Deciphering the Bitcoin

Communicating through the Cypherpunk’s emailing list in 1998, Wei Dai suggested the use of a cryptocurrency that was entirely run by the community that participates in it, rather than an exclusive authority. This idea was not put into practice until 2009 when the mysterious Satoshi Nakamoto released the skeleton of Bitcoin (BTC) and it became the first decentralised cryptocurrency. In 2015, over a hundred thousand transactions are made every day using this digital tender.

The Bitcoin System works using a block chain. Each block represents and contains information about confirmed transactions made using Bitcoin. This entire history is maintained and stored in a user’s wallet, where they also store their own personal BTCs. The block chain is essentially a community ledger of all transactions that have ever been made with Bitcoin and this is why it is classed as decentralised and also transparent.

The block chain is maintained using cryptography, and thus why Bitcoin is a cryptocurrency. Beginning with the first block, every one that comes afterwards contains information about the previous block. This means that BTCs cannot be re-spent as each coin’s unique identities are recorded.

However, a transaction must be confirmed by a Miner in order to be completed. Blocks contain a unique answer to an extremely difficult mathematical equation. In order to add a new block to the ledger you must find the answer to this problem, and this is called Mining. Miners have incentive to include outstanding transactions in their computations as users can offer transaction fees that are given to the miner that solves the equation. Once it is solved, all the transactions that the miner included in the block will be confirmed and completed. The first of these transactions that can be found in a single block is the generation and transference of new BTCs to the miner as a reward for finding the answer.

The flow of currency is regulated in two ways. Firstly, the difficulty of the mathematical problems that need to be solved is set so that approximately one block is added every ten minutes. After 2016 blocks have been added, the network modifies the difficulty depending on how often blocks were added following this ten minute rule. If blocks were solved at a faster rate, the difficulty is increased, if the blocks were mined slower, the difficulty is decreased. Secondly, the reward for mining is predetermined by an algorithm that slowly decreases the amount over time. It was designed to mirror the flow at which other perishable commodities are mined, such as gold. This system is at complete odds with governments that are in control of the flow of a re-printable currency and another reason Bitcoin is decentralised. Between 2009 and 2013 you were rewarded with 50 BTCs per block, however this amount halves every four years. Right now six blocks can be added to the chain per hour, and the amount of BTCs you are rewarded for each block is 25. Satoshi Nakamoto set the total amount of BTCs that can be mined at 21 million, and the final one will be exhausted in 2140. 14,766,925 Bitcoins have been mined as of the publication of these words.

You can use a variety of hardware to mine BTCs, and some are better than others. GPUs (graphics processing units) are better than CPUs (central processing units), FPGAs (field-programmable gate arrays) are better than GPUs and ASICs (application-specific integrated units) are better than FPGAs.

ASICs are designed for the sole purpose of mining cryptocurrencies (that are able to be Mined with ASICs, like BitCoin). They mine much faster than even the highest end consumer grade hardware. To put it into perspective, the fastest GPU produces between 1–2 kilohash (which is the unit of measurement that tells you how quickly you are mining), whereas ASICs can produce up to 1500 gigahash. ASICs also have a very small amount of power consumption when mining. If you are not using ASICs it is imperative to minimise your electricity usage, as your bill can exceed profit made.

There are other cryptocurrencies out there. Including Ripple, LiteCoin, Ethereum, Dash and DogeCoin. However Ripple, LiteCoin and Ethereum are the three main cryptocurrencies by market capitalisation behind BitCoin. Since BTC’s inception, 667 cryptocurrencies have appeared.

The current price of a single BTC in the AUD is approximately $400. In order for users to make purchases, it can be divided down to eight decimal places, 0.00000001 (otherwise known as a Satoshi).

The Bitcoin System is inherently not anonymous at all, however with care you can anonymise your purchases. When you want to make a transaction, you must send a randomly generated numerical address to the other person so they can do business with you. Despite it being recorded that one address sent BTC to another address, these are just numbers and have no identifying qualities to them. But it is possible for your identity to be found if someone is able to make a connection to you by conducting surveillance on address patterns. It is therefore encouraged to create a new address every time you make a new transaction.

But what is the point of a cryptocurrency that can create anonymity? Anonymity is an Ultimate freedom. Fame is a limited freedom. Fame essentially grants you attention. The freedom that this brings puts you into a cage that can include money and power, however all eyes will be watching you. This doesn’t mean you will stop doing what you want, but if you go too far, for example committing a crime, the same eyes that put you in that cage will put you into a different sort of cage: jail. In jail you have no freedom, no matter how famous you are. The purpose of jail is to relinquish freedom.

Anonymity is the opposite of attention. No one is watching you, and you are not in any form of cage. Absolutely no one knows of your existence. You are then free to do anything. However once you do make a move, you start leaving a trail, and if anyone cared enough to notice, could trace them to you and your identity would be revealed. But if you were able to cover up the processes of that trail you would retain your anonymity. Imagine being able to do whatever you wanted without anyone knowing. That is Ultimate freedom.