Backing The Blockchain

Backing The Blockchain

When the price doubled in price from mid-July to early September, Bitcoin could no longer be ignored. Regarded as variously a scam, a joke or at best a curiosity since its creation in 2009, Bitcoin now occupies the thoughts of government regulators and mainstream investors alike. But is it just another pump - and- dump get rich scheme, or are Bitcoin’s true champions - those who call it nothing less than the future of money - about to be proven right?

The solicitor begins reading  from the old, yellowed card. “Autumn,” he says. “Firelight. Baker. Lounge.  Density.”  He pauses and glances as his paralegal - the younger man is keeping up, typing in each word. “Hasty. Awful. Caramel. Accident...” The solicitor finishes reading  a list of 24 words, and then  looks expectantly at the paralegal.

The younger man taps a few more keys, clicks the mouse, stares intently at the screen... and then nods.

The small group of people in the solicitor’s office exhales in relief. Tension drains from the room, and everyone starts hugging or shaking hands, congratulating each other.

No, they didn’t just activate a sleeper agent with a code phrase. This was the retrieval of a Bitcoin wallet, left by the estate of the group’s mutual grandfather. With this key, granddad’s balance of Bitcoins can now be used, split up amongst the family, and of course some of it handed to the solicitor as legal fees.

Could this kind of thing become common, 30 or 40 years from now, as Bitcoin’s first wave of “hodlers” - speculative investors who buy coins just to store them - begins to die off ? Perhaps. If the events of August and September 2017 are anything to go by, Bitcoin is poised to become a big part of everyone’s lives.

License to Email Money
Bit coin is a strange thing. Traditional economists first dismissed it as “made up money”, then insisted it was just another fad like tulip bulbs or the South Sea Company or the Dot com  boom . Then, they  said government regulators would shut it down as an “illegal currency”. And finally, the finance industry just started tracking it, like any other stock, security or commodity.

Life moves fast in the sphere of so-called cryptocurrencies. As I wrote the first draft of this article, Bitcoin had just retreated from its all-time-high of US$5000 set on 1st September, to a still astonishing US$4190.

Then  as we were preparing  to send the magazine to the printer, a wave of fear, uncertainty and doubt swept the market, intiating  what some saw as an overdue  dip down to $3800. So I had to make some edits.

Trying to keep curren though, is pointless. The price will change again before I finish this paragraph, and many times before I reach the end of this article. Bitcoin trades 24/7, globally, and the exchanges never rest.

The recent  price  retre at  first  began because on a Friday afternoon, rumours began circulating  that China would ban the trading of Bitcoin and other cryptocurrencies in exchanges. Debate raged over the next 72 hours about whether this was, inevitably, “fake news”, or whether China was only going to ban trade of non-Bitcoin  crypto, or whether exchanges were going to be shut down while person-to-person trading remained legal.

Or whether indeed this was just what pop- psychologists call FUD - fear uncertainty and doubt - spread deliberately by China, to cause the price of Bitcoin to fall, thus allowing the Chinese government to buy cheap coins.

On the Monday,  JP Morgan CEO Jamie Dimon saw his chance, and gave an interview in which he described Bitcoin as “a fraud”. Others piled on, calling it “a classic pyramid scheme”. The market’s indecision deepened. The price fell, but hardly  crashed, partly because of a pervasive belief that Dimon’s comments, along with Chinese uncertainty, created an opportunity for “cheap coins.”

Around and around the theories and counter-theories went, while on the sidelines, an alternative to Bitcoin - called Bitcoin Cash and distinguishable from Bitcoin only to the heavily invested - maintained a campaign of subtle harassment, both psychological and perhaps  even technological in the form of crafty mining practices..

Ah yes, mining. Because beyond internet forums and social media threads, large scale “mining” operations continue to chew through megawatts of electricity keeping  Bitcoin functioning, influencing its price, and directing (or at least trying to direct) future development of the technology.

Money has never been so fun.

Satoshi Who?
It’s all a far cry from the original vision of Bitcoin’s... well, creator  isn’t quite the right word.  Instigator?  Progenitor?  Whatever - Bitcoin first met the world in November 2008 with the publication of a whitepaper on a cryptography mailing list. Signed by the obviously pseudonymous Satoshi Nakamoto, it described how proof- of-work systems, originally designed to combat  email spam, could be adapted to create a digital peer-to- peer currency, free of a central bank.

In January 2009, Satoshi Nakamoto “mined the genesis block”, as the cypherpunks say, launching the Bitcoin network. An open-source Bitcoin client was made available for anyone to download, and the first Bitcoins were issued.

From there, the network grew organically, spreading around the world. Geeks in university dorms slept with their PCs roaring as they “mined” for “free” Bitcoins. For most of 2009, the system worked as little more than an exercise in crypto-wonkery, and as a working example of a blockchain.

You Blockheads!
Blockchains are distributed databases. Every computer running a blockchain client - in this case, Bitcoin - has a copy of the blockchain. Of course, clever coders can get into their copy of the blockchain and mess with database, giving themselves 10,000 Bitcoins, or whatever.

So how does the system know the blockchain is “true”? By consensus. As computers mine for Bitcoin, they create blocks of data. These blocks are stacked on top of the existing blocks. The chain grows longer and longer.
When you want to send or receive Bitcoins, the system checks the blockchain for validity. Which of the potentially many versions is the true one? Quite simply, the longest one.

The idea is that the overwhelming majority of honest miners keep the blockchain growing too fast for any single malicious actor to replace it with a doctored version.

So if a bunch  of hackers  created a fake blockchain that assigns 100,000 of the world’s finite supply of Bitcoins to their own “private keys” (thus giving them ownership of the coin), and tried to copy it over the “real” blockchain, they’d have a problem.

By the time their fake blockchain was ready, the real one would have grown longer, and so the system would reject their shorter,  fake version. This is one half of what makes Bitcoin plausible as real money. The other half is its finite supply.

Inflated Opinion
Critics of state-issued currency call it “fiat”, as in, it’s created by decree rather than accurately reflecting the amount of work being done by an economic  system. They say the problem with fiat is that governments can just order the printing of another billion dollars. While this can keep a struggling economy afloat, it’s just kicking the can down the road. Someone has to answer for all that magic money, at some point.

The extent to which you agree with this reflects your view of economics.

Gold, by contrast, has a finite supply. It needs to be dug out of the ground, cleaned up, melted into bullion, whatever. Its scarcity is part of why everyone agrees it’s valuable. The actual price of gold, to the last dollar, is set by the market.

Bitcoin, like fiat currency, was created “out of thin air”. But like gold, it can only be created in a certain way, and it has a finite supply.

Satoshi Nakamoto designed Bitcoin so that there would only ever be 21 million Bitcoins issued,  ever. New coins are created when miners do compute  work on a block, which confirms transactions on the network.

Their reward for doing this mining - which the system needs to allow Bitcoins to be “spent” - is a small fee from each transaction and, in certain conditions, the issuing of new Bitcoins. When  the Bitcoin network  first started up, the reward for mining a new block was 50 Bitcoins (now worth $250,000, give or take). Every four years though, the reward halves. Right now, the block reward is 12.5 Bitcoins, and based on the amount of computing power being dedicated to mining, the reward will next halve in June 2020.

The difficulty of creating  a block on the Bitcoin blockchain is determined by the speed at which new blocks are being created. The system constantly adjusts so it takes roughly 10 minutes to create a new block.