Cryptocurrency, digital currency that began in 2009 with Bitcoin seemed like an extreme idea that would never catch on. But the idea that they would never catch couldn’t be more wrong. The total cryptocurrency market capitalzation as of this writing stands at 115 billion USD making the seemingly fringe idea, not so fringe anymore. But what exactly is cryptocurrency, and how does one acquire such assets?
Similar to other hard assets such as gold and silver, cryptocurrencies such as bitcoin have value due to their desirability and limited quantities. Another similarity to other assets is that they are decentralized; they are able to be transferred from person to person without a middleman such as PayPal. There are numerous cryptocurrencies currently on the market. The three biggest are Bitcoin, Litecoin, and Ethereum. If crypocurrencies were metals Bitcoin would be gold, Ethereum would be silver, and Litecoin would be copper. Since each form of cryptocurrency is developed differently; they each have their own set of “rules.” One such example of this is that Bitcoin has a cap of 21 million Bitcoin. Litecoin on the other hand has a cap of 84 million Litecoin.
The origins of cryptocurrencies can be traced to the 1990’s with numerous failed attempts to create a digital currency. Attempts to create centralized digital currencies had all failed. Then, in 2008 an unknown man known only by Satoshi Nakamoto mailed a research paper to a cryptography mailing list. This paper known as “Bitcoin: A Peer-to-Peer Electronic Cash System” would be the foundation of the new era of digital currency. The decision to create a digital currency without a central entity was the single most important part of Satoshi’s paper. In order to have digital cash, a payment network is required containing accounts, balances, and transactions. The payment network is generally a centralized server. The central server keeps records, and ensures that no exploitation such as “double spending” occurs. Satoshi Nakamoto envisioned a decentralized network however. How can a decentralized network work? Without a centralized server every single entity of the network must do the job of a central server. However, a problem occurs. How does a consensus of these records occur? If just one of the peers disagree on a single balance the entire chain is broken. There must be absolute consensus. Nobody believed creating such a network was possible. Until Satoshi Nakamoto invented the blockchain.
The blockchain is crucial to digital currencies; so I will go over a brief description. The best way to think of a blockchain is to imagine a picture. A picture of a spreadsheet duplicated thousands upon thousands of times across computers. Then imagine the purpose of the network is to continually update the blockchain. The blockchain database isn’t stored in any central location, but rather across millions of computers simultaneously. The decentralized style makes hacking the blockchain an almost impossible task. A network of nodes composes the blockchain. A node is a computer connected to the blockchain network using a client that performs the task of validating and relaying transactions gets a copy of the blockchain, which gets downloaded automatically upon joining the blockchain network. Every node is an administrator and joins the network voluntarily. The prize for participation? Bitcoin or other forms of cryptocurrency of ones choosing depending on their set up. Each node in the network competes to win the prize in the form of “mining.” Nodes solve complex computational problems in the network to explain simply. Blockchain has many potential uses outside of cryptocurrences. Security, finance, and other sectors all have potential uses for blockchain due to it’s nature of being very difficult to corrupt and hack. Goldman Sachs believes that blockchain technology holds great potential especially to optimize clearing and settlements, and could represent global savings of up to $6 billion dollars per year.
“As revolutionary as it sounds, Blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where Blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.”
– Ian Khan, TEDx Speaker
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust such organizations and corporations that much. I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in countries that haven’t reached that level yet.”
– Vitalik Buterin, Inventor of Ethereum
Moving away from the blockchain; what is a cryptocurrency? To boil down cryptocurrencies to an extremely basic form, “limited entries in a database no one can change without fulfilling specific conditions.” A very simple explanation, yet one that fits perfectly. The simple definition applies to all currency. What is currency except a limited entry that no one can fulfill without specific conditions? Money in the bank can only be changed except by specific conditions. One can even take hard money. What else are coins and paper money than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is essentially a verified entry in some form of database. Digital money is the same.
Now, what exactly do miners do, and how do miners create coins? In order to answer these questions we must take a detailed looks at the mechanism controlling cryptocurrency databases. A digital currency such as Bitcoin or Litecoin consists of a network of peers. Every peer in the network has a complete history of all transactions, and the balance of every account. What is a transaction however? A transaction is basically a file that says “Bob gives X Bitcoins to Joe.” The transaction is then signed by Bob’s private key. Now, there is nothing special about this transaction; it’s just basic cryptography. Once signed, the transaction is broadcasted across the entire network to every peer. Again, this is nothing special; it is simply basic p2p-technlogy. The transaction is almost immediately known across the whole network, but the transaction only gets confirmed after a certain amount of time. Cryptocurrencies are all about confirmation. An unconfirmed transaction is considered pending and can be forged. Once the transaction is confirmed however; it is considered to be “set in stone.” A confirmed transaction is not longer forgeable, reversible, and part of the immutable series of records known as the blockchain.
Only miners can confirm transactions. The miner’s job in a network is to confirm, and to add their own node to the database. The miner is then rewarded with the currency whose network they are in such as bitcoin. In principal, anyone can be a miner. A decentralized network has no authority to delegate such an important job. If someone made thousands of peers and forged transaction the system would immediately break. Satoshi came up with the concept that people must invest some work from their computer to qualify for the task. Miners must find a hash which is a product of a cryptographic function. This style is called Proof-of-Work. After finding a solution, the miner builds a block and adds it to the blockchain. His incentive, the right to add a transaction that gives a certain amount of a specific cryptocurrency. Bitcoins and other digital currencies can only be created if miners solve a cryptographic puzzle. Only a certain amount of currency can be created as the amount of computing power in a network makes mining consistently harder. This is part of the consensus no peer in the network can break. To get started mining one needs a computer. The parts required are motherboard, quality power supply (or your house may catch fire), ram (approximately 8GB), almost any CPU, and GPU. The GPU is the single most important part of any mining rig. One must also note that running a mining computer will run the GPU’s at 100% and severely slow down your system and shorten the life of the card. A side effect of running your GPU’s this much is large amounts of heat are created so great care must be taken to keep the components cool. The best GPU’s for mining currently are AMD cards such as the RX 580 and 570, RX 480 and 470, and Radeon 295×2. NVIDIA also has good mining cards such as the GTX 1070, 1060, and 970. However, as the difficulty and DAG files of mining a certain currency increases; the amount of VRAM needed in a GPU rises. In Ethereum mining a card with only 4GB of VRAM is going to become very harshly bottlenecked by mid July or earlier. AMD cards are more resistant, but they are not immune however. For this reason I would not recommend anything under 4GB of VRAM for certain currencies. The GPU’s are rated in MH/s which is hashing power. Higher is better. One can read more on other websites or learn from YouTuber’s such as IMineBlocks or Boxmining.
Cryptocurrencies are basically an entry in a decentralized consensus database. Digital currencies are secured by mathematical operations which are extremely secure. Features such as being irreversible, private, fast, global, secure, and permissionless make digital assets a very attractive investment. Digital assets also have attractive monetary properties such as being a controlled supply and having no debt. Cryptocurrenices represent themselves. The supply is not changed by any government or central institution.
Cryptocurrencies are basically a form of digital gold. The supply is fixed and not based upon any central institution. However, digital assets are much more versatile and more usable in the digital age than gold. Many vendors such as Newegg, Steam, WordPress, and others all accept Bitcoin as forms of payment. Other digital currencies are also making their way into the main scene such as Ethereum and Litecoin. Gold must first be traded for cash or bartered with. Digital currencies may be used immediately from the comfort of ones home to order lets say a new TV from Newegg, or the newest game in the Elder Scrolls series from Steam. The uses and versatility of digital currencies will rise as they become larger and more widely publicized. Eventually, it may be common for one to simply use their phone as a mobile wallet to pay for goods and services using different forms of digital currency. With the world progressing into the digital age the uses and applications for digital assets will definitively become greater.