How Auroracoin was set up to fail

Auroracoin, the Icelandic cryptocurrency, has entered stage two of its Airdrop last Friday. Auroracoin was the first national cryptocurrency, created to benefit the citizens of Iceland. To this purpose, an astonishing 50 percent off all coins ever to come into existence was premined. This came down to 10.5 million coins, which would be distributed to the Icelandic citizens through a so-called Airdrop. As there are about 320,000 Icelanders living in Iceland, each person would be entitled to a fair share of 31.8 Auroracoins. These could be claimed as of the 25th of March, 2014.

The Bad

Well before the Airdrop began, Digiconomist warned that such drop could cause tremendous downward pressure on the coin’s price level given the lack of supporting commercial infrastructure. This was at a time when Auroracoins were trading at about $58 each. Currently, each coin is trading at just $0.0525, which equals a drop of 99.9 percent.

The Worse

Shortly after the Airdrop began, Digiconomist revealed how the method for claiming coins led to people using their families’ and friends’ identities to acquire (and sell) even more coins. At the time, 9.38 percent of all Airdrop coins were claimed, this corresponded to 30,980 claims. 8,947 of these were “excess claims” defined as additional claims per unique address. In 2,401 cases, a double claim was made on a single unique address. This could point to couples sharing an address. The other 5,096 cases included two or more excess claims per address, making it likely additional identities were acquired. The latter could be defined as fraud, as it concerns using someone’s account data to ultimately only benefit yourself. 16.45 percent of all Airdrop coins thus consisted of potentially fraudulent claims. This was confirmed by one of the Auroracoin project team members, who wrote “Sadly I personally know a lot of people here in Iceland who convinced their entire family to just give them their Auroracoins.”

The incentives to do this simply worsened an already bad situation, as it would cause even more downward pressure on Auroracoin price levels. As prices dropped, claiming coins became less interesting and also mining rewards dropped significantly in value. The network’s hashrate dropped from its highest point at nearly 30GH/s to just 1 GH/s currently. As Auroracoin is a Scrypt based cryptocurrency, it would therefore now be possible to set up a 51 percent attack with just three Titan Scrypt ASIC miners. This deteriorating security situation further reduces what is left of the confidence in the troubled cryptocurrency.

The Ugly

As stage two of the Airdrop has begun, this means all claims are now reset. Stage two was originally set up to allow every Icelandic citizen to claim 18.18 coins. The developers decided to alter this amount, as only 10.16 percent of all Airdrop coins were claimed at the end of stage one. As low prices make claims uninteresting, the claim sizes have been increased tenfold. The outcome of this action is that is has simply restarted the cycle of claiming and dumping coins. Before stage two commenced, each coins was still trading at a little over 10 cents each. This has immediately dropped to about 5 cents, equaling a drop of roughly 50 percent. So far, 14 percent more of all Airdrop coins have now been claimed. 24.3 percent of all Airdrop coins are in circulation as of today.

With only four months remaining until the third and final stage, the coin will continue to struggle to get rid of most of its Airdrop coins. With this many coins remaining, claim sizes would have to be increased a hundred times in the final stage to achieve this goal. This would, however, destroy what is left of its network security if the mining schedule is not altered as well. It can be assumed that prices would simply drop even more as could be observed in both stage one and two, which would be disastrous for the remaining miners. With the hashrate already dangerously low, it could enable many individuals to execute a 51 percent attack on the network if current miners decide to leave as a result.

Conclusion

Auroracoin trapped itself trapped itself in multiple vicious circles, formed by bad incentives embedded into its design, from which it is unable to escape. Despite already losing 99.9 percent of its value, its outlook is not improving. The worst could be yet to come in the form of a 51 percent attack, which is getting more likely as prices continue to drop. For the average investor, this cryptocurrency remains best left avoided.

 

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