Introduction
The Cryptocurrency industry has evolved dramatically in the recent past, and its adoption as well. Cryptocurrency transmits digital information through cryptogenic methods, ensuring legit and valid transactions (Farrell, 2015). Cryptocurrencies are digital currencies whose ownership can be proved exclusively cryptographically. Brito and Castillo (2016) claim that the cryptocurrency industry’s market value is larger than some major economies and technology companies worldwide.
According to Li & Whinston (2020), Tencent’s QQ coin was the digital currency pioneer in 2005, whereas, in 2009, Bitcoin was the first Cryptocurrency to be introduced. However, the real market for Cryptocurrency started in 2013 (Galetic et al., 2015). Rehman et al. (2020) reported that Bitcoin had gained popularity among the other Cryptocurrencies solely due to its ability to address the centralization and double-spending issues. Among more than 2100 alternate cryptocurrencies, Bitcoin is still a leading cryptocurrency holding 52.5% of the total market share.
Cryptocurrencies have been an important factor in some economic activities. They are generally protected from inflation originating from national government changes or restrictions (Magro, 2016), and nations like Iceland have taken the initiative to have their national cryptocurrencies (Hofman, 2014). Therefore, Cryptocurrency can be a significant currency solution in the near future for every nation.
In contrast to traditional currencies, transactions through digital currency are typically much faster and borderless. The ownership and transactions are recorded on distributed ledgers, typically called blockchains. Moreover, the security and integrity of the blockchains are usually managed by multiple decentralized writers, unlike traditional ledgers. Blockchain, an immutable distributed ledger, is the underlying technology behind cryptocurrencies. The core elements of blockchain include complex cryptographic functions for security and immutability (Rehman et al., 2020).
Cryptocurrencies are differentiated on many aspects that determine their performance, like financial influence, security, and privacy. However, cryptocurrencies and their underlying technologies are still in their infancy, creating mistrust among many stakeholders. In this article, an analysis of trust issues related to Cryptocurrency is presented in detail.
Security
Security is a crucial aspect of any technological system to gain a wide range of acceptance by its users. Understanding the security of a public blockchain can be done by studying the preferences of its writers. It will be interesting to understand how the financial market of Cryptocurrency would respond to a security failure. It can happen through hacking by massive computational power for such a decentralized system, which is almost impossible (Alzahrani & Daim, 2019). In addition, the role of cryptocurrencies in businesses such as ransomware attacks, which has been dependent on payment bitcoins, is also relevant because the business runners will have strong preferences for the security of the blockchain and could become significant writer to ensure it (Li & Whinston, 2020).
Privacy
Cryptocurrencies can generally provide their users higher level of privacy than traditional currencies. Cryptocurrencies operate by managing users’ digital keys, generated in pairs; private keys (secret passwords) and public keys (public usernames). Cryptocurrency wallets created and stored these keys. Each public key is publicly available, whereas the private key is never revealed. A digital signature is generated with the private key to show cryptocurrency ownership
linked with the public key to authorize a transaction. The writers can check the validity of the signature with the public key. Whereas recovery of the private key from the public key is mathematically infeasible (Li & Whinston, 2020).
Privacy of transactions and financial information is a major motivator for adopting Cryptocurrency. Eliminating intermediaries increase desired privacy level for users. Under this system, no one knows how much someone owns, where and for what purpose it is spent. The financial industry’s increasing laws and regulations have threatened people’s privacy, making Cryptocurrency a viable option (Alzahrani & Daim, 2019).
Supply and Financial Influence
Bitcoin’s supply merely consists of awards for its writers. They are set at a certain amount per block; in the beginning, only 50 bitcoins were halved every four years, approximately (Li & Whinston, 2020). Therefore, Bitcoin’s supply is stable and, unlike sovereign currencies, not subject to monetary policies.
Currently, the demand from the markets for bitcoins comes mainly with privacy and speculation for it. Such demand for bitcoin fluctuates more than that of major sovereign currencies. This affects bitcoins’ value, making it fluctuate significantly, combined with sovereign currencies, which is not a desired characteristic for any general currency (Li & Whinston, 2020). Therefore, in general markets, Bitcoins are not acceptable compared to sovereign currencies. Thus, it has less financial influence in the market.
Smart Contracts
The blockchain technology that serves as the backbone of Bitcoin has other potential uses, such as smart contracts (Hileman, 2016). These contracts are payments already programmed to occur only under predetermined conditions. Ethereum also supports smart contracts on the transactions of digital assets. Conditions checking and contract execution are validated by the consensus of the Ethereum blockchain writers, which are publically open.
Smart contracts help solve the issue of mistrust between parties. Traditionally, such parties may go to a trusted escrow, and with smart contracts, the writers play the role of the escrow. Therefore, similar to the security concerns for public blockchains, smart contracts could also suffer due to corrupted writers (Li & Whinston, 2020). Whether the incentives of the writers can be manipulated while executing smart contracts is still an open question.
Financial Influence
Other digital currencies, besides stablecoins, have been backed by sovereign currencies. For example, WeChat Pay and Alipay are fully backed by Chinese currency. Central banks worldwide are considering issuing central bank digital currency that is fully backed by their sovereign currency (Li & Whinston, 2020).
Brunnermeier and Niepelt (2019) suggested that a fully backed digital currency with the same liquidity as a sovereign currency can perfectly substitute it without increasing any financial risk. These conditions are usually satisfied by WeChat Pay, Alipay, and central bank digital currencies, but not necessarily Libra. Thus, stablecoins having reputable backing, like Libra, can have significant financial influence, which is not reached by any of the existing cryptocurrencies.
Conclusions and Discussion
A trustworthy cryptocurrency ecosystem is not achievable within a short period of time. This article presented a detailed discussion about the main trust issues in the whole cryptocurrency ecosystem with suggestions for immediate, short-term, and long-term solutions.
Cryptocurrencies provide privacy to their users. However, how transactions are carried out with such privacy could be different from the ones in traditional settings because transactionees do not know of one another’s personal information and, therefore, may hesitate while trusting each other.
In order to fully develop and use decentralized cryptocurrency systems, awareness should be developed among stakeholders. On the other hand, governments and regulators need to set up legal and regulatory frameworks for financial services, including technology enablers that agree to develop and adopt cryptocurrencies.
However, all stakeholders need to understand the technical and non-technical implications of the cryptocurrency ecosystem. This would ultimately lead to a long-term and sustainable operating environment. Furthermore, the underlying systems should be more privacy-preserving, secure, and trustworthy to attract maximum user bases. These trust issues, if resolved in the upcoming years, will lead to a new generation of Cryptocurrency. Thus, cryptocurrencies will be the main drivers of the mainstream economy and financial institutions.
References
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