What's bitcoin all about?

Cryptocurrency, bitcoin, blockchain, altcoins. These are all terms you may/may not have heard of. What I want to do in this post is show you what all of these mean and explain why blockchain technology is about so much more than teenagers buying drugs on AlphaBay or The Silkroad (R.I.P.) using bitcoin. So without further ado, let me delve into the future of technology and show you why you should care.

Bitcoin is a cryptocurrency and the technology behind it is called the blockchain. There are over 900 different cryptocurrencies in existence, all of which have varying properties and weird and wonderful names from PutinCoin and CyclingCoin to BunnyCoin and CannabisCoin. Bitcoin has the largest market share by a length, at 45.7%, and has a total market capitalisation of $65bn (meaning if you took all the bitcoin in the world and sold it for USD, you’d have that much money). It is currently worth $4000 but this value fluctuates a lot depending on news in the cryptocurrency world. It was, for example, worth half this value just over a month ago.

So what is the point, why would anyone use bitcoin rather than PayPal or normal £££? Well, as it happens there are actually a few very good reasons:

1. Secure: Bitcoin is much more secure than conventional fiat currencies and eliminates the need for trust in all markets and transactions
2. Cheap: Transaction costs are tiny (fractions of cents rather than dollars) and this enables micropayments
3. Private: All transactions can be anonymous
4. Quick: Transferral of value happens in minutes not hours or days

To understand why this is the case, let’s look at the technology in a bit more detail. The blockchain protocol was formally proposed by Satoshi Nakamoto (a pseudonym for an individual or group whose identity remains unknown) in the famous whitepaper of 2008. Satoshi’s masterstroke was to create a ‘distributed ledger’ so that rather than an institution like a bank or PayPal keeping record of all transactions, each ‘node’ in the blockchain network has its own copy of the ledger and as soon as 50% of the nodes agree, a transaction becomes cemented within the blockchain for eternity. So each block in the blockchain is essentially a list of all of the transactions that have taken place in the last 10 minutes, all hashed together using algorithmic functions. Here lies the security aspect of the blockchain because the need for a 3rd party adjudicator and one central ledger listing all transactions is eliminated and there is therefore no way for one malicious party to hack in and alter the ledger, because all of the other nodes would simply recognize this straight away. The replacement of a 3rd party with a distributed ledger running on automatically computed functions means also that the blockchain is both fast and cheap.

Think about how world changing this is for a minute. For an immigrant living in the US to send back a portion of their monthly wages to their family in say, Kenya, requires them to physically go all the way to a Western Union, wait for up to hours in a queue, lose a minimum of 10% of their money to the wealthy shareholders of Western Union in transaction fees and then face a time lag of potentially weeks before their family receives what is left over after Western Union’s fees. With the advent of bitcoin, this same family would be able to instantaneously transfer funds to each other for less than 1% fees and all they need is an internet connection.

So if everything is done automatically and the technology is open source with democratised governance, why are there any transaction costs with bitcoin at all? Well, ‘bitcoin miners’ are those who create each new block by assimilating all the transactions in a process called ‘hashing’. This however, requires computing power and so to incentivise people to undertake this activity and maintain the stability of the bitcoin blockchain, a bitcoin reward is built into the blockchain software for whoever successfully creates the new block (for a neat explanation of how this functions in more detail, see this article. This also serves to counteract the deflationary effects of people losing their bitcoin and maintains a steady supply of new currency in a similar manner to how a central bank prints money. Over time, it becomes exponentially more difficult to ‘mine’ bitcoin as more miners compete for the reward, and so to maintain a sufficient reward and to determine which transactions to process first, the sender can add tiny fees to their transaction and the miners will prioritise those paying the highest fees to hash first. So it is up to the sender how much of a fee they wish to pay, if any at all, but the more they pay, the faster their transaction will be confirmed and it could days or even weeks if they pay nothing. Another useful feature is that fees also prevent one user from trying to overload the system with junk transactions.

Side note on bitcoin mining: bitcoin mining is done with GPUs normally found in gaming PCs, for reasons that I don’t understand and don’t really have any desire to. However, the initial capital to set up a dedicated stack of GPUs to create a mining outfit and the associated energy costs, excessive concurrent heat production and sheer noise and space taken up, all mean that bitcoin mining is increasingly done by mining pools rather than individuals. Here, individuals pool resources and share out the mining profits between them in a similar manner to how a mutual fund operates. A recent worry with these has been that they are growing too large and powerful because if one mining pool garners over 51% or more of the mining capacity then they could prevent new transactions from gaining confirmations or double-spend coins by reversing completed transactions. The mining pool Ghash.io did reach 51% for a brief period of time in 2014 before voluntarily reducing their computing power to avoid the issue. So whilst mining pools remain democratic and benevolent the risk is minimal but it is something to pay close attention to for the future.

So does anyone actually use bitcoins? In short, yes. Whilst still at the very early stages of adoption, there are many outlets that now accept bitcoin ranging from takeaway.com and to pubs in Norwich and the number of places that accept it is increasing every day. According to research at Cambridge University there are roughly 2.9 and 5.8 billion unique users as of 2017 and adoption is increasing exponentially. They are very easy to use and simply involve opening an account on an exchange such as Coinbase or Gemini and using a debit card to buy bitcoin. It is then advisable to transfer this bitcoin to a private wallet (e.g. Jaxx) that is not a public exchange to avoid the very rare possibility of it being hacked and you losing your money.

So bitcoin sounds pretty cool, but why on earth are there 900 other versions of it too?! Well they all have varying properties that alter their functionality. The second largest by market cap ($29bn) and arguably most important and exciting of all cryptocurrencies is Ethereum. Created by the 19 year old Russian-Canadian genius Vitalik Buterin in 2013, ethereum’s blockchain differs from bitcoin’s in that it facilitates the use of smart contracts. These are essentially pieces of computer code that can be deployed onto the blockchain where they are securely and transparently stored and can execute a certain function outlined in the code if certain stipulated conditions are met e.g. the code could take the form of a contract to buy a stock when it hits a certain price and will automatically self-execute at that point. Whilst technically hard to understand, anything centralised can be decentralised by ethereum so the possibilities are really endless. From real estate contracts, to storing health records to sharing the cost of a pizza with your mates, it can all be automated, made infinitely cheaper and more efficient and much more transparent & secure than it currently is due to the requirement for centralised 3rd parties (read more about ethereum here).

The developer world is buzzing with ethereum based projects which have the potential to irreversibly alter our world in a major way like the internet did in the early 1990s. Here are just a couple of the awesome things happening on ethereum:

• Augur — a prediction and forecasting platform that allows people to bet on real world events (e.g. the next president of the US) in a peer to peer fashion and get rewarded for correct predictions
• Uport — a service enabling users to reclaim all of their personal data and lease it out in return for small micropayments to corporations, all autonomously e.g. rather than your email address being shared out to spammers each time you fill out a survey online, you could lease your email address to providers you want to access it like facebook or an advertiser in return for a fraction of a dollar per use.

There are a lot of other cool altcoins too. Some of these were created to improve on technical aspects of bitcoin like ethereum while others have been released as dedicated tokens that must be used to interact with a particular service. For example, the company Agrello recently launched an ICO (initial coin offering) where it publicly sold its delta token in order to raise money in what is rapidly becoming an alternative to venture capital funding for start-ups in this arena. Agrello creates artificial intelligence-powered smart contracts for consumers thus negating the need for high level coding ability to deploy a contract on the ethereum blockchain. In order to pay for Agrello’s service one will have to use the dedicated delta token. ICOs are a prime target for investors as the coins are often initially sold at a discount rate and are also at the very early stage of adoption so buying delta token now raises the prospect of returns is excess of a hundred fold in a few years’ time (in a similar way to investing in Facebook right at its inception). Once public, altcoins can be exchanged for bitcoin on many exchanges e.g. Poloniex (larger cap coins) or Bittrex (large and medium cap coins).

Here are just a few of the cool altcoins out there:

• LiteCoin — a bitcoin alternative with a faster hash rate (time taken to create blocks), so 4x quicker than bitcoin and has a larger transaction capacity (bitcoin has undergone turbulent times over the previous month over trying to find a solution to this very issue to facilitate mass adoption in the future).
• Bitcoin Cash — created on the 1st August 2017, this was a fork of the bitcoin currency which addresses some of the processing power issues of bitcoin but has not received full community support or uptake
• Ripple — a system of connecting global financial institutions to enable transaction free, instantaneous remittance payments.
• Zcash — if bitcoin is http, Zcash is https. Zcash offers a higher level of anonymity and privacy and became the preferred method of donation accepted by wikileaks when conventional sources of financing were cut.
• Dash — similar to bitcoin but with some advanced features enabled by the creation of ‘masternodes’ in addition to miners which enable instant transactions, entirely private transactions and a fully decentralised governance system
• Doge Coin — initially created as a joke and has few mainstream commercial applications but has gained traction as an internet tipping system for content e.g. blog posts
• Golem — The Golem worldwide supercomputer network aims to become the airbnb of computing by employing idle PCs the world over. It enables machines to around the world to interact with each other and transact to purchase computer power. Actually functions as a token that is traded on the ethereum network using a smart contract.

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So what does the future look like, will we all have bitcoin wallets that we use to pay for everything from coffee to rent? Will we all be surrounded by machines that receive micro payments in return for doing everything from selling our lager preferences to the local pub’s stocking AI to automatically paying our local gym an exact amount of bitcoin based on our machine time as determined by face recognition software in the gym’s CCTV? Maybe we will be able to walk along the street and have a continuous WiFi connection because our phone is automatically sending tiny chunks of bitcoin per second of use to the inhabitants of houses we pass, leaving us with a seamless internet experience. Or perhaps instead of dropbox all of our photos will be securely stored in a decentralised blockchain, packaged up into tiny chunks and shared out among participating personal computers to utilise their unused harddrive space in return for a few satoshis per bit (1 satoshi = 0.00000001 bitcoin). It all sounds a little scary, but I don’t think some of this is far from being reality. Regulation, ongoing security issues and slow uptake all are likely to produce friction over the foreseeable future but that’s not to say there won’t be unprecedented progress. In fact, some people already pay rent using bitcoin. Uport as mentioned above has the potential to enable the lager stocking scenario. Storj is already functional as a competitor to dropbox. It’s up to you to decide how you think the world might change but we are undoubtedly on an exponential trajectory of technological progress and given the level of innovation we have seen over the past decade, it’s perhaps not so crazy to start considering that some pretty outlandish things might start to happen over the next one. Maybe blockchain is the next big thing you’ve only just started thinking about.