Bitcoins and Cryptocurrency: Myths and realities

By September 15, 2019 Bitcoin Business
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Part 2: The Journey

This is a story of secret beginnings. A story of a brilliant idea, born of trying times. A tale of ups and downs, theft and despair and triumphant comebacks. The story of an underdog, attempting to overcome the odds. No, this is not a fairy tale, but a real-life story of a… currency. Yes, you read right – currency. This is the story of the beginning of Bitcoin and its journey through the years. And the best part? The story isn’t quite finished... yet.

Now I’m sure many of you will know bits and pieces of this story that I’m about to begin: who is the founder of Bitcoin – Satoshi Nakamoto; why did he start this new currency – because of the 2008 financial crisis; how did he manage to fix the problem of double-spending that had been plaguing the digital currencies of the time – by using blockchain. But this is a mere summary of what is, quite truthfully, a saga. And as the saying goes, the devil is in the details… So, let’s dive in.

Legend has it, that Satoshi Nakamoto first began working on the concept of Bitcoin in 2007, but the concept was only documented and presented to the public through his Bitcoin whitepaper in October of 2008. What was so special about this little old paper? Well, for one, it described the Bitcoin currency, but far more importantly it detailed the use of a new technology called blockchain so that the Bitcoin currency could never be copied, thus solving the problem of double-spending.

About a week after the white paper was published the Bitcoin Project was registered on SourceForge.net – a website that was focused on the development and distribution of open-source software. A couple of months later, on January 3 of 2009, the Genesis Block was mined.

Got a few questions after reading that last sentence? I’m sure you do. So, let’s get some answers. First off, what is mining? Well, if you read on, there’s a whole section dedicated to mining, so we’ll get to that in a while. For now, simply think of mining as a highly competitive, magical process that results in a miner (a user on the Internet) finding a Bitcoin – much like miners in the old ages finding gold nuggets.

Second, what is a Genesis Block? That, I believe we should find out right now. The Genesis Block or Block 0 of the Bitcoin blockchain is the granddaddy of every other bitcoin block out there. How is this possible? Well, each new block that is created in the blockchain is connected to the one that came before it hence they all trace back to Block 0.

Generally, the difficulty of mining blocks is so great that it requires a specialized graphics card but Satoshi Nakamoto was able to mine Block 0 by simply using a CPU since, at the time, the difficulty was set to 1 – much like the first levels of a computer game would start at a difficulty level of ‘Easy’. Compare that with a difficulty level of 10,183,488,432,889 - which is the difficulty level of mining a block on the Bitcoin blockchain as at the time of writing this article – and you will perhaps begin to get an inkling of how the Bitcoin blockchain has expanded in the past decade or so.

Unlike in any of the blocks that came after, Satoshi Nakamoto decided to leave a little message in the code of Block 0. It read “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. This was a reference to an article that appeared in the London Times on the day that the Genesis Block was created, and it provided details on yet another bailout of banks by the British government. Although the message was brief and didn’t give any more details as to why this article was important, many have interpreted this as a message from Satoshi, expressing his distaste for the banks and the middlemen and pointing to yet another reason why he created a more people-driven currency. A lesser-known, yet interesting fact about the Genesis Block is that throughout the years, people have been treating it as a sort of wishing well. How so? Well, the original Genesis Block contained 50 Bitcoins in total and these have never been spendable – they have always stayed put. But since the beginning of the system people have been sending bitcoins to this address (yes this ‘address’ business will be explained later) as a sort of tribute to the creator, in the process quite possibly making all of those coins un-spendable. The Genesis Block is, for many Bitcoin aficionados, synonymous with Satoshi Nakamoto, so in a way, sending Bitcoins to this address is a way for them to be closer to their Crypto God, the Creator of the Bitcoin Universe.

After establishing the Genesis Block, Version 0.1 of Bitcoin was released on January 9, 2009, and interestingly enough, in the release note of the software, Satoshi talked about the fact that the total circulation of Bitcoins would be 21 million, meaning that there would only ever be 21 million coins in the Bitcoin ecosystem. Now, no one really knows why Satoshi decided on this exact figure, although as is common with everything related to Bitcoin, there are many theories floating around, and in this case, many of those theories tend to be highly technical.

To put things into perspective, let us say that the overall supply of Bitcoin can be divided into three parts. One is circulating supply, meaning the number of coins that are out in circulation, either being traded or held by users on the network. Certain cryptocurrencies have all their coins pre-mined, or release all the coins from the beginning of the project, or even mine the coins over time.

Irrespective of which method is used, the circulating supply means whatever is available and circulating at present. Second is the total supply – referring to the number of coins in existence at the moment. This would include all created coins, whether in circulation or not. And thirdly, there is the maximum supply for a coin – meaning that if a number exists for maximum supply, then that particular coin will not be created again once it reaches this number. According to CoinMarketCap, an aggregator website on cryptocurrency information, at the time of writing this article, the total circulating supply of Bitcoin stood at 17,907,850 – roughly 18 million coins. With a maximum supply of 21,000,000 coins, this means that we have a further 3 million coins to mine.

And this perhaps is the best place to delve into the question of mining. Now I do plan to get a little technical here, so those of you who don’t want to clutter your brain with the details should skip right on ahead. For the rest of you brave souls, let us start with the basics. Simply put, mining is a way for you to earn cryptocurrency without having to buy it using money.

Interestingly, when Bitcoin first started, mining one block would earn a miner 50 BTC (Bitcoin). In 2012, it was halved to 25 BTC, in 2016 again halved to 12.5 BTC and is expected to go down to 6.25 BTC in 2020. This halving process occurs once in every 210,000 blocks or roughly every 4 years. Right, back to the topic at hand - what do miners actually DO when they mine? They are in essence being paid to work as auditors of the system. They are verifying past Bitcoin transactions to ensure that double spending has not occurred.

Imagine you had a Rs.100 note and a copy of that same note. If you were to go out and spend both those bills, someone taking the trouble to look at both bills carefully would know that the serial numbers on the notes are the same and hence would know that one of them is a fake.

What miners do is somewhat similar to this. Currently, when a miner has verified 1MB (megabyte) worth of transactions to ensure there is no double-spending, then they are eligible for the reward of 12.5 BTC. Eligible – yes, but not certain to receive it. Why? Well, in order to receive the reward, the miner has to meet conditions. One is that he has to verify 1MB worth of transactions.

But second, he has to be the first miner to get the right answer to a numeric problem. For those of you interested in the Bitcoin jargon, this process is known as ‘proof of work’. The good news here is that there is really no advanced mathematics involved in this process – it’s just a lot of guesswork. What the miner is actually trying to do is come up with a 64-digit hexadecimal number called a ‘hash’, that is less than or equal to a given target hash. Think of it this way. I have 4 friends to whom I say that I’m thinking of a number between 1 and 100 and they’re required to guess what it is. My number is 25.

A and B guess numbers above 25 and therefore are immediately out of the running. C guesses 24 and D guesses 20. They’d both be right because 24<25 and 20<25. No extra points for C just because he guessed closer! C and D are both eligible for the reward.

This happens quite often in the Bitcoin network where multiple miners guess right and the decision for the reward is then based on which miner has verified the most transactions. So, transpose this problem of guessing the number to the Bitcoin network – now the number that the miners are guessing is not between 1 and 100 but a 64-digit number and instead of just 4 people guessing, there are now millions.

There are pages and pages of more details for anyone interested in the subject of mining but since too much of a good thing is never advisable, I believe it is in our best interests to gently leave this topic here.

The writer is an Assistant Director at the Central Bank of Sri Lanka.

The views expressed in this article are those of the writer and do not necessarily reflect those of the Central Bank of Sri Lanka.

– To be continued next week

This is a story of secret beginnings. A story of a brilliant idea, born of trying times. A tale of ups and downs, theft and […]

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