience on “the Net.” Now, you could upload and stream video content on YouTube, and Google became a go-to resource for anything. Yes, kids, ANYTHING!
As the first decade of the 3rd millennium was coming to an end, we had already forgotten about chirping dial-up connections. "Sharing" became a global trend. Online gaming allowed for multiplayer interactions between worldwide users. Facebook helped you stalk your crush, and Instagram enabled you to post funny pictures of your cat, but from your smartphone. It was the bee's knees, kids!
So, do we really need a Web 3.0?
Short answer: Yes, ASAP!
Slightly longer answer: Yes, but we need more than a new way of navigating the Net, which Web 2.0 seems to repackage regularly.
There is an impending demand for decentralizing the internet into a distributed system of computers communicating with each other directly, safely and equally responsible, just like its inventor, Tim Berners-Lee intended it to be.
In the mid-2010s, we had the unpleasant surprise to find out that while we were mindlessly sharing content on the Internet, big businesses and political entities used social media to trade our personal data for big money. Before the Cambridge Analytica scandal even hit the news, a gigantic industry had already formed around the collection and trading of users’ personal information.
Internet users realized that they had traded their valuable information in exchange for easy access to a behemoth network of social media channels, online retailers, and entertainment services.
Giant corporations like Google, Facebook, Twitter, and Amazon can now use our identification data, our engine searches, browsing habits and shopping information to influence our behavior both online and offline. It has become a real-life episode of Black Mirror, kids, I tell you!
Web 3.0 in a Nutshell
The degeneration of the Web 2.0 democracy has ushered in the Web 3.0 revolution.
Web 3.0 is the new step in internet evolution that returns the web’s control pad into the hands of the users. The difference is made by the new technologies like blockchain, which can enable the net’s functioning as a peer-to-peer (P2P), trustless system.
The advances made in consensus protocols thanks mainly to Bitcoin, Ethereum, and other blockchain-based applications have shown that users can engage in P2P transactions, develop global scale projects and build entire industries while keeping complete control of individual privacy.
In web 3.0, big data companies and giant corporations should no longer be able to trade personal data or monopolize power and information sources.
Sounds Exciting! How will Web 3.0 work?
If you have made a recent online purchase, you must have received suggestions about similar products to the ones you paid for, which other consumers also bought. What happens in this situation is that the website is learning from consumer behavior and then making suggestions back to the users.
The transition to Web 3.0 will incorporate similar learning mechanisms for websites and applications but in a more refined manner. Simply put, the internet will understand from your online behavior who you are, and it will reward you with content suggestions that best apply to your interests, searches, and activities.
The large-scale use of trustless P2P frameworks will be one of the main features that will make the difference between Web 3.0 and its older, less-secure sibling, Web 2.0. This aspect will expand to include almost every use we have for the internet at the moment. For example:
Instead of using Google Drive or Dropbox to store, distribute, and share files, we may use services like Storj, Siacoin, Filecoin, or IPFS.
We may use platforms like Experty and Status instead of communicating through Whatsapp, Zoom, or Skype.
Facebook and Twitter seem eternal right now, but not very long into the future we may be using new forms of social media like Steemit or Akasha.
Even Google Chrome may lose its global superiority to browsers like Brave, which has a higher degree of security when it comes to storing cookies and allowing ads.
All of these future alternatives to present-day services will enhance the control that users have over their data. They will also increase security protocols, anonymity, and prevent giant IT corporations from having complete control over the availability of particular information or services.
The Benefits and Properties of Web 3.0
To better understand how Web 3.0 will work, and how you will benefit from it, here is a list of its ground-breaking properties!
Web 3.0 will be decentralized
On Web 3.0 there won't be any central authorities that control the internet. Governments or other political entities will not have the ability to switch off access to the World Wide Web. The model for this network is the Ethereum blockchain, which functions as a trustless system where user data benefits from unbreakable encryption.
Once Web 3.0 becomes reality, large corporations like Amazon, Facebook, and Google will have no use for their factory-size servers where they store the users' data. Instead, internet users will have complete control over their information, including financial details, login details, and even their preferences for funny cat pictures.
One of the most important elements of Web 3.0 will be the semantic metadata. This mechanism will enable the web to understand not only symbols, keywords, and texts, but also their meaning.
For example, the network will recognize the traditional “smiley” emoji, which is formed by two dots followed by an arc, but it will also understand that it stands for a human smile, a sign of happiness and approval.
This is just a minor example, but through semantic data, the web will facilitate communication, transactions, and information exchange easily between entities. The concept actually goes back to Berners-Lee's original idea of the internet. He imagined the future as a bureaucracy-free world where intelligent machines automatically do most of the time-consuming tasks and chores from people's lives.
Artificial Intelligence (AI) is not a concept that will surface on Web 3.0 for the first time. We are already aware of its presence in Web 2.0 applications.
However, on Web 3.0, AI will have such a quick learning mechanism that denying its existence will be impossible. Artificial intelligence will be able to differentiate quickly between good and bad data, between real people and bots, and most importantly, it will separate fake news from real reports almost instantly.
On Web 3.0, all the data will be decentralized and spread across the network. It means that internet providers will no longer be able to share the users’ data with the Governments of the countries in which they activate.
Hackers will have to shut the entire network down to perform an attack. The users’ data will be encrypted and protected by high-security protocols. Again, the concept has its roots in cryptocurrency blockchains where traders can engage in financial transactions while having complete control over their data.
At the moment, most apps are OS-pegged. Some applications work only on Android, while others only function on Apple devices. The same goes for Microsoft Windows programs, MAC software, and the list goes on.
On Web 3.0, applications will be agnostic when it comes to devices and operating systems. The same app should work just as well on an iPhone, on a smart TV as it would do on any device that has smart sensors, including automobile computers.
Right now, the internet seems like a fairly free and accessible commodity. However, access to Web 2.0 is limited in various places on the planet for political reasons and other criteria that regard income, gender, and even ethnicity.
The Web 3.0 will be available for everyone, everywhere, thanks to the permissionless blockchains that the network will use. Cross-border transactions and transfers of wealth will be possible regardless of the geographical positioning of the users involved in the trade.
On Web 3.0, the data will be stored on multiple distributed nodes. This system will guarantee that there will always be enough backup nodes to supply the chain and to prevent server freezing or failure. Simply put, the internet will never be down as a result of catastrophic server destruction.
Virtual 3D Identities
Web 3.0 will open the door to new ways of communication and virtual interaction. Chatting, emailing and video calls may still be available. However, users may also have access to 3D identities that represent them on the web. Similar to online game characters, these virtual avatars will be our representatives in business transactions, work collaborations, and even on dating apps.
When Web 1.0 was released, you could only access the internet from remote locations like your home computer or on a machine at an internet cafe.
With Web 2.0, the internet became available on smartphones, tablets, and other smart, portable devices.
Once it will become available, Web 3.0 will be everywhere. Its implementation will invade all aspects of your daily life. It will be available on many more devices than it is today, and it will become what it was intended in the first place: an invisible web of information, communication protocols, and transaction mechanisms that will co-exist with us everywhere on the planet.
What are the Challenges of Web 3.0 Development
Like every new technology, Web 3.0 is not as easy to implement as it stands, or at least in the beginning. Some of the challenges and downsides of Web 3.0 include:
Web 3.0 sounds like a revolutionary step in technological evolution. Its release will most probably mark a “before and after” mark in our relationship with the internet.
However, we must not forget that people with ill intentions will still be around. Malevolent users may flood the web with intentionally false or misleading information to create the perfect ground for online crimes. Cryptography and artificial intelligence learning mechanisms will have to evolve and update rapidly to diminish the number of hack attacks.
The immensity of Web 2.0
The promise of a fully-semantic web may take a while before it becomes reality. At the moment, Web 2.0 is home to more than 1.5 billion websites. It might take a long period before the AI rummages through all this information and connects its meaning with user intentions, interactions, and behaviors.
Lastly, Web 3.0 will not be an overnight sensation for everyone. More seasoned internet users will remember that Web 1.0 took almost a decade before it reached global popularity. Web 2.0 came along bringing smart technology and social media, but there were still users trying to figure out how chat rooms and email worked.
Many companies will take their time before making the transition from a centralized network to a trustless chain. Also, many devices will become obsolete, but their users will not afford to make the switch to Web 3.0 right away. So, Web 2.0 and Web 3.0 will co-exist for a while.
Conclusion - When will Web 3.0 be released?
Just as Web 2.0 took over from Web 1.0 through a series of interconnected innovations, so will Web 3.0 take the reins of the internet in a gradual process.
There won’t be an exact release date for the new evolutionary step in internet technology. That transformation has already started with the advent of Bitcoin and blockchain technology, trustless P2P networks, DApps, AI technology, and the list can go on. Web 3.0 is a revolution in the making!
If you’ve ever wondered what airdrops are and how you can get hold of some free tokens, you’ve come to the right place!
Today, we take a closer look at how companies choose to spend their resources by giving away digital assets. Why do they do it, and how can you avoid airdrop scams? Let’s find out!
What is a Cryptocurrency Airdrop?
The term "airdrop" originates from aviation. Airdropping is the practice through which airplanes drop supplies to an isolated community. For example, if a city has been devastated by a flood or a hurricane, and terrestrial access is blocked, the authorities will drop food, water, and other goods to the stranded people inside from the air.
In cryptocurrency, an airdrop is a marketing practice through which companies send free coins or tokens to wallet addresses to increase the popularity of a specific digital asset.
Why Companies Do Cryptocurrency Airdrops
So far, the concept of receiving free tokens in your wallet seems fascinating. But the question remains. Why would companies airdrop cryptocurrency free of charge? It couldn’t be because of their philanthropic nature.
In fact, there are several reasons for which companies airdrop free tokens, such as:
- Increasing popularity
- Foraying the market
- Gathering funds
- Rewarding users
- Enhancing token circulation
- Hard Forks
Let’s break down each of them to better understand the mechanism behind cryptocurrency airdrops!
- Increasing popularity
Until recently, most companies would use Initial Coin Offerings (ICOs) to raise awareness over cryptocurrencies. The ICO was their favorite brand-boosting tool for soon-to-be-released tokens. However, in 2019, ICOs raised a little over $118 million, which was 58 times less than they managed to attract in 2018.
The forecast for ICOs in 2020 does not look good either. So, airdropping free tokens seems to be a more effective marketing weapon for increasing a crypto’s popularity.
Also, planning and running an ICO is much more time-consuming than simply sending a few free tokens to potentially interested investors.
- Foraying the market
Cryptocurrency enthusiasts that wish to become eligible for airdrops have to share some of their information with the generous company at the other end of the donation. Most of this data is harmless for your privacy but priceless for their marketing department. It usually includes one or more of the following details:
- Your email address
- Your approval to join the company’s Telegram group
- Your approval to follow the company on Twitter
- Your Ethereum address
The issuing company can use this information to create a virtual profile of their potential investor. They may also use it to understand buyer behavior and preferences to tweak their marketing strategy accordingly.
- Gathering Funds
Airdrops can provide up-and-coming companies with precious financial support even if they lack investors.
Let's take the hypothetical case of a company creating a DApp on the Ethereum blockchain. Their application uses XYZ tokens, each valued at $0.10. The complete issuance is 100 million tokens, so the total market cap will value $10 million.
If the company would airdrop 20 million tokens, it would lose $2 million of its capital. However, the publicity that the airdrops would bring through social media and other cryptocurrency channels should increase the value of the XYZ token on the market. Even if it increases by only $0.04, the total value of your tokens will also rise to (0.04 * 80) = $11.2 million. So, the company would enjoy a $1.2 million profit without making a single sale.
- Rewarding Users
Most cryptocurrency investors are on a continuous hunt for the “next Bitcoin,” so they tend to exchange the digital assets in their portfolio frequently.
Companies can also use airdrops to inspire or strengthen loyalty in their users. They can give away free tokens to reward those investors that keep that specific crypto in their wallet the longest. This way, the owners have the necessary motivation to buy more of those tokens and hold onto them.
- Enhancing Token Circulation
A whale takeover is one of the biggest fears of ICO-running companies. Whales are rich investors that buy a substantial amount of the tokens, leaving very few available for the users that have limited buying power.
Whale takeovers result in the dividing of most of the tokens between a handful of owners. While the practice is not illegal, it takes away the “decentralized” attribute from the cryptocurrency.
To avoid whales from invading an ICO, companies can enhance token circulation through airdrops. This way, they can maintain a certain level of control over the distribution at an early phase of the release.
- Hard Forks
A hard fork is the update of a blockchain that makes it incompatible for old users who do not follow the change. For example, if a chain goes through a hard fork, the newly-issued tokens will not be available to users who remain on the old chain. Also, the old tokens will not be compatible with the new version of the chain.
Companies may use the airdrop method to send the new tokens freely to the users in the event of a hard fork.
How to Benefit from Airdrops
If you follow the cryptocurrency market and you connect to the social media channels that link to it, you will notice that airdrop opportunities appear all the time. To benefit from airdropping free tokens, you must have 3 prerequisites:
- Own a cryptocurrency wallet
- Have the base tokens
- Stay alert
Let’s take a closer look at these essential conditions for receiving cryptocurrency airdrops!
- Own a Cryptocurrency Wallet
The first condition is straightforward. If you want to receive free digital assets, you better have a digital wallet to store them. Unlike real-world wallets, a cryptocurrency wallet only stores the private keys that give you access to your virtual bounty.
Here are a few examples of highly-secure digital wallets where you can receive free tokens:
- Have the Base Tokens
Most of the new cryptocurrencies available on the market today are built on top of one of these blockchains:
The corresponding token for each of these chains is also known as a base token, and they are
Companies send free tokens to users according to the number of base tokens that they have. So, if you want to be eligible for an airdrop, you must ensure that you already have the base token that corresponds to the free token beforehand.
- Stay alert
If you already have a digital wallet and at least one base coin in it, all you need to do now is to stay alert and constantly on the lookout for airdrop offers.
- Follow social media accounts from relevant companies and experts from the industry
- Join Telegram groups that deal with airdrops news
- Follow cryptocurrency websites
Subscribe to the relevant and trustworthy channels from these categories and you may have a good chance at being one of the first in line to receive an airdrop.
How Many Types of Airdrops Are There?
You may be eligible for receiving free tokens, but to apply for them, you may have to go an extra step depending on the type of cryptocurrency airdrop that a company makes available.
Here are the most common types of airdrops that you may encounter:
- Standard Airdrop
- Bounty Airdrop
- Holder Airdrop
- Hardfork Airdrop
- Exclusive Airdrop
You can try your hand at most of them before you find the ones that best suit your investment strategy in the cryptocurrency market. Here is a short breakdown of each of them:
- Standard Airdrop
This one is the typical airdrop for which you need the minimal prerequisites. Companies usually ask for your name and email, and then all you have to do is wait for the free tokens to land in your wallet.
- Bounty Airdrop
In this case, you may have to sweat a bit more to get your hands on the free cryptos. A company may airdrop you some tokens if you advertise their project on your social media channels. Generally, a single tweet will do.
- Holder Airdrop
To qualify for this type of airdrop, you must already have a particular token in your wallet. So, if a company decides to give away free EOS tokens, your wallet should already contain a few EOS beforehand.
- Hardfork Airdrop
In this scenario, if you are the holder of a coin going through a hard fork, you will be eligible for airdrops of the new tokens as well.
- Exclusive Airdrop
This type of airdrop is rare and mostly reserved for loyal/VIP members of a community or a project. As the name suggests, you will be in a select company of receivers if a company decides to reward your allegiance with free tokens.
How to Avoid Airdrop Scams
Receiving free tokens through airdrops feels great! However, the thrill of a workless gain comes at a cost, which you may have to pay sooner or later. If you do it wisely, most of the time, the price consists of sharing some of your data for marketing surveys, adhering to a social media advertising campaign, or mere loyalty.
The biggest danger of applying for free token giveaways is the abundance of cryptocurrency airdrop scams out there. Some of the most common ones include:
- Dump Airdrops
- Private Key Scams
- Phishing Scams
- Bait and Switch Scams
Where there is money to invest, there is always room for people to take advantage of the most gullible investors that show up, so let’s take a closer look at these airdrop scams and how to avoid them!
With the expansion of the cryptocurrency market, the cases of dump airdrop scams have increased significantly. The process is simple to understand for seasoned investors but almost unnoticeable to entry-level crypto buyers.
Generally, a dump airdrop scam starts with a company generating massive hype on social media about a certain token. They also send a substantial amount of tokens freely to users.
As the interest in it grows the price of the token will grow. The users who have received the free tokens start trading them on exchanges. At that point, the developing company dumps all their tokens and abandons the project. Simply put, they take all the investors’ money and disappear with it while the token owners are left behind to trade a value-less asset.
To avoid dump airdrops, you must follow these simple steps:
- Conduct thorough research of the development team behind the airdrop
- Ensure that the developers have a trustworthy history in the industry
- Analyze carefully the whitepaper and identify the benefits that it brings to the crypto ecosystem
- Understand if the project needs a token or not
Private Key Scams
Some very shady organizations out there prey on the most naive and less experienced crypto investors on their market. Their strategy is simple, and it implies asking for a wallet holder’s private key in exchange for a substantial, once-in-a-lifetime airdrop offer.
Similar to the first two rules of the Fight Club movie, the golden rule of cryptocurrency is that you never, ever, under any circumstances talk about (divulge) your private key. It is that simple to avoid private key scams correlated with free token airdrops.
As we've mentioned earlier, one of the prerequisites for airdrop eligibility is being alert and staying in touch with the crypto community. However, by doing so, you share some of your data, such as your name, email, your Telegram, and Twitter handles, etc.
Some ill-intended marketers may use this data to contact you with what may look like airdrop offers. In reality, they are trying to phish you for secret information, such as your email password or your social media login details. Your best choice is to never share personal information that could endanger your privacy or the security of your accounts in any way.
Bait and Switch Scams
This type of airdrop scam is almost untraceable by the unlearned eye. You may notice it while applying for an airdrop offer and the company asks you to join a Telegram group or a social media community as a condition for your eligibility.
While these scams will not take any money out of your pocket, they will waste your time. Most likely, there is no airdrop offer on the table. Instead, the scammers are looking to get some referral credit for a larger scam that they are preparing behind the scenes.
Cryptocurrency Airdrops - The Bottom Line
A cryptocurrency airdrop is a highly effective tool in the hands of professional, trustworthy marketers and developers. It can help a company raise funds, increase awareness, and build loyalty for a growing project.
Being on the receiving end of an airdrop can result in substantial gains for your portfolio in the long run, especially if the project turns out to be a successful one. Even if it doesn’t, you at least get a few free tokens that you can exchange and move some of your assets around, depending on the situation.
The most important thing to remember when applying for airdrops is security. Do your due diligence and thoroughly research the magnanimous company that wants to send you free tokens before you open your wallet.
Companies that wish to develop cryptocurrencies have to overcome a crucial hurdle in their path to success, which is fundraising. There are several methods of attracting investments in the crypto world, and most of them resemble real-world IPOs. STOs and ICOs are the most popular ones, and so far, the most accessible for new projects.
Today, we take a closer look at STOs, ICOs, and IPOs as we try to find out what the best fundraising method is. Stick with us, and discover how successful they apply in real-life projects in one of the most crypto-embracing economies in the world, Malta.
What are IPOs?
An Initial Public Offering (IPO) is the practice through which a private company puts some or all of its stocks up for public sale. It is an age-old strategy for companies to increase their capital by becoming a public, stock market-listed entity.
In return for their contribution, shareholders get to have a stake in the company. Also, depending on the number of stakes that they hold, they can even have a say in the way the corporation runs.
In the European Union, under present legislation, IPOs are passportable across all EU state members.
Benefits of IPOs
- The company gets access to attract equity from external investors
- Potential increase in liquidity through a secondary listing
- The company can use stocks as a means of payment
- Increased brand awareness
- Improved public image
Downsides of IPOs
- Stricter regulations and disclosures
- Market pressure
- The initial owners risk losing control over the company
- Initial Public Offerings are very expensive to organize
What are ICOs?
An Initial Coin Offering (ICO) is the IPO-equivalent, fundraising method for a company that deals in cryptocurrency, and for which most of its growth takes place on a blockchain.
Startups often use ICOs to garner capital for projects that are still in their early development stages. They begin by publishing a whitepaper in which they offer a detailed presentation of how the project will evolve.
The company then emits tokens to investors in exchange for funds that may be in the form of fiat money or other cryptocurrencies. Once the project is up and running on the blockchain, the token holders can use their coins to make further investments or trade them on exchanges.
Benefits of ICOs
- Startups can raise funds and develop projects quickly
- ICOs are still unregulated in many jurisdictions, so the fundraising process is faster
- Developers can get an early insight into the market that they wish to enter
- Easy and cost-effective investments for cryptocurrency enthusiasts
Downsides of ICOs
- The absence of legislation gives ICOs low credibility
- Susceptible to fraud, hacks, and scams
- The funds are subject to intense volatility
- The tokens do not represent equity
What are STOs?
A Security Token Offering (STO) is a fundraising method that combines some of the benefits of IPOs with the advantages of ICOs while having very few downsides for both of them.
Through an STO, a company issues stocks, bonds, or funds in the form of tokens on a blockchain. This practice of raising funds is regulated by traditional legislation in the European Union. Similar to IPOs, STOs are passportable across the EU member states and the members of the EEA.
Benefits of STOs
- Because they take place under transparent regulations, STOs are more credible than ICOs
- More cost-effective and quicker to process than ICOs
- They give company owners more control and flexibility
- Improved market efficiency due to low issuance costs
- Easy and quick enhancement of asset liquidity
Downsides of STOs
- STO tokens are generally more expensive than ICO tokens
- Complex compliance limitations for investors
- Security tokens can only be transferred via licensed platforms
How Malta regulates ICOs and STOs
Malta has one of the most progressive approaches when it comes to cryptocurrency. The small Mediterranean island-state became the first country in the world to regulate cryptocurrency use in late 2018.
Also known as the Blockchain Island, Malta aims to become the global capital of cryptocurrency by creating a regulatory framework for the use of digital assets. Some of the acts from the new legislation issued by the Malta Digital Innovation Authority (MDIA) include:
As per the VFAA, Malta regulated a form of ICO, also known as an Initial Virtual Financial Asset Offering (IVFAO), which states the conditions under which companies can practice this fundraising method in the country.
The country’s single regulator of financial services, the Malta Financial Services Authority (MFSA) is also looking into safe ways of legalizing STOs within its jurisdiction.
How does Malta’s IVFAO work?
When a company wants to launch in IVFAO in Malta, it has to abide by the MDIA legislation, which will appoint a group of experts to supervise the project. The group generally consists of:
- A VFA agent
- An Auditor
- A Custodian
- A Systems Auditor
- A Money Laundering Reporting Officer
Out of all the MDIA experts, the VFA agent will follow the development of the IVFAO from start to finish. This person is also the last one to greenlight the project's whitepaper after ensuring its compliance with the regulations for virtual financial assets.
Issuing an STO in Malta
While the MFSA has not fully regulated STOs yet, a company can still issue a Security Token Offering in Malta, if it meets the following requirements:
- Put the token through the Financial Instruments Test to verify if it is classifiable as a security
- Prove the financial soundness of the company
- Prove that the board of directors has a good understanding of the industry
- Show transparency in regards to the EU legislation for financial assets and securities
The process of issuing an STO in Malta is somewhat arduous and time-consuming, and it may remain that way until the MFSA regulates STOs in the same manner as it did for the IVFAOs.
The Bottom Line - Which one is better between IPOs, ICOs, and STOs?
For a startup that wants to build a project on a blockchain, an IPO is out of the question since it most probably lacks the necessary funds and shares to organize it.
On the other hand, ICOs have made the news in recent years for being vulnerable to scams and hack attacks. Most entry-level projects have abandoned this method for attracting investors, and prefer to opt for STOs. However, if a company chooses to issue an ICO in Malta under the IVFAO formula, it benefits from the protection of a regulatory framework.
All in all, the best fundraising method for any given company is the one that best suits its interests. A startup must find a solution that provides most of the benefits of IPOs, ICOs, and STOs, and the smallest risks they bring.
The Lightning Network is one of the most important additions to the Bitcoin blockchain. It stamped out the idea that cryptocurrencies can never achieve practical use in real life. It also set the stage for almost instant crypto transactions, and it may soon become the primary platform for BTC transfers.
The cryptocurrency community first found out about the Lightning Network in 2015. At that time, Joseph Poon and Thaddeus Dryja published a draft of the whitepaper and presented it as a solution for the Bitcoin scalability problem.
If you are new to cryptocurrency, understanding layer-2 protocols may be difficult. We hope that this guide to how the Lightning Network works and how to use it will clear the air for you.
What is the Lightning Network?
The Lightning Network spurred from the growing demand for a resolution of the Bitcoin scaling issue.
Bitcoin was the first cryptocurrency to see the light of day, and while it revolutionized the financial world, it showed functionality problems from the start. One of them is the limited rate at which the network can process transactions, and which results from the block size limit parameter.
Without a reliable solution, this issue would result in the gradual increase of transaction fees and in the delayed processing of transfers that cannot be fit into a block. It would make Bitcoin unscalable and question its potential mass adoption.
In recent years, the community has suggested several answers to the Bitcoin scalability problem. One of them came in the form of a hard fork, Bitcoin Cash. However, the demand for a simpler solution that would not defeat Bitcoin’s initial purpose remained.
Bitcoin required a protocol that would enhance transaction speed without sacrificing trustless operation, and this is where the Lightning Network entered the stage.
How the Lightning Network Solves Bitcoin’s Limited Scalability
The Lightning Network enables the creation of a payment channel through a funding transaction on the Bitcoin blockchain. Users can operate on this channel, which works as a second layer for fast micropayments without delegating funds custody and by paying low or no fees at all.
The network also enables users to access multiple channels at the same time through nodes. Once the payment channel closes, the final transaction set is added to the blockchain. This way, the participants are not limited by Bitcoin's block size limit parameter, and they can still engage in lightning-fast bidirectional payments with all the benefits of the trust protocol.
Here is how the Lightning Network helps Bitcoin users trade:
- The participants in a transaction agree on a smart contract or a multi-signature contract that creates a payment channel on the network
- Once they are on the layer 2 protocol, the participants can communicate with each other without notifying miners
- The participants can engage in an unlimited number of microtransactions through the payment channel
- After the final transaction ends, the payment channel closes and the transaction becomes part of the blockchain below it
A payment channel closes only when it meets a condition preset by the participants, and which may include:
- A specific period in which the transactions can take place
- A specific number of transactions that can take place
There are various types of payment channels that participants can use, out of which the Hashed Timelock Contracts (HTLC) channel is the easiest and most popular one. The benefits of using HTLCs include:
- A participant can forfeit a transaction and send back the payment to the other participant
- It enables participants to exchange cryptos on a blockchain for different cryptocurrencies on another chain, a practice also known as an atomic swap
The other forms of payment channels are Nakamoto High-Frequency Transactions and the Spillman-Style Payment Channel.
What Makes the Lightning Network Scalable?
The Lightning Network can combine millions of payment channels to create a global web for microtransactions between an equally high numbers of users.
Here is a simple example of how it works!
Let's say that we have 3 users (A, B, and C) who access the layer 2 protocol by creating payment channels. User A agrees on a payment channel with User B and on a different payment channel with User C. At this point, User A becomes a node that facilitates microtransactions between User B and User C without the two having to agree on a payment channel between them.
Now, let's consider that Users A, B, and C each have 100 unique payment channels with other users. They all create a wide web of interconnecting nodes that enable fast and potentially free microtransactions based on the trust protocols that smart contracts establish between them.
With the continuous revolutionizing impact that Bitcoin has on financial markets, the Lightning Network may facilitate daily transactions of millions of dollars once BTC reaches mass adoption.
What Makes the Lightning Network Secure?
Mutual trust between users is one of the fundamental principles of the Bitcoin blockchain that also defines the Lightning Network. However, in a time when digital hacks reach $4 billion per year, it is difficult to imagine that none of the participants to the network will try to run off with all the money inside the channels.
Fortunately, the Lightning Network benefits from a high level of security given by:
- Smart Contracts
As we’ve mentioned before, one of the conditions for participants to access the layer 2 protocol is to sign a smart contract.
Smart contracts represent conditional agreements between two parties that automatically self-execute when they meet their requirements. A smart contract does not need a central authority to ensure that none of the parties will interfere with the forthcoming transaction.
Another condition for engaging through a payment channel asks participants to agree on a specific period in which the transactions can take place. Also known as a timelock, this transaction period ensures that none of the participants can exit the channel while the clock is still ticking.
- Asymmetric Revocation Commitments
To make matters even more secure, the Lightning Network enables users to agree on penalizing commitments before entering the protocol. Some of these commitments may go as far as users losing the entire balance of their wallets if they attempt to cheat the network in any way.
Is the Lightning Network Expensive?
When you consider the fees that miner nodes practice, the transaction fees on the Lightning Network seem like a true bargain.
In time, as the number of blockchain miners drop the number of Lightning Network users will increase. Once all the Bitcoins will be mined out, the miners may remain on the chain and capitalize on the increasing transaction fees on the Lightning Network rather than from mining.
How to Use the Lightning Network
The Lightning Network functions on a straightforward mechanism, which you should grasp once you start trading on it. Here is a simple example of a transaction involving users A, B, and C from the previous showing:
- We already established that User A acts as a trusted node between Users B and C even if a payment channel doesn't exist between these two.
- If User B wants to make a payment towards User C, it will have to go through User A.
- At this point, User C generates a SHA256 hash code, which it then sends to User B.
- User B puts a condition for the transaction, which states that the only user who can receive the payment is the one who has the hash code that User C generated.
- User B sends the payment to User A, who immediately forwards it to User C. User A cannot hold the payment for himself because he doesn’t have the hash code.
- User C sends the hash code to User A, and in return, it receives the payment.
- User A forwards the hash code to User B at which point the transaction completes.
The Lightning Network in 10 Flash Statistics
Here are some representative data about the Lightning Network at the time of this writing, according to 1ml.com:
- The current capacity of the Lightning Network is 936.63 BTC
- There are 12,665 nodes and 36,017 channels in the world
- The top locations in the world are
- Paris (FR) - 231 nodes and 370 channels
- Toronto (ON, CA) - 89 nodes and 730 channels
- Ashburn (VA, US) - 79 nodes and 5,619 channels
- North America features 1,132 nodes and 15,018 channels
- Europe has 1,446 nodes and 15,018 channels
- Asia has 161 nodes and 1,017 channels
- The United States has 884 nodes and 13,557 channels
- Germany has 365 nodes and 2,741 channels
- France has 239 nodes and 1,409 channels
- Canada has 239 nodes and 1,409 channels
The Lightning Network Benefits
If you are not sure yet about the efficiency of the Lightning Network, here are some of its benefits that may convince you:
- Quick Microtransactions
The average duration for a Bitcoin transaction is between 10 minutes and 1 hour. With the Lightning Network, microtransactions can take place in a matter of seconds, thus reducing the overall time of a major transaction significantly.
- Low Transaction Costs
The average microtransaction fees on the Lightning Network vary between 1 and 10 satoshi ($0.00008 — $0.0008), which are much lower than the Bitcoin transaction fees that average around $2.5 at the time of this writing.
- Less Pressure on the Bitcoin Blockchain
Since many users access the layer-2 protocol to complete microtransactions, the Bitcoin blockchain does not have to deal with constant user agglomeration.
- Atomic Swaps are easier to perform through the Lightning Network
- Constant protocol improvements should take place with the ongoing increase of the community
- Seamless user experience makes it easier to access for people who are new to Bitcoin
The Lightning Network Disadvantages
- Unlike in the case of Bitcoin transactions, for payments on the Lightning network, both parties involved in them have to be online
- Participants on the Lightning Network must keep their assets in hot wallets, which are more susceptible to hack attacks
- The Lightning Network is still in its development stages, and several bugs and issues must be addressed before mass adoption occurs
Wallets to Use on the Lightning Network
If you have opted to participate in the Lightning Network, you will require a reliable wallet for your transactions. Here is a list of the best wallets for the Lightning Network that will make layer 2 microtransactions safe and easy:
Lightning Network Alternatives
The Lightning Network is not the first form of peer-to-peer payment protocol built on a blockchain. A similar solution comes from Litecoin.
The Litecoin Lightning Network is also in its developing stages, but it is lagging far behind Bitcoin’s similar network. It currently features over 220 nodes and more than 600 channels worldwide.
The Bottom Line
The jury is still out on how long it will take before the Lightning Network hits mass adoption levels. It all depends on its evolution, and how many investors choose to trade on the layer 2 protocol.
The Lightning Network may have a few bugs to solve now, but it promises much in the long run. It’s convenient scalability, secure and fast transfers, as well as the low-cost payment fees should take cryptocurrency transactions to the next level.
The 2020 Bitcoin halving and a gradual decrease in the value of the rewards that miners get for their work should increase interest in the most reliable solution to the Bitcoin scalability problem so far.
If you have ever wondered what Bitcoin mining difficulty is and how it works, you have come to the right place! This short guide on one of the fundamental components of the Bitcoin protocol should clear the air for you. In the end, you should be able to set up the difficulty on your mining machine and use the Nakamoto consensus in your favor.
The Definition of Bitcoin Mining Difficulty
The BTC mining difficulty is a relative measure that shows how difficult it is to mine a new Bitcoin block and add it to the blockchain. Alternatively, it tells a miner how difficult it is to find a hash below a certain target.
The higher the mining difficulty is the more energy and computing power will be necessary to mine the same number of blocks. The main benefit of high mining difficulty is the increase in security for the network.
The total estimated mining power in the Total Hash Rate is the primary regulator of Bitcoin mining difficulty. To maintain an average of 10 minutes between block creations, the difficulty is readjusted every 2016 blocks, which is more or less 14 days.
Why Bitcoin Mining Difficulty Increases
BTC mining difficulty is not linear. It oscillates depending on how easy miners manage to produce valid blocks. If it becomes too difficult for miners to mine the mining difficulty increases, and vice-versa.
A fundamental part of the Bitcoin protocol is that new BTC should enter the circulating supply every 10 minutes. This feat is possible by ensuring a balance between network difficulty and the miners’ power to find a hash below the target. As a result, the chain receives new, valid blocks, and the network does not lose its integrity.
Another reason for why the mining difficulty will change is the overall security of the network. The hashrate determines how powerful the miners are on a specific network. A high hashrate reveals an active group of miners and a highly-secure, high-speed network. A low hashrate determines that a network is at the opposite side of this spectrum.
Both types of networks have to maintain their hashrate in balance to produce new blocks consistently. If the hashrate is too high, the Bitcoin mining difficulty will become too high for them to mine a block in the necessary time to meet protocol demands.
After the recent halving, Bitcoin difficulty dropped, which made it easier for miners to mine for new blocks consistently.
The biggest drop in mining difficulty took place at the end of March 2020 when the network difficulty fell by 16% from 16.55 trillion to 13.9 trillion. The massive decrease was the result of a sudden crash of the Bitcoin price, which led to many of the users stopping their mining.
You can get the current Bitcoin mining difficulty here.
What is the Formula for BTC Mining Difficulty?
To keep in line with the Bitcoin protocol, the mining difficulty readjusts after every 2016 blocks. There is a simple formula for calculating mining difficulty on a network, and that is:
difficulty = difficulty_1_target / current_target
Now, let’s break it down:
“target” is a 256-bit number, which is a custom floating-point type with restricted preciseness. Bitcoin users can approximate difficulty on its value, which is also known as “bdiff.”
“difficulty_1_target” is also known as pool difficulty, or “pdiff,” and it represents a hash where the leading 32 bits are zero and the rest are 1. This hash differs according to the setting that you pick to measure difficulty.
Every block on the chain keeps a record of the Bitcoin mining difficulty under the name of “Bits.” This record is a target that you will generally find as 0x1b0404cb (stored in little-endian order: cb 04 04 1b).
By using a preset formula, each block on the chain calculates the target value. Considering the target above, we can determine the following elements of Bitcoin mining difficulty:
- The hexadecimal target:
0x0404cb * 2**(8*(0x1b – 3)) = 0x00000000000404CB000000000000000000000000000000000000000000000000
The highest possible target (difficulty_1_target) is defined as 0x1d00ffff or, in hex form:
0x00ffff * 2**(8*(0x1d – 3)) = 0x00000000FFFF0000000000000000000000000000000000000000000000000000
- The bdiff and pdiff values:
We already know from the information above that the current_target is 0x1b0404cb or 0x00000000000404CB000000000000000000000000000000000000000000000000.
As per the standard formula, the current mining difficulty is:
Therefore, bdiff is 16307.420938523983.
Now, let’s calculate the pdiff. Mining pools tend to use non-truncated targets which establish
difficulty_1_target at 0x00000000FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF.
If this scenario, for the same current_target, the pdiff value is:
This example from Bitcoin Wiki shows how Bitcoin calculates difficulty:
inline float fast_log(float val)
int * const exp_ptr = reinterpret_cast <int *>(&val);
int x = *exp_ptr;
const int log_2 = ((x >> 23) & 255) - 128;
x &= ~(255 << 23);
x += 127 << 23;
*exp_ptr = x;
val = ((-1.0f/3) * val + 2) * val - 2.0f/3;
return ((val + log_2) * 0.69314718f);
float difficulty(unsigned int bits)
static double max_body = fast_log(0x00ffff), scaland = fast_log(256);
return exp(max_body - fast_log(bits & 0x00ffffff) + scaland * (0x1d - ((bits & 0xff000000) >> 24)));
std::cout << difficulty(0x1b0404cb) << std::endl;
How to Set Up the Difficulty for Your Mining Pool
Mining pools are generally a cluster of ASIC machines, which are supercomputers that can calculate and deliver numerous tetrahashes per second. For the mining process to run at a consistently high speed, they do not stop to check every hash that they produce.
Instead, they use a mechanism called “Share Time,” which is a preset period, usually in seconds, after which miners submit their shares to the pool.
For example, if you have set a Share Time of 7 seconds for your Bitcoin mining pool, each miner in your pool will have to submit a share to them every 7 seconds.
You can adjust the mining difficulty for your mining pool like this:
- Set a Share Difficulty target for every miner in your pool
(The Share Difficulty is directly proportional with each miner’s hashrate)
- Miners will set up their equipment to produce a myriad of hashes
- Once miners discover a hash that corresponds to the Share Difficulty target, they will send the hash to the pool
Here’s a simple example of how that will work for you if you join a mining pool:
- Let’s consider that your ASIC machine has an individual hashrate of 50 TH/s.
- The mining pool has set your Share Difficulty target at 2,000,000.
- The moment that you get shares above 2,000,000, you receive a reward from the pool
- The mining pool may adjust your difficulty to ensure that you do not deliver shares too fast
The Share Difficulty target for your mining machine will increase every time you enhance your hashrate by adding new, and better mining equipment. The rate at which you will send the shares will remain the same. However, you will receive a higher reward that will be directly proportional to the upgrade in hashrate that you have made.
The mining pool will always try to avoid setting the difficulty too high to avoid a substantial number of stale shares. Nevertheless, it will always encourage mining at a high difficulty on fast-running hardware to reduce network load across the network.
Remember that as a miner, you will receive a reward from the pool according to the “Pay-Per-Share” (PPS) formula. It means that the value of your reward will depend on the number of shares that you submit, and on how difficult it was to find them.
What is the Nakamoto Consensus and how does it Work?
You will get a better grasp of how important Bitcoin mining difficulty is once you understand how the Nakamoto Consensus works.
Bitcoin is not the first attempt at creating a feasible, decentralized cryptocurrency. Many other projects have tried to produce a form of digital currency before BTC, but they failed to overcome the double-spending problem.
Double spending is an error that enables users to spend a Bitcoin more than once. This problem would not be possible in real life where you couldn’t purchase two different $5 products with the same $5 bill.
However, when it comes to digital money, the files of a digital coin are prone to duplication and subsequently to double-spending.
The main consequences of double-spending are inflation and an irremediable loss in value and trust.
How the Nakamoto Consensus works
Bitcoin’s founder(s), Satoshi Nakamoto came up with a solution to the double-spending problem that we today call the Nakamoto Consensus.
This consensus protocol ensures network integrity, trust, and transparency. Furthermore, it enables the adoption of any form of governance.
The Nakamoto Consensus asks each potential participant in the chain to pay a price if they want to become part of the network. This price is Proof-of-Work (PoW), and it represents the work that miners put into mining Bitcoin. The work itself is the computational energy that their ASIC machines consume in the process.
The PoW algorithm allows the participants on the network to trace every single Bitcoin right to its very source. Therefore, every BTC stamp is unique and almost impossible to duplicate and double-spend.
The only dystopian scenario in which a user would hijack the blockchain by forking out and try to double-spend all the Bitcoins is nearly unattainable. That user would have to put in so much energy that the result would be economically unfeasible.
The Bottom Line
Bitcoin mining difficulty is the feature that makes BTC mining both cumbersome and rewarding enough to keep the mining going. It also enhances security and transparency on the network, thus solving the double-spending problem.
The Bitcoin protocol would not function without fundamental mechanisms like mining difficulty. It is due to such innovations that Bitcoin managed to pick off as an innovative payment network without trust issues.
Cryptojacking is a serious threat to your personal computer. Hackers use it to enslave your machine and force it to mine cryptocurrencies on their behalf. It is an almost seamless attack on your device that can transform it into an unknowing tool for cybercriminals everywhere.
Fortunately, there are easy ways to detect cryptojacking attacks in time. There are also safe ways to prevent cryptojacking and to make your computer impervious to it.
In this article, we are looking at all the solutions for cryptojacking that you can employ to keep crypto hackers at bay.
What is Cryptojacking?
Cryptojacking is the practice of taking unauthorized control of a computer and using its computing power for cryptocurrency mining purposes.
There are more than 3,000 cryptocurrencies out there, out of which Bitcoin and Ethereum stand out as the most popular ones. Users can “mine” for both of them by using computing power. Most legitimate miners use supercomputers, also known as ASICS, and generally as part of a farming facility that holds hundreds of such machines.
However, as it is the case with all financial assets, there are illegal ways of obtaining cryptocurrency, and one of them is cryptojacking.
Through cryptojacking, cybercriminals install malware on personal or business computers. Once they reach the machine's security system, they install a cryptomining protocol that silently mines for specific crypto in the background. Every block that it successfully adds to the blockchain results in valuable tokens, which the chain sends directly to the hacker's digital wallet.
Throughout this time, the victim of cryptojacking is not aware of the attack. Users generally notice a massive slowing down of the computer's performance but rarely do they suspect a cryptojacking attack to be behind it.
Types of Cryptojacking Attacks
Hackers use various types of cryptojacking into personal computers. Most of the time, they do so with the involuntary help of the users, who are naive or unaware of the threat.
Here are the most common cryptojacking attacks:
Cloud storage and facilities are popular with numerous businesses and regular users nowadays. Unfortunately, they are popular targets for cybercriminals as well. By using malicious software, they infiltrate computers and networks that use cloud technology. Then, they proceed to hack the API keys that give access to the cloud.
Once they hack inside the cloud, cryptohackers get hold of immense mining power that they use to obtain digital assets without the knowledge of the users.
Ever since it’s initial introduction to the World Wide Web in the early 1990s, the email has been the hackers’ favorite vehicle for remote scams and security attacks.
In the age of cryptocurrency, the email remains a reliable hacking tool. Cybercriminals send users emails while mimicking a company that they trust. Inside the message, they plant a cryptomining code that installs on the receiving computers when the users click on it.
Another method of cryptojacking involves pop-ads on websites. Hackers install a cryptomining code behind them, and when users click on them, the code automatically downloads and starts running on their computer. Sometimes, they even hide the code in Wordpress plugins that have recently gone through a software update.
How Cryptojacking Works
Cryptojacking works as a silent method of taking control of your computer for illegal cryptocurrency mining. In most cases, the hackers use the same sequence of attack:
- They penetrate your computer’s security system through malware hidden in emails, pop-up ads or cloud software
- The malware installs a mining code on the computer that runs in the background
- The code uses the computing resources of the machine to mine for cryptocurrency on a specific blockchain
- The rewards that result from the silent mining go directly to the cybercriminal’s digital wallet
Signs That Your Computer Has Been Cryptojacked
Besides the obvious security threat that cryptojacking poses, this hack attack comes with additional problems for the victim, such as:
- A severe slowing down of the computer’s performance
- A costly energy bill
- The compromising of an entire network of computers when the target is a business computer
Before all of these consequences become visible, you should notice some clear signs that your computer has been cryptojacked, such as:
- The system struggles to complete even the most basic functions
- The device overheats quickly
- The CPU usage is constantly high
Also, if you use the computer for website development, you may notice coding changes on your websites, typically in Wordpress plugins.
How to Prevent Cryptojacking
Cryptojacking is usually a hit-and-run attack and a short-term cybercrime. Generally, you can detect it easily before it gets out of hand. However, you would like to take the necessary steps to avoid it long before your computer is secretly mining for Bitcoin in the background.
Here are the easiest ways to prevent cryptojacking:
- Install a high-performance security protocol on your system
- Check for malware frequently
- Use browser extensions that block hidden mining codes
- Install ad-blockers on your browsers
Last, but not least, if you run a company that connects its computers through an internal network or cloud technology, you should stay alert to cryptojacking attacks. Ensure that your employees are aware of the threat. Instruct them not to click on suspicious links in emails or on pop-up ads on websites.
Stay up-to-date with the latest developments in the fight against cryptojacking. Upgrade your anti-malware system regularly to maintain your devices safe from unauthorized cryptocurrency mining. Cybercriminals do not waste time in coming up with new and efficient hacking methods. When it comes to protecting your computer against them, neither should you.
Governments worldwide are looking into effective ways of adopting blockchain technology. What seemed like a futuristic scenario 10 years ago, when Bitcoin was in its infancy, is inching closer to reality.
More and more blockchain projects involve governmental approval and funding. Today, we take a closer look at examples of blockchain use by governments as we try to discover their impact on the world of tomorrow.
We start with ICON, which is one of the biggest and fastest-developing blockchain projects at the moment.
What is ICON?
Unsurprisingly, ICON comes from South Korea, which is one of the few countries that openly advocate for blockchain and cryptocurrency adoption. The South Korean Government backs the ICON project, which is a decentralized network that looks to connect numerous blockchains from everywhere in the world in a bid to reduce the gap between autonomous online communities and other blockchains.
How will ICON work?
Creating a worldwide network that incorporates all the existent and future blockchains is an ambitious goal, to say the least.
ICON wants to achieve this seemingly incommensurable feat through a new technology called “Loopchain.” The developers have been working on it from the project’s early beginnings. All we know about it so far is that it will manage to create a seamless cross-chain communication through real-time smart contracts.
So, adhering to the ICON network will have all the blockchain communities communicating and working through smart contracts.
How South Korea is backing ICON development
ICON is spearheading South Korea's immersion in blockchain technology. The ICON Foundation and the Government have teamed up in 2016 and together have initiated numerous projects in the Insurance, Healthcare, Customs Service, and Education sectors.
In 2018, the Korea National Information Society Agency (NIA) launched a new program called "Building the Next Generation Election System based on Intelligence Information Technology" under the supervision of the Korea National Election Commission (NEC). The agency chose ICON as their blockchain technology consultant and asked them to provide a blockchain-based voting and ballot counting solution.
At a smaller, local level, ICON is working closely with the Seoul Metropolitan Government. The capital city's mayor, Park Won-soon has been warming up to the idea of Seoul having its own cryptocurrency. The digital asset would bear the name Seoul Coin or S-Coin, and ICON will be in charge of its development.
The huge Seoul administration machine would use the S-Coin for internal operations in a bid to make them quicker, more effective, and to reduce paper costs.
Another collaboration between ICON and the Seoul Metropolitan Government is a project called “Seoul Blockchain Demonstration Project." As the head operator of the project, ICON will have to provide innovative public services based on blockchain technology.
Other collaborations between the South Korean Government and ICON include:
- Governmental funding for U-Coin implementation in the national education system in April 2017
- Governmental funding for the Insurance Project from the Ministry of Science, ICT and Future Planning also in April 2017
ICON and Chain Sign
ICON has already begun putting Loopchain to work, and one of its initial projects is a collaboration with Cyberdigm. The latter is a service provider involved in document centralization, collaboration, and knowledge management.
Their partnership produced Chain Sign, which is a blockchain-based contract platform that allows legally binding contracts to be signed digitally. The platform has already hosted operations between prestigious Korean clients, such as the Financial Supervisory Service (FSS) and Samsung Electronics.
Next on our list is Power Ledger - a peer-to-peer energy trading company that was established in 2016, in Australia.
What is Power Ledger?
Power Ledger is a private company that uses both an energy trading platform and a native cryptocurrency to enable the selling and buying of renewable energy through blockchain technology.
The Australia-based company has already extended its operations in and outside its home country, with ongoing projects in Thailand, India, Japan, and the United States.
How does Power Ledger work?
The easiest way to understand how Power ledger allows energy trading via blockchain is to look at one of its recent projects.
In 2020, Power Ledger signed a partnership with BCPG, a Thai renewable energy business, and with the Thai Utility Metropolitan Electricity Authority (MEA). Their collaboration will see the development of “innovative products and services based on blockchain technology in P2P electricity trading and renewable energy credit trading for the Thai market.”
Simply put, this project will enable the trading of rooftop solar power between an international school, apartment complex, shopping center, and dental hospital in Bangkok. The system will generate a maximum capacity of 635 KW, and provide essential benefits for all the parts involved in it, such as:
- The community receives the necessary energy
- Lower energy bills for buyers
- More convenient prices for energy sellers
- A smaller carbon footprint
- The excess energy will be sold to neighboring communities
How the Australian Government is backing Power Ledger
One of the most exciting blockchain-based projects comes from a collaboration between Power Ledger and the Western Australian Government together with the local land developer DevelopmentWA.
The partnership is part of the Australian Government’s Smart Cities and Suburbs Initiative, and it aims to create a 100% renewable energy residential complex. The project will include a microgrid supply network for water and power and a 670 kWh on-site battery.
Their goal is to identify feasible alternatives of renewable energy that would make living in Western Australia sustainable and cost-effective. The results in terms of energy consumption and power will come from an on-site laboratory that will track the energy traded on the blockchain.
We continue our selection of blockchain government-backed projects with Algorand, which represents the future generation of financial instruments.
What is Algorand?
Algorand is one of the most market-incisive blockchain projects that have received stable government backing so far. It is a unique, open-source blockchain that can never fork, and which supports full, proof-of-stake contracts and permissionless operations.
The brain behind Algorand is Silvio Micali, a Turing Award winner and one of the top-leading researchers in cryptography and information security. The Italian computer scientist is also a professor of computer science in the prestigious MIT's Department of Electrical Engineering and Computer Science since 1983.
The Marshall Islands have commissioned SFB Technologies to find a blockchain project on which the Micronesian state can develop its own digital currency. After extensive research, the SFB experts settled on Algorand as the protocol for the future Central Bank Digital Currency, also known as the Marshallese Sovereign (SOV).
Algorand stands out in the crowd for its speed, scalability, and high-security. The joint effort should produce a globally available digital currency that will also have a legal tender use.
The Marshall Islands wish to become one of the first countries in the world that embrace a cashless economy. Their CBDC should become a model worth-following for other governments around the world that have been dabbling on this futuristic idea.
How does Algorand work?
Algorand has full governmental backing to produce a powerful digital currency in SOV, which should come with essential features, such as:
- Fully decentralized network - users will engage in transactions without the supervision of a central bank
- Digital wallets for each citizen - every Marshallese may receive a basic public address to store their SOVs
- Complete transparency - a CBDC blockchain-based will enable the easy tracing of every SOV and each transaction to its origin
The Marshall Islands' CBDC will be on the close watch of larger countries that will want to follow suit and release their own versions of an SOV. In the beginning, the SOV should circulate alongside the USD both nationally and globally.
We kept the best for last, and one of the most active blockchain-based projects out there, Rootstock (RSK) fits that bill completely.
What is Rootstock?
Rootstock (RSK) is what you get if you would be able to combine Bitcoin “DNA” with Ethereum “genes,” and create a completely new platform for digital operations and functionalities.
If that seems hard to imagine, it didn’t seem that difficult for the developers to create. RSK is a platform that connects through sidechain technology to the Bitcoin blockchain, but it is also compatible with Ethereum applications, and it supports smart contracts.
How does RSK work?
Here are some Rootstock features that explain its purpose better:
- It works as a 2-way pegged Bitcoin sidechain
- It functions as a deterministic virtual machine for smart contracts that uses Turing mechanisms and the same hashing mechanism as Bitcoin while remaining compatible with Ethereum's EVM
- At its core, it is a SHA256D merge-mining consensus protocol with 30-seconds block intervals
RSK ensures fast, cheap transfers that are compatible with the Bitcoin protocol, and it offers a highly-secured platform for smart contracts at the same time. Unsurprisingly, it is one of the first choices of blockchain-based projects for worldwide governments that look towards the future.
How the Argentinean Government is backing RSK
Argentina has just defaulted for the second time in this century. Still, the back-breaking debt is not killing its goal to achieve a sort of readiness for when the digital currency will become standard.
At the moment, RSK seems to be a reliable choice for the mission. The Central Bank of Argentina (BCRA) has already made progress in creating a proof-of-concept (PoC) on RSK technology, which would enable the end-to-end traceability of account debit claims.
The development team behind BCRA’s project is the Blockchain Group, which consists of prestigious names, such as the IOV Labs, Sabra Group, Banco de la Provincia de Córdoba, BBVA, ICBC, Banco Santander, BYMA, Interbanking, and Red Link.
The implementation of this PoC will bring banks, financial institutions, and technology developers under the same umbrella. Its viability will be the subject of conclusive tests from all the actors involved in the process. One of its challenges will be the addition of other banks and commercial banking agents while maintaining its practicability and long-term functionality.
The bond between RSK and Argentina strengthens
Argentina has taken a genuine liking to RSK, and the country’s natural gas regulator, Enargas is looking at effective ways of using the platform.
In this regard, Enargas and one of its main distributors, Gasnor, have kick-started a joint project that would secure and accelerate Argentina’s gas certification processes.
The new smart contract-based platform will be a permissionless blockchain dubbed Gasnet, which will run a network node between the two entities. This way, transactions, certifications, and other documents will travel with lightning speed between them. Both the processing time and the costs will decrease significantly, as will the annual volume of paper consumption.
IOV Labs in collaboration with Grupo Sabra are in charge of the development, and they successfully launched Gasnet in March 2020.
The long-term plans for the project aim to transform Gasnet into a national blockchain-based database for the gas distribution industry, which at the moment comprises nine companies.
RSK gets international backing through OS City
RSK is steadily becoming the go-to smart contract-based platform when it comes to leveraging the latest technologies. One company that finds it trustworthy is OS City, which provides full digitalization services for governments worldwide.
OS City is a gov-tech company that originates from a project led by PhDs in Political Science and Artificial Intelligence. It aims to implement "open-source digital certification solutions using blockchain to increase transparency, preserve data integrity, and accelerate the use of portable records in the public sector and informal economy."
Simply put, a government can use OS City to upgrade its municipalities to the present-day technological progress and prepare them to become the smart cities of tomorrow.
OS City has chosen RSK to create a blockchain-based platform on which government agencies and departments could exchange information and transactions through smart contracts. This highly-secure network would speed up government actions, reduce corruption, and promote environmental, social, and economic prosperity.
A series of prestigious brands are backing OS City, such as Google, UNICEF, Singularity University, and The WEF. For now, countries like Argentina, Mexico, Brazil, Colombia, and Chile have expressed their desire to implement OS City services.
Understanding blockchain governance is crucial if you wish to invest in cryptocurrency or take part in a chain-based project.
Blockchain technology is evolving at a rapid pace. It attracts users from all over the world and rakes in billions of dollars in investments every year. To ensure the fair participation of all users and the transparent distribution of resources a set of rules is necessary.
The way rules appear on the chain and how much power users have in changing them constitute blockchain governance.
In this guide, we dissect blockchain governance and discover its mechanisms through crypto examples and associations with real-life political systems. We take a closer look at off-chain governance and find out whether on-chain governance is feasible in the long run. In the end, you should have a clear understanding of who calls the shots on blockchain roadmaps and their success.
What is governance?
Before we dive into the blockchain governance definition, we should take a second to remember what governance is.
If you don’t remember the definition of governance from your school days, have no worries! We got your back with a simple explanation. Governance depends on three elements:
Think of any 1st world country in the world or any state that functions on a democratic system. The people living there are participants in a system (society) that offers them rights, protection, and opportunities to thrive.
For the system to work and the participants to benefit from all these advantages, a set of strict rules is put into place. In our case, these rules make the constitution and all the civil and criminal laws that derive from it.
While all the participants are expected to follow the rules entirely, there is the possibility that some may not do it out of ill intention or negligence. So, the presence of rulers is crucial to ensure the system’s functioning. In our example, the rulers are the politicians in command and the instruments that they use to enforce the correct application of the rules, such as the police and the courts of law.
The system works towards reaching a mutual goal for all those involved, and its completion is achievable as long as all three elements collaborate and engage in as little corruption as possible.
The example of a state democracy is an easy way to understand what blockchain governance is. However, governance is everywhere around us. It is the fundamental mechanism behind the well-functioning of a company, a social media network, a book club, and even a family.
Types of governance
Governance has been a mechanism for social symbiosis and control ever since humans gathered in tribes, which was one of the first instances of social networking. History has recorded several forms of governance that ranged from tyrannical and totalitarian to exceptionally libertarian.
To better understand blockchain governance, we will focus on two types of standard governance that best apply to blockchain technology:
- Representative Democracy
- Direct Democracy
Let’s break them down!
- Representative Democracy
This is one of the most common forms of state governance in the world. It works by having the participants vote to delegate some of their members as their representative, and implicitly rulers. This select number of people then produces and votes on rules that should improve the functioning of the system.
The Pros of representative democracy include:
- Participants don’t have to worry about voting on every new rule that comes into discussion
- The implementation of new rules works faster and more efficiently
- It’s cost-effective and brings balance to the system
- Participants are encouraged to participate by having their say on who should become a ruler
The Cons of representative democracy are:
- Some rulers may act in favor of personal interests rather than for the good of the system
- The election process is susceptible to fraud
- The rulers can deceive the participants in exchange for their votes
- It provides more benefits for the majority groups within the system and harms minorities
- Direct Democracy
In a direct democracy, participants vote individually for the rules that govern the well-functioning of the system. All of them are rulers. Imagine a country without a parliament where you, as a citizen would have to express your opinion on every decision that has to be made nationwide.
The Pros of direct democracy are:
- Every vote weighs heavily in the final count
- It offers more transparency by eliminating potentially corrupt rulers
- Participants have more control over the rules
- The government is more accountable and easier to replace than in a representative democracy
The Cons of direct democracy include:
- Reaching consensus on a rule is slower and more expensive
- Not every participant is keen on voting
- Participants may vote under an emotional influence or out of self-interest rather than logical reasoning
- The larger the system gets the more difficult it is to maintain the governance efficient
What is Blockchain Governance?
Now that we have a better understanding of what governance is it should be easier to get a better grasp of blockchain governance and how it works.
A blockchain is a network of computers that collaborate to obtain mutual benefits and attain a particular goal. Similar to a social system, a blockchain needs a set of rules to function and to ensure that all the participants have equal rights and opportunities. For those rules to come into effect a form of governance is imperative.
However, contrary to a social network, a blockchain is by nature a decentralized system where users come and go. One of the fundamental conditions of its success is its scalability or its potential to evolve and increase in size while adapting to both internal and external factors of change.
The scalability of blockchain results from its ability to attract new users, which usually is in the form of incentives. Without incentives, the computers that contribute to the network's existence leave, and the blockchain crumbles and its purpose diminishes.
Blockchains also require consensus through a set of coordination methods that ensure the equally beneficial participation of all the peers on the network. This condition is generally met through smart contracts and validated transactions.
In conclusion, blockchain governance is the ability of a blockchain to generate incentives for the participants while ensuring that consensus is always achievable between them.
Who decides blockchain governance?
Blockchain works in theory, but it needs real-life entities to put it in practice as well. Responsible for this task are four groups of elements that are essential for the blockchain’s existence:
- Core Developers
- Node Operators
- Token Holders
- The Blockchain Team
Let’s break them down and see what each of them represents!
- Core Developers
This group is responsible for ensuring that the blockchain’s core code works in its preset parameters. They have the power to make small, local modifications to the code without changing it for the entire network.
- Node Operators
This group is responsible for implementing the changes that the core developers make to the code. They have an entire copy of the blockchain ledger on their computers, and they decide whether they update it with the developers’ new features or not.
- Token Holders
This group forms the majority of participants to the blockchain. They hold the digital assets or tokens that the network uses to validate transactions and smart contracts. Similar to how citizens of different states have a varying range of rights and responsibilities, so do token holders on different blockchains.
- The Blockchain Team
This group’s role varies from one blockchain to another. In some cases, it can be a company that runs a blockchain as a large scale project, as it is the case of Ripple.
The Blockchain Team can also be a non-profit organization or a community of developers and investors. They may have control over the marketing structure and the mission to attract new participants to the blockchain.
Types of Blockchain Governance
Blockchain is still a relatively new technology that can develop to embody and employ several forms of governance. However, to maintain our focus on the present state of peer-to-peer, trustless networks, we will refer to the two most common types of blockchain governance:
- Off-Chain Governance
- On-Chain Governance
Both forms of blockchain governance derive from the traditional, real-life types of governance we have discussed above. Let’s take a closer look at each of them to discover how governance works on real blockchain examples!
- Off-Chain Governance
Most blockchain-based projects use off-chain governance to ensure the well-functioning of the network. Two of the most popular examples include Bitcoin and Ethereum. In both cases, the respective communities try to maintain equilibrium between incentives, methods of coordination, and the businesses that use the blockchains.
In off-chain governed blockchains, only a few participants make all the decisions. While they represent a minority, they are generally the users with the most power, influence, and knowledge on the network. So, while the blockchain is a decentralized web, the ability to govern it is centralized in the hands of a few participants.
Nevertheless, off-chain governance does not imply tyrannical constraints for the users who can otherwise deliberately leave the blockchain if they lack incentives. They may easily exercise this right in the event of a hard fork.
A hard fork takes place when the network cannot achieve consensus over a new set of rules, so some users choose to diverge into a new blockchain while the others remain on the previous, "classic" one.
The consensus is a big theme of off-chain governed blockchains where core developers, large miners, and wealthy entities have a strong grip over the decisional power.
Another topic that creates dissent among off-chain governed blockchains is the incentives problem. All the actors in the community, including miners, traders, developers, and investors have tangential goals, but not identical.
As a result, they have to engage in push-and-pull collaborations to move their projects forward. One case of disagreement over incentives led to the first hard fork on the Bitcoin blockchain, which spurred Bitcoin Cash.
Generally, off-chain governance has three distinct approaches:
- Benevolent Dictator for Life
The utopist association of two contrasting terms, “benevolent” and “dictator” define the simplest approach to off-chain governance. In this case, the creator of the blockchain or network is the only participant who can approve or veto a change that would affect the entire community.
An example of this form of governance is Facebook’s creator and CEO, Mark Zuckerberg who enjoys exclusive privileges in deciding the future of the social media behemoth.
- Core Development Team
In this case, a team of the most active developers has the final say on the changes that should shape the future of the network. This type of off-chain governance best suits open-source projects where users can suggest or demand new features and the core development team decides their implementation.
- Open Governance
This form of governance is similar to representative democracy. It allows the participants to pick a team of rulers from among the most skilled developers and investors. Open-source projects like Corda and Hyperledger employ this off-chain governance model with successful results.
- On-Chain Governance
The most recent form of governance regarding blockchains is the one that differs the most from real-life governance models. On-chain governance enables a network to function based on rules that are stored on the blockchain as smart contracts. The participants can use built-in methods of coordination to modify the rules according to their needs, but without changing the regulations on which the blockchain works.
On-chain governance benefits:
- Minimal risk of chain fragmentation through hard forks
- Access to an in-built voting system for all participants
- Direct democracy and equal voting rights
- A high level of transparency and trust
- Optimal decentralization through smart contracts
On-chain governance aims to increase democracy and give participants more control and power to take decisions in a bid to avoid extreme events such as hard forks in the blockchain. In this regard, users have access to an in-built voting mechanism that lets them choose in which direction the blockchain should move next. The majority of the votes help the participants achieve consensus easily and it decides the next stage of the roadmap.
In terms of incentives, the power to make decisions and influence the blockchain is a reward itself. However, as many of the users lack the necessary technical knowledge to make progressive changes, the blockchain may suffer from selfish, poorly-conceived resolutions.
One of the most obvious advantages that on-chain governance has over off-chain governance models is the high degree of transparency. In this case, the voting process is available for monitoring to all users, and the path from the rule proposal to rule admission is clear. On off-chain governed blockchains, the participants merely attend the decision-making process, which is usually led by one or just a few of the other users.
On-chain governance offers the highest possible level of decentralization, which goes in line with one of the fundamental principles of blockchain technology: a decentralized network. This performance is possible thanks to the existence of smart contracts that hold the rules of blockchain operations and the instruments that allow their modification.
The Downsides of On-Chain Governance
While some may argue that on-chain governance is better than off-chain governance, this type of blockchain governance does not enjoy impeccable functioning. There are certain downsides to employing it that derive mostly from the risks of real-life direct democracies, such as:
Nowadays, except for a couple of tiny Swiss cantons, there is not a single country that uses direct democracy as a political system. One of the earliest examples of its existence dates back to ancient Greece, and most specifically to the city of Athens. The reason why this policy worked almost 2,500 years ago is that it only involved around 30,000 people at that time.
Blockchains are by definition networks that aim for scalability. A blockchain is more powerful and rewarding with every new user that it incorporates. However, as it increases in size, on-chain governance becomes very difficult to implement efficiently.
At one point, most users would rather have someone represent their interests than having to deal with any issues that surface on the blockchain. From then on, off-chain governance may appear as a more feasible solution for many participants.
Lack of coherence
In theory, the proposal and implementation of new stages for the blockchain roadmap should be easy. There is a voting system that enables all users to have their say on any issue or potential change.
However, the chances of having an entire community of developers, node operators, investors, and casual users acting for the benefit of the group rather than for selfish goals are very slim. Divergent opinions can lead to a slow process of debating and voting even on the rules with the smallest impact.
Examples of Successful (so far) On-Chain Governance Implementation
On-chain governance is difficult to implement in the long-run. The odds of balancing scalability goals with network consistency are small, but still achievable as these projects have revealed:
Tezos is a blockchain project that likes to advertise the success of its on-chain governance model. The network functions on Proof-of-Stake smart contracts and allows its users to vote on any possible change to the chain, including major rewrites.
It sounds like a clear example of direct democracy so far, doesn't it? Well, it's not entirely so because while every participant gets a vote, not every vote weighs the same in the final count.
Tezos users receive incentives according to their investments. The more financial resources that they employ on the chain, the more incentives they receive and the heavier their votes will weigh. So, in the end, the ones that decide a new change in the Tezos roadmap are the richer participants.
Decred is an autonomous digital currency that employs a hybrid consensus system between Proof-of-Work and Proof-of-Stake. It is a self-ruling currency and aims for complete decentralization by offering equal voting rights to all its participants.
The platform users can always send their requests for new features or changes to the chain, which later go through a voting process similar to direct democratic systems. The only issue here is with the vote’s transparency since voting takes place outside the chain, and not directly on it.
EOS uses on-chain governance, but not in its fully direct democratic meaning. The platform gives access to the blockchain for users who buy EOS tokens. From then on, their participation is valid through the Delegated Proof-of-Stake consensus mechanism. They also receive voting rights, which they can freely exercise when changes are up for debate.
However, similar to how the Athenian Democracy did not allow women and slaves to vote more than two millennia ago, EOS does not give voting rights to its miners. So, while it embraces on-chain governance, EOS does not practice all-inclusive direct democracy.
The Bottom Line - Who really governs the blockchain?
Similar to real-life politics, blockchain has yet to find the ideal governance model that involves everyone equally in the decision-making process, and which also rewards all its participants with the same incentives.
The community is still divided between on-chain governance and off-chain governance alternatives. It will take time, innovation, debates, and plenty of trial-and-error attempts before the scale will tilt decisively in one direction or the other.
One thing that we can all agree on is that the users eventually call the shots on a blockchain’s trajectory.
Once the incentives on a blockchain lose their value the number of participants decreases. Fewer users result in smaller power of attraction for the project. The lack of power kills the chain's hope for scalability, and all the work that developers and investors have put in it.
The strength is in the numbers, as the old saying goes. Revolutions are possible even on the chains that are under the strict control of benevolent dictators, as Ethereum's Vitalik Buterin found out during the infamous DAO hard fork in 2016. So, until blockchain governance achieves an indisputable level of feasibility, the power of decision remains in the hands of the many!