On March 14, 2014, some of Iceland’s top bankers and politicians gathered in a closed session of Parliament to discuss the threat posed to the country by an unprecedented new financial technology: Auroracoin.
Iceland’s financial system collapsed in 2008, resulting in strict capital controls. A cryptocurrency similar to Bitcoin, Auroracoin was positioning itself as a direct challenger to the government’s financial controls. Its rhetoric adopted a revolutionary tone. It would, proponents claimed, “break the shackles” of fiat currency and help people “stand up to the power of politicians.”
Those politicians were getting worried. The committee’s vice chairman went so far as to publicly warn citizens that Auroracoin would not be considered legal tender or protected by the government.
No representatives of the digital currency were present at the closed-doors meeting. Auroracoin’s creator, Baldur Friggjar Óðinsson, told cryptocurrency news site CoinDesk that no attempt to reach out was made—though it’s doubtful whether Óðinsson would’ve attended anyway. For one thing, that’s a fake name, taken straight from Norse mythology.
At the time of the meeting, Auroracoin hysteria was peaking: In early March, its total market capitalization reached more than half a billion dollars, beating out far more established coins like Litecoin. It was considered the leader in a wave of localized cryptocurrencies—SpainCoin and MazaCoin, chief among them—that appealed to both people’s pride and their frustrations with the traditional system.
And yet a month or so later, after all of the headlines had faded, the coin was all but worthless, a dismal and technically plagued failure that has had many critics claiming fraud. How did things go so spectacularly wrong?
The rise of an altcoin
Auroracoin’s rise was meteoric, even by the high standards of cryptocurrency. It was first introduced shortly before midnight GMT on Feb. 2, 2014, brazenly branding itself as a “cryptocurrency for Iceland.”
Óðinsson’s initial forum post positioned the coin as a direct response to this history of financial instability, promising that Auroracoin was an “opportunity for Icelanders to free themselves from currency controls and government debasement of the currency.”
“People don’t trust the financial system [in Iceland], so there are people looking for something else,” Eli Dourado, a research fellow at George Mason University’s Mercatus Center, told the Daily Dot at the time. “It’s a really interesting way to try to get a currency off the ground—to take advantage of the distrust.”
Auroracoin’s rise was meteoric, even by the high standards of cryptocurrency.
How exactly would Icelandic citizens get this revolutionary new digital currency? Positioning himself as a modern-day Robin Hood, Óðinsson promised to give it away through a highly publicized “airdrop.”
Cryptocurrencies are typically “mined.” Users who contribute computing power to the network are rewarded by giving a share of the currency to do what they want with, gradually releasing the full amount. What made Auroracoin unique is that half of the coins, exactly 10.5 million of them, were to be pre-mined and distributed equally between all 330,000 Icelandic citizens in a three-stage process that would take one year. Those that weren’t claimed by the end of the first period would be redistributed among all citizens again and re-offered. That meant each resident would be entitled to at least 31.8 coins, which translated at the time to roughly $400.
The way this would work was ingenious, as Óðinsson revealed to curious posters on bitcointalk.org. The coin would make use of Iceland’s unique Electronic National ID scheme as a form of verification, ensuring that eligible users could only claim once, and those ineligible couldn’t defraud the system. More importantly, the release strategy would expedite user adoption.
“Doing an airdrop solves the critical mass of ownership problem,” Dourado added.
The initial public response, however, was skeptical. “Go home OP, you’re drunk,” wrote one user. “This is crazy,” said another. “We’ve had our share of grotesque scams here but this is probably the most idiotic launched this year,” a third noted.
One month later, the market cap of Auroracoin was $515 million.
The beginning of the end
Graphs generated by coinmarketcap.com best illustrate the speed of Auroracoin’s rise.
On Feb. 27, Auroracoins were trading hands at at $3.163 USD each. The next day, they were worth $25.10. By March 4, they were peaking at $89. Not even the collapse of beleaguered Bitcoin exchange Mt. Gox in February or Bitcoin’s drop from its giddy $1,000-paid highs at the tail end of 2013 failed to dampen the speculation and excitement surrounding Auroracoin.
Auroracoin had come at the perfect time to capitalize on a wave of media interest in cryptocurrencies. It was easier to pigeonhole and explain than meme-based Dogecoin, and it filled a void in the area, since the Icelandic Central Bank prohibited the trading of Bitcoin in the country.
“It is clear that there is great interest in the new Icelandic Auroracoin,” the Icelandic newspaper Visir proclaimed. “Experiencing triple-digit growth over the last two days, Iceland-based auroracoin is as much a political statement as it is a bitcoin alternative,” wrote the International Business Times. “You don’t need to be defined as ‘bullish’ or a ‘libertarian’ to appreciate what is currently taking place in Iceland,” gushed Bitcoin Barbie.
Positioning himself as a modern-day Robin Hood, Óðinsson promised to give it away through a highly publicized “airdrop.”
By the end of March, however, the coin was plagued with technical issues, and its value was quickly plummeting. On March 29 the coin forked—a not-uncommon problem in cryptocurrencies where the coin splits into two different “paths” due to technical incompatibilities in software updates, effectively creating two identical and competing, nontransferable versions of the coin. “Game over,” read a forum post about the forking. “[I] highly advise all exchanges to suspend trading.”
The problems compounded. The Cryptocurrency Times reported in May that Auroracoin had a verification time (the time it takes for your transaction to be “verified” by the network and set in stone) of several hours, which is hopelessly slow for real-time commerce. The sudden drop in price also meant many miners found themselves unable to make a profit, leaving the network susceptible to what’s called a “51 percent attack,” where an individual controls more than half of the total network, compromising its integrity.
A blog post in early April claimed to have evidence of “severe fraud” on the Auroracoin network, alleging that up to 30 percent of coins were being claimed illicitly. By April 13, Auroracoin’s price flatlined. It became practically worthless—and it never recovered.
Pump and dump
Since Bitcoin, every cryptocurrency has been faced with an existential crisis: What is it actually for? Bitcoin was conceived of as a bankless, borderless, universal currency. Given how unlikely it is that an imitator would ever surpass Bitcoin, what need is there for alternatives? Some, like Weedcoin and Titcoin, have branded themselves as niche services; Dogecoin found its value tied to a strength of community and collective charitable endeavours.
For Auroracoin, its worth was supposed to be defined by its geographic borders.
But without a critical mass of businesses actually willing to use Auroracoin, the currency was unlikely to ever stabilize, especially after such a blistering ascent. “Very few Icelandic shops and services accepted payments in AUR,” Icelandic journalist Hamllgrímur Oddsson wrote. “[F]or a geographically based virtual currency to establish itself, it must have a use beyond market speculation.”
Some businesses did accept Auroracoin—but not enough. Icelandic citizens didn’t view Auroracoin as a legitimate currency in its own right but as a chance to make a quick buck. Jökull Vilhjálmsson, an Icelandic tailor who accepted Auroracoin, told me that trading ran rampant in the days after the airdrop, as people rushed to cash in and capitalize on the vast market cap Auroracoin had inflated to.
People “weren’t ready” for the cryptocurrency, he said. Many didn’t even bother to go through formal cryptocurrency exchanges, instead selling theirs off on makeshift Facebook groups in search of a quick buck. It’s since been characterized by the Cryptocurrency Times as “one of the most infamous cryptocurrency pump-and-dumps to date.” Even Vilhjálmsson, whose own business accepted Auroracoin, succumbed, quickly selling off his airdropped allocation for around $200.
By the end of March, the coin was plagued with technical issues, and its value was quickly plummeting.
In June 2014, the BBC published an article discussing Auroracoin that included an interview with an optimistic student who had just paid to use a cybercafé with the digital currency. But much has changed since then. Vilhjálmsson said that since Auroracoin’s decline in value, it has almost totally dropped off the radar in Iceland. People simply never talk about it.
Vilhjálmsson managed to sell just one shirt using Auroracoin.
Óðinsson hasn’t been active on bitcointalk.org, where the initial announcement of Auroracoin was made, since May 2014. The official Auroracoin Twitter account went inactive even before the second scheduled airdrop, in July 2014, and emails sent to addresses listed on Auroracoin’s official website have gone unanswered as of press time. An email to David Lio—an individual formerly involved with Auroracoin—was not returned.
Óðinsson’s identity remains a mystery. A month after the initial airdrop, he spoke to the International Business Times, calling the launch a “resounding success,” as nearly 10 percent of the Icelandic population had claimed their coins. He said the almost-$100 highs were “absurd,” and defended his continued anonymity, saying it was for his own safety.
“I am faced with threats of prosecution, from people like Frosti Sogurjónsson,” he said, referring to a member of Parliament from Iceland’s dominant Progressive Party. “I think these are empty threats, without a legal basis, but I’d rather not take that chance.”
Many people—some presumably having lost money speculating over Auroracoin—have subsequently accused Odinsson of fraud. They claim that Auroracoin was a front to launder pre-mined coins, or that the anonymous creator had always intended to generate and capitalize off of the hype rather than intending to create a legitimate cryptocurrency.
That’s certainly possible—but it’s equally plausible that Auroracoin’s launch was royally botched and doomed to fail from the get-go. Iceland, given its history of financial instability, seemed the perfect site for Auroracoin. Even as the value began to plummet after the airdrop, cryptocurrency news site CryptoCoinsNews lamented that it “is hard to imagine how [Auroracoin] could not be an improvement in comparison” to the Icelandic króna.
Now it’s not so hard to.
Photo via Ted Eytan/Flickr (CC BY SA 2.0) | Remix by Jason Reed