In 2004, before the invention of bitcoin, Joseph Liu wrote his PhD thesis on how to secure the anonymity of people who were buying and selling goods on the internet, using some cryptographic algorithms. He was playing with an idea that was being floated by computer scientists and cryptographers – ­­ that the web could be used to devise a peer-to-peer system of currency exchange, without involving banks or a central authority.

Bitcoin, the world’s first digital cryptocurrency, was launched four years later. It was developed in the aftermath of the global financial crisis, on October 31, 2008. The currency is controlled by a decentralised network of users and allows people to pay for goods and services. Transactions are recorded in a publicly distributed ledger called a blockchain, which protects the identity of the user. Since bitcoin was created, hundreds of other cryptocurrencies have sprung up, but bitcoin remains the best-known and most widely used.

Dr Liu, who's now a senior lecturer at Monash University’s Faculty of Information Technology, says the privacy measurers he devised when he was a PhD student at the Chinese University of Hong Kong are superior to those used by bitcoin. Bitcoin provides “pseudo anonymity”, he says, because the IP address of the computer used to make the transactions can be traced. By contrast, the system he devised uses a “linkable ring signature” that guarantees “true anonymity”.

Last year, Dr Liu discovered that the proposals he outlined in his thesis had been adopted by the open-source cryptocurrency Monero, which was created in April 2014.

“I got nothing for that,” he says. “But I am very happy that my research was used.” At the time of writing, Monero’s market capitalisation was $US3.1 billion. Although Dr Liu is gratified that a real-world application had been found for his work, he says that for the past 10 years he and his long-time collaborator, Dr Allen Au from Hong Kong Polytechnic University, have been improving the algorithms adopted by Monero. The pair prepared a paper on the improvement of Monero for the European Symposium on Research in Computer Security (ESORICS) 2017 in Norway in September, and posted it on Reddit in August. Two days later, the price of a single Monero doubled from $US50 to $US100. Dr Liu speculates that this could be because he had pointed out the merits of his improved algorithm.

The system he devised uses a “linkable ring signature” that guarantees “true anonymity”.

Collinstar Capital then entered the scene, to help develop a new cryptocurrency called Hcash, based on Dr Liu and Dr Au’s research. The pair are now developing algorithms to advance the potential of Hcash, so that it can act as a connecting point for all existing blockchain cryptocurrency systems. At present, all existing cryptocurrencies can only be exchanged within their own system. Their hope is that Hcash will act as a virtual cryptocurrency exchange.

The collaboration between Monash University and Collinstar will see the development of a joint blockchain cryptocurrency research and development lab with Hong Kong Polytechnic University. The lab will be located at Monash's Clayton campus, with a node based at the Polytechnic in Hong Kong. Over the next three years, a team of PhD students and research fellows will develop cryptographic algorithms to be deployed in Hcash.

Dr Liu says one of the advantages of Hcash is that it will be “post-quantum secure”, meaning that the system will continue to be secure even with the advent of faster and more powerful quantum computers sometime in the future.

Uncertain future

The future of cryptocurrencies continues to be uncertain; the unregulated market is subject to volatility. During the past two weeks, the value of the cryptocurrency has fluctuated wildly, between $US8000 and almost $US20,000 with significant differences between exchanges. The latest surge has been influenced by this week’s launch of a futures market for bitcoin on the Chicago Board Options Exchange (CBOE).

Moves were made in September to curtail bitcoin’s value as it approached $US5000. JP Morgan CEO Jamie Dimon described bitcoin as a fraud that was about to crash. China then moved to restrict trading in cryptocurrencies on its currency exchanges (but it cannot stop trades between individuals). In the past, China accounted for about 23 per cent of all bitcoin trades. By late September, bitcoin’s value had dropped to $US3890 before rebounding.

Other Asian economies including Singapore, Malaysia, the Philippines, Thailand, Vietnam and South Korea have established markets for cryptocurrencies. Critics of virtual currencies say they can be used for dark trades and to finance terrorist networks. Dr Liu’s response is that criminals have also been using cash for many years. The rise of online banking transactions means that our daily activities can be monitored by bankers, and those with access to banking networks – you don't have to be a criminal to desire privacy.

“Maybe in the future it may be possible for a cryptocurrency to be developed that can be regulated by a government authority,” he says. “I think it would be easy to construct.”

The system will continue to be secure even with the advent of faster and more powerful quantum computers.

Although JP Morgan’s CEO is sceptical about bitcoin, the bank has invested in blockchain technology research, which it hopes will be used to lower the cost and complexity of financial transactions, such as international money transfers and loan trading.

A drawback of blockchain technology is that it's power-hungry. A single bitcoin transaction has been conservatively estimated to be almost 4000 times as energy-intensive as a credit card transaction. This is because it verifies trades by using a system called Proof of Work that involves a vast amount of data-crunching. An alternative system that can also be employed by blockchain, called Proof of Stake, uses a fraction of the power.

Hcash will employ a hybrid system, combining Proof of Work and Proof of Stake. Dr Liu says this will potentially allow small traders to grow their Hcash. At the same time, the use of Direct Acyclic Graphs (DAGs) in the blockchain will allow small transactions to be made for free, which is not possible with bitcoin.