Coin Burning: A Guide

Coin burning is a concept exclusive to the cryptocurrency marketplaces, having been adopted by a wide range of coins and tokens. Though it may sound hard core, but coin burning is a central mechanism that could prove to be a popular feature for cryptocurrency projects down the road. In fact, many Initial Coin Offerings (ICOs) have integrated a coin burning mechanism for unsold tokens at the end of their token sale. Not only that, but major exchanges with their own native tokens – like Binance – also adopt a periodic token burning mechanism to add value for those who hold Binance Coin (BNB).

There are of course, many motivations for projects to consider a coin burn structure. This guide will delve lengthily into the mechanics of coin burning to provide a new outlook on what the future holds for the cryptocurrency marketplace.

Coin burning – as the name suggest – is a process of intentionally ‘burning’ or eliminating the coins by rendering it unusable. This is done by sending a portion of the coins to an ‘eater address’, which is often referred to as a ‘black hole’ since the private keys to that address are not obtainable by anyone. Therefore, any coins sent to an eater address are unrecoverable and cannot be used again, forever! These coins are effectively taken out of circulation and is publicly recorded and verifiable on the blockchain.

Reasons for Coin Burning

1) MORE EFFECTIVE CONSENSUS MECHANISM

This applies to coins that adopt Proof-of-Burn (POB) as their consensus mechanism. POB is a unique way of achieving consensus in a distributed network, requiring participants – miners and users – to burn a portion of coins. There are many variations of POB which will be discussed in the next section.

2) INCREASE VALUE OF COINS

In order to understand this, we need to understand the basic economic laws of demand and supply. Scarcity is a central economic concept that gives value to a particular asset and in this case, cryptocurrency. Unlike fiat currencies, cryptocurrencies are deflationary in nature. This means that the coin supply for most cryptocurrencies are fixed, with no additional coins created once it has reached its total supply count. The best example is Bitcoin, which has a fixed supply of only 21 million; if demand increases, prices would increase since there is a limited number of Bitcoin in circulation. Likewise, if the supply of Bitcoin further decreases – due to burning, lost private keys or forgotten Bitcoins – then prices would similarly increase since there is now a lesser number of Bitcoins to satisfy people’s demands.

Coin burning reduces the total supply in circulation since the coin is intentionally destroyed. It is an effective method of increasing and stabilizing the valuation of coins and tokens. Economic principles dictate that reducing the quantity of something makes it much more valuable!

3) PROTECTION AGAINST SPAM

Coin burning acts as natural mechanism to safeguard against Distributed Denial of Service Attack (DDOS) and prevent spam transactions from clogging the network. The same way how users pay a small fee for sending Bitcoin (BTC) or pay gas for smart contract computations in the Ethereum blockchain, coin burning creates a cost for executing a transaction. Instead of paying fees to miners to validate transactions, some projects have integrated a burning mechanism where a portion of the amount sent is automatically burnt. Ripple (XRP) is a project that utilizes this burning model.

4) SIGN OF LONG-TERM COMMITMENT

Coin burning is an effective tool to signal a firm commitment by a cryptocurrency project. The goal of any project is to add significant value to coin holders, who will probably be the core users and supporters of their service. Employing a coin burning mechanism to burn excess ICO tokens or provide periodic burning schedules (by buying back tokens from the open market using generated profits and thereafter burning them) would go a long way in reinforcing the project’s growth prospect.

Atomic Swap Explained

An atomic swap is a smart contract technology that empowers the exchange of one cryptocurrency for an alternative cryptocurrency without using central intermediaries, such as exchanges.

Atomic swaps can take place unswervingly amid blockchains of different cryptocurrencies, or they can be conducted off-chain, away from the foremost blockchain. They first came into prominence in September 2017, when an atomic swap between Decreed and Litecoin was conducted.

Since then, other start-ups and decentralized exchanges have allowed users the same facility. For example, Lightning Labs, a start-up that uses bitcoin’s lightning network for transactions, has conducted off-chain swaps using the technology. Cryptocurrencies and decentralized exchanges, such as 0x and Altcoin.io, have also incorporated the technology.

Atomic Swaps Break Down

As it occurs today, the process for switching cryptocurrencies is time-consuming and complex. This is due to several reasons. For example, the disjointed nature of today’s cryptocurrency ecosystem presents several challenges to average traders.

Not all cryptocurrency exchanges support all coins. As such, a trader wishing to exchange her coin for another one that is not supported on the current exchange may need to migrate accounts or make several conversions between intermediate coins to accomplish her goal. There is also an associated counterparty risk if the trader wishes to exchange her coins with another trader.

Atomic swaps solve this problem through the use of Hash Time- lock Contracts (HTLC). As its name denotes, HTLC is a time-bound smart contract between parties that involves the generation of a cryptographic hash function, which can be verified between them.

Atomic swaps necessitate both parties to admit receipt of funds within a specified timeframe using a cryptographic hash function. If one of the involved parties fails to authorize the contract within the timeframe, then the entire transaction is voided, and funds are not exchanged. The latter action helps remove counterparty risk.

Blockchain Nodes Explained

A node is a device on a blockchain network, that is in the crux the underpinning of the technology, allowing it to function and survive. Nodes are disseminated across a widespread network and carry out a variety of tasks. In this blog we will try to understand what blockchain nodes are.

A node can be any active electronic device, including a computer, phone or even a printer, as long as it is connected to the internet and as such has an IP address. The role of a node is to support the network by maintaining a copy of a blockchain and, in some cases, to process transactions. Nodes are often arranged in the structure of trees, known as binary trees. Each cryptocurrency has its own nodes, maintaining the transaction records of that particular token.

Nodes are the individual parts of the larger data structure that is a blockchain. As the owners of nodes willingly contribute their computing resources to store and validate transact ions, they have the chance to collect the transaction fees and earn a reward in the underlying cryptocurrency for doing so. This is known as mining or forging.

Processing these transactions can require large amounts of computing and processing power, meaning that the average computer’s capabilities are inadequate. Generally, professional miners tend to invest in extremely powerful computing devices known as CPUs (central processing units) or GPUs (graphics processing units) in order to keep up with the demand for processing power that is required for them to validate transactions and as such earn the rewards that comes with doing so.

A node can either be a communiqué endpoint or a point of communiqué redistribution, connecting to other nodes. Every node on the network is considered equal, however certain nodes have different roles in the manner in which they support the network. For example, not all nodes will store a full copy of a blockchain or validate transactions.

A full node downloads a complete copy of a blockchain and checks any new transactions coming in based on the consensus protocol utilized by that particular cryptocurrency or utility token. All nodes use the same consensus protocol to remain compatible with each other. It is the nodes on the network that confirm and validate transactions, putting them into blocks. Nodes always come to their own conclusion on whether a transaction is valid and should be added to a block with other transactions, irrespective of how other nodes act.

Cryptocurrency Mining Explained

Cryptocurrency mining is one of the most regularly used approaches of validating transactions that have been executed over a blockchain network. Not only does blockchain work to protect transaction data through encryption, as well as store this data in a decentralized manner (i.e., on hard drives and servers all over the world) so as to keep a single entity from gaining control of a network, but also the primary goal is to ensure that the same crypto token isn’t spent twice. In effect, “mining” is one means of making sure that cryptocurrency transactions are accurate and true, such that they can never be compromised in the future.

Cryptocurrency mining itself refers to a type of validation model known as “proof-of-work” (PoW). There are two common validation types, and we’ll look at the other, known as proof-of-stake, in a moment.

In the PoW model — which bitcoin, Ethereum, Bitcoin Cash, and Litecoin use, to name a few — individuals, groups, or businesses compete with one another with high-powered computers to be the first to solve complex mathematical equations that are essentially part of the encryption mechanism. These equations correspond to a group of transactions, which is known as a block. The first individual, group, or business that solves these transactions, and in the process validates the accuracy of these transactions within a block, receives a “block reward.” A block reward is paid out as digital tokens of the currency that’s being validated.

As an example, the current block reward for bitcoin is 12.5 tokens. That means whoever is the first to correctly solve equations for a block is paid 12.5 tokens. With bitcoin near $9,500 per coin, that works out to a nearly $119,000 haul.

There are two major concerns attached to the PoW model. First, it’s an extremely electricity-intensive practice. To mine virtual currencies, massive mining centres with graphics processing units and/or ASIC (application-specific integrated circuit) chips are set up to handle this validation and processing. The electricity costs, depending on where an operation is located, can be enormous. It could also, in theory, be a drain on local or national electric grids, depending on how large digital networks and mining farms become.

The other issue is that the PoW model has a security vulnerability, at least for smaller digital currencies. Any individual or group that can gain control of 51% of a network computing power could essentially hold that network and digital currency hostage. Networks the size of bitcoin, Ethereum, and Litecoin have next to nothing to worry about. However, newly issued coins with fewer participants could be susceptible.

Though cryptocurrency mining might often be lumped in as one big free-for-all, there are differences in the equipment being used to validate transactions. For bitcoin, miners need to use highly specialized and expensive ASIC chips because of the difficulty in validating bitcoin transactions. Meanwhile, most other virtual currencies allow miners to use some variation of graphics processing units from the likes of NVIDIA or Advanced Micro Devices to proof transactions. However, the difficulty in this mining can still vary from one cryptocurrency to the next.

Blockchain and Remittance

Remittance is the transference of money from a migratory worker to someone back in their home country. People have always moved in search of better work forecasts in high-income (or high currency value as compared to home) countries. Based on the World Migration Report 2018, there are presently a projected 244 million international migrants living in other countries. This number has either unswervingly or indirectly contributed to the global remittance’s $689 billion-dollar industry with India being top of the pile, contributing $80 Billion or 11.6% of its entirety. The global remittance industry is expected to grow by more than 3% in 2019.

Blockchain can be the future for remittance

The most prevalent Cryptocurrency is Bitcoin. It has been labelled as the future of the global financial industry. Bitcoin positively has great potential to be the digital currency of the world but before that, one of two things needs to happen:

Bitcoin becomes less volatile
Products and Services everywhere become priced in Bitcoin rather than fiat

We are still a long way from that and therefore, let us focus our attention on not Bitcoin but on its underlying technology: the Blockchain Technology.

The key proponents of blockchain technology suggest that it can reduce the costs for remittance services. Interesting things are happening behind the scenes where blockchain technology is attempting to replace the current financial services industry’s centralized business model. Financial institutions and banks are exploring ways to implement blockchain to reduce transaction costs, increase transaction speed, reduce fraud and eliminate third-parties.

By cutting out the traditional middlemen, blockchain technology can speed up and simplify cross-border payments, making remittances more affordable. Currency fluctuations can result in a loss when transactions are being made cross borders and blockchain can provide an almost guaranteed, real-time transaction.

Distributed Ledger Technology or DLT can serve as the backbone for a new cross-border payment infrastructure that can potentially solve inefficiencies and provide a faster, secure and more affordable service.

The average transaction cost of remitting money currently is more or less 4–5% per transfer. This cost includes exchange rate margins, charges from both the sender and recipient intermediaries, agents, overheads etc in remitting USD500, USD20–25 will go into transaction fees. Online Money Transfer Platforms like TransferWise was able to reduce the cost to 1%. Blockchain can reduce the cost from 5% to a fraction of a percentage. This will drastically reduce the USD30 billion dollars in the cost of sending remittances to an absurd amount in the thousands and thus, be an effective cost-saving method.

Federal Reserve System

The Federal Reserve System is the central bank of the United States and debatably the most powerful financial institution in the world. The Federal Reserve System was instituted by the U.S. Congress in 1913 to deliver the nation with a innocuous, flexible, and stable monetary and financial system.

It is founded on a federal system that encompasses a central governmental agency (the Board of Governors) in Washington, D.C., and 12 regional Federal Reserve Banks that are each accountable for an exact geographic area of the U.S. The Federal Reserve is considered to be independent because its decisions do not have to be ratified by the president or any other government official. However, it is still subject to Congressional oversight and must work within the framework of the government’s economic and financial policy objectives. Often known simply as “the Fed.”

The Federal Reserve’s creation was precipitated by repeated financial panics that afflicted the U.S. economy over the previous century, leading to severe economic disruptions due to bank failures and business bankruptcies. A crisis in 1907 led to calls for an institution that would prevent panics and disruptions. The 12 regional Feds are built in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The Federal Reserve’s responsibilities can be characterized into four wide-ranging areas:

Conducting national financial policy by influencing monetary and credit conditions in the U.S. economy to ensure maximum employment, stable prices and moderate long-term interest rates.
Supervising and regulating banking institutions to ensure safety of the U.S. banking and financial system and to protect consumers’ credit rights.
Maintaining financial system stability and containing systemic risk.
Providing financial services – including a pivotal role in operating the national payments system – to depository institutions, the U.S. government and foreign official institutions.

The Fed’s main income source is interest on a range of U.S. government securities it has acquired through its operations. Other income sources include interest on foreign currency investments, interest on loans to depository institutions, and fees for services (such as check clearing and fund transfers) provided to these institutions. After paying expenses, the Fed transfers the rest of its earnings to the U.S. Treasury.

Advantages and Disadvantages of Fiat and Cryptocurrency

Since we’ve already understood what fiat currency and cryprocurrencies are in our previous blog. Let’s look at what advantages and disadvantages that each of them entails.

Advantages of Fiat Money

Fiat Money has remained legal tender in most countries in part because they are highly stable and controlled. Unlike other forms of money, such as cryptocurrencies and commodity-based currencies, fiat currencies are relatively stable. The stability allows regulators and governments to navigate the economy against recession and inflation. Stability also allows fiat money to act as a means of storing value and facilitating exchange. It can also be used to provide a numerical account. Greater control also allows central banks to manage various economic variables such as liquidity, interest rates and credit supply key to ensuring a robust, stable economy.

Disadvantages of Fiat Money

Though Fiat Money is considered a stable currency, yet that is not always the case. Economic recessions over the years have highlighted some of the deficiencies associated with Fiat money. The fact that a central bank’s greater control at times does little to stop inflation or recession has led most people to believe that gold could be a much stable currency given its unlimited supply. The notion of central banks control over the economy and the constant increase in global prices create the need for cryptocurrencies.

Cryptocurrencies Advantages

Cryptocurrencies are available on a click of a button, all over the world. Anyone that can make an online transfer can also acquire and own a digital coin of choice. Although the process is still complicated, in the futures, it will be easier to transact and own cryptocurrencies.

Fast settlement times are another attribute that continues to accelerate widespread adoption of virtual currencies. Unlike other electronic cash settlement systems that take days to process transactions, cryptocurrencies enable instant settlements. Lower transaction fees have seen cryptocurrencies emerge as a preferred means of sending money across borders. Transferring money using other bank gateways can be quite expensive given the number of fees charged along the way. Privacy is another aspect that has made cryptocurrency desirable as users don’t have to share their identity to be able to complete transactions. There are altcoins which the main functions are to maintain the privacy of people behind transactions.

Disadvantages of Cryptocurrencies

Cryptocurrencies can be quite difficult to understand – one of the reasons why some countries and regulators continue to shun them. A lack of knowledge on how to use them is another headwind that continues to clobber digital currencies prospects and sentiments. The fact that it is not possible to reverse a transaction once it is made is another headache that has forced most people to shun cryptocurrencies. If a wrong a transaction is made the only thing one can do is ask for a reversal from the recipient. There is nothing one can do on recipients of a wrong transaction turning down a request for a refund. Volatility is by far the biggest disadvantage that has clobbered cryptocurrencies sentiments. Volatility goes a long way in affecting the value of a coin, which can be difficult to comprehend or contend with.

Fiat Currency Vs Cryptocurrency

Before we get into the the differences lets understand what Fiat currency and Cryptocurrency. Fiat Money is a kind of currency, issued by the government and regulated by a central authority such as a central bank. Such currencies act like legal tender and are not necessarily backed by a physical commodity. Instead, it is based on the credit of the economy.

Fiat currencies such as the US Dollar, Pound or Euro derive their value from the forces of supply and demand in the market. Such currencies are always at risk of becoming worthless due to hyperinflation as they are not linked to any physical reserves such as commodities.

Fiat currency first came into being at around 1000 AD in China before spreading to other parts of the world. Initially, currencies were based on physical commodities such as gold. It is only in the 20th century that President Richard Nixon stopped the conversion of U.S dollar into gold.

A cryptocurrency is a form of digital or virtual currency that can work as a medium of exchange. Being virtual in nature, they use cryptography technology to process, secure and verify transactions.

Unlike Fiat currencies, cryptocurrencies are not controlled by any central authority such as a central bank. Instead, they are limited entries in a database such as a blockchain that no one can change or manipulate, unless certain conditions are met.

Cryptocurrencies came into being as a side product of Satoshi Nakamoto, the brainchild behind Bitcoin cryptocurrency. Nakamoto did not intend to develop a currency but a peer-to-peer electronic cash system for facilitating transactions without any central oversight.

The decentralization aspect of the network means there is no central server where transactions are hosted or controlling authority. In a decentralized network like Bitcoin, every transaction to have ever happened is displayed for everyone to see. Each transaction file also consists of senders and recipients’ public keys.

Differences Between Fiat Money and Cryptocurrencies

While both fiat money and cryptocurrencies can be used as a means of payment, there are some differences.

Legality

Governments issue fiat currencies, which are in return regulated by the central bank. Fiat money is deemed legal tender in that it is often the official means of finalizing transactions. Governments control fiat money supply and issue policies from time to time that affects their value.

Cryptocurrencies, on the other hand, are merely digital assets that act as a medium of exchange that governments have no control over. The decentralization aspect means no central body can control or influence their value.

Some countries have banned cryptocurrencies on concerns that some of them are being used to fuel illegal activities such as terrorism and money laundering.

Tangibility

It is not possible to have a physical feel of cryptocurrencies as they operate online as virtual coins. Fiat currencies, on the other hand, have a physical aspect as they can exist as coins and notes thus possible to have a physical feel. Fiat money physical aspect at times does present a lot of challenges as it can be a nuisance to move around with vast chunks of money.

Exchange Aspect

Cryptocurrencies exist in digital form as they are created by computers and operate as private pieces of code. The means of exchange is thus purely digital. In contrast, fiat money can exist in both digital and physical form. Electronic payment services allow people to transfer fiat money digitally. In addition, people can transact with one another and exchange money physically.

Supply

A major difference between fiat money and cryptocurrency has to do with supply. Fiat money has an unlimited supply which means central authorities have no cap to the extent in which they can produce money.

Most cryptocurrencies have a cap when it comes to supply, which means there is a set amount of coins that will ever be in supply. For example, the total number of Bitcoin coins that will ever be in supply is capped at 21 million.

With fiat money, it is impossible to tell the amount of money in circulation at any given time, but with cryptocurrencies, it is possible.

Storage

Cryptocurrencies virtual aspect means they can only exist online thereby stored in digital wallets commonly referred to as cryptocurrency wallets. While most digital wallets claim to offer secure storage, some of them have been hacked resulting in people losing a substantial amount of holdings.

The versatility of fiat money, on the other hand, means it can be stored in various forms. For instance, there are payment providers such as PayPal that allow people to store fiat money in digital form. Banks also do act as custodian of hard currencies. Cryptocurrencies and fiat money come with attributes that make them stand out as a means of legal tender regardless of jurisdiction. However, they also come with cons that have seen them continue to divide opinion around the world.

While there are many advantages of cryptocurrencies over fiat money, it seems that cryptocurrencies are not yet mature to replace the current standard payment method. It is a matter of time and not necessarily will be in the form of Bitcoin, Ethereum or any other cryptocurrency. The crypto market will most likely evolve to create a positive product that might change the current money system.

What is Cryptojacking?

Cryptojacking (also called malicious cryptomining) is an emerging online threat that hides on a computer or mobile device and uses the machine’s resources to “mine” forms of online money known as cryptocurrencies. It’s a burgeoning menace that can take over web browsers, as well as compromise all kinds of devices, from desktops and laptops, to smart phones and even network servers.

Like most other malicious attacks on the computing public, the motive is profit, but unlike many threats, it’s designed to stay completely hidden from the user.

Cryptojacking is a scheme to use people’s devices (computers, smartphones, tablets, or even servers), without their consent or knowledge, to secretly mine cryptocurrency on the victim’s dime. Instead of building a dedicated cryptomining computer, hackers use cryptojacking to steal computing resources from their victims’ devices. When you add all these resources up, hackers are able to compete against sophisticated cryptomining operations without the costly overhead.

If you’re a victim of cryptojacking, you may not notice. Most cryptojacking software is designed to stay hidden from the user, but that doesn’t mean it’s not taking its toll. This theft of your computing resources slows down other processes, increases your electricity bills, and shortens the life of your device. Depending on how subtle the attack is, you may notice certain red flags. If your PC or Mac slows down or uses its cooling fan more than normal, you may have reason to suspect cryptojacking.

The motivation behind cryptojacking is simple: money. Mining cryptocurrencies can be very lucrative, but turning a profit is now next to impossible without the means to cover large costs. To someone with limited resources and questionable morals, cryptojacking is an effective, inexpensive way to mine valuable coins.

How does cryptojacking work?

Cryptojackers have more than one way to enslave your computer. One method works like classic malware. You click on a malicious link in an email and it loads cryptomining code directly onto your computer. Once your computer is infected, the cryptojacker starts working around the clock to mine cryptocurrency while staying hidden in the background. Because it resides on your PC, it’s local—a persistent threat that has infected the computer itself.

An alternative cryptojacking approach is sometimes called drive-by cryptomining. Similar to malicious advertising exploits, the scheme involves embedding a piece of JavaScript code into a Web page. After that, it performs cryptocurrency mining on user machines that visit the page.

In early instances of drive-by cryptomining, web publishers caught up in the bitcoin craze sought to supplement their revenue and monetize their traffic by openly asking visitors’ permission to mine for cryptocurrencies while on their site. They posed it as a fair exchange: you get free content while they use your computer for mining. If you’re on, say, a gaming site, then you probably will stay on the page for some time while the JavaScript code mines for coin. Then when you quit the site, the cryptomining shuts down too and releases your computer. In theory, this isn’t so bad so long as the site is transparent and honest about what they’re doing, but it’s hard to be sure the sites are playing fair.

More malicious versions of drive-by cryptomining don’t bother asking for permission and keep running long after you leave the initial site. This is a common technique for owners of dubious sites, or hackers that have compromised legitimate sites. Users have no idea that a site they visited has been using their computer to mine cryptocurrency. The code uses just enough system resources to remain unnoticed. Although the user thinks the visible browser windows are closed, a hidden one stays open. Usually it’s a pop-under which is sized to fit under the task bar or behind the clock.

Stay tuned to learn how to stay safe form cryptojacking and how to prevent it altogether.

What is Replay Attack?

A replay attack is a class of network attack in which an aggressor detects a data communication and deceitfully has it deferred or repeated. The postponement or repeat of the data transmission is carried out by the sender or by the malevolent entity, who intercepts the data and retransmits it. In other words, a replay attack is an attack on the safety protocol using replays of data transmission from another sender into the proposed into reception system, thereby fooling the members into believing they have effectively completed the data transmission. Replay attacks help attackers to gain access to a grid, gain data which would not have been effortlessly available or complete a replica transaction.

Note: A replay attack is also known as a playback attack.

Averting a Replay Attack

Averting such an attack is all about having the right technique of encryption. Encrypted communications carry “keys” within them, and when they’re deciphered at the end of the transmission, they open the communication. In a replay attack, it doesn’t matter if the aggressor who intercepted the original communication can read or decrypt the key. All he or she has to do is seize and resend the entire thing — communication and key — together.

To counter this possibility, both sender and receiver should establish a completely random session key, which is a type of code that is only valid for one transaction and can’t be used again. Another pre-emptive measure for this type of attack is using time-stamps on all messages. This averts hackers from resending messages sent longer ago than a certain length of time, thus reducing the window of chance for an attacker to eavesdrop, siphon off the message, and resend it.

Another technique to avoid becoming a victim is to have a password for each transaction that’s only used once and superfluous. That guarantees that even if the message is verified and resent by an attacker, the encryption code has perished and no longer works.