Phenomenon of Bitcoin 1. Characteristics of Bitcoin 1.1. Definitions and terminology 1.2. History of Bitcoin 1.3. Statistical data 1.4 Criticism 2. Bitcoin market 2.1. Distribution of bitcoin 2.2. Legal status in selected countries 2.3. Comparison to other digital currencies 3. Predictions concerning currency (?) 3.1. Perspectives 3.2. Introduction of Bitcoin into real world 3.3. ? 1. CHARACTERISTICS OF BITCOIN 1.1. Definitions and terminology Bitcoin (BTC) - digitalcryptocurrency designed by Satoshi Nakamoto in 2008, based on peer-to-peer open source protocol, not managed by any central authority. https://en.bitcoin.it/wiki/Bitcoin The currency may be accessed by anyone with internet connection who has digital wallet, where Bitcoins are stored. Bitcoin is administered through a decentralized peer-to-peer network. Cryptographic technologies and the peer-to-peer network of computing power enables users to make and verify irreversible, instant online Bitcoin payments, without an obligation to trust and use centralized banking institutions and authorities. Bitcoin itself divides to smaller pieces called Satoshi (to honour the name of the founder), which are the smallest amount of currency possible (1 Satoshi equals to 0.00000001 BTC https://en.bitcoin.it/wiki/Satoshi). Current market cap is around 1.5 billion US dollars, however because of varying exchange rate of the currency it fluctuates. Bitcoin is a Cryptocurrency, which means it is a type of electronic money, that acts as alternative currency. Cryptocurrencies are based on cryptography for sake of anonymity and security. They have little inflation rate, usually around 1%, as emission is restricted by supply and demand, rather than by central bank, as in case of usual currencies. Flow of the currency is ensured by Bitcoin transactions that are authorised by community’s virtual servers and added to a ledger. Each update of a ledger creates small amount of bitcoins - the amount of bitcoins created is halved every 4 years, endeavouring to zero, which is estimated to happen around year 2140. At this time there would be 21000000 of Bitcoins and no new units would be added to the circulation. New Bitcoins are issued through Bitcoin mining https://en.bitcoin.it/wiki/Mining - Bitcoin is defined by chain of digitally-signed transactions. Each Bitcoin owner transfers a sum of Bitcoins to another owner by digitally signing them. Each transaction is being time-stamped and then added to the chain of blocks - called blockchain. Such block cannot be recreated without repeating whole work that had to be done to create such a block, transaction after transaction. Blocks are then being verified by majority of Bitcoin users and transactions are processed. The blocks are stored on computers of every Bitcoin miner and are being updated after connection to the server, so the blockchains are up to date. Bitcoin mining is conducted through using processing power to try to produce a valid block, and as a result mine some bitcoins. The network rules are such that the difficulty is adjusted to keep block production to approximately 1 block per 10 minutes. Thus, the more miners engage in the mining activity, the more difficult it becomes for each individual miner to produce a block. Difficulty changes after every 2016 blocks https://en.bitcoin.it/wiki/Difficulty . At the beginning, personal computers have been used to verify all the transactions. However nowadays this method is too expensive - the cost of energy used for mining is higher than the value of Bitcoins mined. Along with increasing popularity of the currency, highly specialised devices have appeared on the market - what has lead to rapid growth of mining difficulty. All the data about transactions is permanently recorded in the Bitcoin network through files called blocks. A block is a record of some or all of the most recent Bitcoin transactions that have not yet been recorded in any prior blocks. New blocks are added to the end of the record, and once written, are never changed or removed. Each block memorializes what took place immediately before it was created. Blocks are important for the security of Bitcoin transactions, as they are authorised by using combined computing power of peers participating in Bitcoin network. If one wanted to change any transaction, recalculating the whole block chain would be necessary, which requires almost impossible to gather computing power. Every necessary data is stored in Block chain - transaction database shared by all people participating in a system based on the Bitcoin protocol. A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address at any point in history. Having updated block chain is necessary to conduct transactions and to mine new Bitcoins. Bitcoins are stored either physically on user’s hard disc or virtually on websites in Bitcoin wallet, which is a file that contains a collection of private keys. Private key in the context of Bitcoin is a secret number that allows Bitcoins to be spent. Every Bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance. Using their wallets, users are free to conduct transactions. These are signed sections of data that is broadcasted to the network and collected into blocks. It typically references previous transactions and dedicates a certain number of bitcoins from it to one or more new public keys (Bitcoin address). Freshly acquired Bitcoins may be spent after approximately 10 minutes - that is how long it takes to create new block and valid all the previous transactions. They are usually verified after 5-6 transactions (depending on Bitcoin market that user has chosen) - as difficulty to double-spend Bitcoin grows logarithmically with every following money transfer. Bitcoin transactions are irreversible, which means that once they have been made, they cannot be undone (as it would require to re-compute whole block, which requires impossible to gather computing power). 1.2. History of Bitcoin Bitcoin is first cryptocurrency in the world that was implemented into real-life. It is decentralised, relying on peer-to-peer transactions, without control of any central authority of government. Emission is based on solving the block-chains, the pace of emission depends on processing power of bitcoin miners connected to the network and the amount of transactions being handled over time. The history of Bitcoin began in 2008, when Satoshi Nakamoto posted an article describing architecture of the Bitcoin, justification of using such a system and basic arithmetics behind it. In 2009 the first open source Bitcoin client has been released and Nakamoto himself mined first 50 Bitcoins - it is so-called The Genesis Block - the first block of the block of chains ever created. 2010 was the historical year, as the first Bitcoin transaction was introduced into real life - on May 21st, Laszlo Hanyecz, programmer living in Florida transferred 10000 BTC to a volunteer in England, who bought him two pizzas worth 25$. On 6th of August, a major vulnerability in Bitcoin protocol has been discovered, enabling users to create indefinite amount of BTC, bypassing the formulas and economy behind it. On August the 15th, the bug has been exploited, leading to creation of over 184 000 000 Bitcoins (the idea was, to have 21 000 000 of BTC created in total) - which were later sent to two addresses in the network. The mistake has been spotted within hours and erased from chain of blocks soon after. The Bitcoin client has been adequately updated to prevent such occurrences in the future - it was the only major security flaw that has been exploited in the history of Bitcoin. On 6th of November, Bitcoin’s economy passed US $1 million with price of 0,50$/BTC. In 2011 Bitcoin slowly began to be introduced into real-life world, as more and more institutions and merchants began to accept it as a method of transaction, despite it’s unstable exchange rate. In June 2011 many organisations (including famous Wikileaks) began to accept BTC as a method of donations. It was the first step before introducing BTC broader to the world. In February Bitcoin reached parity with US dollar, touching 1$/BTC at MtGox. On April 23rd, value of the Bitcoin money stock at current exchange rate passes $10 million USD threshold. During this period the currency rate fluctuated dropping from 30$/BTC in June to 2$/BTC in October. Till 2012 BTC spreaded, reaching over 1000 merchants, that would accept BTC as an alternative method of payment according to the BitPay - company that helps online merchants accept the digitized currency as payment. 60% of these companies were USA-based, all of them were based in 98 countries among the world in total. The Internet Archive, company which archives internet websites announced that it would not only accept BTC as a method of donations, but would also pay the amount of salaries of it’s employees in Bitcoins. On 6th of December, first bank operating on Bitcoins has been established. It offers guarantee of deposits, each user receives his own IBAN number, as well as a debit card, which they can use to conduct transactions either in BTC or EUR. By 2012 there were at least 15000 active hosts with full copy of block-chain publicly accessible. 2013 just began, but it is becoming revolutionary for the digital currency. First cash machines for BTC have been developed and the BTC itself became topic of interests of few governments, including USA, which stated, that Bitcoin exchanges must comply with money-laundering laws. In May 2013 US Homeland Security Investigations has seized bank account of Mt. Gox, largest Bitcoin exchange. It was stated, that Mt. Gox has failed to register as a money transmitter. 1.3. Statistical data As the popularity of Bitcoin grows, among with with it grows the number of Bitcoin miners and transactions, which straight-forward lead to increase in number of Bitcoins in circulation.The growth is steady and if nothing interrupts it it will eventually stop at the 21000000, the expected number of Bitcoins that would be emissioned (till year 2140, according to the forecasts about the currency). Since July 2012 clear rise in interest in Bitcoins can be seen, with a volatile rises and drops, that are related to the price of currency. At this stage the currency is highly speculative, which would be the issue throughout emission of the currency. Constant rise in the price may be observed, which is caused by several reasons. First of all, as mentioned before - growth in popularity of the currency. Secondly - Bitcoin is honored by more and more online shops, restaurants, currency exchanges. Growing interest of financial and political departments, speculations, real life incidents - on this stage of currency development they all cause that the exchange rate of currency fluctuates, what is an opportunity for traders to make benefits on short-term investments. The USD price of a bitcoin increased in 2013 from $13 on 1 January to $190 on 9 April. Among the factors which may have contributed to this rise were the European sovereign-debt crisis – particularly the 2012–2013 Cyprus’ financial crisis and rising media and Internet interest. As it can be seen on the chart, the price of Bitcoin has been slowly rising, with peak on 16th of April (266$/BTC), after which it fell down to 123$ on 17th. Now the price is stable, ranging around 125$/BTC. Average transaction confirmation time depends mostly on the current hashrate of the Bitcoin network, high peak on 16th on April can be noticed, when everyone was buying bitcoins and a lot of people have been connected to the network hoping for easy profit. Hashrate is increasing constantly, mostly because of quick development of highly specialised devices used to mine Bitcoin, instead of old method of mining them by ineffective personal computers. Increasing computing power of whole network is it’s strong asset - with every new device connected, whole currency is more secure and immune to attacks and potential dangers, for example double spending. https://en.bitcoin.it/wiki/Double-spending One should be aware of facts - one of indicators of currency’s popularity is it’s market capitalization. Below is brief statistic for Bitcoin, as for 16.11.2013: 1548 days from 0 to 1 billion USD 202 days from 1 billion to 2 billion USD 18 days from 2 billion to 3 billion USD 3 days from 3 billion to 4 billion USD 5 days from 4 billion to 5 billion USD 2 days from 5 billion to 9 billion USD Growing interest and popularity is clearly visible, market volume is constantly growing, what can be seen on the chart below: CHART 1.4. Criticism As Bitcoin is becoming more and more common, it is often criticised for its’ weaknesses, among which most often mentioned are: no central authority, that would be responsible for it, anonymity, which makes it good tool for scams, trouble to pay with it in casual places, technical issues, i.e. deleting your wallet makes your Bitcoins disappear forever and they would never be replaced. Another problem is the issue of deflation - as Bitcoins are emissioned, their value drops. Lack of central authority, that would run and take care of whole phenomenon is very important factor that refrains countries and financial institutions from respecting the idea of such currency. http://www.cityam.com/debate/could-decentralised-virtual-currencies-bitcoin-replace-traditional-forms-money In that case Bitcoin is treated like digital commodity rather than digital currency, as no monetary authority stands behind it. This affects it’s credibility and weakens its position as pretender to global currency status. Bitcoin has never been based on gold standard, like many real currencies such as US dollar or British pound have been in the past. This leads to problems with estimation of its’ real value - Bitcoin is highly volatile and its’ price fluctuates rapidly - however basically it grows. Its price cannot be based on any real item, as it is not tied to any real-value object, such as previously mentioned gold. Its wholly speculative. >>>>> We've seen this in the past when private currencies were attempted. Without trust in the currency because of a backing in something with intrinsic value, it rapidly can become worthless. Bitcoin has no backing. Even if it had backing, insiders may remove the backing and leave the currency worthless. Another argument of opponents is that Bitcoin is not unique. Earlier on there were other digital currencies that pretended to become global, few of such still exist and would be broader explained in following chapters. The fact is, that basically anyone with technical knowledge is able to create and promote such a network and become competitor. Furthermore, many people claim that Bitcoin is designed to enrich those, who join it and/or invest early. "But Bitcoin is not designed to be a functioning currency, it's designed to enrich early adopters. Again, that is why it is a scam. Period." http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Adam-Cohen-2 Which is only partially true, as the currency should not be assessed until the emission stops - as for now on, its’ value is still being set up, what would take few more years - for now on it is speculative tool, place for people, who would like to make money. This leads to opinions, that whole Bitcoin hype looks like America’s gold rush in 19th and 20th century. It of course enriches those, who join it early - as trend of currency is generally growing, the sooner someone buys Bitcoin, the more one earns. Value fluctuates with every minute, but because of market mechanisms it would finally stabilise after emission and when currency becomes world-widely recognised and respected. Anonymity is just another reason why Bitcoin is developing with such a pace - on one hand, there are groups of people, who are keen on staying private while making purchases through the internet, but on the other - there is even larger amount of people, who prefer transparency, especially if it concerns their money. Bitcoin is often related and mentioned as a pair with Silkroad http://pl.wikipedia.org/wiki/Silk_Road deep-web store, which specialised mostly as a drug-trade intermediary, which allowed Bitcoin transactions in care of its’ users safety and anonymity. Another often quoted criticism is, that Bitcoin is virtual, thus vulnerable to all kinds of virtual attacks - like disconnection from the internet, global energy or connection problems, wars. It is true - Bitcoins do not exist in real life, but that does not make them any worse, than any other currency. In case of any attacks, every currency would be equally in danger, as nowadays all the bank data is stored virtually. It does not matter, whether one has Bitcoins or e.g. dollars - the consequences of lack of power or internet shutdown would be the same - inability to access gathered funds on internet accounts. However Bitcoin is becoming more present in media and people’s minds, it is still difficult to pay with it in real-life shops - but every day new places launch Bitcoin transactions, to meet needs of their customers and increase their share in Bitcoin market - as collecting Bitcoins from customers might be a good investment strategy, especially for low-income local stores, that would like to invest part of their earnings in currency. 2. Bitcoin market 2.1. Distribution of Bitcoin Bitcoin is distributed in several ways. First of all it is mined - each peer in network gets reward for solving transaction blocks - in this way new Bitcoins are being generated, that is emission of Bitcoin. Another flow of currency is lead by major currency exchanges - where Bitcoins are being traded daily. Each exchange has its own exchange rate and slightly different rules, e.g. confirmation time, minimum and maximum levels of deposits and withdrawals. For the time being, most important Bitcoin markets are: BTC China (1,5 million BTC) Mt. Gox (1 million BTC) Bitstamp (1 million BTC) http://bitcoincharts.com/markets/ and several others. It is worth to mention, that biggest currency exchange that enables its users to trade Bitcoins for Polish Zlotys is Bitcurex - currently on 8th place in terms of market capacity, 42000 Bitcoins as for end November 2013. There are over 12 millions of Bitcoins generated, but only around 4 million are available on exchanges. It is estimated, that missing 8 millions are held in private wallets, either online or offline - as both are inaccessible to any calculations regarding volume. Some of them, though, are said to be lost forever, as their rightful owners have lost access to their accounts or sometimes even forgotten address under which their Bitcoins have been stored. Last way of Bitcoin distribution are transaction and withdrawal fees - usually small amounts of Bitcoins are being paid to peers for confirming users’ transactions. The amount paid is much smaller, than in classic banking system. Each currency exchange has its own rates regarding withdrawal or deposits - this has two purposes. One of them is way of funding exchange market - as they are maintained by companies, that need to pay numerous liabilities, workers salaries, virtual servers, data transfer, security and so on. Another purpose is to discourage some users from trading really small amounts of Bitcoins, that would lead to server shutdown - simplifying - to decrease traffic on the website. 2.2. Legal status in selected countries Bitcoin is of interest to law enforcement, tax authorities, and legal regulators, all of which are trying to understand how it fits into existing frameworks. Threats among many problems with legalising Bitcoin as an alternative currency are numerous. One of the mostly raised concerns is it’s anonymity - because of lack of verification, Bitcoin may become effective tool towards money laundering. However recent studies show, that there is no significant correlation between the currency and disposal of illegally gathered money. Another important concern is internet gambling - as the popularity of Bitcoin is rising, many websites introduced Bitcoin payments - which allowed users to omit law enforcing them to pay taxes because of profits they make in online casinos. One of the frequently raised doubts is fact, that some of Bitcoin payments are conducted between illegal online drug stores and anonymous buyers. However many government agencies fight with such dealing, it is impossible to ignore the fact, that such transactions take place. Most recent case is closure of biggest illegal Bitcoin marketplace - Silkorad - which has lead to arrest of it’s owner - Ross Ulbricht and seizure his Bitcoin wallet with 144000 BTC, worth 28,5 million USD at current exchange rate. http://www.forbes.com/sites/andygreenberg/2013/10/25/fbi-says-its-seized-20-million-in-bitcoins-from-ross-ulbricht-alleged-owner-of-silk-road/ Result of this case was that in the being FBI became owner of around 1,5% of all Bitcoins distributed, which was unprecedental, as never before any public agency became owner of the currency. There is no doubt that if Bitcoin is supposed to be introduced as a world-wide transactiosn methods, it would need certain regulation and law framework. With growing interest of investors, the topic of it’s legal status is often raised in law institutions and media. If it wants to become mainstream, it is going to have to subject itself to regulation. That will be a very interesting situation for those involved to subject themselves to that kind of scrutiny, http://www.smartcompany.com.au/finance/33249-us-court-ruling-on-bitcoin-case-sees-digital-currency-achieve-legal-status.html This leads to dissonance between original idea about Bitcoin and it’s future path it would have to follow. On one side it was supposed to be anonymous and completely out of governal control, yet spread world-widely, easily accesible and available for payments for most of everyday things. On the other side, if it wants to be introduced as an alternative payment method, it would need many regulations, including tax issues, which are usually the case. Some of the countries do not legalise Bitcoin, yet they want to tax it - so however Bitcoin is not threated as any casual centralised currency, it is supposed to be taxed as it was one of them. Next paragraph is description of legal status in selected countries: CA (Canada) Not only is use of Bitcoin in Canada legal, but the Canadian financial regulation agency has taken a Bitcoin-friendly stance.http://pokerati.com/2013/05/canada-becomes-bitcoin-friendly/ However, the province of Quebec has its own financial regulation agency, which has thus far not issued a statement about Bitcoin. Taxation of Bitcoin in Canada is similar to that of any other currency or commodity: income tax and capital gains tax both apply.http://bitcoinmagazine.com/5526/regulatory-responses-to-bitcoin-2013-edition/ DE (Germany) The German financial regulatory agency, BaFin, has effectively classified Bitcoin as a commodity.http://bitcoinmagazine.com/2497/a-recap-of-mega-corporate-and-government-attention-on-bitcoin-this-past-year/ Consequently, Bitcoin transactions are considered barter, and are taxable as barter. http://www.cnbc.com/id/100971898 NO (Norway, Kingdom of) The Norwegian Secretary of the Treasury has confirmed that Bitcoin falls under no existing monetary laws, because Bitcoin does not meet the current Norwegian definition of “money”.http://www.stortinget.no/no/Saker-og-publikasjoner/Sporsmal/Skriftlige-sporsmal-og-svar/Skriftlig-sporsmal/?qid=57052 Consequently, Bitcoin trade is legal and unregulated. NL (Netherlands) Although the Netherlands has not officially vindicated the legality of Bitcoin, it has assented to its legal usage by providing tax guidance. Income in bitcoins is taxable as income in any other currency is. http://bitcoinmagazine.com/5526/regulatory-responses-to-bitcoin-2013-edition/ GB (United Kingdom) HMRC has stated that Bitcoin exchanges need not register to comply with regulations.http://www.coindesk.com/hmrc-uk-bitcoin-exchanges-dont-have-to-register-under-money-laundering-regulations/ The agency has also stated that Bitcoin is taxable under standard capital gains taxation.https://bitcointalk.org/index.php?topic=145972.msg1827953#msg1827953 TH (Thailand, Kingdom of) The Foreign Exchange Administration and Policy Department of Thailand found illicit most Bitcoin-related activities, including commerce, exchange, and remittance. https://bitcoin.co.th/trading-suspended-due-to-bank-of-thailand-advisement/?bettertitle Although a bank would not usually be authorized to make currencies illicit, the Department is not simply a private institution. It is indeed a part of Thailand's central bank and some argue that it can enact policies banning the use of Bitcoin. https://en.wikipedia.org/wiki/Bank_of_Thailand#Roles_and_Responsibilities Others argue that because a higher level of government has not confirmed the law, the bank's role is only advisory. http://www.cnbc.com/id/100923551 http://www.coindesk.com/information/is-bitcoin-legal/ 2.3. Comparison to other digital currencies However Bitcoin is currently most popular digital currency, it is not the only one still existing on the market. There were many in some way similar projects previously, some of them still exist. In this chapter few of them would be briefly presented in order to compare them to Bitcoin. Among many definitions of digital currencies, for sake of this work this one is sufficient: Digital currency, among its various names,iis electronic money that acts as alternative currency.Currently, alternative digital currencies are not produced by government-endorsed central banks nor necessarily backed by national currency. It differs from virtual money used in virtual economies due to its use in transactions with real goods and services; not being limited to circulation within online games. The purpose of this chapter is to compare Bitcoin to other currencies, so the number of them has been narrowed down to those with biggest market capitalisation, as they are as for now most important. As a criterium of scale of currency, market capitalization has been chosen, as depth, size and popularity of each can be easily assessed by volume of each market. Litecoin (LTC) - peer-to-peer cryptocurrency, inspired and nearly identical to Bitcoin - based on open source protocol and not managed by any central authority, launched in October 13, 2011. As of November 19th, 2013, 1 LTC is worth approximately 8 USD. This makes Litecoin the second largest cryptocurrency with a market cap of around 220 million USD. It offers 3 key differences from Bitcoin, which in future are supposed to make it better and more popular than Bitcoin itself. First of them is average confirmation time. As previously explained, every transaction has to be confirmed and joined into block. Litecoin’s confirmation time equals 2,5 minute, which compared to 10 minutes as in Bitcoin gives it huge advantage. Litecoin’s faster confirmations provide its’ users with faster access to their finances, especially in time-sensitive situations. Secondly, Litecoin uses a proof-of-work script, firstly introduced by - Colin Percival. In contrast with Bitcoin’s SHA-256d it serves to inhibit hardware scalability by requiring a significant amount of memory when performing its calculations. This change reduces the efficiency gain and economic incentive to develop custom hardware. While ASICs (Application Specific Integrated Circuits) can be adopted for any purpose and are likely to be introduced for Litecoin, the use of scrypt should delay this change, and preserve the decentralization in mining that brings a decentralized currency so much of its value and resiliency. Last advantage is scale of emission - there would be 84 million of Litecoins in circulation, which is four times more compared to Bitcoin - this would allow market to be more liquid. Litecoin is often cited as an alternative to Bitcoin. Peercoin (PPC) is third biggest digital currency. As of 18 November 2013, one Peercoin had a value of approximately 0.98 USD, with a money supply valued at 20 million USD. It was created in 2012 by software developer Sunny King, inspired by Bitcoin network. Although it shares similar features, it has some crucial differences. Peercoin's major distinguishing feature is that it uses proof-of-stake/proof-of-work hybrid system. The proof-of-stake system was designed to address vulnerabilities that could occur in a pure proof-of-work system. https://en.bitcoin.it/wiki/Proof_of_Stake With a proof-of-stake system, new coins are generated based on the holdings of individuals.This has the effect of making a monopoly more costly, and separates the risk of a monopoly from proof-of-work mining shares. http://peercoin.net/peercoin-paper.pdf It is also energy efficient. The proof-of-stake method of generating coins requires very minimal energy consumption; it only requires the energy to run the client software on a computer, as opposed to running resource-intensive cryptographic hashing functions. During its early stages of growth, Peercoins will be generated by proof-of-work like Bitcoin, however over time proof-of-work will be phased out as proof-of-work difficulty increases and rewards decrease. Proof-of-stake will then become the primary source of coin generation, which will lead to a decrease in energy consumption over time. Steady inflation - Peercoin is designed so that it will theoretically experience a steady 1% "decentralized" inflation per year (inflation for each user is proportional to the number of coins they have), yielding an unlimited number of coins. This is a combined result of the proof-of-stake minting process, and scaling of mining difficulty with popularity. Although Peercoin technically has a cap of 2 billion coins, it is only for consistency checking, and the cap is unlikely to be reached for the foreseeable future. The Peercoin transaction fee is fixed at 0.01 PPC for every transaction; however, the fee does not go to miner's income, but rather destroyed in order to offset the inflation caused by the proof-of-stake minting process. Therefore, if the network's economic activity and transaction volume grows, it follows that the deflationary aspect will also rise proportionally according to the "network effect". This is designed to ensure that there is no overall change in the money supply. If inflation increases, then transaction costs become cheaper which increases the urge to participate in transactions. However, if deflation increases, then transaction costs become more expensive which increases the urge to save more, which in turn causes inflation. The network, in comparison to Bitcoin, is designed in such way, that transaction fees don’t supply miners, but are destroyed instead. This is intended to offset inflation by deflating the money supply and serves to self-regulate transaction volume, and stop network spam. Fourth biggest digital currency is called Namecoin (NMC) - it was first described in 2010 by anonymous user using nickname Appamato and then by Aaron Swartz, internet activist and programmer. Namecoin is based on technology similar to Bitcoin’s, a cryptocurrency, which is used to securely distribute and register domain names. What differs it most from Bitcoin is fact, that Namecoin is whole environment, which allows it’s users to freely trade Namecoins, but also to create and trade domains for Namecoins. Users are free to change the domain name upon trading it, they also act as their digital wallets, each domain is able to hold a sum of Namecoins. Namecoin shares some main similarities with Bitcoin, among them are few to name. One of them is - anonymity, currency is traded between randomly generated addresses, which cannot be tied to real people. The network is secure, as it is based on similar protocol as Bitcoin is - it is impossible to, i.e. double spend Namecoins, as every transaction has to be verified several times. It is open and free to contribute, anyone can join the network at any time. Namecoins are mined as Bitcoins are. Currently Namecoins may be obtained through merged mining, as a free by-product of Bitcoin mining. Last difference are fees - there is no network fee, as coins get destroyed instead, there are only transactions fees, that are set up individually by each user, usually 0,01 NMChttp://dot-bit.org/Main_Page Novacoin (NVC) is currently fifth biggest digital currency - introduced in 19th of February, 2013 by programmer under nickname Balthazar. As for now, market capitalization is around 1.8 million USD, with price of approximately 5.12 USD per unit. There are three main features, that distinguish Novacoin from Bitcoin. First of them mixing proof-of-stake with proof-of-work, which creates hybrid system, invulnerable to, i.e. 51% attack (the case, where single entity holds more than 50% of network’s computing power, which could possibly lead to double-spending ). With such a system, even if number of miners begins to decline because of decline of amount of rewards for mining, which decline exponentially, new coins would still be generated, based on the holdings of each user. Main effect of such solution is making monopoly more costly or even unprofitable. Second difference is steady inflation, which is designed so that it will theoretically experience a dynamic inflation, yielding an unlimited number of coins. This is a combined result of the proof-of-stake minting process, and scaling of mining difficulty with popularity. Although Novacoin technically has a cap of 2 billion coins, it is only for consistency checking, and the cap is unlikely to be reached for the foreseeable future. If the cap were to be reached, it could easily be raised, hence for all practical purposes Novacoin can be considered to have a dynamic inflation, with a limitless money supply. The inflation rate depends on popularity just like proof-of-work minting does. Last difference are transaction fees. As network fees are removed, there are only transaction fees, that are set up by network (currently 0.01 NVC) - this is one of the inflation limiting techniques. Last example in this chapter is Primecoin (XPM) - introduced on 7th of July 2013, is the sixth biggest cryptocurrency in the world - with price of around 0.55 USD per unit and 2.2 million USD market capitalization. Primecoin was created by software developer Sunny King (who also developed the cryptocurrency PPCoin) http://primecoin.org/static/primecoin-paper.pdf As every previous currency, this one mostly shares similarities with Bitcoin, however there are some key differences, which are listed below. First of them is totally different proof-of-work algorithm - Primecoin uses the finding of long Cunningham chains for proof-of-work purposes in comparison to Bitcoin, which computes SHA-256 security algorithm. More important difference is block generation time - it is ten times faster than Bitcoin - 1 minute for Primecoin, thus 10 minutes for Bitcoin - this leads to faster transaction confirmations. Time necessary to confirm single transactions equals roughly one minute - it allows money owners to transfer their funds easily and effectively. Last features that distinguish it from Bitcoin are smoother difficulty adjustment and self-adjusting block reward. The difficulty is changed slightly after every block - in contrast, Bitcoin adjust it’s difficulty after every 2016 blocks (2 weeks approximately). The approach to reward is also different from Bitcoin - instead of halving it every 210000 blocks, number of released units upon solving a block is always equal to 999 divided by square of difficulty.