crypto-token.
REGULATORY / GENERAL FRAMEWORK TOKEN (IDENTIFICATION)
For a long time, the development of crypto currencies stayed under the radar of both regulatory mechanisms and the public. Increasing market capitalization and enhanced media attention drew institutional market participants on the scene. In mid 2019, Facebook took the lead promoting the idea of its own digital currency'Diem' [1]
Increased restrictions and / or regulations exist through general or partial bans such as:
- ban on generating, or mining, certain crypto currencies (e.g. in China and Turkey)
- suppressing of trade (including payment with crypto) by central banks (e.g. in China)
- strict prohibitions on possession (e.g. in Bolivia, Morocco or Algeria)
[1]
At that time still known under the name Libra. The project has since been discontinued.
TECHNOLOGY / FUNCTIONS TOKEN (IDENTIFICATION)
Tokens and / or coins are calculated using an algorithm agreed on for the encryption process. In doing so, the algorithm limits the number of possible results and thus counteracts any inflation in crypto payment.
The result of the calculation is a character string that is unique for the procedure. In the BTC's SHA-256 algorithm, a token looks approximately as follows:
da0044f2605042BDde0e2cf5998Ae5653CA6a02691fb9b81d5f18dfbE1B19730
This string would then represent a specific, unique BTC.
In the process of calculation, the initial value is filled up to a specified length (padding). The padded value is then divided into individual blocks of equal length. The encryption is carried out by applying the algorithm to one of these blocks together with the encryption result of the previous block. Once all blocks have been processed, the overall result is established by means of a finalizing function, which produces the final result - the hash.[1]
Each block is encrypted individually, the result of the encrypted block then flows back into the processing of the subsequent blocks and is finally encrypted again by use of the finalization function. This multiple processing of every block results in even the smallest changes in the original value (e.g. changing or adding just a single letter or number) leading to a complete change of the token, the so-called avalanche effect.
The essential aspect of the BTC concept – BTC being the first crypto currency and therefore the crypto currency movement’s role model - is the compartmentalizing of the infrastructure, just as the internet itself is characterized by a structure in which the functionalities are assigned to a wide range of levels and participants.
Creating a token according to the default procedure is called 'mining'. The complexity of the mathematical-cryptographic steps in the mining process requires a certain calculative effort. The token is usually obtained and traded via a crypto exchange platform. It can be stored in both a software and hardware-protected environment.
The concept of logically limited mining and the remuneration in crypto currency units allows the process to be distributed in a decentralized pattern. Tokens and all transactions made in the crypto payment system can be stored in a blockchain. The transactions are recorded, one after the other, in logically linked blocks - hence the name "block-chain”. Once tokens are mined and authorized, they become part of the blockchain, too.
The blockchain is best compared to a ledger in which all of a bank’s transactions are stored in chronological order. Under certain conditions, this ledger can be secured both cryptographically and through organizational measures, thereby ensuring that its content cannot be altered later on. In this way, the ledger no longer requires centralized and physical back-up. This ledger can be distributed to several parties who continue to work on it simultaneously, thus creating a Distributed Ledger.
Fig.: : 4-Peer model in the peer-to-peer network of a crypto economy
From the payer's point of view, the usage is quite simple. As with a conservative bank account, acquiring new tokens usually takes place through an account at a crypto exchange. However, as with a classic bank transfer, an individual can also receive tokens from another user. In addition to the account at a crypto exchange, digital crypto wallets are also available for the purposes of storing and paying with tokens.
Crypto currencies can usually be purchased at crypto exchanges using the prevalent payment methods - SEPA SCT, credit card or other internet payment methods. The token acquired is either stored in the exchange platform's crypto account or in one’s own wallet. The transition from one wallet to another is documented in the blockchain.
This charging feature is a fundamental requirement for trading or purchasing crypto tokens. Their use is partly still subject to tremendous fluctuations. After purchasing the crypto tokens, they can be utilized in different use cases, the most relevant and frequent types being:
- as a medium of exchange or means of payment, e.g. for purchasing goods or services
- as a speculative or investment object
- financing of various projects and business plans (the initial investment being rewarded by an interest-like component)
STRATEGIC POTENTIAL TOKEN (IDENTIFICATION)
Tokenization is the core element of all crypto payment methods. Although the first crypto currency, the BTC, is hardly older than 10 years, recently its distribution and range of use have seen unprecedent heights. The BTC and other crypto tokens are being increasingly used as a payment tool, and lately, combined with other technologies such as smart contracting, for speculation purposes.
We are assuming that we are still at the beginning of the development of the crypto industry. Crypto currencies continue to increasingly attract focus of institutional investors.
Following the lead of Tesla's [1] announcement to accept bitcoins as a means of payment, a number of companies, e.g. the U.S. card schemes Visa and Mastercard, are currently evaluating whether they will include digital crypto currencies into their payment mix.
Regarding emerging tendencies at regulation of the crypto market, it is difficult to predict the scope of effects they will have on the use of crypto tokens.
Taking into account that a large part of the BTC use supposedly serves the shadow economy and tax-free speculation, there is reason to question the potential of public crypto tokens such as the digital euro.
In present times, the crypto token, as a technology, has become indispensable. Even so, the increasing vulnerability of the encryption processes coupled with its need for significantly enhanced computing capacity poses a challenge for individual systems. SHA-3 has been functioning for a number of years. The question is: how would a decentralized crypto payment process organize its migration into a new cryptographic process? And should it manage to master this task: what will happen with the tokens generated using the old method?
The BSI (the Federal Office for Information Security in Germany) currently considers the SHA-2 family to still be safe. With the spread of quantum computers, this estimate will have to be reviewed. There is a significant motivation to attack crypto methods that have been operating successfully. As computing complexity increases, so does power consumption, which is already considered to be a highly problematic issue from the environmental protection point of view.
Crypto tokens might become less attractive as a result of regulatory requirements reversing anonymity once the token is used; in that case, crypto tokens would compete with current internet payment methods. Since the latter are only required to secure the integrity of the individual payment transactions as opposed to the entire payment history (i.e. a blockchain), their energy consumption for tokenization would probably be significantly lower. As a consequence, from an environmental protection point of view, internet payment methods would be far more attractive.
[1]
The annual reports for 2020 show almost 30% profit by holding cryptocurrencies.
[2] See also here the efforts of the US payment processors Visa or Mastercard.
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