The financial news, and essentially all news, keep mentioning and reporting on these terms Now, what is crypto-currency, mining, and blockchain technology? What are they used for? What do they accomplish? What do the terms mean and why use crypto-currency at all? Why not just stick with simple dollars? Let’s make it a bit simpler to understand, then you make your own decision.

Key facts:

→ Crypto-currency mining is the act of recording a “block” (all transactions that occurred within the last ~10 minutes) to the digital general ledger record (blockchain) of that currency. Then upon that posting, every ~10 minutes, the updated digital ledger is uploaded to all peer-to-peer “nodes”. Nodes are privately owned computers registered to participate in the peer-to-peer network.

→ A blockchain is the public ledger shared amongst all nodes via peer-to-peer networking. It is a shared database recording all the approved transactions. The name developed because all of the transactions coming onto the network were grouped into “blocks” of data, and then “chained” together. Each block contains a cryptographic “hash” (64-digit numeric string) recording of the previous block, a timestamp, and all prior transactions. By design, a blockchain is resistant to modification of the data

→ Mining is the posting of transactions to the public, peer-to-peer network, ledger (blockchain)

  • block = all transactions generated within the last ~10 minutes
  • chain = posting of that block to the single public ledger, accessible by all nodes/members of the peer-to-peer network

Nodes Make Money by being the first node to verify

→ Nodes, referred to as “miners”, make money by being the first node to verify ~10 minutes of transactions (a “block”) and posting them to the digital blockchain general ledger. The work necessary to post the block is called “mining”.

→ The successful node is paid 12.5 bitcoins (the amount is cut in half every few years). That amount (12.5 bitcoins) is paid every ~10 minutes to the first node/miner that is able to validate and verify the block and post it to the digital ledger. Many nodes exist that compete against each other, so essentially the nodes with the fastest computer hardware and software are more likely to win. To validate block transactions, the nodes must analyze huge bits of 64 digit numbers (each transaction within the node is reported via 64 digit numbers). Because the numbers are so large with so many numbers, mining requires significant numbers of extremely fast computers, which inherently requires large amounts of (cheap) electricity.

→ The first miner to guess the correct “hash” for the desired “block” announces its victory to the rest of the network. Then all the other miners immediately stop work on that block and start trying to figure out the mystery number for the next one. As a reward for its work, the victorious miner is paid 12.5 bitcoins (the amount is cut in half every few years). That amount (12.5 bitcoins) is paid every ~10 minutes to the first node/miner that is able to validate and verify the block and post it to the digital ledger. The successful node gets this as a reward for creating a block of validated transactions and including them in the blockchain.

→ How do they find this correct number hash? They need to guess at random. The 64-digit mystery number hash function is impossible to predict, so miners essentially guess at the mystery number. What’s more, there may be several nodes that produce the correct number hash, or there may be none (in which case the miners keep trying, but with a different block).

→ There are a lot of mining nodes competing for that reward, and who wins is dependent upon luck and computing power (the more guessing calculations you can perform, the luckier you are). The costs of being a mining node are considerable, not only because of the powerful hardware needed (if you have a faster processor than your competitors, you have a better chance of finding the correct number before they do), but also because of the large amounts of electricity that running these processors consumes.

→ A primary advantage of blockchain technology is that its’ ledger and data is peer-to-peer, so it is stored and maintained within many data sources –it is stored within all computer nodes included within the peer-to-peer network, so the risk goes away that a single central bank or data source can be hacked. The result is that the essential data underlying monetary records becomes absolutely protected and secure, and faster to obtain.

→ There is a maximum of 21 million bitcoins that can be issued. As of now 17 million bitcoins have already been issued. It is projected that the 21 million maximum will be issued by year 2040. After all bitcoins are issued to Node miners, they will likely continue to make monies for maintaining the digital ledger by charging transaction fees.

→ All of the current 17 million bitcoins have been issued to Miner nodes as compensation for maintaining the digital ledger, or kept by the Bitcoin founder (“Satoshi Nakamoto” team). No bitcoins were granted to initial buyers. Because the maximum amount to be issued is 21 million, there is speculation that the value of each bitcoin will increase substantially over time.

→ The way that this bitcoin (and all other digital) currency becomes valuable is when it can be used to pay for goods and services, or it can be converted to US or other existing and recognized dollars. If digital currency cannot be used for good or services AND it cannot be converted to recognized dollars, then digital currency effectively becomes worthless.

→ All bitcoin transactions are included within the public ledger via user personal ID’s. No user name is listed. However, if a personal ID becomes public all of that person’s history and ledger of transactions can be viewed via the public Blockchain/public ledger.

→ The rumor that this privacy would encourage all criminals to transfer illegal dollars via cryptocurrency is not practical. The exchange of US and other cash would accomplish that better as there is no record of who is paid via cash.

So what now?

I hope this helped…Now make your own decisions – does it work, will it last – in fact, SHOULD it last and continue? Does it actually improve the central banking currency system that we now use? Crypto-currency is still new, yet it keeps gaining steam? Here is my conjecture … the key to what makes crypto-currency beneficial is the blockchain, peer-to-peer network process. Using a peer-to-peer network to generate and record transactions eliminates the risk that computer viral attacks may impact the sole record of transactions now used – central banks. My conjecture is that because of the safety-net that peer-to-peer networks provide, blockchain technology shall continue. Whether Bitcoin or the other specific crypto-currencies that are now in place continue — that is a whole other question.


Callens Capital

 

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