What is a Bitcoin ETF?

While Bitcoin presently enjoys several Futures markets offered through the likes of CBOE and CME, the pre-eminent cryptocurrency has yet to achieve another financial milestone: inclusion in an Exchange Traded Fund – or ETF.

What is an Exchange Traded Fund (ETF?)

An ETF, simply put, is a marketable security that tracks either an index of funds, a commodity, or a basket of assets.

Rather than serve as something similar to a mutual fund (a professionally managed investment program funded by shareholders that trades in diversified holdings), ETFs trade similarly to a common stock on a stock exchange next to other listed companies or assets – think Microsoft (MSFT), Apple (AAPL), or Gold.

ETFs hence trade similarly to a stock, and do not have a net asset value (NAV) calculated once at the end of every day. However, ETFs enjoy higher liquidity (the degree to which an asset can be quickly bought or sold) and usually employ lower fees than a professionally managed mutual fund.

An ETF owns the underlying assets that comprises the fund (whether that is shares of a stock, gold, or foreign currency) and divides ownership of that asset into shares. As such, shareholders in an ETF do not directly own these assets, but instead do have claim to shares of the ETF itself. Simply put, asset ownership in an ETF is what we call ‘indirect’.

At the bottom line, an ETF can be considered to be a distributed fund that can be traded in portions on a currency exchange. An ETF functions through offering shareholders a denomination of the profits the fund rakes in. Given that the fund’s value is distributed through shares, shareholders can easily buy, sell, or trade shares of the ETF just as they would stocks of a company. Should an ETF be liquidated, shareholders can still retain residual value.

What are blockchain ETFs?

While we’ve yet to see a major Bitcoin ETF, there are already several ‘blockchain ETFs’ that have arrived on the market.

However, a notable distinction is that so-called ‘blockchain ETFs’ do not invest in actual blockchain-based cryptocurrencies or altcoins, but instead invest in companies involved with blockchain technology – regardless of whether the firm is a startup creating new fundamentals with blockchain technology, or an older firm introducing blockchain technology to its core practices.

Blockchain ETFs are seen to be a more ‘stable’ form of investment compared to Bitcoin ETFs, given that the former does not precisely track Bitcoin’s market volatility and is instead invested in the performance of companies themselves.

So, what are Bitcoin ETFs?

While several Bitcoin ETFs have been proposed, we have yet to see one accepted by the United States Securities and Exchange Commission (SEC).

Chiefly, a Bitcoin ETF would purchase an underlying amount of actual Bitcoin and distribute those funds into shares, distributed to shareholders.

Many proposed Bitcoin ETFs have proposed tracking the price of Bitcoin through Futures contracts rather than through the listed price of Bitcoin on cryptocurrency exchanges. Other proposals may, in time, invite the idea of tracking Bitcoin’s price through other indices.

At the time of writing, the SEC has rejected most proposals for Bitcoin ETFs given issues with liquidity and valuations. Principally, the SEC has argued that the trading volumes and liquidity on Bitcoin Futures contracts are too low to serve as a Bitcoin price indicator, given that Bitcoin Futures contracts themselves follow spot prices on Bitcoin and cryptocurrency exchanges.

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What is a 51% attack?

We’ve just heard the news that ZenCash has experienced a 51% attack and before we’ve seen Verge, Monacoin, and Bitcoin Gold all face similar malicious occurrences.

I know what you’re thinking. “51%! An attack! How awful!”

Well, yes, but what actually does it mean?

Essentially it happens when a group of malicious miners manages to take authority of a cryptocurrency’s blockchain in a very particular manner of hacking.

This type of hacking can only occur on a blockchain – making it a new form of online theft.

To execute a 51% attack, hackers would have to gain more than half of the network’s mining total hashrate – this means that the hacker would need to gain the majority of the total the computing power that users on a blockchain execute at a given time.

By doing so, this would give a hacker the authority to censor recorded data on a blockchain and potentially force the blockchain to accept fraudulent blocks.

After gaining at least 51% of the blockchain’s authority, the hackers could then curb user’s payments going through, meaning that they would not verify transactions as complete.

A classic way of a successfully executed 51% attack is in the form of a “double-spend” attack. This means that after halting transactions, the hackers reverse any transactions that were attempted while they had control of the network and they would then move the funds from the transactions straight into their pocket, meaning that the coins would be double-spent – from the originally intended account to the hacker’s wallet.

During the time in which the attack occurs, hackers essentially use the hashpower (which is the majority of the network’s computing power) to create a new fork of the cryptocurrency’s blockchain. The fork will rapidly increase and will become longer than the network’s verified one, allowing them to employ the “double-spend” tactic.

Since the hacker is the authority of the blockchain, they launder the money into their account, force the blockchain to accept the new, longer fork. Funds vanish from the account to which the user intended and appear in the attacker’s wallet as if it was authorized officially.

Regrettably, a 51% attack against cryptocurrency networks can be a startlingly easy endeavor, since hashpower can be hired from “cloud mining” firms and hackers can pay for control of the majority of the blockchain.

The hacker can be in and out and clear out a huge amount of money from the blockchain into their accounts in minutes.

In defusing a 51% attack, prevention is far easier than cure. The most effective way for blockchain networks to prevent such malicious hacking attempts is to ensure a varied and decentralized base of miners, and to ensure resistance to high-end mining rigs. Recent findings indicate that many cryptocurrency networks may be easier to hack than previously thought.

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What are decentralized cryptocurrency exchanges?

Given the emergence of blockchain technology and cryptocurrencies – which may offer a far more secure, trustless, and enticing future compared to fiat currency – it has become somewhat ironic that decentralized currencies have relied on centralized exchanges to facilitate transfers and trading requests.

In recent months and years, however, a new form of cryptocurrency exchange has offered a new solution for traders seeking to conduct transactions trustlessly and in privacy. Colloquially, these are called ‘decentralized exchanges’.

Remind me – what is a ‘traditional’ cryptocurrency exchange?

Cryptocurrency exchanges usually operate similarly to traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies.

Trading on such platforms typically involve fees, and some allow fiat-to-cryptocurrency trades. There are many online exchanges available in different regions around the world that accept a host of different currencies. Typically, cryptocurrency exchanges are regulated by governments and have to adhere to two sets of important requirements called “anti-money laundering (AML)” laws (which prevents the products of criminal activity from appearing as legitimate money) and “know your customer (KYC)” laws, which ensure that traders have to register their identities on services as proof of involvement.

Despite the fact that centralized exchanges can be prone to hacking attempts, manipulation by individuals with oversight, or can be shut down by governments, such services have typically seen a welcome adoption by traders as well as a high trade volume thanks to their ease-of-use.

So what is a ‘decentralized’ cryptocurrency exchange?

Decentralized exchanges have emerged in recent months and years as an alternative to their centralized or ‘traditional’ counterparts.

Put simply, a decentralized exchange is an exchange market that does not rely on a service to hold a user’s funds. Trades instead are facilitated peer-to-peer (or customer-to-customer) and are conducted through an automated process.

Decentralized exchanges leverage blockchain technology to creating a trustless and secure way to exchange cryptocurrencies without the need for a central ‘broker’. Principally, decentralized exchanges serve only as a matching and routing layer for trade orders.

On a decentralized exchange, trading is completed utilizing smart contracts on cryptocurrency platforms – many of which run on Ethereum.

When using a decentralized exchange, users leverage a proxy token (many of which are Ethereum-complaint) to facilitate an exchange of value.

Essentially, users deposit their funds on decentralized exchanges, and are offered an ‘IOU’ in the form of a token which can be traded freely. When a user is prepared to withdraw their funds, these tokens are restored to the cryptocurrency they represent and are returned to customers.

What are the benefits of a decentralized exchange?

Decentralized exchanges offer several enticing benefits over their ‘traditional’ counterparts – chief of which may be the trustless nature of such services.

Users of decentralized exchanges do not need to trust the honesty nor security of a facilitator or ‘broker’, given that contracts and agreements are executed autonomously.

Further, while users on centralized exchanges sacrifice some of their privacy in compliance with KYC and AML regulation, users of decentralized exchanges do not need to disclose their identity to anyone unless the exchange in question relies on bank transfers.

Given that decentralized exchanges are distributed through network nodes all around the world, they are not likely to suffer from server downtime that might disrupt the operations of a centralized exchange.

What are the weaknesses of a decentralized exchange?

In the same manner in which a ‘traditional’ cryptocurrency exchange can be vulnerable to hacking attempts (and the theft of cryptocurrencies), traders place their faith in smart contracts – which can be similarly manipulated, poorly constructed, or otherwise prone to failure – potentially resulting in a loss of funds.

Newer decentralized exchanges have promulgated the concept of “cross-chain atomic swapping”, which could allow cryptocurrencies on different blockchains to be traded seamlessly. This, however, is still a new concept and has not been widely adopted by a large number of cryptocurrency projects.

While decentralized exchanges may be far less prone to manipulation or hacking attempts than traditional exchanges, their complexity and relative novelty typically mean that such platforms can expect far lower trade volumes when compared to their centralized counterparts.

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What are cryptocurrency exchanges?

When making the decision to invest in a cryptocurrency, one has several options. Similarly to fiat currencies, one can receive cryptocurrency as payment for services rendered or goods provided, receive it as a gift, participate in an Initial Coin Offering, or, in similar fashion to buying shares in a company, endeavor to purchase it on an exchange or custodial service of one’s choice.

While some traditional online exchanges do now provide easy access to digital currencies, most investors choose to invest through what are colloquially termed cryptocurrency exchanges.

What is a ‘traditional’ cryptocurrency exchange?

Cryptocurrency exchanges usually operate similarly to traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies. Trading on such platforms typically involve fees, and some allow fiat-to-cryptocurrency trades – meaning that investors can purchase a cryptocurrency such as Bitcoin through their local fiat currency, such as the US Dollar.

Some cryptocurrency exchanges instead utilize Bitcoin as their base currency – meaning that investors must first purchase Bitcoin from another source, and then move that Bitcoin to the relevant exchange to begin trading in other cryptocurrencies.

There are many online exchanges available in different regions around the world that accept a host of different currencies. Typically, cryptocurrency exchanges are regulated by governments and have to adhere to two sets of important requirements called “anti-money laundering (AML)” laws (which prevents the products of criminal activity from appearing as legitimate money) and “know your customer (KYC)” laws, which ensure that traders have to register their identities on services as proof of involvement.

Thus, most fiat-to-cryptocurrency exchanges require traders to link their personal bank account (where fiat currency can be sent from or received) as well as lodge documents that verify their identity before they can trade. Exchanges around the world differ in terms of verification required prior to trading, transaction fees, trading limits, and fiat currencies accepted.

Despite the fact that centralized exchanges can be prone to hacking attempts, manipulation by individuals with oversight, or can be shut down by governments, such services have typically seen a welcome adoption by traders as well as a high trade volume thanks to their ease-of-use.

What is a ‘decentralized’ cryptocurrency exchange?

While cryptocurrencies aim to create a decentralized and peer-to-peer monetary system, traditional cryptocurrency exchanges still rely on a ‘middleman’ to facilitate financial transactions and verify trades.

Subsequently, several decentralized exchanges have emerged over time which aim to leverage blockchain technology in creating a trustless and secure way to exchange cryptocurrencies without the need for a central ‘broker’.

Decentralized exchanges, as their name implies, are not operated by one co-ordinated entity. Instead, decentralized exchanges run on distributed ledger – meaning that a decentralized exchange does not hold customers’ funds or information, and only serves as a matching and routing layer for trade orders.

On a decentralized exchange, trading is completed utilizing smart contracts on cryptocurrency platforms, which at the time of writing typically run on the Ethereum platform. In such cases, Ethereum-compliant tokens are traded trustlessly.

In the same manner in which a ‘traditional’ cryptocurrency exchange can be vulnerable to hacking attempts (and the theft of cryptocurrencies), traders place their faith in smart contracts – which can be similarly manipulated, poorly constructed, or otherwise prone to failure – potentially resulting in a loss of funds.

Newer decentralized exchanges have promulgated the concept of “cross-chain atomic swapping”, which could allow cryptocurrencies on different blockchains to be traded seamlessly. This, however, is still a new concept and has not been widely adopted by a large number of cryptocurrency projects.

While decentralized exchanges may be far less prone to manipulation or hacking attempts than traditional exchanges, their complexity and relative novelty typically mean that such platforms can expect far lower trade volumes when compared to their centralized counterparts.

What is a ‘custodial service’?

The term ‘custodial service’ describes a platform that retains possession of a trader’s purchased cryptocurrency. This typically means that the service retains possession of an investor’s private keys, and track trades through a balance sheet rather than through a blockchain.

Custodial services usually afford investors with the ability to make trades both quickly and cheaply, though such operations come with a lack of transparency and further see an investor sacrifice their ‘control’ over their respective cryptocurrencies.

The benefit of such services usually involve the ability to deposit and withdraw fiat currency, enjoy high trading volumes, and trade with higher limits.

What is a ‘non-custodial service’?

Non-custodial services, as their name implies, are trading platforms that do not require their users to create an account nor do they hold an investor’s cryptocurrency on a balance sheet. Providing a high degree of security and anonymity. Non-custodial services perform trades instantly on their investors’ behalf.

Principally, a non-custodial service creates a separate wallet for each customer and cannot make unilateral transactions, meaning that a customer must type in his password (or use some other hardware-based method) to authorize transactions.

What are peer-to-peer services?

Should you rather not wish to proceed through an online exchange, you can always accept cryptocurrency through what is called a ‘peer-to-peer’ transaction. This involves a buyer providing a seller with fiat currency or other goods, after which the seller sends an allotted amount of bitcoin to the buyer in question.

It is important to note that given the decentralized nature of cryptocurrencies, transactions are not natively refundable. Should you wish to request a refund, you are relying on the goodwill of another party to oblige your request.

Peer-to-peer transactions can take place in a number of different ways. The most conventional method is for a recipient to provide the public key of their cryptocurrency wallet, where a sender then directs an allocation of cryptocurrency to that address. After a waiting period, the transaction will have been “confirmed” and the transfer will reflect in the wallets of both parties and on the Blockchain.

Some services have further emerged to facilitate this transaction, and help secure trust by placing funds in escrow until the transaction has concluded in full.

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Is Ethereum money?

Ethereum is often touted as Bitcoin’s foremost ‘rival’, but in reality the two digital currency platforms serve two different purposes. While Bitcoin is a decentralized, peer-to-peer payments network, Ethereum is a platform that uses blockchain technology to replace ‘third party’ internet vendors that store data or keep track of complex financial instruments.

Ethereum, in itself, relies on a currency called Ether. Given the fact that Ether has seen massive price increases in recent months, and the fact it is frequently accepted as tender in new Initial Coin Offering (ICO) projects, Ether is frequently labeled as a financial asset that might one day eclipse Bitcoin’s supremacy. However, while Ether is a digital bearer asset similar to Bitcoin, the cryptocurrency is instead designed to serve as a token necessary to pay for computational resources necessary to process an application or program built on the Ethereum platform.

In the same manner that Bitcoin has been called ‘digital gold’, Ether has been similarly labeled ‘digital oil’.

What does Ether do?

The vision of the Ethereum platform is to accommodate users around the world with control over their own data through a distributed computing platform wherein new projects could build services atop of the platform itself. In the Ethereum network, thousands of servers and clouds are replaced by ‘nodes’ – computing power offered by committed volunteers – which weave together to serve as a decentralized ‘world computer’.

Requests made on this network are calculated in GAS – a unit of computation used in transactions – and are paid for in Ether.

The amount of GAS necessary to complete a transaction is determined by the cost of computation. Essentially, all smart contracts and decentralized applications running on the Ethereum platform cost GAS.

What is Ether’s relationship to GAS?

Essentially, GAS is pegged to the supply and demand of computational power available on the Ethereum network. Ether is used to pay for GAS rather than facilitate computational requests directly due to the fact that a volatile market could easily render ordinary requests on the Ethereum network far too costly for the average developer.

Could Ether be used as a currency?

Presently, Ether does not have a fixed supply despite the fact that no more than 18 million Ether are minted each year. Proposals from Ethereum’s developers have indicated that the platform may shift from proof-of-work mechanics (mining) to proof-of-stake mechanics in the near future, meaning that the platform may introduce a hard cap at some juncture.

While Ether is the currency of the Ethereum platform, it has not been expressly designed to be used as a means of exchange or a unit of account for general goods in the same way Bitcoin has. However, vendors may at some point in the future choose to adopt Ether as tender, given that the currency generally fulfills the properties of being good money despite its original intent and its present lack of a hard cap.

What is the relationship between Ether and ICOs?

Ether’s role as the currency of the Ethereum platform and the possibility of it being used as a means of exchange have been conflated by the emergence of several ICOs running on Ethereum’s mainnet, which appealed for the donation of Ether in exchange for new ERC-20 (Ethereum compliant) tokens.

Given that new ICO projects have requested Ether as payment from interested investors, the price of Ether has soared in recent months – outstripping even Bitcoin’s growth. This reflexive relationship has lead to the saying that ‘ICOs are Ethereum’s killer app.’

Is Ether better money than Bitcoin?

Bitcoin enjoys primacy in cryptocurrency markets given its status as the original digital currency outlined by Satoshi Nakamoto, as well as the fact that – unlike Ethereum – Bitcoin is limited to a 21 million-hard cap.

Ethereum as a platform, however, generates several appealing qualities that Bitcoin does not possess.

Ether’s block time is typically between fourteen and fifteen seconds – as opposed to ten minutes on the Bitcoin network – and the mining of Ether generates new tokens at a consistent rate. This means that transactions in Ether complete more rapidly, while new Ether enters the system more quickly.

Ether’s transaction fees differ by the varying complexity of the computations required to facilitate a smart contract – meaning that developers, in principle, pay for what they require. Bitcoin’s transaction fees are instead determined by the relevant size of a transaction.

The development of smart contracts, specifically, can craft complicated and autonomous agreements that can execute when certain premises are met – meaning that Ethereum may represent a compelling platform to create payment agreements.

Given its prevalence as a decentralized platform, Ethereum has also birthed a number of projects designed to leverage the platform’s finer qualities for the purpose of serving as a general currency. Among these are Dai – a ‘stablecoin’ pegged to the US dollar, and Digix -a token pegged to the price of gold.

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What is Bitcoin’s ‘Lightning Network’?

While many investors who have made the bold decision to buy Bitcoin have been rewarded thanks to the cryptocurrency’s volatile price movements, a key ingredient missing to establish Bitcoin as a global peer-to-peer currency is that of scale.

At present, Bitcoin – despite its remarkable technological foundation in blockchain technology – is only capable of processing some seven transactions per second; a far cry from the likes of Visa or Mastercard, which process an estimate 1700 transactions a second!

The challenge of scaling the Bitcoin network to (potentially) millions of users has brought with it several interesting concepts. While some projects – such as Bitcoin Cash – have sought to expand the amount of information stored within an individual ‘block’ on the Bitcoin network, others have sought to develop new networks that can act ‘on top’ of Bitcoin’s blockchain and avoid directly interfering with the technology pioneered by Satoshi Nakamoto.

The Lightning Network is one such idea, and has rapidly gained prevalence as the solution that could expand Bitcoin to millions of consumers, merchants, and institutions.

While Bitcoin works by broadcasting all transactions on its publicly distributed ledger, the central idea behind the Lightning Network is that not all money issued on digital transactions necessarily need to be broadcasted – and by broadcasting fewer transactions, the Bitcoin blockchain is essentially ‘freed up’ wherein processing seven transactions per second can feasibly serve greater amounts of people.

Essentially, this would see the Bitcoin blockchain move to handle ‘macro’ transactions (large scale, conclusive transfers), with the Lightning Network would instead cater for ‘micro’ transactions.

Micro-transactions are created on the Lightning Network by way of ‘channels’ – direct lines of transfer between two parties. Each transacting party would place a deposit of Bitcoin to open a channel, and could feasibly transact in denominations of Bitcoin – for example, a user could open a channel with their favorite coffee shop, and pay in Bitcoin through that channel for each cup of coffee. Once the channel has been expended – or the agreement behind its creation fulfilled – all microtransactions in one channel in the Lightning Network are written to the Bitcoin blockchain as a macro-transaction.

Through the Lightning Network, experts and researchers estimate that parties transacting in Bitcoin would add just two transactions a year to the Bitcoin blockchain – slashing present fees to just a few millionths of a cent.

The Lightning Network offers some interesting solutions that are presently beyond the scope of the Bitcoin network – for example, users establishing channels on the Lightning Network can create smart contracts (agreements that conclude once completed) and can even ‘stream’ money.

By using a smart contract, a passenger in a taxi cab could effectively create a smart contract that pays a taxi driver a set amount of money per kilometer or mile, rather than paying a predetermined amount at the inception or conclusion of a journey.

While Bitcoin’s Lightning Network is yet far from perfect – opponents have cited concerns that entities could simply create numerous ‘nodes’ from which to operate the network and effectively ‘centralize’ it – the technology might be the key in maintaining Bitcoin’s early dominance over wider cryptocurrency markets.

In time, and should users, merchants, and institutions decide to adopt it, Bitcoin’s Lightning Network could effectively become a new standard in global transaction – harnessing both the incredible potential of Bitcoin and blockchain technology, and the speedy efficiency of fiat currency when used at scale.

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What is Ethereum?

While Bitcoin offers to serve as a new monetary system wherein units of currency are instead verified through cryptography and transactions are distributed through blockchain technology, Ethereum – often incorrectly termed as Bitcoin’s ‘major competitor’ – is instead an approach to decentralize content and applications.

As the internet works today, users can request information stored on servers around the world. While this is convenient, this principle relies on a foundation of trust between a user and the server vendor in question; wherein the best case information is stored confidentially, while in the worst case hackers – or rogue entities – can use such data for nefarious purposes.

Ethereum is a new technology – best referred to as a platform – that use blockchain technology to replace ‘third party’ internet vendors that store data or keep track of complex financial instruments.

Whereas servers and clouds handle most complex requests that users can conjure over the internet, Ethereum brings with it the possibility of decentralizing – and possibly democratizing – such services.

In the Ethereum network, thousands of servers and clouds are replaced by ‘nodes’ – computing power offered by committed volunteers – which weave together to serve as a decentralized ‘world computer’. The vision of the Ethereum platform is to accommodate users around the world with control over their own data through a distributed computing platform wherein new projects could build services atop of the platform itself.

Essentially, Ethereum replaces the need for a single server as a point of reference (which a server vendor might charge for) and instead provides a network of decentralized computers around the world through which information and requests can be run through. Should a user wish to use this network, computational requests aren’t paid for in traditional currency, but are instead issued in Ether.

Ether, then, is a digital bearer asset similar to Bitcoin – however, Ether instead serves as a token necessary to pay for computational resources necessary to process an application or program built on the Ethereum platform. Ether, for good reason, has sometimes been referred to as ‘digital oil’, as opposed to Bitcoin’s ‘digital gold’.

The cost of Ether is determined by how much computational power a transaction will take, and for how long it will run for. Transactions on the Ethereum blockchain require ‘gas’, which are subsequently paid for in Ether.

Each time a program is used within the Ethereum platform, thousands of computers process the instruction instead of a single server. By basing its design off Bitcoin’s blockchain, Ethereum’s blockchain instead provides a means for developers to create and run not only applications, but further agreements that have additional steps, rules of ownership, or specific transfer options through what are termed ‘smart contracts’. Smart contracts, then, are essentially programs that execute exactly as they are set up to by their creators.

Similarly to how Bitcoin mining works – wherein computer users around the world verify transactions through cryptography and, as a reward for doing so, are allocated new Bitcoins – Ethereum leverages what is called ‘proof of work’ to determine that transactions are valid and that no tampering has been attempted by malicious entities. Thus, similarly to Bitcoin, miners are an essential population that ensure the integrity of the Ethereum blockchain.

As with Bitcoin, Ethereum users can store mined or purchased Ether in wallets – regardless of whether they are found on a desktop computer or mobile device. Thereafter, users can either trade Ether to interested parties for fiat currency or another cryptocurrency, or can join (or even create) a smart contract or decentralized application of their choosing.

Given the newfound popularity of the Ethereum platform, users have been quick to not only use Ether as a mechanism to fuel new smart contracts or applications, but have further held onto the surging price of the cryptocurrency as it is frequently used for new services and platforms running on the Ethereum network.

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What are ‘darkcoins’?

While Bitcoin might be the first and most recognisable cryptocurrency, thousands of alternatives do exist – and as new investors seek to buy cryptocurrencies and stake their claim in a bold and exciting new financial world, many have turned their attention to so-called ‘dark coins’ – cryptocurrencies with a focus on providing secure, private transactions.

While Bitcoin is pseudonymous – providing transacting parties with the means to obscure their identity – the leading cryptocurrency is not perfectly anonymous; meaning that chain analysis tools and wallet identities can be traced to show exchanges of value between parties. 

Crucially, this impacts on Bitcoin’s fungibility – meaning that one transacting parties might refuse the obtain a Bitcoin (or part thereof) that could have been used for illicit purposes. Considering the fungibility of fiat currency such as the US Dollar – which typically has an untraceable origin beyond the advent of its printing – is part of what empowers its use as a means of transaction, it becomes clear that this is a hurdle cryptocurrency needs to cross.

Subsequently, new alternative coins – or altcoins – have emerged in recent years that offer strong focus on anonymity; ensuring that despite tough regulatory talk, the power for blockchain technology to bypass middlemen such as nation-states and other regulators might well continue unabated.

Why privacy coins?

With increasing legal scrutiny surrounding cryptocurrencies – which has specifically seen many nations plan to implement tax laws upon cryptocurrency transactions – many believers in blockchain technology have begun to turn to privacy coins as a means to escape observation.

While this can naturally have the implication of fuelling illicit activities on the internet, privacy coins offer a means for regular consumers to privately purchase goods or services while retaining control of their own financial information – a key promise that underpinned the introduction of cryptocurrencies from the inception of the Bitcoin white paper.

What are the leading darkcoins?

Several privacy-focussed cryptocurrencies have debuted in the market space, though this this article we will highlight three contenders that each have a unique approach to privacy and fungibility.

Monero

Originally created in 2014 as BitMonero, Monero is sometimes recognized as the most visible privacy coin.

Monero leverages the concept of ring confidential transactions – a means which essentially bundles together sending and recipient addresses and renders transaction flows opaque. Further, technologies such as ring signatures and stealth addresses can obscure both the sender and receiver in any given transaction.

For these reasons, Monero has quickly risen in popularity – and its focus on privacy has presented a strong focus on fungibility.

Dash

Digital Cash, or Dash, originally started life as DarkCoin – a privacy-focussed effort. Today, Dash is one of the largest cryptocurrencies by its market capacity alone, which presently stands at some $2 billion USD.

Dash is unique in the sense that it provides both a transparent and ‘opaque’ method of transaction. While Dash users can opt to issue Instant transactions which are recorded on a blockchain similarly to how the Bitcoin blockchain functions, transacting parties can also use its PrivateSend feature, which uses a decentralized ‘mixing’ service.

Essentially, this enables three or more participants to pool their funds – leaving any intended transaction obfuscated. The cryptocurrency has its limits, however, and at present only allows 1,000 DASH to be spent per PrivateSend transaction.

Zcash

In a somewhat alternative approach to the protocols leveraged by Dash and Monero, Zcash has risen to fame for its use of ‘zero-knowledge proofs’.

Fundamentally, this allows data recorded on a blockchain to serve as a private means of verification. The Zcash enables the encryption of both sender and recipient addresses alongside transaction amounts – meaning that any analyst attempting to determine the origin, destination, and nature of a given transaction might well be stymied.

Importantly, Zcash does not obfuscate the IP addresses of its users – meaning that Zcash cannot hide personal identifiers linked to public data.

Do darkcoins have a future?

Many market pundits have issued their expectations that should Bitcoin or other cryptocurrencies be deemed ‘illegal’ or otherwise heavily regulated, cryptocurrency enthusiasts might elect to adopt darkcoins to escape excessive legislation or erstwhile oversight.

While it remains to be seen as to how financial regulators will legislate the use of cryptocurrencies, advocates such as John McAfee – the man behind the popular McAfee Antivirus software – has predicted that darkcoins will see increased usage in the near future.

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