Page 367 - Introduction to Electronic Commerce and Social Commerce

354 11 Electronic Commerce Payment Systems and Order Fulfillment

Basically, it only functions as a currency because there is a comers would experience rapid growth (in the 130–200%
community of users willing to treat it as such. Finally, digital range). Yet, the mature markets would still garner the lion’s
currency is a generic term that refers to the digital representa- share.
tion (0 s and 1 s) of either e-money (fiat) or virtual currency However, the problem with the estimates are that, then
(non-fiat). So, e-money and virtual currency are types of digi- and now, it is very difficult to assess the exact values associ-
tal currency but not vice versa. ated with the game-based and Bitcoin currencies, although
Virtual currency covers two sub-types: non-convertible for different reasons. For game-based you not only have to
(closed) and convertible (open). According to the U.S. calculate an exchange rate but many of the game companies
Treasury’s Financial Crimes Enforcement Network (fincen. don’t provide the necessary data to do a reasonable assess-
gov), convertible virtual currency is a virtual currency that ment. For Bitcoin the number of coins in circulation is
has “an equivalent value in real currency, or acts as a substi- known, however their exact value is dependent on exchange
tute for real currency.” Some examples include the crypto- rates that can fluctuate substantially at any given time. The
currencies like Bitcoin and most retail e-coupons. In contrast, value is subjective and based on market volatility and the
a nonconvertible virtual currency is a virtual currency going rates paid by the Bitcoin exchanges. For example, in
used in a specific virtual world or domain that cannot (theo- the spring of 2016 the total number of Bitcoins in circulation
retically) be exchanged for fiat currency. Many of the better was around 15.5 billion and the price was fluctuating between
known examples come from online games. Some examples $400 and $450. That’s a difference of around $6.2 billion to
of this would include: World of Warcraft Gold, Farm(ville) $6.7 billion which is fairly substantial.
Cash, and Q Coin from TenCent QQ. In these games success
is based on obtaining virtual money, which is earned by com-
pleting various tasks or purchased using real money (which Bitcoin and Other Cryptocurrencies
is often the primary source of income for the game com-
pany). Technically, these currencies cannot be used or Among the (digital) virtual currencies, the one that has gar-
exchanged in the outside world. However, it many cases sec- nered the most attention is Bitcoin. From previous discus-
ondary markets (black or not) have arisen that are willing to sion, it was stated that Bitcoin is an encrypted, decentralized
exchange the nonconvertible currency into a fiat currency or (peer-to-peer), convertible, virtual currency. Taken together
some other virtual currency. it sounds complex, and it is. That’s why we will simply touch
A key feature of nonconvertible, virtualized currencies is the surface of how it works along with its advantages and
that they are centralized. This means that there is a single disadvantages. For those who are interested, there are any
administrative authority in charge of regulating the currency— number of books (e.g., Antonopoulos 2015) and Youtube
issuing the currency, establishing rules of use and exchange videos devoted to various aspects of its history, underlying
rates, tracking payments, and controlling the amount in circu- mathematics, structure, operation, and uses. Instead, in this
lation. In contrast, convertible virtual currencies can be either discussion we’ll hit the highlights of these elements.
centralized or decentralized. A decentralized virtual currency
is distributed, open-sourced, and peer-to-peer. There is no Bitcoin Background
single administrate authority who oversees and monitors the
currency. This is the nature of many of the cryptocurrencies The origin of Bitcoin comes from a specification and proof
like Bitcoin which we’ll discuss momentarily. of concept developed in 2009 by Satoshi Nakamoto and pub-
lished in a paper entitled “Bitcoin: A Peer-to-Peer Electronic
Size of the Virtual Currency Market Cash System.” That’s not his real name, it’s a pen name. The
real identity of the inventor is still unknown. After the initial
A couple of years back, the Yankee Group (McKee 2013) development, Satoshi left the project in the hands of a com-
accessed the size of the virtual currency market. Their analy- munity of open source developers (see bitcoin.org), mean-
sis included both the mature virtual currencies like loyalty ing that the development and maintenance of the underlying
points, credit card points, air miles and physical coupons, as code is being done by a community in much same ways as
well as the up-and-coming (digital) virtual currencies includ- projects like Linus and Apache.
ing app-based coins and tokens, personal information and Bitcoin was not the first system to propose a decentralized
time (exchanged) for apps and tokens, and Bitcoins. At that virtual currency. However, it was the first to come up with a
time (2012), the total value of all the virtual currency mar- decentralized system that offered a useable solution to what
kets was close to $48 billion with the mature currencies mak- is known as the double-spend problem. As the concept
ing up close to 97% of the total. They estimated that by 2017, implies, in a virtual currency double-spending refers to the
the mature markets would grow steadily, while the up-and- result of spending the same money more than once. For