It’s not about the money. Ok, it’s about the money.

Decentralized trust networks are the core of the thing we are talking about when we discuss Bitcoin, Ethereum, and other cryptocurrencies. Cryptocurrencies rely on decentralized trust networks and vice versa. They stack.

Decentralized trust networks

Blockchain is a popular way to implement a decentralized trust network. In my previous article, to simplify things, I intentionally did not use the term “blockchain” — instead, I just described it. The blockchain is the ever-growing, public ledger of transactions that network users copy to their computers and keep updated (through software applications called nodes). Here are node maps for Bitcoin, Ethereum, and Litecoin.

Decentralized trust networks* — also called consensus networks — that use blockchain depend on cryptocurrencies to provide the incentive for keeping the whole network running smoothly. Bitcoin, Ethereum (for now), and many other cryptocurrencies use proof-of-work (POW) algorithms for linking (hashing) the recent blocks of transactions in the particular network onto the respective blockchain (linking and recording the transactions permanently).

Electricity hog

There are other algorithms besides POW for figuring out consensus when permanently recording transactions: proof-of-stake, Ripple, hashgraph, and more. However, the POW algorithm is a popular one. Unfortunately, POW algorithms require a lot of computing power to run.

Icelandic Bitcoin mining operation has a power bill of 1 million euros per month

It’s not just Bitcoin that is power-hungry. Ethereum uses a different type of algorithm (Ethash) than Bitcoin (hashcash), but it still a POW algorithm and also requires a lot of electricity.

Mining rewards decline toward the cost of electricity over time

No money, no blockchain

Without some kind of monetary incentive, miners in a cryptocurrency network would drop out, the computing power of the network would plummet, and, although transactions would still be generated by users, there would not be miners to put the transactions into blocks in the public ledger (blockchain). As a result, transactions would not be confirmed so people would stop trusting and using the cryptocurrency.

The coins earned from successfully hashing the blocks of transactions onto the blockchain is what fuels the network. For Bitcoin, each successfully hashed block of transactions earns the miner 12.5 Bitcoins (as of July 2017) plus the sum of all the transaction fees within the block. Those transaction fees are added onto transactions by senders of Bitcoins to ensure their transactions get picked up in the next block of transactions added to the blockchain (fees negotiable). This mechanism of miners linking blocks of transactions to the blockchain to earn fees is a common pattern among cryptocurrencies.

Money makes the world go around

So, even though cryptocurrencies are applications that are implemented using decentralized trust networks, many of today’s decentralized trust networks would not work properly without cryptocurrencies. Thus, yes, Liza, money does make the world go around, including the world of decentralized trust networks.


Homework

You can keep reading these articles in a passive nature, but I think you’ll get a lot more out of the discussion about blockchain and applications if you become an active participant:

  • Set up an exchange account: Exchanges are where you can buy cryptocurrencies for government currencies. Coinbase is a reputable one with VC funding from Union Square Ventures and others. Setting up an account through this link will give both of us a bonus.
  • Buy a small amount of currency: Once the the account is set up then buy a small amount of Bitcoin, Ether, or Litecoin. It doesn’t really matter which one, but don’t go overboard with your purchases. It will take about a week for you to actually get the currency in your exchange account. We’ll then discuss what you can do with your cryptocurrency later.

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