Will cryptocurrency really change the world?
You may be reading this and wondering, “What the heck is cryptocurrency? Shouldn’t I know about this thing that may or may not change the world?”. Right now, Bitcoin is the most used cryptocurrency — you are probably more familiar with Bitcoin. Cryptocurrency is a method of moving money securely over the Internet, and it can even be done anonymously if desired. Bitcoin does just this, it transcends identity and national currencies by establishing itself as a self-regulating worldwide currency.
Cryptocurrencies can vary quite a bit; since Bitcoin is the current standard, I will use it to explain a type of cryptocurrency. Bitcoin was set in motion by one or more individuals operating under the moniker Satoshi Nakamoto via a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. In this paper, Nakamoto describes a peer-to-peer system in which the users are the exchange system, i.e. no third parties are involved in any transactions, which makes it the first system that is considered “decentralized”.
Rather than a federal mint printing out cash, Bitcoins are also generated by the users through what’s known as a hashing algorithm. In short, the output of a highly complex mathematical function is made public, and users known as Bitcoin “miners” use their computers to test possible inputs. The number of possible inputs is in the billions, so being the first miner to determine the correct input is highly rewarded. As of this writing, the miner receives 12.5 Bitcoin, which is almost $20,000! Their correct input is tacked onto what is known as the “blockchain”, which is a decentralized ledger recording all transactions that have occurred over the Bitcoin network.
The benefits of a decentralized currency go beyond convenience and anonymity — they can mend the flaws in financial systems that result from our reliance on banks and other financial institutions. This property is explored in Quoc Khanh Nguyen’s paper titled Blockchain — A Financial Technology For Future Sustainable Development. Nguyen looks at financial vulnerabilities such as market bubbles and money laundering, and looks at ways that a decentralized system could affect how vulnerable we are to them. The presence of the blockchain means money transfer is “more transparent” and thus less vulnerable to money laundering. On the other hand, Nguyen points out that it reduces competition between banks as a decentralized system is, by nature, shared by all. Nguyen concludes that cooperation with a decentralized financial system benefits consumers and the economy in general (2).
The points that Nguyen makes appear a bit strange to me, especially the one about fixing a vulnerability in money laundering. While it is true that the blockchain records all transactions between users, essentially creating a global and historical ledger viewable to anyone and everyone, the transactions are shown only as exchanges of Bitcoin between one Bitcoin Address and another Bitcoin Address. Bitcoin Addresses are what makes the Bitcoin Network attractive to users who wish to maintain anonymity; a Bitcoin Address has no inherent ties to an individual, group, or entity, it is simply a string of numbers and characters. To tie a transaction to a specific person would require knowing said person’s Bitcoin Address, and to determine that a transaction is illegal would require knowing both the sender and the recipient’s Bitcoin Address.
What does this mean, then? How hard is it to tie a Bitcoin Address to another identity? It is actually not so difficult; if you browse any exchange in which people are buying and selling with Bitcoin, the addresses must be public if anyone is to send or receive funds. However, those addresses are linked to usernames, not real identities. In a way, Nguyen is wrong about illegal activity, such as money laundering, being detectable in a Bitcoin Network… but only if we assume that Bitcoin users are properly disassociating their online identities from their real identities. As a result, the burden of hiding identities is pushed more on the end user; that is one of the effects of utilizing a decentralized system!
In a world governed by a single, decentralized financial system, there are concerns with how a single system will hold up in changing times. One such concern is known as “algorithmic authority”, the “trust in algorithms to direct human action and to verify information, in place of trusting or preferring human authority” (3). Caitlin Lusting and Bonnie Nardie of UC Irvine investigate this property in Algorithmic Authority: The Case of Bitcoin. In this paper, Lusting and Nardie dismiss the notion that Bitcoin users are blindly trusting in an algorithm but rather are versed in the social benefits of decentralizing currency. They also discuss how algorithmic authority is often seen as rigid and impossible to modify by humans when, in reality, humans have the authority to determine which algorithm they use to conduct financial actions. In other words, if a certain currency algorithm falls under doubt, users can move to other algorithms (3).
One aspect of cryptocurrency, Bitcoin in particular, that is often overlooked is the impact it has on energy usage. Cryptocurrencies are commonly regulated through intensive computation, and anything involving a high amount of computing will utilize a proportionally high amount of power. Karl O’Dwyer and David Malone of the Hamilton Institute look into the feasibility of Bitcoin when energy draw is taken into account in their paper Bitcoin Mining and its Energy Footprint. The self-regulation of Bitcoin results in more computation and more energy usage for each subsequent generation of Bitcoin. At the writing of this paper, O’Dwyer and Malone determined that Bitcoin mining on the individual level, using “commodity hardware”, uses up more money in energy use than is gained through Bitcoin generation. This flaw in Bitcoin is much like those that would drive people to other algorithms (Litecoin, Dogecoin, …), reducing the aforementioned algorithmic authority (4)!
Personally, I got to experience Bitcoin’s energy usage flaw in an academic setting during my Senior year of Computer Engineering undergrad. In Fall 2016, I got to lead a capstone project developing a Bitcoin Miner. A Bitcoin Miner is a piece of hardware solely dedicated to running the algorithm to [potentially] generate a hefty reward of Bitcoin, if we were to get lucky. The amount of times your Miner performs this algorithm is measured in “Hashes”, so the speed is measured in hashes/second. We spent the entire semester developing our Miner to use the hardware in the best way possible, making use of every feature available on the board. Alas, our efforts were [somewhat] fruitless.
What happened to our project was an oversight on a single feature of the board we were developing on: block RAM. We used devices known as registers, which are extremely fast but low capacity, to hold our values. What we failed to realize was that by using these low-capacity registers, our board had to slow itself down in order to keep from using more registers than were available. If we had used block RAM, we could have gotten speeds that blew our actual speeds out of the water. In the end, our project was about a hundred times slower than it needed to be in order to break even between energy cost losses and Bitcoin gains. In a word, we created a device that used 99% of its energy to create heat and noise.
The advent of cryptocurrency was the release of Bitcoin, which is still the leading decentralized currency. The benefits of a decentralized currency, however, are not exclusive to Bitcoin. Since Bitcoin’s flaws are growing each day, there will likely be a move to another algorithm before cryptocurrency has any hope of catching on for the general public. So to answer the title question: in my opinion, cryptocurrency is changing and will continue to change the world, but it probably won’t be Bitcoin that survives the cut.
1. Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system.
2. Nguyen, Q. K. (2016, November). Blockchain-A Financial Technology for Future Sustainable Development. In Green Technology and Sustainable Development (GTSD), International Conference on. IEEE.
3. Lustig, C., & Nardi, B. (2015, January). Algorithmic authority: The case of Bitcoin. In System Sciences (HICSS), 2015 48th Hawaii International Conference on. IEEE.
4. O’Dwyer, K. J., & Malone, D. (2014). Bitcoin mining and its energy footprint.
