Cryp­tocur­ren­cies 101

THEY’VE TAKEN THE TECH WORLD BY STORM BUT WHAT ARE CRYP­TOCUR­REN­CIES AND HOW DO THEY WORK? TECHLIFE DIVES THROUGH THE HYPE AND LOOKS AT THE BA­SICS OF NEW DIG­I­TAL CUR­REN­CIES.

TechLife Australia - - CONTENTS - [ DAR­REN YATES ]

UN­LESS YOU’VE BEEN liv­ing a self-im­posed dig­i­tal detox for the last year, it’s been tough to miss the sky­rock­et­ing hype sur­round­ing cryp­tocur­ren­cies and Bit­coin in par­tic­u­lar. News of spec­u­la­tors mak­ing mil­lions from in­vest­ing in dig­i­tal cur­ren­cies are of­ten off­set by sto­ries of im­mi­nent car­nage as bub­bles burst and in­vest­ments slide. Still, what ac­tu­ally is a cryp­tocur­rency, how does it work and what can you do with it?

WHAT IS A CRYP­TOCUR­RENCY?

A cryp­tocur­rency is its own vir­tual, dig­i­tal cur­rency — you can’t phys­i­cally hold it, but you can spend it like nor­mal cur­rency where it’s ac­cepted. How­ever, it’s more ac­cu­rate to de­scribe it as a se­ries of trans­ac­tions stored in a global database — and in that re­gard, there’s ar­guably less dis­tance be­tween dig­i­tal and phys­i­cal cur­ren­cies than ever be­fore.

Over the last few years, there’s been grow­ing chat about Aus­tralia be­com­ing a ‘cash­less so­ci­ety’, pos­si­bly even as soon as 2020. With in­ter­net bank­ing, EFTPOS and credit cards, Ap­ple Pay and An­droid Pay, you could ar­gue we’re nearly there al­ready. These dig­i­tal mech­a­nisms are links to the Aus­tralian dol­lars we have in our bank ac­counts, but think about this — how of­ten do you see those dol­lars? The prac­ti­cal re­al­ity is our money ex­ists as en­tries in a database and when we buy that DVD se­ries on eBay, we’re dig­i­tally trans­fer­ring amounts of cur­rency from one ac­count to another in re­turn. In Aus­tralia, those trans­ac­tions are con­firmed by your bank and the bank of the ser­vice or prod­uct provider, fi­nan­cial in­sti­tu­tions reg­u­lated by Aus­tralia’s cen­tral bank, the Re­serve Bank.

HOW CRYP­TOCUR­REN­CIES WORK

But here’s where cryp­tocur­ren­cies dif­fer — cryp­tocur­ren­cies typ­i­cally have no reg­u­lated, cen­tralised con­trol. In­stead, they use a dis­trib­uted database or ledger that works a bit like peer-to-peer file-shar­ing. The database doesn’t ex­ist in any one lo­ca­tion on a main sys­tem or or­gan­i­sa­tion's server — it ex­ists over a net­work of equal-ranked com­put­ers or ‘nodes’, where each node on the net­work has ac­cess to the en­tire database. When you make a trans­ac­tion us­ing a dig­i­tal coin, it first must be checked that you have that coin to spend. The trans­ac­tion then has to be writ­ten to the ledger, a task per­formed by ‘min­ers’, com­put­ers set up for this pur­pose. As you’d ex­pect, this isn’t sim­ply writ­ten down on the next blank line of a ledger book. The ‘crypto’ in 'cryp­tocur­rency’, you might have guessed, refers to the fact that all of these trans­ac­tions are recorded in en­crypted form. To en­sure the ac­cu­racy and per­ma­nency of the ledger, your trans­ac­tion must first be added to oth­ers to form a group or ‘block’. The next step is adding this block to the pre­vi­ously-recorded blocks in the ledger and this is where the con­cept of the ‘blockchain’ comes from — it’s lit­er­ally a chain of blocks, each con­tain­ing many trans­ac­tions.

But here’s the clever bit — be­fore a new block can be added to the blockchain, the block’s trans­ac­tion data is com­bined with a num­ber that pro­duces a spe­cial code or ‘hash’ that starts with a par­tic­u­lar num­ber of ze­ros. How do they find the num­ber? Lit­er­ally, by guess work.

Min­ers are in a race to dis­cover these un­known num­bers or ‘nonces’ (num­ber used once). Once a miner has dis­cov­ered a valid hash, it gets to write a block of trans­ac­tions, be­com­ing the next block in the blockchain.

Cryp­to­coin-min­ing is this process of dis­cov­er­ing block nonces, cre­at­ing new blocks and writ­ing them to the ledger, but be­cause of the com­pu­ta­tional com­plex­ity in­volved and to in­cen­tivise them to con­tinue the word, cryp­to­coin min­ers are re­warded with coin of their own. Early on, the re­ward for writ­ing a valid block to the Bit­coin blockchain was 50 bit­coins — but back when one bit­coin was worth only a few US dol­lars, so bit­coin-min­ing was for the die-hards mostly. Mean­while, that block re­ward num­ber re­duces over time, halv­ing ev­ery four years or so. To­day, it’s only 12.5 bit­coins — but at US$8,000 per bit­coin, that’s US$100,000 and as you can imag­ine, bit­coin-min­ing is fast be­com­ing a pop­u­lar busi­ness.

CAN’T BUY A PC GRAPH­ICS CARD?

So there are two ways you can the­o­ret­i­cally get into a cryp­tocur­rency like Bit­coin — you can ei­ther buy it or mine it. For a while in the early days, a rea­son­ably pow­er­ful home com­puter was enough to mine coins at a sus­tain­able rate and make a bit of money on the side. How­ever, as elec­tric­ity prices rose, and com­bined with Bit­coin’s rel­a­tively-static value and fall­ing block re­ward rate, costs be­gan to over­take and only the en­thu­si­asts con­tin­ued. More re­cently, Bit­coin’s boom­ing price has seen coin min­ers come out of the wood­work, build­ing high-end sys­tems to crank up min­ing op­er­a­tions.

At the same time, PC gamers be­gan notic­ing a rise in PC video card prices due to an in­creas­ing card short­age. Ac­cord­ing to re­ports, prices for cards such as Nvidia’s GeForce GTX 1080 or AMD’s Radeon RX 580 have dou­bled as the frenzy deep­ened. A look at lo­cal sup­pli­ers showed mid-range cards such as the GTX 1070 were of­ten un­avail­able.

But why graph­ics cards? You can mine cryp­tocur­rency with al­most any com­puter — even a small Rasp­berry Pi. How­ever, PC graph­ics cards fea­ture many small-scale but very fast pro­cess­ing ‘cores’ that are not only ideal for gen­er­at­ing vivid 3D gam­ing graph­ics, they’re also suited for pro­cess­ing the cal­cu­la­tions as­so­ci­ated with min­ing crypto-coins.

The prob­lem is, with so many now com­pet­ing in the race to mine coins, in­clud­ing com­mer­cial min­ers us­ing much faster FPGA (field-pro­gram­mable gate ar­ray) and ASIC (ap­pli­ca­tion-spe­cific in­te­grated cir­cuit)-based sys­tems, plus the ever-grow­ing com­plex­ity in find­ing a valid nonce, its ques­tion­able whether home min­ers can even make back the elec­tric­ity bill these days, let alone turn a profit.

HOW MANY DIG­I­TAL CUR­REN­CIES?

If you have only a pass­ing in­ter­est in dig­i­tal cur­ren­cies, you’ve prob­a­bly heard of Bit­coin, you may have heard of Ethereum, or even Lite­coin. As of Fe­bru­ary 2nd this year, cryp­tocur­rency mar­ket track­ing web­site Coin­mar­ket­cap ( coin­mar­ket­cap.com) fol­lowed around 1,500 dig­i­tal cur­ren­cies, worth col­lec­tively a lit­tle over US$400 bil­lion. About a third of that be­longed to Bit­coin at US$142 bil­lion, each Bit­coin then worth just un­der US$8,500, fol­lowed by Ethereum with a mar­ket cap­i­tal­i­sa­tion of US$85bil­lion. Even num­ber 25 on the list — Zcash — made the bil­lion­aire’s club at US$1.129 bil­lion to­tal. More sur­pris­ingly, there were 743 dig­i­tal cur­ren­cies with a val­u­a­tion of at least US$1 mil­lion as of Fe­bru­ary 2nd. But as you’ll quickly dis­cover, cryp­tocur­rency val­u­a­tions can be a very volatile busi­ness.

THE BIT­COIN BOOM

The hype be­hind dig­i­tal cur­ren­cies has been fu­elled in no small por­tion by the me­te­oric rise in the value of Bit­coin. From a prac­ti­cal value of less than one cent per Bit­coin back in May 2010, it had risen to $13 by the end of 2012. By April the fol­low­ing year, it peaked at $266. When we cov­ered blockchain tech­nol­ogy in this col­umn back in Oc­to­ber 2016, it had spent the last two years trad­ing in a range be­tween $500 and $800. It broke new ground in March 2017, top­ping $1,300 and then went for a run, catch­ing the main­stream me­dia as it reached US$2,000 by May, $5,000 by Septem­ber (and this is where things get white-knuckle) be­fore hit­ting the sum­mit of US$17,900 in De­cem­ber. Bit­coin’s in­cred­i­ble run even prompted a fa­ther-of-three in the Nether­lands into sell­ing ev­ery­thing he owned — in­clud­ing a house worth 300,000 Eu­ros — in part at least to buy Bit­coins.

Still, noth­ing de­fies grav­ity for­ever and the in­evitable cor­rec­tion fol­lowed. By the end of Jan­uary 2018, the price had plum­meted nearly 50% from its De­cem­ber 2017 peak to be US$9,850. It then fell another US$1,000 on Fe­bru­ary 1st alone, as more than US$100 bil­lion was slashed from the cryp­tocur­rency mar­ket in just 24 hours.

MAKE YOUR OWN CRYP­TOCUR­RENCY?

The Bit­coin Boom also brought along for the ride many of its com­peti­tors, al­ter­na­tive coins or so-called ‘alt­coin’, such as Ethereum and Lite­coin. The dig­i­tal cur­rency hype be­came so in­fec­tious, just an­nounc­ing a cryp­tocur­rency was in the works seemed enough to light a rocket un­der a com­pany’s share price. Ko­dak was best known for mak­ing film cam­eras, yet in the days im­me­di­ately fol­low­ing its 9th Jan­uary 2018 an­nounce­ment of plans to launch its own cryp­tocur­rency, Ko­dakCoin, the com­pany’s share price tripled as in­vestors piled onto the bus. By early Fe­bru­ary, the share price had slid back to un­der US$7, but still well above its pre-an­nounce­ment lev­els.

That got us think­ing — if a cam­era com­pany can set up its own cryp­tocur­rency, is it pos­si­ble to make your own? As it turns out, there are sev­eral ‘alt­coin’ ser­vice providers that of­fer, for a fee, to take care of the blockchain tech man­age­ment for you. But if you have C++ cod­ing skills, you can do it your­self — the source code for Bit­coin and Lite­coin is avail­able on the GitHub source-code re­pos­i­tory. How­ever, you just can’t cre­ate a new coin and ex­pect ev­ery­one to jump on-board — con­sen­sus seems to be you gen­er­ally need a user com­mu­nity to get things mov­ing. That’s where busi­nesses, with their cus­tomer base and loy­alty pro­grams, would seem to have ready-made com­mu­ni­ties for the job.

WHAT SETS A CRYP­TOCUR­RENCY’S WORTH?

The value of a cryp­tocur­rency is de­ter­mined by many dif­fer­ent fac­tors, such as scarcity of the cur­rency, fear of gov­ern­ment reg­u­la­tion and good-old fash­ioned hype, but ul­ti­mately, its value is set by ba­sic sup­ply and de­mand. Yet, while most cryp­tocur­ren­cies aim to be al­ter­na­tives to tra­di­tional cen­trally-con­trolled cur­ren­cies, you’re likely to see a sig­nif­i­cant change come over the cryp­tocur­rency land­scape in the next few years, thanks largely to loy­alty pro­grams.

Busi­nesses have used loy­alty pro­grams to keep cus­tomers com­ing back for years — just look in your wal­let. How­ever, many loy­alty schemes will likely suf­fer from two ma­jor lim­i­ta­tions — you’ll be lim­ited in how you can spend your points and, af­ter a pe­riod of time, those points will of­ten ex­pire. Cryp­tocur­ren­cies are start­ing to be seen by big re­tail­ers as a way out of the prob­lem. Here’s an ex­am­ple that’s lit­er­ally ‘food for thought’ — Burger King in Rus­sia launched ‘Whop­per­coin’, its own cryp­tocur­rency, as a loy­alty pro­gram in 2017. Buy a burger and you get coins in your dig­i­tal wal­let. The value of the coins comes by be­ing able to re­deem the coins for burg­ers (one burger will cost you 1,700 Whop­per­coins), but also by trad­ing them with other coin hold­ers.

A re­cent trial of a cryp­tocur­rency loy­alty scheme in­volv­ing stu­dents and fac­ulty at the Univer­sity of New South Wales, backed with New South Wales Gov­ern­ment sup­port, has been an early ex­am­ple here. We reckon it won’t be the last, so ex­pect cryp­tocur­rency loy­alty re­ward pro­grams to take off over the next few years.

THEFTS AND RISKS

The blockchain tech­nol­ogy be­hind cryp­tocur­ren­cies might well en­sure the le­git­i­mate owner of coins en­joys the spend­ing power of those coins, but it can’t nec­es­sar­ily pre­vent them from be­ing stolen. Ear­lier this year, Ja­pan’s Coincheck dig­i­tal cur­rency ex­change alerted in­vestors in the ‘NEM’ cryp­tocur­rency that its net­work had been bro­ken into on Jan­uary 25th and around US$530 mil­lion worth stolen. It was later re­ported the funds were stolen from an on­line wal­let rather than a more se­cure off-line op­tion, rais­ing ques­tions of why that much cur­rency wasn’t more se­curely stored. Cryp­tocur­rency thefts are not un­heard of — the Mt. Gox ex­change re­port­edly suf­fered losses from Bit­coin theft of ap­prox­i­mately US$460 mil­lion be­fore it halted trad­ing in 2014.

Mean­while, fi­nan­cial in­sti­tu­tions are grow­ing in­creas­ingly wary of dig­i­tal cur­ren­cies and Bit­coin in par­tic­u­lar. The head of Eng­land’s Fi­nan­cial Con­duct Author­ity, An­drew Bai­ley, hasn’t minced his words when it comes to Bit­coin. “If you want to in­vest in Bit­coin, be pre­pared to lose your money — that would be my se­ri­ous warn­ing,” Bai­ley told the BBC in De­cem­ber 2017. In Fe­bru­ary 2018, Face­book even banned all ads pro­mot­ing cryp­tocur­ren­cies, in­clud­ing Bit­coin.

BLOCKCHAIN’S HEALTHY FU­TURE

While cryp­tocur­ren­cies ap­pear set to con­tinue their rocky ride, blockchain tech­nol­ogy con­tin­ues to be re­searched for a range of al­ter­nate ap­pli­ca­tions. One of those ar­eas is elec­tronic health records (EHR), where re­searchers are in­ves­ti­gat­ing tech­niques for ap­ply­ing blockchain tech to man­age ac­cess to pa­tient med­i­cal data.

Much in the way cryp­tocur­ren­cies use blockchain tech to store trans­ac­tions, re­searchers are de­vis­ing sys­tems to im­ple­ment blockchain as a per­ma­nent record of all ac­cesses to per­sonal data. In 2017, Deep­Mind — the ar­ti­fi­cial in­tel­li­gence unit launched by Google’s par­ent com­pany, Al­pha­bet — an­nounced plans to de­velop such a sys­tem and is work­ing with hos­pi­tals in the UK.

In­creas­ingly, the value of med­i­cal data is be­ing seen through ma­chine-learn­ing and other ar­ti­fi­cial in­tel­li­gence meth­ods search­ing for treat­ments for a range of med­i­cal con­di­tions and dis­eases, from men­tal health to can­cer. Con­cur­rently, re­search is look­ing into ways of anonymis­ing the data so that it still pro­vides health re­searchers with the raw ma­te­ri­als they need, with­out iden­ti­fy­ing the per­son the data de­scribes.

BLOCKCHAIN’S THE KEY

As eye-catch­ing as cryp­tocur­ren­cies are, the real story here is the rise of blockchain and the cryp­tog­ra­phy tech­nolo­gies com­bin­ing with it. With talk of it be­ing used in ev­ery­thing from po­lit­i­cal elec­tions to elec­tri­cal power gen­er­a­tion, a dis­trib­uted ledger act­ing as a per­ma­nent record that’s dif­fi­cult to hack is tech that’s quickly gain­ing the in­ter­est of gov­ern­ments, in­dus­try and univer­sity re­search around the world.

Gart­ner sees Blockchain slid­ing into the trough of dis­il­lu­sion­ment.

Google off­shoot Deep­Mind plans for blockchain to pro­tect med­i­cal records.

Coincheck suf­fered theft of $500 mil­lion of NEM cryp­tocur­rency in early 2018.

Bit­coin reached a peak value of near US$20,000 each in De­cem­ber 2017.

New re­search could bring blockchain in to pro­tect per­sonal med­i­cal records.

Coin-min­ing is ap­par­ently to blame for a global short­age in PC graph­ics cards.

Could smart­phones of the fu­ture be blockchain-pow­ered?

Ko­dak’s share price tripled on news it was to launch its own cryp­tocur­rency.

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