What if I told you, that anyone can create a new cryptocurrency and make it worth $1 billion in less than a month? Basically, all you have to do is clone Bitcoin and add a gimmick. Promote it with clever marketing and get enough people to buy your coin. You don’t even need to be able to code.
Recently we saw two attempts of that: Auroracoin and Zerocoin, which are now worth $1 billion each. Auroracoin was created as an Icelandic national cryptocurrency and Zerocoin is trying to solve the privacy issues of Bitcoin by integrating zero knowledge proofs (zk-snarks).
In my opinion neither coin is very well thought out or executed. In this article I’ll explain why I believe they are flawed.
Auroracoin
Auroracoin was created as a national cryptocurrency for Iceland. 50% of the coins were distributed through airdrops to every Icelander’s official identification number in March 2014. This led to an influx of buyers from Iceland who perceived the coin as something valuable because it was their national currency. After the distribution event ended on March 25th, 2014, the price surged from $4 to $13 overnight and reached its all time high of $95
This is part of a series of blog posts about Auroracoin and Zerocoin.
We’re going to explore some fundamental flaws in these coins, and why they’re not going to work.
Auroracoin
I’m going to start with Auroracoin since it’s the most recent entrant into the crypto-currency space. It has numerous flaws, but I am just going to focus on the two major ones that I think warrant further discussion.
Auroracoin’s distribution plan is flawed, because it encourages people to sell their coins as soon as they get them. If you had a chance to get $500 USD for free, would you say no? Of course not! Most people don’t even have that amount of money in their bank account, so anything over a few hundred dollars is a massive windfall for most people. To make things worse, once you receive your free money you have no incentive to hold onto it: at best you might be able to break even by selling it on an exchange at the current market rate. At worst, your free money will be worth less than it was when you received it! So there is no incentive for anyone with any sense of self-preservation to hold onto their coins
I have been getting a lot of emails about Auroracoin and Zerocoin lately. These are two cryptocurrencies that are trying to make a name for themselves by claiming that they are more private or anonymous than Bitcoin. I am going to respond to their claims, but please note that I am not trying to pick on either of these coins. I think it is great that people are experimenting with cryptocurrency, and I hope people will continue to do so. However, I don’t want people to be misled by the claims of these coins, because in my opinion they are flawed.
The first thing you need to know is that both of these coins were created as forks of Litecoin, which was itself created as a fork of Bitcoin. This means that they are very similar to Bitcoin in many respects (they use the same protocol and cryptography). They also both use something called Proof-of-Work mining, just like Bitcoin and Litecoin. This means they require solving extremely difficult math problems in order to create new coins.
Auroracoin, the Icelandic cryptocurrency and Zerocoin, a bitcoin extension, are both supposedly anonymous digital currencies. However, both suffer from a fatal flaw which makes them worthless for anonymous transactions.
Both Auroracoin and Zerocoin use a method called “blinding” to hide the identity of the sender and recipient of a transaction. The basic idea is that instead of sending your coins directly to another address, you first send them to yourself in a transaction that uses blinding. That transaction will then be added to the blockchain as usual.
But instead of revealing the address that you sent it to, only an encrypted version is revealed. So nobody can see who received your coins except you.
For example, let’s say you want to send 1 BTC to somebody else without anybody finding out about it. With the original Bitcoin protocol, you would simply create a transaction sending 1 BTC from one of your addresses (let’s call it A) to another address (B), and broadcast it over the network. Everyone in the Bitcoin network would then see that address A contained 1 less BTC after this transaction got added to the blockchain than before.
With Zerocoin however, you first create a “blinding” transaction where you send 1 BTC from address
Auroracoin is an alternative cryptocurrency that was created in 2014 as a method to distribute coins to every citizen of Iceland. This was implemented as a means to prevent concentration of the currency in the hands of a few wealthy people.
The distribution was based on the national registry, and everyone with an Icelandic national identity number could receive 31.8 AUR.
In general, the concept behind this distribution method is not bad, but there are some flaws with it which I will explain later. Also, it is important to note that the anti-wealth-concentration aspect of Auroracoin was not really necessary because the currency was released as a clone (fork) of Litecoin and Bitcoin, both of which have a fair distribution process with no premined coins or ICOs.
Nowadays, there are many other cryptocurrencies with fair distributions such as Monero or Zcash for example. These currencies were not created for the purpose of distributing wealth between citizens as Auroracoin was, but they still have more fair distributions than most other cryptocurrencies.
Another problem with Auroracoin is that it relied on some third party website to give people their coins rather than giving them out directly from the blockchain itself.
This seems like quite a large flaw
In February 2014, Prime Minister Sigmundur Davíð Gunnlaugsson of Iceland announced the creation of Auroracoin, a cryptocurrency that would be distributed to the nation’s 330,000 citizens. Within days, it became clear that the scheme had fallen flat on its face.
In an ironic twist of fate, Auroracoin has seen its market cap drop from a high of $1.1 billion on March 2nd to $4 million today – a 99.6% drop in less than two months!
The coin has been plagued by problems since inception and is at best a failed experiment and at worst a deliberate attempt to defraud Icelanders.
Just this week, the developers admitted they had secretly pre-mined half the total coins; a fact they had specifically denied prior to release. They also claimed that the pre-mining was necessary because the distribution process was such a logistical challenge. This is despite the fact that there are plenty of other ways to distribute coins evenly among a given population and there was no need to start with 50% pre-mining.
On March 24th, one week after launch day, an official press release stated: “all pre-mined coins have already been destroyed by sending them back to themselves
The world of cryptocurrencies has seen a lot of hype the last few weeks. A new coin is released with a promise to change the world and take over Bitcoin’s throne. Once in a while one of these coins actually get a little traction and start to gain some value. But most of them are flawed, even if they are supported by some pretty smart people.