Anthony Parker of Cuberoot64 began by introducing himself and his company. He then conducted a quick survey of the audience, revealing that everyone had heard of bitcoin but very few were aware of its origins. We were told that bitcoin was a cryptocurrency invented by an unknown person or group using the pseudonym Satoshi Nakamoto in 2009. Bitcoin has the characteristics of being, 'Distributed, Decentralised, Deflationary and Divisible, (smallest unit is one 'satoshi' = 10-8 bitcoin). It had also attracted some bad press, being used to make payments on the 'Silk Road', an online market place for illegal drugs and for the sudden suspension of the largest bitcoin currency exchange, Mt, Gox, and the loss of $450 million.
Bitcoins are created by computing nodes, called 'miners', connected together in a virtual peer-to-peer (P2P) network, (i.e. computers linked via the internet in a non-hierarchical structure). A new bitcoin is created by solving a complex calculation, subsequent calculations increasing in complexity and setting an ultimate limit of 21 million bitcoins. Thus the generation of bitcoins is distributed between the nodes, the management is decentralised, there being no hierarchy and being of finite number the currency is deflationary. The nodes also process movements or transactions of bitcoins co-operatively. Successful processing of a transaction earns the node a fee. As the number of bitcoins in circulation increases the income from generating new bitcoins reduces and that from transaction fees increases.
Processed transactions must be agreed by consensus with the other nodes in the network and then form a block, which is cryptographically linked to earlier blocks, creating a blockchain, starting from the so-called genesis block. Each block is time-stamped so that if need be all transaction can be traced backwards, as in an audit trail. Indeed those involved in the Silk Road market found out this to their cost when they were successfully prosecuted. The blockchain forms a distributed append-only register.
Because of the open-source nature of blockchain software it is possible for new blockchains to be seeded from a point on an existing blockchain, in a process called forking. The new blockchain can be used for an entirely different purpose to the original, which solely provides an established starting point, (genesis block), for the new chain.
When a blockchain is used for payment processing, i.e. bitcoin, the transfer is effectively peer-to-peer and can clear in minutes, as opposed to days when conventional banks make international payments. This difference in processing times is reflected in processing costs, a £90M transfer might cost only 40p with bitcoin. Clearly this has major implications for the banking industry.
Conventional or fiat money, (issued by central banks but not possessing intrinsic value such as equivalency to gold), can literally be printed as required and consequently is inflationary. The US dollar is now worth only some 10% of its value of one hundred years ago. As a more extreme example the speaker revealed that he was a 50-fold billionaire - unfortunately in Zimbabwe dollars, (worth one US dollar in 1970 and 1 x 10-25 dollars in 2009). Would bitcoin have solved Zimbabwe and Venezuela's problems?
Cryptocurrencies have suffered from the 'double-spending' problem, a record or file can be duplicated and transferred to more than one payee. To prevent this two techniques have been developed. Proof of Work, (PoW), and Proof of Stake (PoS). Using PoW a node has to perform a substantial amount of calculation in order to be able to add its block to the chain, it being relatively easy for other nodes to validate that calculation. [For example it is harder to find the square root of an irrational number than to prove the result]. PoS requires the node to associate some its own funds with the transaction, a kind of article of faith. The bitcoin blockchain uses the PoW method while other blockchains, such as that used by Ethereum, use PoS. Some concerns have been raised over the amount of computing power needed to support PoW and the related energy costs.
A comparison was made between the annual energy consumptions and costs of various ways of transmitting or storing wealth [1], gold mining was said to cost $105 billion and use 475 million GJ (132 TWh), the banking system $1870 billion and 2340 million GJ (650TWh), and bitcoin $0.79 billion and 3.6 million GJ (1TWh). Banking gold reserves would fill an Olympics swimming pool, i.e. about 48,250 t (aprox. two trillion US dollars).
Blockchains can have many applications, so-called smart contracts being one of them. Traditional contracts had been called 'wet' [2] and smart contacts 'dry' by proponents such as Nick Szabo. Smart contracts can be satisfied in minutes as opposed to days, automatically as opposed to needing manual intervention and are virtual as opposed to being physical. There is no need for specific escrow arrangements as the necessary trust is implicit in the blockchain.
Blockchains make use of the TCP/IP (transmission control protocol/internet protocol) structure introduced in 1990 that runs the internet. Originally conceived to route simple text documents it has gone on to support streaming video, originally considered impossible. The trend on the internet is towards zero costs which makes it possible to conceive of 'micropayments'. Rather than only companies such as Facebook making money from users' data the users themselves could be paid a fractional amount. Wherever there was some sort of value, a digital right, being transferred in an authenticated fashion there was scope for smart contracts or other schemes [3] using the blockchain technology. Examples were given of tenancy agreements or confirming candidate's qualifications. [The blockchain can hold a decentralised record that can be used rather than referring to the awarding body that might no longer exist].
Part of the appeal of cryptocurrencies and blockchains is that they stand outside of conventional regulation. Naturally there had been some attempts by governments to regulate them. It was said that a country could rule itself out of bitcoin but countries can't rule out bitcoin.
The question was asked whether companies needed blockchain. The conclusion seemed to be that they might but they had to understand the technology before they took that step. Many new jobs would be created and they would need a wide range of skills, spanning the usual business activities plus graphics and web design and knowledge of languages such as C+, javascript, haskell, erlang and hyperledger. A company would have to choose the best type of blockchain for its purposes, public versus private, permissioned versus permissionless. The blockchain used by bitcoin is permissionless, any holder of bitcoins can join the network. Permissioned blockchains have access controlled by a central authority. Companies inclined to use these might actually just be creating a slow database, (the implication being that blockchain isn't appropriate for the business).
Returning to cryptocurrencies, we were warned that not all cryptocurrencies were equal. Of a total of more than 1,500 only a few allowed purchases to be made with fiat currencies. Similarly with currency exchanges there were only ten that traded more than 1 million dollars per day. Cryptocurrencies were volatile, bitcoin had peaked and dipped several times but the trend was upwards. As always, do your research and only invest what you can afford to lose! Also beware of the difference between ICO, STO, and IEO. An Initial Coin Offering (ICO) is a 'crowd funding' project that issues tokens in lieu of a future issue of a new cryptocurrencies. The Security Token Offering (STO) is similar to the ICO but is subject to regulation by the financial authorities. The Initial Exchange Offering (IEO) is similar to the ICO but via an exchange which, in theory, should have carried out due diligence checks.
Clearly there are risks in investing in cryptocurrencies but the fiat currencies are not necessarily stable and it could be said that some were currently conducting a novel financial experiment by operating under negative interest rate regimes with unknown consequences.
An example of a physical bitcoin wallet, the ledger nano s, was shown. Alternatives like trezor were available or virtual wallets such as metacert or blockchain.info, acting as internet browser extensions. The important thing was to retain one's personal 12-word passphrase private key, without that the account is unrecoverable. It is estimated that between 2.78 – 3.79 million bitcoins have been lost for good. A likely assumption is that if an account hasn't carried out a transaction within six years then the owner is dead.
For further study it was suggested that works by Satoshi Nakamoto, Andreas M. Antonopoulos and Nick Szabo were worth reading.
Many of the questions raised by the audience related to security issues, 'breaking the code'. To counter this the rules for controlling the interaction of nodes were designed and refined to exclude the actions of 'bad actors' .The large number of nodes in a network would tend to make the expenditure needed to attack the network more than any potential gain.
Our speaker clearly was an enthusiastic advocate of cryptocurrencies and the block chain technology that supports them, at the same time stressing that not all cryptocurrencies are equal and, like any other investment, there was a degree of risk.
I am sure that for most of us even 'conventional' money, the so-called fiat currencies is a bit of a mystery. Particularly if we only operate in a single-currency 'world', as long as its value in comparison to tangible things that we might buy is reasonably stable, we probably don't think too much about it. To the extent that I do think about it the 'Emperor's New Clothes' come to mind, money exists as long as we all pretend it does! How much more so must that be true of a cryptocurrency that doesn't have the authority of a government behind it?
And yet those two thoughts go together, fiat currencies only exist because an authority, (government), says it does. That same government can devalue 'the pound in the pocket' overnight should it choose, whereas in theory the cryptocurrencies are beyond the arbitrary control of politicians. It was suggested that Zimbabwe might not have suffered hyper-inflation if it, (its people or its government?), had been using a cryptocurrency. Clearly any citizen would have retained their wealth relative to the rest of the world if they had held it in a cryptocurrency, but the same would have been true if the held US dollars. At the end of the day they would have needed to buy bread, say, made from foreign wheat, but in short supply. The price, in whatever currency, would have risen. The intangible bitcoin might move unimpeded across national boundaries but tangible food products might not.
The Bitcoin is claimed to be deflationary, the limited supply ultimately driving the price up. Is this a good thing? The saver retains their wealth and gains value by delaying any expenditure, not so good for the potential seller. The borrower is faced not only with interest payments but the capital that has increased in value. Rightly or wrongly we live with a debt economy, the bill will be paid tomorrow with borrowed money.
Underpinning cryptocurrencies are blockchains. It was interesting to hear that this technology has other applications and the potential to find many more. The ability to obtain value from micro-transactions could lead new and interesting commercial models.
This was a very interesting talk, without doubt introducing concepts that were novel to many of us and alerting us to some important issues and trends.
Notes:
'What Is The Environmental Impact Of Bitcoin Mining?' Coin Central 11 June 2018
Szabo had described contacts created by the human brain as 'wet' and those using computer code as 'dry'. The terms have been used to differentiate between contracts involving sea voyages, 'wet', and contracts to get around Roman Catholic law relating to interest charges, 'dry', going back to Genoa in AD 1271. Just to add confusion computing science has a concept that blocks of code should be re-usable, leading to the expression 'Don't Repeat Yourself', (DRY), as opposed to 'Write Everything Twice' or 'Write Each Time', (WET)! - 'A Formal Language For Analyzing Contracts' Szabo, Nick (Draft 2002)
Daniel Wong of University of California-San Francisco (UCSF) protypes a blockchain-based system to accept data from individual patients taking part in clinical trials. “It makes it relly obvious when someone is changing something, you can see who put their hands on it, who made it, who changed it and who received it.” Could blockchain ensure integrity of clinical trial data? E&T Vol. 14 Iss. 4 May 2019
Commercial links:
Cuberoot64 – Anthony Parker's Company website
Getting Started With Bitcoin– Bitcoin.org site
Ethereum App Platform – Ethereum.org site
ledger nano s – cryptocurrency wallet
trezor – cryptocurrency wallet
Wikipedia links
Bitcoin - Cryptocurrency
Silk Road - Illegal Drug Market
Mt. Gox - Defaulting bitcoin currency exchange
Blockchain – Technology underlying cryptocurrencies
P2P Networks – Peer-to-peer networks
Double-spending – Fraudulent spending
Ethereum – Smart contract platform
