In the work of the American rapper 50 Cent, the topic of money is constantly raised. The rapper’s most successful album is called “Get Rich or Die Tryin'” (“Get Rich or Die Tryin'”). The album was so successful that in 2003 the performer became a multimillionaire.
Twelve years later, the rapper filed for bankruptcy. The news was immediately picked up by the tabloids. Over the years, there have been stabbings, gunshot wounds, drug charges, a costly revenge porn scandal, two gold Bravo Otto statuettes, and the disastrous Animal Ambition album. And it was these failures that turned out to be a real gold mine.
In 2014, the 50 Cent album could be bought on the Internet not only for dollars, but also for bitcoins. Then the performer received about 700 bitcoins from sales and simply did not remember them. And then he discovered that he is the owner of eight million US dollars. Or maybe four. Or maybe ten. The bitcoin exchange rate tends to fluctuate a lot.
The rapper’s story allows you to look at the hype around bitcoin from different angles: there is a little underworld, a little luxurious life, a little lottery, a lot of ignorance, and a lot of crazy rollercoaster turns. The concept itself is not clear. What is bitcoin? Currency? A subject of speculation? Electricity turning into money? Is the invention of the secret services a bait for conspirators who enjoy the benefits of network technologies, and a source of money?
One thing seems certain: Bitcoin is a decentralized online payment system powered by consent and cryptography. Bitcoin is based on the “blockchain” technology (“block chain”), which keeps not only geeks and gamers, but the entire world of finance and economics in constant excitement. True, representatives of the latter use a broader concept – “distributed ledger technology” (Distributed Ledger Technology, DLT), since they do not agree with all the ideas of the blockchain user community.
And all because when it comes to such a sensational topic as blockchain, in fact, it means the romantic-anarchist idea of “open source”: a decentralized database used by all participants on the basis of equality and transparency.
In a classic blockchain accounting system, Bitcoin would be the ledger. This registry contains the entire history of transactions in the form of ordered blocks. But these accounting records are not stored on a central server, but in copies of the databases of network computers, the so-called nodes. This ensures transparency, and subsequent changes become possible only if they are confirmed by more than half of the nodes. Upcoming transactions are included in new separate blocks, each block contains the code of the previous one.
The classical banking system is based on trust, and central banks are usually responsible for new money. Blockchain is built on transparency and consent. Bitcoins can be created by anyone; both the registration of new transactions and the production of new bitcoins occur during the mining process.
When miners include new transactions in a block, they need to “seal” it with a hash. To create such a unique character string, the data of the new transaction and the hash of the previous block are used. As a variable that complicates the cryptographic task, a random code is added – nonce. Only when the string of this data is determined by the computer by brute force, the miner will find a new hash. When the miner generates a header hash whose numerical value does not exceed the target number (target) determined by the algorithm, a new block is formed. The smaller the set value, the more difficult it is to fulfill the condition not to exceed it.
The computers on the other nodes then check the new value for validity. This happens almost in real time. But determining the correct hash value takes about ten minutes. To keep within the desired time frame, the blockchain algorithm adjusts the difficulty of calculating the value: every 2016 blocks, that is, approximately every two weeks, the difficulty is adjusted. And the miners are accepted for the next block.
Reward is a transaction fee paid by users. A particularly high fee can increase the processing priority of a transaction. There is also a fixed reward for the formation of one block, currently its size is 12.5 new bitcoins. Back in 2009, you could get 50 bitcoins for one block. Since then, the reward has been halved after every 210,000 blocks.
The maximum allowable issue of bitcoins is 21 million. This number is predicted to be reached by 2140. There are currently almost 17 million bitcoins in circulation. The halving mechanism is designed to control inflation. Of course, along with this, the profitability of mining decreases, but this should be compensated by an increase in the power of the equipment and an increase in the cost of bitcoin.
Make big money on coal
Traditional computer equipment is no longer suitable for participating in the fight for bitcoins. Miners today calculate hash values using application-specific integrated circuits (ASICs). For example, Bitmain’s AntMiner S9 ASIC miner is capable of producing 13.5 trillion hashes (terahesh) per second (TH/s) and costs about €3,400 in Europe. The power supply will cost another €250.
Mining now requires so much energy that it is profitable to do it only in countries with low electricity tariffs. Most bitcoin is mined in China, primarily in the province of Inner Mongolia, where the energy industry uses mainly coal. However, China opposes megaminers.
Many mining farms have already moved to other countries with low electricity prices, such as Singapore. Currently, electricity consumption for mining is estimated at more than 40 terawatt-hours per year, which is about the same as Portugal’s annual demand, 170 countries consume less. If this madness continues to pick up pace, in the summer of 2019, miners will need more electricity than the United States. According to the forecasts of the English portal powercompare, in February 2020, bitcoin mining in terms of electricity consumption will reach the level of consumption of the whole world.
Whether more energy-efficient equipment can significantly slow the growth of electricity consumption remains an open question, as its performance has already grown exponentially in the past. If the mining costs cease to be justified and the ten-minute limit disappears, then the algorithm will facilitate the calculation of the hash, which may reduce the power consumption. In other words, the surest way to make mining more environmentally friendly is to raise electricity rates and lower the price of bitcoin.
Cryptography is designed to secure the use of bitcoin. For the user, this means the following: in order to make a transaction using the block chain, you need an electronic wallet. It generates a pair of keys – private (private) and public (public). The public key is converted to a public address visible to the network. The private key remains secret and is used to sign transactions. For each new process, it is recommended to create a separate address – this reduces the likelihood of identifying the owner based on several transactions.
Of course, storing large amounts in an e-wallet is not practical, because in this case, the factor of trust in a third party comes into play again, and this contradicts the idea of bitcoin. Cold storage on hardware wallets greatly improves security. But if law enforcement agencies are interested in the wallet, then no measures can promise absolute protection – however, as in other areas of the use of private data.
The majority decides what is right
If bitcoin holders are responsible for the safety of their digital assets, then security is more broadly governed by consensus: the blockchain becomes valid only if the majority of participants in the network confirm it. If someone tries to tamper with the transaction, they will need to change the hash as well. But in this case, the block will fall out of the chain, and the forgery will be highlighted. Changes to transaction blocks could be made if an attacker took control of more than half of the computing power of the network.
Only the NSA (US National Security Agency) is suitable for the role of a player in the cryptocurrency market participating in such an expensive attack. Given the capabilities of its hardware, which is difficult to assess, it can generally be considered capable of any attack, but it is more obvious that it pays attention to and monitors individual actors in the blockchain space. If the NSA had a goal to destroy the bitcoin system, it would be enough for it to publish the necessary appeal to the public. Investors would immediately drop out, the rate would collapse, and faith in digital currency would be destroyed.
And even if the attack on bitcoin seems meaningless, the intelligence agencies need not be sad. Blockchain technology in general provides ample opportunity to obtain secret information. Not every chain is as secure through node control and computing power as bitcoin, and in such cases there is always a fallback.
Already, so-called smart contracts based on block chains are in use. Contracts are laid down in the program code itself, which allows you to perform actions after checking the conditions (if-then). And just when working with confidential data, smart contracts can become more efficient than traditional ones. For example, in real estate trading, a large number of documents and payment procedures must be coordinated and certified.
It may take many months for the parties to the agreement, their banks, the notary, the cadastral department and other participants to complete all the necessary actions. The smart contract algorithm would automate the process of executing procedures and payments, and a digital signature would be enough for signing. Each entry in the registry could be accepted forever, and its changes would not be allowed. The role of notaries, officials and bankers would lose their significance. They, like other intermediaries, would be losers if distributed ledger technology really took hold in the sensitive data industry. In this regard, the DLT could accelerate the often predicted decline in well-paid civil service positions.
It is crazy to think that BTC can replace the money issued by the Central Bank.
Kenneth Rogoff,
professor of economics
But there are doubts that DLT will really turn the world of finance upside down. After all, it costs nothing for responsible persons to turn the weapons of their opponents against themselves. Harvard economist Kenneth Rogoff has already described a similar scenario for bitcoin: “Eventually, central banks can create their own digital currencies and, through regulation, change the playing field until they win. […] It is crazy to think that BTC will ever be allowed to supplant central bank-issued money.”
The central banks of large states are indeed considering the possibility of issuing digital money. Thus, Sweden may become one of the first European countries to issue its own national electronic currency – e-krona.
Blockchain as an intelligent surveillance tool
The ability to automate processes through the use of infrastructure promises many benefits, such as the Internet of Things. But DLT does not necessarily mean that all participants will have equal rights or anonymity. Thus, Deutsche Bank, noting the destructive potential of DLT for the financial sector, believes that the technology needs to be adapted for it: “Thus … the ability to identify participants, non-disclosure of transactions to third parties and the absolute completion of transactions are mandatory.”
Transferred to other areas of life, such chains could store the entire history of the client. For the first time, a “transparent” person would have a digital identity that could not be hidden, that would be firmly linked to personal data, invoices and contracts – a kind of life history archive, on the basis of which it would be possible to issue orders or impose sanctions using smart -contracts. Without the appropriate access rights, it would be impossible to correct any incorrect information about yourself. In this aspect, state-run blockchains could chain information self-determination.
Read also:
- Where to buy Bitcoin: online cryptocurrency trading platforms
- How scammers mine cryptocurrency at your expense
Photo: manufacturing companies; Marco Krohn/wikimedia.org
