Blockchain and Bitcoin
Blockchains, the technology underpinning the cryptocurrency, could revolutionise the world economy.
Several years ago, an unknown person or persons named Satoshi Nakamoto came up with the Bitcoin protocol. Once again, the technology genie has been unleashed from its bottle. It gives us another kick at the can, another go, to try and rethink the economic power grid and the old order of things. Satoshi Nakamoto does not exist! It’s possible the original white paper that describes the principals of blockchain was published by an American, a Brit or by a collective open a new tab here for an interesting discussion on possible identities!
What is Blockchain?
The blockchain is basically a distributed database. Think of a giant, global spreadsheet that runs on millions and millions of computers. It’s distributed. It’s open source, so anyone can change the underlying code, and they can see what’s going on. It’s truly peer to peer; it doesn’t require powerful intermediaries to authenticate or to settle transactions.
It uses state-of-the-art cryptography, so if we have a global, distributed database that can record the fact that transaction has occurred, what else could it record? Well, it could record any structured information, not just who paid whom but also who married whom or who owns what land or what light bought power from what power source. In the case of the Internet of Things (IOT), we’re going to need a blockchain-settlement system underneath. Banks won’t be able to settle trillions of real-time transactions between things.
So this is an extraordinary thing. An immutable, ‘unhackable’ distributed database of digital assets (although reports seem to circulate weekly about individual sites containing wallets being hacked!). This is a platform for truth and it’s a platform for trust. The implications are staggering, not just for the financial-services industry but also right across virtually every aspect of society.
Most blockchains—and Bitcoin is the biggest—are what you call permission-less systems. We can do transactions and satisfy each other’s economic needs without knowing who the other party is and independent from central authorities. These blockchains all have a digital currency of some kind associated with them, which is why everybody talks about Bitcoin in the same breath as the blockchain, because the Bitcoin blockchain is the biggest. Bitcoin is one of the main ‘tradeable’ or settlement currencies that is needed to purchase other smaller coins.
The blockchain network lives in a state of consensus, one that automatically checks in with itself every ten minutes. (or faster !) A kind of self-auditing ecosystem of a digital value, the network reconciles every transaction. Each group of these transactions is referred to as a “block”.
Two important properties result from this:
- Transparency data is embedded within the network as a whole, by definition it is public.
- It cannot be corrupted altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network. Think about trying to remove a segment of DNA without disrupting the entire strand and altering the unique structure.
The blockchain is made up with so-called “nodes”, which is basically any computer connected to the blockchain network. Every node is an “administrator” of the blockchain, and joins the network voluntarily.
Implications & use
The potential uses for blockchain are almost only limited by human imagination! Stock market trades become almost simultaneous on the blockchain, for instance — or it could make types of record keeping, like a land registry, fully public. And decentralization is already a reality.
By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology (and we are seeing hundreds is what is known as ICO’s) – these are typically new businesses being launched that both utilise blockchain capabilities and issue their own tokens or coins that act somewhat like shares in a traditional company – they can be traded and owners hope they appreciate in value – some of the hysteria around blockchain stems from some of the huge increases in these coins – so-called ‘alt coins’. They are very volatile and in investment terms, very much a gamble or true bet.
Cryptocurrencies like bitcoin provide a unique service: Financial transactions that don’t require governments to issue currency or banks to process payments.
Currently, finance offers the strongest use cases for the technology. International remittances, for instance.
By storing data across its network, the blockchain eliminates the risks that come with data being held centrally.
Its network lacks centralized points of vulnerability that computer hackers can exploit. Today’s internet has security problems that are familiar to everyone. We all rely on the “username/password” system to protect our identity and assets online. Blockchain security methods use encryption technology.
Several coins, especially Bitcoin require high ‘mining power’ and getting higher, thanks to a computational arms race. It requires computers to solve very complex mathematical problems – ‘hashes’. The required number of zeros at the beginning of a hash is tweaked biweekly to adjust the difficulty of creating a block—and more zeros means more difficulty.
The Bitcoin algorithm adds these zeros in order to keep the rate at which blocks are added constant, at one new block every 10 minutes. The idea is to compensate for the mining hardware becoming more and more powerful.
When the hashing is harder, it takes more computations to create a block and thus more effort to earn new bitcoins, which are then added to circulation. Mining is very tricky and time consuming. Plus it costs a lot of money in electrical power.
Today, each bitcoin creation requires the same amount of energy used to power nine homes in the U.S. for one day. And miners are constantly installing faster computers.
In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants. China are starting to clamp down on these ‘mining farms’ due to the drain on it’s grid and knock-on effects of pollution due to dependence on coal fired power stations.
According to Digiconomist’s Bitcoin Energy Consumption Index, 0.13% of total global electricity is being used for mining. While that may not sound like a lot, it means Bitcoin mining is now using more electricity than 159 individual countries e.g more than Ireland or Nigeria.
If Bitcoin miners were a country they’d rank 61st in the world in terms of electricity consumption.
- In the past month alone, Bitcoin mining electricity consumption is estimated to have increased by 98%
- If it keeps increasing at this rate, Bitcoin mining will consume all the world’s electricity by February 2020.
- Estimated annualised global mining revenues: $7.2 billion USD (£5.4 billion)
- Estimated global mining costs: $1.5 billion USD (£1.1 billion)
The easiest way to acquire Bitcoin or any other coin is to buy it on an exchange like Coinbase.com. Alternately, you can always leverage the “pickaxe strategy”. This is based on the old saw that during the 1848 California gold rush, the smart investment was not to pan for gold, but rather to make the pickaxes used for mining. Or, to put it in modern terms, invest in the companies that manufacture those pickaxes.
In a crypto context, the pickaxe equivalent would be a company that manufactures equipment used for Bitcoin mining. You can look into companies that make ASICs miners or GPU miners.
Another play would be to acquire stakes in coins that provide the software that other applications will run on – somewhat taking a step back from trying to pick individual winners – for example NEM https://nem.io/investors/getting-started-on-nem/. This theory is also part of the attraction of coins like Etherium.
For a comprehensive look at some of the main ‘runners and riders’! Go here for a good overall summary and a guide on how to get started.
In conclusion, believing that current leading cryptocurrencies will be long-term winners may be premature as the ecosystem is still in its infancy and new entrants or forks of existing cryptocurrencies are to be expected. Fiatcoins issued by central banks (i.e. cryptocurrency issued by governments) are a natural evolution, and too many cryptocurrencies may well be a hindrance. Nonetheless, cryptocurrencies are undeniably bringing innovation and excitement to the world of money and currencies.
Co-guest writer: Mr Robert van Kasteel