What Is Digital Money?

Any means of payment that exists purely in electronic form. Digital money is
not tangible like a dollar bill or a coin. It is accounted for and transferred using
computers. The most successful and widely-used form of digital money is the
cryptocurrency Bitcoin. Digital money is exchanged using technologies such as
smartphones, credit cards, and online cryptocurrency exchanges. In some cases,
it can be transferred into physical cash, for example by withdrawing cash from
an ATM.

Digital currency (digital money, electronic money or electronic currency) is

a balance or a record stored in a distributed database on the Internet, in an
electronic computer database, within digital files or within a stored-value card.
[1]
Examples of digital currencies include cryptocurrencies, virtual
currencies, central bank digital currencies and e-Cash.
Digital currencies exhibit properties similar to other currencies, but do not have
a physical form of banknotes and coins. Not having a physical form, they allow
for nearly instantaneous transactions. Usually not issued by a governmental
body, virtual currencies are not considered a legal tender and they
enable ownership transfer across governmental borders
These types of currencies may be used to buy physical goods and services, but
may also be restricted to certain communities such as for use inside an online
game. One type of digital currency is often traded for another digital currency
using arbitrage strategies and techniques.
Digital money can either be centralized, where there is a central point of control
over the money supply, or decentralized, where the control over the money
supply can come from various sources.
Digital currency as a specific type and as a meta-group name
Digital Currency is a term that refers to as a specific electronic currency type
with specific properties. Digital Currency is also a term used to include the
meta-group of sub-types of digital currency, the specific meaning can only be
determined within the specific legal or contextual case. Legally and technically,
there already are a myriad of legal definitions of digital currency and the many
digital currency sub-types. Combining different possible properties, there exists
an extensive number of implementations creating many and numerous sub-types
of Digital Currency. Many governmental jurisdictions have implemented their
own unique definition for digital currency, virtual currency, cryptocurrency, e-
money, network money, e-cash, and other types of digital currency. Within any
specific government jurisdiction, different agencies and regulators define
different and often conflicting meanings for the different types of digital
currency based on the specific properties of a specific currency type or sub-
type.
Digital versus virtual currency
Main article: Virtual currency

A virtual currency has been defined in 2012 by the European Central Bank as "a
type of unregulated, digital money, which is issued and usually controlled by its
developers, and used and accepted among the members of a specific virtual
community".[12] The US Department of Treasury in 2013 defined it more tersely
as "a medium of exchange that operates like a currency in some environments,
but does not have all the attributes of real currency".[13] The US Department of
Treasury also stated that, "Virtual currency does not have legal-tender status in
any jurisdiction."[13]
According to the European Central Bank's 2015 "Virtual currency schemes – a
further analysis" report, virtual currency is a digital representation of value, not
issued by a central bank, credit institution or e-money institution, which, in
some circumstances, can be used as an alternative to money.[14] In the previous
report of October 2012, the virtual currency was defined as a type of
unregulated, digital money, which is issued and usually controlled by its
developers, and used and accepted among the members of a specific virtual
community.[12]
According to the Bank for International Settlements' November 2015 "Digital
currencies" report, it is an asset represented in digital form and having some
monetary characteristics.[15] Digital currency can be denominated to a sovereign
currency and issued by the issuer responsible to redeem digital money for cash.
In that case, digital currency represents electronic money (e-money). Digital
currency denominated in its own units of value or with decentralized or
automatic issuance will be considered as a virtual currency. As such, bitcoin is a
digital currency but also a type of virtual currency. Bitcoin and its alternatives
are based on cryptographic algorithms, so these kinds of virtual currencies are
also called cryptocurrencies.
Digital versus cryptocurrency
Cryptocurrency is a sub-type of digital currency and a digital asset that relies
on cryptography to chain together digital signatures of asset transfers, peer-to-
peer networking and decentralization. In some cases a proof-of-work or proof-
of-stake scheme is used to create and manage the currency.[16][17][18]
[19]
Cryptocurrencies can allow electronic money systems to be decentralized.
When implemented with a blockchain, the digital ledger system or record
keeping system uses cryptography to edit separate shards of database entries
that are distributed across many separate servers. The first and most popular
system is bitcoin, a peer-to-peer electronic monetary system based on
cryptography.
Digital versus traditional currency
Most of the traditional money supply is bank money held on computers. They
are considered digital currency in some cases. One could argue that our
increasingly cashless society means that all currencies are becoming digital
currencies, but they are not presented to us as such.[20]

Types of systems
Centralized systems
Currency can be exchanged electronically using debit cards and credit
cards using electronic funds transfer at point of sale.
Mobile digital wallets
A number of electronic money systems use contactless payment transfer in
order to facilitate easy payment and give the payee more confidence in not
letting go of their electronic wallet during the transaction.


Decentralized systems
Main article: Cryptocurrency

See also: List of cryptocurrencies

Digital Currency has been implemented in some cases as a decentralized system of any
combination of currency issuance, ownership record, ownership
transfer authorization and validation, and currency storage.

Distributed ledger technology (DLT) is a digital system for recording the transaction of assets
in which the transactions and their details are recorded in multiple places at the same time.
Unlike traditional databases, distributed ledgers have no central data store or administration
functionality.

In a distributed ledger, each node processes and verifies every item, thereby generating a
record of each item and creating a consensus on each item's veracity. A distributed ledger can
be used to record static data, such as a registry, and dynamic data, i.e., transactions.

A distributed ledger (also called a shared ledger or distributed ledger

technology or DLT) is a consensus of replicated, shared, and synchronized digital data
geographically spread across multiple sites, countries, or institutions.Unlike with a distributed
database, there is no central administrator.
A peer-to-peer network is required as well as consensus algorithms to ensure replication
across nodes is undertaken. One form of distributed ledger design is the blockchain system,
which can be either public or private.

Characteristics
The distributed ledger database is spread across several nodes (devices) on a peer-to-peer
network, where each replicates and saves an identical copy of the ledger and updates itself
independently. The primary advantage is the lack of central authority. When a ledger update
happens, each node constructs the new transaction, and then the nodes vote by consensus
algorithm on which copy is correct. Once a consensus has been determined, all the other
nodes update themselves with the new, correct copy of the ledger.[3][4] Security is
accomplished through cryptographic keys and signatures.[5][6][7]

Applications
In 2016, some banks tested distributed ledgers for payments[8] to see if investing in distributed
ledgers is supported by their usefulness.[2]

Types[
Distributed ledgers may be permissioned or permissionless. This determines if anyone or
only approved people can run a node to validate transactions.[9] They also vary between the
consensus algorithm – proof of work, proof of stake, or voting systems. They may
be mineable (one can claim ownership of new coins contributing with a node) or not (the
creator of the cryptocurrency owns all at the beginning).
All blockchain is considered to be a form of DLT. There are also non-blockchain distributed
ledger tables.
Non-blockchain DLTs can be in the form of a distributed cryptocurrency or they may be the
architecture on which private or public data is stored or shared.
The main difference is that while blockchain requires global consensus across all nodes a
DLT
can achieve consensus without having to validate across the entire blockchain.
The term blockchain was first described back in 1991. A group of researchers wanted to create

a tool to timestamp digital documents so that they could not be backdated or changed. Further,

the technique was adapted and reinvented by Satoshi Nakamoto. In 2008, Nakamoto created

the first cryptocurrency, the blockchain-based project called Bitcoin.

What is Blockchain?

The blockchain is a chain of blocks which contain

specific information (database), but in a secure and
genuine way that is grouped together in a network
(peer-to-peer). In other words, blockchain is a
combination of computers linked to each other instead
of a central server, meaning that the whole network is
decentralized.

To make it even simpler, the blockchain concept can be

compared to working on the same Google Doc
simultaneously.
Database vs. Blockchain
System

The traditional architecture of the World Wide Web

uses a client-server network. In this case, the server
keeps all the required information in one place so that
it is easy to update and controlled by a number of
administrators.

In the case of the distributed blockchain network, each

participant within the network maintains, approves,
and updates new entries.

The structure of blockchain technology is represented

by a list of blocks with transactions in a particular
order. Two vital data structures used in blockchain
include:
  Pointers — variables that keep information
about the location of another variable

 Linked lists — a sequence of blocks where

each block has specific data and links to the
following block with the help of a pointer

Basically, the following blockchain sequence diagram

is a connected list of records.
Blockchain can serve the following purposes for
organizations and enterprises:

 Cost reduction

 History of data

 Data validity & security

Types of Blockchain Explained

All blockchain structures fall into three categories:

 Public blockchain

 Private blockchain

 Consortium blockchain

The following table provides a detailed comparison

among these three blockchain systems.
Core Components of Blockchain: How Does It Work

These are the core blockchain architecture components:

 Node — user or computer within the blockchain

 Transaction — smallest building block of a blockchain system

 Block — a data structure used for keeping a set of transactions which is

distributed to all nodes in the network

 Chain — a sequence of blocks in a specific order

 Miners — specific nodes which perform the block verification process

 Consensus— a set of rules and arrangements to carry out blockchain

operations

The following is a blockchain diagram that shows how this actually works in the form of a

digital wallet.
Let’s have a closer look at what is a block in a blockchain. Each blockchain
block consists of:

 certain data

 the hash of the block

 the hash from the previous block

On the other hand, in theory, it could be possible to adjust all the blocks with the
help of strong computer processors. However, there is a solution that eliminates
this possibility called proof-of-work. This allows a user to slow down the
process of creation of new blocks.

How to Make a Private Blockchain

A decentralized blockchain application is designed just the same as any other
normal software product. Functional specification, UX/UI designs, and an
architecture plan are required for its development. It is crucial to identify the
app’s functionality, user roles, and think over the system flow and the interaction
between users and information.

In order to build your own blockchain, it is necessary to consider:

 Blockchain network — refers to the application’s infrastructure

placed within a particular environment inside one, or a few,
organizations.

 Blockchain code — refers to the tasks and goals this blockchain

solution has been developed to perform.

There are a few open-source solutions used to build a private blockchain

architecture. The most popular among them is Hyperledger by Linux
Foundation. This project is also widely used by IBM and other famous tech
organizations. Hyperledger Composer provides a set of tools for building
blockchain.

Some other solutions to build your own blockchain with are Ethereum and
Corda.

Here is a high-level hyperledger architecture diagram to create a blockchain

solution.
Key Characteristics of Blockchain

Blockchain possesses a lot of benefits for businesses. Here are several embedded
characteristics:

 Cryptography

 Immutability

 Provenance

 Decentralization

 Anonymity

 Transparency

Create Your Own Blockchain!

Blockchain technology enables organizations & companies in the following

ways:

 Possibility to complete transactions much more quickly and with

trust

 Cost reduction for businesses or cross-enterprise processes while

removing intermediaries, inefficiencies, and duplications

 Introduction of modern digital interaction

 Opportunity to keep detailed control over business processes and

transactions without a central control point

 Remove cheating, cyber attacks, or other electronic crimes

 Hash Chain

A hash chain is the successive application of a cryptographic hash

function to a piece of data. In computer security, a hash chain is a
method to produce many one-time keys from a
single key or password. For non-repudiation a hash function can be
applied successively to additional pieces of data in order to record
the chronology of data's existence.

Hash chain vs. blockchain

A hash chain is similar to a blockchain, as they both utilize a cryptographic hash
function for creating a link between two nodes. However, a blockchain (as used
by Bitcoin and related systems) is generally intended to support distributed
consensus around a public ledger (data), and incorporates a set of rules for
encapsulation of data and associated data permissions.

What Is a Consensus Mechanism?

A consensus mechanism is a fault-tolerant mechanism that is used in computer
and blockchain systems to achieve the necessary agreement on a single data
value or a single state of the network among distributed processes or multi-
agent systems, such as with cryptocurrencies. It is useful in record-keeping,
among other things.

Consensus Mechanism Explained

In any centralized system, like a database holding key information about driving
licenses in a country, a central administrator has the authority to maintain and
update the database. The task of making any updates – like
adding/deleting/updating names of people who qualified for certain licenses – is
performed by a central authority who remains the sole in-charge of maintaining
genuine records.

Public blockchains that operate as decentralized, self-regulating systems work

on a global scale without any single authority. They involve contributions from
hundreds of thousands of participants who work on verification and
authentication of transactions occurring on the blockchain, and on the block
mining activities.

In such a dynamically changing status of the blockchain, these publicly shared

ledgers need an efficient, fair, real-time, functional, reliable, and secure
mechanism to ensure that all the transactions occurring on the network are
genuine and all participants agree on a consensus on the status of the ledger.
This all-important task is performed by the consensus mechanism, which is a set
of rules that decides on the contributions by the various participants of the
blockchain.

There are different kinds of consensus mechanism algorithms which work on

different principles.

The proof of work (POW) is a common consensus algorithm used by the most
popular cryptocurrency networks like bitcoin and litecoin. It requires a
participant node to prove that the work done and submitted by them qualifies
them to receive the right to add new transactions to the blockchain. However,
this whole mining mechanism of bitcoin needs high energy consumption and
longer processing time.

The proof of stake (POS) is another common consensus algorithm that evolved
as a low-cost, low-energy consuming alternative to POW algorithm. It involves
allocation of responsibility in maintaining the public ledger to a participant node
in proportion to the number of virtual currency tokens held by it. However, this
comes with a drawback that it promotes cryptocoin saving, instead of spending.

Similarly, there are other consensus algorithms like Proof of Capacity (POC)
which allow sharing of memory space of the contributing nodes on the
blockchain network. The more memory or hard disk space a node has, the more
rights it is granted for maintaining the public ledger.

Distributed ledger technologies have revolutionized the world by transforming

the existing systems to become more secure, reliable and scalable. It forms a
system that provides a trustworthy ledger among a group of nodes across a
network that doesn’t fully trust each other [1]. Distributed ledgers especially
blockchain has been conceived as a provider of cryptocurrency but it has found
its applications in different sectors including finance, academics, IoT, industries,
and etc. That is why, we have witnessed an exponential adoption of this
technology over the last few years. This has also raised the interest in the
distributed ledger development community, which has scaled from hobbyists and
academics to enterprises i.e. IBM and Intel. From the emergence of Bitcoin in
2008, there are currently many active development variants of this technology
i.e. Ethereum, Hyperledger, Tangle, Corda, and etc. [2]

All these variants differ in the way they choose to reach the consensus, which
helps a distributed ledger to function fairly, securely and efficiently. A consensus
protocol, which is the core of the distributed ledger, performs two tasks: it
guarantees that the next block of the network is the only version of the truth, and
it protects the network from adversarial influences on the nodes and the network
[1] [3]. It allows the network to confirm the transactions without relying on the
intermediaries i.e. central authority. A consensus protocol makes a ledger
functional and a flaw in the protocol will fail the accountability of the ledger.
That is why, it owns a significant interest of the researchers and the industry. It
also defines the nature of the distributed ledger which could be public, private or
consortium/federated [4]. Another popular classification is permissioned and
permissionless protocols.

In this article, we will overview of some of the famous public, private and
permissioned consensus protocols. We will survey different consensus protocols,
their properties, concept, implementations, analysis, and use cases. We will also
identify and discuss multiple variations of these protocols as similar work under
the same section.

Proof of Work

Introduction:

Proof of Work (PoW) [6] is the first consensus protocol for crypto-currency that
allows the participant to reach consensus in the Bitcoin. The protocol is
primarily based on costly computer computation involving Hashing (SHA-256),
Merkle Tree and P2P networking for creating, broadcasting and verifying blocks
on the network.

Properties:

· PoW is designed for permissionless public distributed ledger and

consumes computational resources (or hashrate) of the system for mining.

· PoW maintains a block of transactions in a linear fashion (a single list of

blocks) and each block contains a group of transactions.

· Each new block formation requires the miner to solve a cryptographic puzzle
and the miner who solve it first, broadcasts its result to the network and takes the
reward.

· This computational challenge-response process is called mining [6].

· Every transaction is cryptographically signed and the transaction is only

accepted in the network only if the signature is valid and verifiable.

· In case of conflicts, the protocol extends multiple branches of blocks but only
the longer branch is retained as the truthful branch.

· The protocol has a fair distribution of reward. The miner with p fraction of total
computation power has a probability p to mine the next block.

· The management of the consensus is objective given that a new node can reach
the current state of the network based solely on protocol rules. [13]
Concept:

PoW introduces the concept of mining which involves validation of a set of

transactions (block) in the network by means of showing the computational
proof of the work done. When a transaction is initiated, all the miners on the
network race against each other to be the first to solve a cryptographic puzzle
and create the block. The miner who successfully solves the puzzle, broadcasts
his solution and block over the network to other peers, who after verification of
the solution accept the new block on the chain.

Bitcoin. Bitcoin is the first and innovative peer to peer cryptocurrency that
allows two parties to exchange payments without the need of an intermediator.
Since its inception, it has not only revolutionized the financial industry but has
also inspired other sectors i.e. health, management, governance and etc. Bitcoin
provides payments exchange with trivial fees and identity anonymity. As a
decentralized cryptocurrency, it is not influenced by the policies of the financial
institution and avoids counterparty risk. Bitcoin allows micropayment channels
through off-chain Lightening network and native protocol library You can also
sell computational data via zero-knowledge proof to attain utmost trust during a
transaction It also supports multi-signature transaction over an address for
improved security

Litecoin. Litecoin is an open source and peer to peer cryptocurrency that is an

implementation of proof of work Litecoin was forked from the Bitcoin codebase
and went live in 2011. It uses improved security algorithms which is both
computationally and memory intensive. It uses scyrpt [21] in the consensus
protocol that makes it more expensive to counterfeit.

Other cryptocurrencies implementing PoW are Primecoin [22], ZCash, Monero,

Vertcoin and etc.
Analysis:

· PoW is a power-hungry protocol that requires an immersive amount of

computation power [23] which is a pure wastage of resources as we have new
efficient protocols.

· The difficulty level in the PoW keeps increasing so as the power required to
solve a harder cryptographic puzzle, which makes it inaccessible for solo miners
to participate in the network.

· Due to its extensive power consumption, this protocol is considered a waste of

huge resources. Other consensus protocols are recommended for efficient
processing and better output

· High computation requirement by the protocol also guarantees high security. A

malicious user needs 51% of the computing power which is near impossible
considering the computational difficulty level of the protocol. However, the
protocol is highly vulnerable to Sybil and Denial of Service attack, and least
affected by Selfish Mining attack. [25]

· The mining process of the system is also not fair; it is easily influenced by
specialized hardware known as Application Specific Integrated Circuit (ASIC).
These specialized and expensive machines give an unfair edge to miners over
others in the network.

Similar Work:

Proof of eXercise. Proof of eXercise (PoX) [26] is designed for the public
distributed ledger, consumes computational resources (or hashrate) of the system
and is a conceptual consensus protocol that requires dedicated research for its
practical implementation. It is an attempt to transform the PoW hash-based
puzzle mining process towards forming a useful output and avoid wastages of
resources. Currently, the annual electricity consumption of mining Bitcoin is
equivalent to that of Ireland in 2014 [27], and is expected to be equal to that of
the entire world by 2020 [23], thus making it unsustainable in the future [26]
[24]. It proposes a variant of PoW that solves real-world scientific computation
problems based on matrices as an eXercise. There are many real-world
application of matrices based scientific problems including image processing,
DNA and RNA matching and sequencing, data mining and etc.

Proofs of Useful Work. The nearly similar idea was published in 2017 as
“Proofs of Useful Work”, which proposes to solve the scientific problems based
on orthogonal vectors OV as the useful proof-of-work The paper also integrated
the idea of zero-knowledge proof This enables the miners to give only the proof
of the solution to their delegated task and not the solution itself to the delegator.
The solution is made available by the network only when a particular pre-set
condition is met. The paper does not discuss any challenges and practical
implementation of the protocol.

Proof of Stake

Introduction:

Proof of Stake (PoS) is another consensus protocol that chooses the validator to
mine the next block on the basis of its economic stake in the network (amount of
coins a validator owns) and the age of that stake. PoS comes in many variants
from minimal to significant changes in their base protocol. The most apparent
fashion in which they differ is what strategy they implement to minimize the
double spending and centralization issue in the protocol.
Properties:

· PoS is designed for permissioned public distributed ledger and works

on economically bonded puzzle solutions.

· The process of computational challenge-response in the protocol is called

minting.

· POS is weakly subjective given that a new node requires recent state, protocol
messages, and rules to reach the current state of the network [13].

· As no new coins are generated, there is no block reward in the PoS and the
miner only takes the transaction fee.

· The miner for a particular block is chosen in a deterministic way depending on

its economic stake in the network.

· The protocol is also fair given that the probability p of a validator is directly
proportional to the fraction p of the stake he owns out of all the in circulation.

Concept:

The PoS based ledger keeps track of all the validators (equivalent to miners in
PoW) and their respective stake (cryptocurrency) in the network. In PoS, all the
validators invest the stake in the system to earn chances to mine the next block.
The higher the stake, the higher the chances. However, it doesn’t guarantee that
the validator with the highest stake will be selected. The system chooses the
validator randomly for block creation, like a lottery. If any participant tries to
cheat the system, he loses his stake in the system. Unlike PoW, block creation is
straightforward and doesn’t require any significant computational power.
Implementations:

Ethereum. Ethereum is an open-source and public blockchain powered by PoS

as the protocol for reaching the consensus. Ethereum was initially PoW based
cryptocurrency but it shifted its consensus mechanism to proof of stake, as it
makes Ethereum energy efficient and secure as compared to proof of work
counterparts It also features a powerful scripting language “smart contracts” to
perform an operation on the blockchain. Ether is a cryptocurrency that works on
the Ethereum blockchain. Unlike Bitcoin, which only offers peer to peer
payment transfer, Ethereum offers a blockchain development stack on which
developers can build and deploy DApps (Distributed Apps). This opens up the
opportunity for developing unlimited ideas on this promising technology.

Analysis:

· PoS is an environment-friendly consensus protocol due to negligible

computation requirement. Also, the protocol doesn’t require any specialized
hardware for participation.

· While PoS is energy efficient, it is more profitable for major stakeholders and
biased towards.

· In PoS, an attacker would need 50%+ currency in the network to corrupt it,
which is easier as compared to acquiring 51% computation power in its PoW
counterpart. To avoid such security attacks, PoS design has several economic
penalties to punish the colluding participant. This is indeed very effective since
only major stakeholder can centralize the network and they will prohibit that to
avoid penalty (losing the stake) by the network. The penalty is implemented in
Ethereum whereas other implementations have attempted different strategies to
solve this problem .
· PoS has many security concerns, one of which is Bribe Attack . This involves
the process of reversing your own transaction for which an attacker builds his
own chain and bribe the stakeholders for the block confirmations.

· PoS is attracting many new and existing implementations of distributed ledgers

due to its energy efficient and decentralized design.

Similar Work:

Delegated Proof of Stake. Delegated Proof of Stake (DPoS) [35] is the most
common variation of PoS, where stakeholders elect the validators rather than
being the validator themselves. Unlike PoS, which follows the direct democracy,
it works on the concept of representative democracy. Those who hold the wallet,
vote for the validator to create the new block. Validators can also collaborate to
create a block instead of competing against each other, unlike PoW and PoS.