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Research question: What is the probability of cryptocurrencies based on
Blockchain Technology to replace traditional monetary and financial system?1) 
What is Blockchain Technology? Technical
aspectsBlockchain is the type of database, where records are grouped into
blocks. Each block is linked to the previous one using a hash of the key. Due
to this, the block can be used as a distributed ledger, access to which can be
demarcated by recording / editing rights. There are many ways to achieve
consensus. Consensus is confirming the record in bitcoin, where the term
“mining” is used. The real novelty of blockchain technology is that
it is possible to set business logic in the transaction itself. This
distinguishes this technology from traditional databases in which business
logic is installed in the database itself or in software.The block contains a set of records. And new blocks are always added
strictly at the end of the chain.Picture 1.1: The set of blocks in BlockchainSource: The technology of Blockchain is built on 4 important principles.1)     
of data using cryptography methods.Different organizations today send out messages to each other for
transfer of detailed information about transactions. After receiving the
relevant message, each institution updates its own ledger. However, today there
is no quick and effective way to ensure that such copies are consistent.
Blockchain technology can solve this problem using various methods: for
example, simply by exchanging the same basic data or by providing
“confirmatory elements” for the purpose of data verification.
Different registry participants (users) reach consensus on the status of basic
data using various consensus algorithms (for example, Proof of Work, Proof of
Stake, Practical Byzantine, Fault Tolerance)1.2)     
 Distribution of copies among multiple recipients.A copy of all or a part of the data can be sent to multiple parties,
which reduces the likelihood of a critical error in a single site.
Multiplication today is quite a big problem for existing database technologies,
which leads to additional costs and complexities in the implementation of
various projects. An additional advantage of using this technology is that in
case of failures in one of the copies, the others remain intact. Numerous
parties can also confirm the facts of adding certain records during the
reconciliation by own forces2.3)     
access control.Distributed ledgers use “keys” and signatures to grant certain
persons the right to perform certain actions in the general ledger. Such keys
can receive certain features that are available only under certain conditions.
For example, a regulator may have a “key for viewing”, allowing it to
view all transactions of the relevant institution, but only if the owner gives
the regulator permission (control) of carrying out such actions3.4)     
transparency and confidentiality.Due to the fact that numerous parties receive a copy of the ledger and
multiple parties can perform verification of each record, the common ledger
provides a high level of transparency. This allows the regulator to verify that
the contents of the database have not been edited or altered fraudulently. The
addition of records is carried out using a unique cryptographic signature that
confirms the fact that the corresponding participant added the record in accordance
with the applicable rules4. 1.2) The origins of Blockchain
TechnologyDistributed databases come from the late eighties. As soon as powerful
computers appeared, connected by a network (local, and then global), the idea
arose to ensure accurate data transfer in the absence of a central node.
Especially this topic worried the military, interested that a package is
guaranteed and in an unchanged form came from point A to point B, even if
somewhere along the way there will be a minor trouble like an explosion block.Blockchain technology has many advantages over distributed ledgers.
Blockchain technology is more secure again cyber-attacks. Most of the big
companies now use encrypted ledger while it is easy to break it, but because of
the fact that Blockchain is decentralized and tamperproof, it is not possible
to break system from one point. Blockchain technology stands against money
laundering by being transparent and showing detailed information regarding
transaction including exact date, personal information and all transactions
before and after it. So it is apparent where money came from and went partly or
in whole. While distributed ledgers are reversible, in Blockchain nothing is
reversible and no past changes are allowed. Blockchain technology can be compared to Internet. In general, the
blockchain is a single system of records, which is tightly connected and can be
easily tracked and checked. This database is universal, it is suitable for both
transferring funds and storing documents for any other important legal
transactions. But what is important is that the system meets all the demands
that are put by people who have entrusted their papers and money. In fact,
blockchain technology is a new Internet that will change all business processes
on Earth.1.3) What is cryptocurrency?Digital values that allow secure transaction with cryptographic /
encrypted and additional virtual money supply are called crypto money.
Crypto-currencies are alternative currencies that are digital, and at the same
time are virtual currencies5.Bitcoin and its derivatives are often mixed with digital and virtual
money. Digital and virtual currencies other than bitcoins and their derivatives
are not currencies themselves, they are based on the national currency of the
country they represent, and can be regulated and supervised by the central
authorities of that country. Bitcoin is a spontaneous currency that cannot be
regulated by any central authority6.The main actor of this thesis Bitcoin, based on information systems such
as DigiCash, e-gold, which have been tried since 1990s, was created in 2009 to
solve the issues in the previous mentioned actors. It is crypto-paradigm that has
not centralized management and actors. Since 2009, many altcoins have been
defined as alternatives to Bitcoin7.Crypto-currencies are decentralized, unlike central electronic money and
banking systems. Control of this decentralized structure is performed by the
Blockchain transaction databases.Cryptocurrencies are produced in decentralized cryptosystems, publicly
available and publicly known, at market cap determined at the time of
establishment of the system. In traditional monetary systems, governments may
issue additional money through national central banks when they deem necessary.
However, governments or corporations cannot produce crypto-money, and the
cryptocurrencies owned by others cannot be seized without their permission. The
amount of crypto-money offered and the shape and timing of the money supply are
determined during the establishment phase of the crypto-system.There is a third institution / organization that is trusted in
traditional electronic money deposit and transfer operations. For example; If a
person A wishes to transfer money to person B, it transfers it to a third party
which is C (bank or intermediary institution), the institution C performs the
transfer transaction and is responsible for the safety and correctness of this
transfer. Actor A and actor B trust in actor C.There is no third party / tool in crypto systems, trust is unnecessary.
Security, integrity and the complexity of the global ledger are made through
mutually unreliable miners. The system is trusted, but the parties do not trust
each other. The security of cryptocurrency is based on the principle that the
majority of miners have the desire to honestly hold large books and obtain
financial incentives.In most cryptocurrency systems, cryptocurrency production decreases over
time in order to fix the total crypto money in circulation.The banknotes in
circulation that countries export are fiat money and they are under the
guarantee of an authority that exports, supervises and regulates them. On the
other hand, trust to virtual cryptocurrencies is provided by virtual money
issuance and belief that the circulation system and the majority of system
users will not do wrong.1.4)
Subjective Theory of ValueThe answer to the
question “What is the value of commodity money, gold and silver, money or
certificates based on gold and silver, fiat money, digital and virtual
money?” is important in terms of the existence and future of money. Money
is becoming more and more abstract, on daily bases getting away from being
tangible.The subjective theory of
value asserts that the value of a product or service is the labor-value theory
which claims that it is equal to the expenditure for that production. According
to the subjective theory of value; there is no measurable and objective value
of goods and services. The value of the product or service may vary according
to the taste of the person, it is subjective8. The theory suggests that
the value of goods and services derives from the importance and utility of the
factors used in their production, not the nature or amount of labor, but the
consumer / buyer’s realization of his own aims and the satisfaction of his
needs.Subjective theory of
value also includes the concept of intrinsic value. The gold and silver that we
think are worthy of their own value are in fact do not own their own values, we
are the actors who add value to them. If gold was valuable itself, some of the
gold miners would not go bankrupt because they could not afford the gold
extraction costs9.The subjective theory of
value tells us that no matter how scarce a product or service is, how much work
and labor are obtained, and whether there is a demand or value. There is no
spontaneous value of gold and silver. Value formulates according to our request
to him and belief that others will demand it.There are also people who
think that gold is directly related to human psychology, that during the
economic collapse and when the confidence in the paper money is reduced, gold
is secured by population who believe that it is valuable10.1.5)
Cryptocurrencies and Golden Standards eraThe modern world currency
system was formed following the results of three key events of the 20th
century: the abolition of the gold standard in the USA (1933), the Bretton
Woods agreement, which granted the US dollar status of the world reserve
currency (1944), the US refusal to exchange dollars for gold (1971), which put
an end to the Bretton Woods system.Such a mechanism has a
number of drawbacks. Governments can understate the exchange rate of the
national currency, and then exporters of the country gain a competitive
advantage – during translation of foreign earnings into the national currency
at a higher rate, more money is obtained. Artificial management of the course
does not suit other states, which also seek to support exporters, and provokes
currency wars. Such a mechanism has a number of drawbacks. States can
understate the exchange rate of the national currency, and then exporters of
the country gain a competitive advantage – when translating foreign earnings
into the national currency at a higher rate, more money is obtained. Artificial
management of the course does not suit other states, which also seek to support
exporters, and provokes currency wars.The value of money is
based on trust. The financial crisis undermined confidence in the world’s
leading currencies, $ and €. The current monetary system is being scolded for
the opportunity to print money uncontrolled. There is even an opinion that the
existing predatory monetary system is the greatest threat to human freedom,
peace and harmony with the environment, and should be abolished, and replaced
with already proven tools or something fundamentally new. Enthusiasts around
the world are racking their brains over how to solve the problem of creating a
new currency system.Someone called for a
return to the gold standard, others were considered in the following form: a
currency free of interest from the Ministry of Finance without the
participation of central banks (for example, directive 11110, J.F. Kennedy in
July 4, 1963). Defenders of gold assure that the paper currency (which is not
secured by anything) is not money, because does not have a commodity value.
Gold and silver coins (commodity money) and 100% gold denominated deposits are
considered the only correct and honest monetary system in history. And for such views there
are serious fundaments – gold (in the more general case – a basket of precious
metals) at the top of the lists of accounts, because it has good prospects for
a return to the financial system. Therefore, many are calling for the return of
the gold standard – supposedly it will give real money to paper money. The main objection of the
critics of gold is that its reserves are not infinite, and they can also be
manipulated. But everything depends on the price of gold, as well as on the
possibility of attracting gold jewelry, as it was in the United States during
the Great Recession.Recently, fundamentally
different approaches to the creation of new currencies, which have a measure of
value, are proposed. For example, in 2011 the “Lectro” system was
proposed based on kWh of electric power.Another interesting
proposal, the closest to the gold standard – the introduction of a virtual electronic
currency. This is one of those inventions that could be found in the science
fiction writer of the last century: e-currency, without paper and a printing
press, and not controlled by special services and governments. Several variants
of such currencies have already been proposed, but the most famous is the
electronic currency Bitcoin.1.6)
A brief history of BitcoinBitcoin is a software
product created in digital environment, which was introduced by a person or
group (which is later disappeared) that was diagnosed as “shadow
builder” Satoshi Nakamoto in 2008. Beyond the fact that Satoshi Nakamoto’s
name is not real, it is said that Bitcoin’s motive is related to big technology
companies and those are Samsung(Sa), Toshiba (Toshi), Nakamushi (Naka), Motorola
(Moto)11.The first Bitcoin
transfer was carried out in January 2009 and circulated in June 2011 to
approximately 6.5 billion dollars’ market cap between 10,000 users. As of July
2014, the market value of approximately 7 billion Dollars has reached to
approximately 70,000 daily transactions per day since the beginning of the
operation in December 2013 with the highest market value of approximately USD
13.9 billion recorded12.1.7)
Bitcoin and Subjective Theory of ValueThe issue of new Bitcoin
coins is associated with the costs of a certain labor. Though, Bitcoin as a currency
has a measure of value. It is very important for understanding the essence of
the matter. Everyone is used to the fact that real money does not appear from
the air, but is created at mints, and their issue is regulated by the National
Bank or other authorized body. In the case of Bitcoin, the situation is
different: the users themselves generate the currency, providing the power of
their computers to solve certain and quite complex mathematical problems.The mathematical problems
solved by the “miners” (similar to gold, miners are those who claim
to issue new coins) are the tasks of checking the absence of duplicate
bitcoin-coins (clones) in the system that can appear as a result of fraudulent
operations and eventually destroy the entire system. This function – the
solution of such mathematical problems – is the most important in the Bitcoin
system.SWOT            Strength•
Bitcoin is the best and clean payment that the world has seen so far13,•
Because it is not centralized and does not depend on any state or central bank,
it operates independently•
Not affected by manipulation or inflation,•
There is no central bank that adjusts the value of Bitcoin against inflation14,•
There is no need to any intermediary institution that directly transfers the
money to the person or institution account,•
The cost of the transaction is either null or void because of the no need for
financial intermediaries such as banks15,•
Rapid and direct transfer system,•
Accounts are completely hidden,•
It can perform freely under the rules that others have written or written by
third parties and / or institutions,•
This method, which is based on a special encryption method, can be used to
detect theft,•
The total supply limit of 21 million units reduces the inflation riskWeaknesses•It
does not have any physical aspect, it’s just a computer software or code,•
Lack of supervisory authority is accompanied by inadequate inspections and
risks that may arise therefore,•
Since the amount of Bitcoin offered cannot exceed 21 million, it is not
possible to show the functions of money,•
Once the supply of bitcoin has been completed and the credit is the subject;
new Bitcoin credit it is not possible as new Bitcoin cannot be found,•
The “mining” system, which provides increased bitcoin supply and
monetary integrity, has led to an unsustainable armament race,•
It is difficult to use as an “accounting unit”,•
Distributed ledger system becomes difficult to use (The Economist, 2013),•
The daily volatility in the price of bitcoin does not give a complete idea of
the true value of money•
It has a serious price risk for its investors,•
Bitcoin in digital form is vulnerable to sudden losses16,•
It is open to the attacks of cybercrime and internet hackers that can live in
virtual wallets•
It is also vulnerable to operational errors or abuse of malicious attacks due
to the irreversible nature of the transactions,•
Anonymity facilitates uncontrolled and unlimited transactions on illegal sites,
especially tax evaders, arms dealers, gambling, drugs, child pornography.Opportunities•
Bitcoin supporting circles define the system as a very effective method for
global money transfers,•
Not being taxed, being unable to freeze and being easily watched creates
opportunities for some user groups•
Speculative increases and high volatility provide easy monetization and
arbitrage opportunities,•
A way out for people who live in EU countries and seized in their bank
Non-identification of parties’, i.e. confidentiality is a threat at the same
time because an appropriate environment for the use of virtual money in illegal
activities it constitutes,•
Supply of 21 million units leads to the risk of deflation,•
US Department of Justice officials said that Bitcoin’s drug trafficking, child
pornography and widespread use in such areas is recorded in large scales. 

1 Dr. Arati Baliga (April,2017)
Understanding Blockchain Consensus Models, Corporate CTO Office, 2017
Persistent Systems Ltd. P. 7-10

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2 UK
Government Chief Scientific Adviser, Distributed Ledger Technology: beyond
block chain. P.67

Sayed Hadi Hashemi, Faraz Faghri, Roy H Campbell, Decentralized User-Centric
Access Control using PubSub over Blockchain. 29 September 2017, P 1-3

4 Marcella
Atzori, Blockchain Governance and The Role of Trust Service Providers: The
TrustedChain® Network, May, 2017. P. 9

5 Carter
Graydon, September 2014, “What is Cryptocurrency?”

Sarah Rotman, 2014, “Bitcoin Versus Electronic Money”, World Bank.

7 Carter
Graydon, September 2014, “What is an Altcoin?”

8 Carl
Menger, “Principles of Economics”, Ludwig von Mises Institute. P 330

9 James
Rickards, 2016, “The New Case for Gold”, Barnes & Noble. P 192

10 Cory
Mitchell, August 2016, “Why Gold Always Had A Value”, Investopedia

11 Allison,
C. (2013). “Bitcoin makes mainstream moves”. The National Business Review






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