Криптовалюта / CEX.IO / Дмитрий Волков

Hello.

Cryptocurrency is, first of all, a currency that moves through unusual channels — unusual for most users. This is usually blockchain. Blockchain is a distributed database that doesn't have a single server as we're used to. It's distributed across thousands of computers around the world, so it can't simply be shut down, censored, and so on. Cryptocurrency is a currency that exists on such a distributed database — blockchain.

Right. If we have a paper bill in hand, we can buy something with it. But you can also have a debit or credit card, where the bank has a record that you have one dollar on that card. However, what's there as one dollar today — the bank can, at its discretion, make it zero dollars. In a blockchain, with its decentralized nature, this is impossible. If you have one dollar or one unit of cryptocurrency in your wallet, only you — whoever has the special cryptographic key — can do anything with that dollar. No one can steal that money from you, as long as you don't lose that key. In the banking system, everything is centralized — if there's a court decision, the bank has the right to withdraw that amount from your account. None of that is possible in a decentralized blockchain.

Through the distributed nature of the database storage. Information about your money — that you have some cryptocurrency on your wallet — is distributed across thousands of computers around the world. To steal your money or forcibly withdraw it, a criminal would have to reach an agreement with thousands — even millions — of people around the world. This is practically impossible.

The fact that there's some amount stored on my wallet is known to all participants — millions of people around the world. They each keep a copy of this database on their computers. Even if someone loses this database, there's still a certain consensus. If you ask how much money is on a specific wallet, the question is asked to all participants worldwide. If, for example, 98 percent of participants say there's one bitcoin, then it's considered that there is indeed one bitcoin at that address. If there are some dishonest participants — say 2 percent — who claim you have 2 bitcoins or 10 bitcoins or 0 bitcoins, the majority rules. If the majority says there's one bitcoin at that address, then there's one bitcoin.

Previously, cryptocurrencies were commonly called altcoins. Over time, people created not just coins but units of measurement for various things — ownership rights, voting rights, and so on. These things are not quite formally considered money. They're called tokens, but tokens can also perform the function of money if they have value, are easily traded, and also often serve the role of money.

About ten years ago, or a bit less, to do this a person would have had to install a copy of this distributed database on their computer, create transactions, and communicate with other participants who also have a full copy. In 2021, that's quite difficult to do — you'd need a fairly powerful server or computer. The simpler option is that as a user, you don't install a full copy of the database but only some part of it. Or an even simpler option is online wallets, where you don't control the entire database but only your private key. There are also multi-signature wallets where several people have access to the wallet. The simplest option is to install a mobile app for some online service or wallet that doesn't require a full copy of the blockchain.

A crypto exchange serves as a portal from the crypto world to the real world, where you can exchange what we're used to calling real money for crypto money and vice versa. It's not just cryptocurrencies — there are different tokens, and participation in this system is essentially an entry and exit point. The second function is forming a market relationship of value between one cryptocurrency and another, where you can exchange one cryptocurrency for another. These are the main needs that exchanges fulfill. However, there are also not-so-good things — criminals can use exchanges to launder money. For example, if some amount was obtained illegally, it needs to be laundered, made harder to trace. For this, they perform various complex operations to obfuscate the trail, and sometimes they try to use exchanges for this. But exchanges fight against this — they work to suppress these attempts at money laundering.

Cryptocurrency itself is one of the tools for quite large criminal capital. According to a UN Secretary-General report, in 2009, about one percent of transactions were already linked to criminal money via Bitcoin. Exchanges fight this and suppress such activity. Legal exchanges that have licenses for their activities and a regulator, or self-regulated exchanges, conduct KYC and AML procedures. KYC — the exchange only serves a client if it knows who the client is, their name, possibly address, what they do. AML is the procedure for anti-money laundering. For example, if a very large transaction occurs, AML tries to find out from the client where they got the cryptocurrency, where it came from, and what they plan to do with it. Many people have the impression that exchanges try to create obstacles, but in reality, there are simply legal requirements that exchanges must perform certain checks to ensure the legality of operations. The focus is not on tax evasion but rather on combating terrorism financing, scams, and fraud — that's what exchanges usually fight against.

For the most part, yes, that's correct. But it's still a step toward simplifying and speeding up many types of operations. Cryptocurrency is currently mainly used for cross-border transfers — transfers between countries. In many countries, this is quite difficult to do even on a personal level. For example, paying for production in China — a Ukrainian entrepreneur who wants to pay for manufacturing of some device he wants to sell in China — this is quite difficult to do through the banking system because there are many intermediaries in the chain: several correspondent banks, and everything takes a long time. But the slowness is one problem — it might not happen at all. With cryptocurrency, it happens very quickly, and you only need a short time to register on an exchange, pass verification, and tell the exchange who you are and why you need cryptocurrency. After that, everything proceeds fairly quickly. Delays can occur mainly when converting between cryptocurrency and fiat money. If no such conversion is needed, everything can be significantly accelerated.

Taxation — even if we make a transfer through the banking system — taxation is the bank's least concern. Those are the client's obligations to some state of which they are a tax resident. The bank checks rather superficially and doesn't really interfere. The point is that a client may be a resident of one country, pay taxes in another country, and have a bank account in a third country — while the correspondent bank is in a fourth country. The client's obligations to pay taxes don't disappear regardless of how the transfer happens — whether through cryptocurrency or the banking system.

Most people believe — and this is partially true — that mining is for earning cryptocurrency: you buy a graphics card, it works and generates money. Usually, understanding stops there. In reality, mining in cryptocurrencies such as Bitcoin plays a key role in the security and reliability of the system. Miners don't just do abstract operations — miners perform specific computations that are difficult to forge. For example, there's a certain operation or several operations, and a miner tries to sign this operation in a specific cryptographic way. Signing means doing complex computational work to create this signature, and the more difficult that work was, the harder it is to later forge that block of transactions. Then the next block is created, and the next. If any criminal wants to forge a transaction, change some amount, or remove some operation, they'd have to recalculate this signature, and usually one person doesn't have enough computational power. Even large miners don't have enough. The more complex this cryptographic signature, the more reliable the block is considered to be. And the more miners there are, the more complexity, and the greater the reliability. To attract more miners, cryptocurrencies create incentives — new coins are created and distributed to miners. That's why in Bitcoin's blockchain, the number of miners grows over time, because they want their share of newly created coins. And the higher the exchange rate of this cryptocurrency relative to the dollar, the greater the interest for miners to join.

Blockchain, as we've discussed, is where the history of operations with cryptocurrency is stored. But where does cryptocurrency actually appear? It depends on the specific cryptocurrency. There are cryptocurrencies where, at the moment of creation, there's a large pre-created package of cryptocurrency that belongs to the creator, and they can transfer it somewhere. This is mainly how modern blockchains work. Classical blockchains like Bitcoin don't have such a function — all cryptocurrency is created through the mining process, through creating these signatures for each block. The miner receives a reward — a coin is created at the moment of mining. After that, the miner can transfer this cryptocurrency, and it enters circulation.

Yes, that's correct. And such a cryptocurrency is, for example, Ethereum. Many people don't know this — when Ethereum was created, a large number of coins were created, and it was specified at the moment of creation what these coins would be used for and who could do what with them. Part of these coins belongs to the development team. Usually these coins are locked for a certain period — the algorithm prevents spending these coins for, say, five years or one year. The development team has motivation to make the project successful, so it develops and the value of the currency increases — then their coins increase in value. They use this to pay for development and marketing costs, and so on.

That's a philosophical question. Often it's related to belief in something. For example, the recent events when Elon Musk bought Dogecoin and simply said he likes this cryptocurrency. The mass of Elon Musk's followers may not understand this, but they believe in the person — they believe in an authority figure. If this authority bought cryptocurrency, then maybe I should too, and perhaps it has a future, because everything he touches turns to gold. This is a fairly common phenomenon. There are many authorities in the crypto world, and if an authoritative person makes a statement, everyone immediately tries to follow. Also, people often believe in an idea — at the moment of a cryptocurrency's creation, a promising idea is described for why this cryptocurrency is needed and what its role is. For example, it might be connected to useful functions. Different cryptocurrencies have different functions — some kind of voting, or storing additional information in the cryptocurrency itself, such as ownership rights, or a cryptocurrency that provides gaming and casino services. If people believe in this idea and that it will be used in the future, they also buy this cryptocurrency. These are more investment-related questions, but there are also people who don't aim to invest — they simply use cryptocurrency. For example, an entrepreneur who wants to pay for production in China simply buys some currency and sends it. Whether they believe in it or not, they use it as a utilitarian tool.

Yes, it's forbidden by the algorithm. But here's another important philosophical question — how decentralized is a cryptocurrency? For example, Bitcoin is considered a very decentralized coin because it doesn't have a development team as such — it's an open-source project. There was no moment when some development team took a share of the coins. But even this currency isn't considered one hundred percent decentralized. The mining power is more or less concentrated among about a dozen large miners worldwide who can generally be said to control this network — this Bitcoin blockchain.

This is called a mining pool. It's a way for small miners to combine forces. The reward goes to whoever first solves a complex mathematical task and signs a block. Miners compete to see who can sign first, and each individual miner has small chances of finding the signature and receiving the reward. One miner might find such a signature, say, once every three years. But if miners want more predictable, smoother income from mining, say ten or a hundred miners can combine together. Then they'll find signatures more often, and the reward will be distributed smoothly among all participants. That specific miner would receive the same income over three years, just not in one random moment but more smoothly with daily payouts. So mining pools are very convenient for miners. Practically all miners mine in mining pools, and only very large ones mine independently.

It depends on the specific cryptocurrency. Those hangars with equipment are usually Bitcoin miners. In reality, it's not graphics cards — it's specialized equipment designed to mine only Bitcoin and nothing else. Hundreds of units of this equipment — usually in warehouses with good cooling and, most importantly, cheap electricity, because they consume a lot of electricity. If several such hangars are present, these miners can mine independently, but even they often join pools for smoother income. Graphics cards are used for mining more modern cryptocurrencies, such as Ethereum and others. This is done so that there aren't oligarchs who can afford an entire hangar of equipment, because graphics cards are much harder to buy in bulk and harder to set up in a hangar. Mining pools mainly unite small miners who set up 6 to 12 graphics cards at home. But even large miners with hangars participate in pools — they're often participants and even organizers of pools.

First, you need to mentally accept that this money can be lost — these are very risky investments. Determine what sums you're willing to invest. In cryptocurrencies, there are many instruments you can invest in. For an ordinary person, the simplest solution is to buy some cryptocurrency, like Bitcoin, and wait for the price to rise or fall — and potentially lose all your money. This is the simplest way and possibly the most reliable. But there are many other ways to invest. Especially in the last few years, an entirely new infrastructure called DeFi has emerged — decentralized finance — which has introduced many services such as lending, margin trading, and other things. Mining and these things are a bit more complex for users, but they currently hold the most promise.

An algorithm decides. In decentralized finance, a special program is created — a decentralized one that doesn't run on any specific server or computer but runs simultaneously on all computers. If a person wants to interact with this algorithm — this algorithm is essentially, say, a bank where you can take out a loan or make a deposit — this person can read the code and understand how it works. The algorithm can only do what's written in it — it can't refuse a loan because it didn't like someone's appearance; that's simply not programmed in. These algorithms usually describe who can receive what amount of credit and when, and usually credits are issued against collateral — collateral in the form of another cryptocurrency. For margin trading, the person who received the credit uses these funds to buy even more cryptocurrency, increasing leverage for their trading.

It's an increase in the amount of capital you can trade with. For example, a person has $1,000. With $1,000, they can buy one unit of cryptocurrency — one coin. Suppose someone lends them another $9,000. Now this person can take the borrowed $9,000 and their $1,000 and buy not one unit but ten units. If the price of this cryptocurrency rises from $1,000 to $1,010, without leverage the person would have earned only $10 on the operation, but with ten times more, that's $100. Leverage allows you to increase potential profit, but it also increases potential losses — because if the cryptocurrency in this example drops to $990, the person would lose $10 on one unit, but with ten units, the loss is $100. Leverage is for people who want more risk and more profit.

Yes, it's open to everyone. There are no special restrictions, but there is a certain technical entry threshold. It's a special programming language. If we're talking about Ethereum, it's the Solidity language — a programming language on which anyone can write their own program and offer it to other participants for everyone to use. For example, I could write some kind of lottery algorithm. The idea is that people can send money to the lottery address, and once a day one participant is randomly chosen and receives the entire reward — a straightforward game. I write this code, publish it publicly, and this program runs on all computers. Now anyone can interact with this program. I'm the author, but I don't have the ability to change the algorithm — unless that possibility was built in from the start. So people who interact with this algorithm aren't required to trust me as the organizer of the lottery.

First, a person can read the code, study it, and understand how fair it is and whether they should send money to it. Second, when miners mine cryptocurrency, they execute this code, and miners have no motivation to execute it incorrectly. Here, the role of consensus comes in. If, for example, one miner with malicious intent executes this code...

If the code is executed incorrectly, all other 99 percent of miners will execute it correctly, and that malicious miner will simply be left out. So the code is executed correctly by miners, but of course you need to study the code itself.

In general, yes, but there are some specifics — sidechains and various off-chain solutions, as they're sometimes called. But in general, yes, each cryptocurrency needs its own pool of miners. And each cryptocurrency tries to increase the number of miners connected to its network, if there is a development team for it. But there are exceptions — for example, Ethereum. The main cryptocurrency runs on the Ethereum blockchain, but there are also many other cryptocurrencies launched on that blockchain as tokens on smart contracts, and they don't need separate miners. This simplicity — the absence of the need to find unique miners — motivates creators of new tokens to launch them not on their own separate blockchain but within an existing one, like Ethereum. And then usually when projects grow and Ethereum's performance isn't enough, they migrate to their own blockchain.

There's no 100 percent guarantee, but regulators and other government agencies try to minimize the chance of this happening. For example, they impose requirements on exchanges almost identical to those on banks — user capital must be stored in separate accounts and not mixed with the exchange's operating funds. In case of bankruptcy, these segregated accounts where client funds are stored are not used to pay off the exchange's debts — they are returned to clients.

There should be technical audits where an authoritative auditor verifies how exactly the cryptocurrency is stored. It shouldn't be possible that one person in the company, even the CEO, can take all the cryptocurrency. There should be at least several people who need to sign a transaction for anything to happen with the cryptocurrency. This is more difficult because legally you can't impose restrictions on the movement of cryptocurrency itself, but you can impose restrictions on the movement of money in banks — or rather, the storage of fiat funds in banks.

Blockchain as a distributed database has certain properties — reliability of storage, protection from modification. These properties can be useful for some businesses. For example, notaries who need to certify that something happened at a certain moment in time. Theoretically, a notary could sign this fact with their cryptographic key and certify that this event happened. Second, information about this fact can be recorded on the blockchain, providing proof that it occurred between certain blocks. If blocks are mined every ten minutes, that's proof the event happened within that ten-minute window. Or there are blockchains like Ethereum where blocks come every ten seconds, so you can prove the event happened at that exact moment. This could be property registration, for example, or a sale — that at this moment, the owner of a car changed.

There's a lot of talk about it, but in practice it's rarely implemented. In theory, it should be useful. When a long supply chain occurs — from the moment of assembly or production of some device or item to the consumer — each item can have its own unique code, and its path can be tracked, much like how you track delivery from an online store. At some point it transferred to a certain dealer, something happened — this way you can track warranty obligations or verify that the product is authentic. For example, you can immediately tell how much of each product is in stock, and you can't say 'something got lost in our papers — there were 100 tons and now there are 10.' Everything is preserved in the history and is impossible to forge because of mining and cryptographic signatures.

Physically, it can be destroyed — blockchain won't help with that. If someone stole a container, for example, the event is simply recorded that the supply chain ended at that moment when the product was destroyed. It could burn, for example. An authoritative organization must put their signature to certify that yes, this product was indeed lost — it suffered in a fire or was stolen.

I haven't encountered it yet, for unknown reasons. Most likely because of the expense and complexity of implementation. Redesigning existing processes in logistics or manufacturing companies can be quite difficult. Companies are also distrustful of new technologies, especially older people. There's no sense of control over this database because it's somewhere in the world, distributed in the cloud, and not controlled by a specific organization. This often stops people, but primarily it's the cost of integrating and implementing these systems into existing processes.

The financial system is already changing significantly, and even not so much because of cryptocurrencies but because of a new direction in the crypto world — decentralized finance, or DeFi. Various services can be launched on decentralized finance platforms, and they're becoming very popular. Modern banks and even governments that aren't afraid of cryptocurrencies are integrating and trying to use the best of what exists in DeFi systems. For example, central banks of developed countries want to launch their own cryptocurrency — a digital national currency controlled by the central bank. This isn't quite the same as Bitcoin because it will be a centralized currency, and the central bank will have significant control rights. But nonetheless, it will simplify money movement and integration with DeFi services — for example, you could borrow in this currency.

Because their manifesto was about removing this centralization, and now it seems like the same entities just created a mimicry of this technology. But existing cryptocurrencies aren't going anywhere. The community generally supports central banks' desire to create their own currencies because it's another brick in building the new financial system. It's actually very convenient because if there's a legal framework and a blockchain controlled by a central bank with a national cryptocurrency, it can be much more easily integrated into existing DeFi services and other cryptocurrencies. This will be beneficial for the industry. The community supports this direction — it's not an attempt to replace Bitcoin with something else, it's a complement to existing cryptocurrencies.

'Legalize' is a vague word. In most countries, if it's not explicitly prohibited, you can do it. In most countries, including Ukraine, using cryptocurrency is legal — it's not directly prohibited. There are some countries that try to prohibit cryptocurrency, where it may be illegal, with fines or other sanctions, even imprisonment. But in most countries it's a legal tool, though not as regulated as regular money. Cryptocurrency is not considered a means of payment — national currency is considered a means of payment, cryptocurrency is not. Classical legal approaches often don't work in courts because a court can order cryptocurrency seized from one person and given to another, but it's impossible to seize cryptocurrency on the Bitcoin blockchain without the cryptographic key.

This is unlikely based on current trends. Developed, open countries that are open to new technologies, startups, and financial system development don't try to strictly ban cryptocurrency — they try to regulate it. They want to create rules for relationships involving cryptocurrency, primarily to protect people from fraud, to create a basis for contracts and so on. They try to create legal frameworks but not prohibit it. And such countries often try to lead in certain directions — for example, creating a national cryptocurrency. There's another trend, though: countries with more totalitarian regimes, where freedom is limited — freedom of speech, freedom of capital movement. Things that can't be clearly controlled aren't welcome in these countries. They're in a gray zone, and the simplest solution for these countries is to ban, not to create proper regulations. They often create a negative image of cryptocurrency — that it's only used by drug dealers or bad people — so they ban it to protect good people from bad people. But this is fiction — the country just doesn't want to allow finances of a type they can't control. So the world is currently developing simultaneously in two directions: some countries ban, others develop and lead.

Actually, there's too much — I mean, we need to create terminology and legal frameworks so that people can conduct legal operations without raising questions from counterparties or tax authorities. Most people don't mind paying taxes. I don't mind filing reports so it doesn't create difficulties for businesses. Simply create a law or amend existing legislation that a business can sell its services for cryptocurrency, describe rules for how this cryptocurrency is accounted for, how taxes can be paid from it, or whether taxes need to be paid. Something similar might be needed for mining, but the most important thing is to give businesses the legal ability to use cryptocurrencies for their purposes. It's also important not just to sell goods or services for certain currencies, but to create services based on blockchain — for example, property rights confirmed by tokens, because a token can be sold to another person and by law that second person becomes the owner of the thing. A popular example now is NFT tokens. We just need to create order in relationships between people using cryptocurrencies and blockchain.

If we draw an analogy with the real world, we have real money — regular dollars. NFTs are something like collectibles — collectible coins that exist in one or ten copies. The coin is indivisible, it's not used for payment. It's a unique item you can own and transfer or sell to another person. For example, two unique collectible coins of nominal value one don't combine to form two units that you can pay with — they're just objects. And these objects can be anything unique: a painting, a building, property rights to a building or something else. This has created a very wide market for artists in the digital space because it's easy to track. A digital painting can be created with a unique digital hash — a large number identifying the painting — and an NFT token can be created that determines ownership rights to this painting by this hash. It's easily done with music, audio files, and all digital art. It's slightly harder with real-world art, like a painting in a gallery, because while you can create a token and trade it, there's no legal mechanism for determining when ownership of the painting changes through the token. Since there are no such frameworks yet, this all happens in the digital world because it's much simpler there.

You need to register somewhere, use specific software — but the simplest way is to use certain services designed for these needs. You need to register, create NFT tokens that determine ownership of a specific piece of art, and put the token up for auction. NFTs are usually traded through auctions, just like auctions for physical paintings. After the auction ends, someone owns my artwork and transfers the payment to me. NFT platforms earn through commissions, and they often also issue their own governance tokens, but that's a side product.

The environmental concerns around mining are somewhat exaggerated. Yes, a lot of electricity is spent, but if this electricity weren't spent on mining, it wouldn't be spent anywhere else. The largest miners are in China, in a special region with many rivers and hydroelectric stations where electricity is very cheap. It's a sparsely populated region beloved by miners. In the rainy season, when there's a lot of water, miners bring their equipment to this place and use this cheap electricity for several months. If miners didn't do this, the electricity produced by these stations couldn't be used anywhere — we couldn't transport this electricity to, say, Australia. So the issue isn't the availability or use of electricity.

When people talk about ecological damage, they usually mean coal-burning power stations emitting ash into the atmosphere creating a greenhouse effect. The ecological harm is often overstated. Firstly, that electricity can't be used elsewhere. Secondly, in countries where electricity is expensive, mining isn't very popular because it's barely profitable. Of course, resources spent on mining can be considered wasted — they could theoretically have been used for something else, or the equipment could simply not have been produced. That's why the current popular idea is to move away from mining and adopt a different principle. Mining is used in currencies that employ proof of work — each miner performs a complex mathematical operation to prove the work done. Another principle is proof of stake, where miners prove ownership of cryptocurrency without spending computational power. The more cryptocurrency a miner has, the more weight they carry, and the less motivation they have to harm the cryptocurrency — because if they sign incorrect transactions or damage the blockchain, they're hurting themselves since their cryptocurrency's value drops. Some blockchains allow miners to accumulate a certain amount of cryptocurrency, and the more you have, the more you can mine without heavy computational resources. These cryptocurrencies exist and are quite popular, and another feature is they work very quickly.

Technology will likely develop in the direction of DeFi and building increasingly complex and new services in the financial world. In the coming years, this system will likely expand not only to the financial sector but to the real economy — manufacturing, for example. Tokens will be created that are tied to non-financial businesses and service provision. National bank cryptocurrencies will also likely develop as part of these new services. As for crypto exchanges — they will react to market demand and anticipate what's needed. While crypto exchanges used to mainly focus on buying and selling cryptocurrency for regular money, they now offer many other services, like staking or delegation. This is when you can put your cryptocurrency into a special instrument and earn a small yield — it's a built-in blockchain mechanism. But to use it, you need to install wallets and understand the technical processes. Our exchange offers a simplified way to access these services for a small fee. A person can buy cryptocurrency on the exchange, hold it there, and earn the same staking rewards. We also have integrated services like borrowing dollars against cryptocurrency collateral. Exchanges are transforming and adapting to market needs — in the coming years, exchanges won't just be places to buy and sell cryptocurrency, but places where many different near-financial services are concentrated.

We take security very seriously. Back in 2013-2014, when nothing was yet regulated, we invested heavily in security. Currently, legislation requires certain methods of fund storage, minimum infrastructure requirements, and so on. More specifically, we store cryptocurrency funds in different wallets. The main wallet is the so-called hot wallet — it's used for receiving client funds and processing withdrawals, but it only holds a few percent of all client funds. The bulk of funds is stored in a so-called cold wallet that isn't connected to the internet, with very complex access. No single person has access to it — the storage is encrypted and distributed across computers worldwide. There's a specific process for accessing these funds. We undergo financial and technical audits, and external authoritative companies verify that our infrastructure works exactly as we claim. Client funds are stored in a way that, in case of the exchange's bankruptcy, they won't be affected. To ensure this isn't just words, we undergo at least one year of technical audits and at least one year of financial audits. I hope I've reassured depositors about their funds.