Blockchain as Poker: Part 2
This is a followup Article to “Blockchain as Poker”. Read that or this won’t make any sense! This article extends on the Blockchain as poker metaphor to explain Miners, Inflation and Growth, Cryptocurrency, Scaling, Exchanges, and Gas.
Getting Complex
More people want to join your game, Bill is fed up dealing with doing the paperwork every week, it’s becoming annoying to add new people, and Kurt’s wife is fed up with the poker game.
Miners
First let’s take care of Bill.
The group decides that Bill’s job, being annoying and time consuming, is worth an extra ten free chips each game he does the accounting for. Those chips will be new, and thus will slightly deflate the value of everyone else’s chips over time. It’s a tiny amount, but to avoid too much deflation the group decides that this is the only way new chips will ever come into the game, so there will only be a few new chips each time there is a poker game (once a week for now). If the group agrees to switch off on who has to make the new page and hand it out, that new person who does the work will get the ten chips.
Bill is the miner, the person creating and receiving the new cryptocurrency in return for creating new blocks (or chips and pages, in this example). It is a bit more complicated than that, but we will get there (and here is a nice little video on it too).
Inflation and Growth
Everyone has been raving about your poker game, and Ella wants in. She wants to buy in for $100 like everyone else, but the group has decided they can’t make any more chips (other than Bill’s fee), even if someone is buying them. So Ella buys $100 worth of chips from others in the group, and everyone’s binder get’s updated. Suddenly there are still 1000 chips in the game, but they are worth $1.10 each, with Ella’s extra $100 in there. Ella get’s her own binder, and gets not only the latest page, but a copy of every past page when she joins, so that her binder matches everyone’s in the group.
Ten weeks pass and it’s still just the 11 of you. You’ve been adding 10 chips each week to give to Bill, so now you have 1100 chips, and even with Ella’s extra $100 they are worth $1 a chip again.
Cryptocurrency
The poker chips in our game are a cryptocurrency, like Bitcoin, Ethereum, Ripple, IOTA, LiteCoin, Dash, DogeCoin, and dozens more. You can think of those cryptocurrencies as each being their own poker game, each having its own shared ledger, and an independent value that in general is based on how many dollars (or Euros, etc.) have been put into those chips and how much people are willing to pay to buy into the game. They also have some different rules and specializations. At least 5 cryptocurrencies have gone up over 100,000% (that is not a typo) in value since their ICOs as well, so they are worth paying attention to.
ICO stands for Initial Coin Offering, and refers to the selling of the first 1,000 chips in our poker game (or however many coins the new blockchain will start with). It’s kind of like a combined launch and IPO for cryptocurrency, it’s when the network goes live and when the money is raised for that company. ICOs have raised more than 1.8billion in 2017 alone.
You might also hear the term Token Generation Event, or Public Token Sale, in most cases they are basically the same thing as an ICO. Buying into an ICO may be appealing (and for investors are becoming an important part of the game), but keep in mind the risks (and factors to be aware of when researching) as well as those juicy 100,000% rewards.
Scaling
So how can Bitcoin’s price go up as much as it has, in our poker game? Well, Ella has friends, and 99 more people want to join our game. It’s still week 10, so there are still only 1100 chips. For 110 people. If each of those 99 people buy in for 100$, suddenly each poker chip has gone from 1$ to 10$. They’ve gone up 10x in value (110 people*$100 =$11,000 bought in / 1100 total chips).
And then things get crazy, everyone wants to join the poker game.
Bill gets a dozen accounting buddies to join to keep up with the pace. Games start happening simultaneously. Each accountant is getting 10 chips each time a game happens, and that accountant updates the ledgers and hands everyone a new page. The amount of chips is growing, as is their value with each person who buys in. Everyone has these gigantic binders (all 110 of you). The people who bought the first chips are crushing it, except for Todd, who lost almost all his chips week two. Poor Todd.
The value of the poker chips (or currency) is scaling nicely, but some things were not perfectly thought out. People have to get a second and third binder, and then a bankers box. And Bill’s job has gotten nasty, it’s taking him hours to go through the records each week, but it’s still worth it because his coins are now worth so much more. It’s become his full time job.
Consensus and Mining
Because the poker game is so big, it’s become important not just to record when chips change hands, but to verify the correctness of all the transactions. Everyone trusts Bill, but now we have a dozen accountants, and we need a way to ensure they are qualified and doing a good job.
We decide that in order for Bill and his new accountants to prove that they have the accounting chops to keep up with everyone’s transactions, they each have to do a really hard math problem, and solve it faster than anyone else, to keep being in charge of new pages/blocks and thus earning their 10 tokens. This math problem, which gets harder the bigger the game gets, is called Proof-of-Work, and it’s Bitcoin’s consensus method. If someone solves the problem faster than Bill, they are more qualified and get to write and hand out the new block. When networks are big, lots of people can be working on math problems at the same time, and keeping track of all the transactions, just like we need lots of accountants to handle all of our poker games.
Block-time is how long it takes to solve that math problem, and how often everyone gets a new page in their binder. For our poker game, block-time is a week. For Bitcoin, block-time is about ten minutes. Other protocols are bringing this down to a few seconds, meaning transactions are updated more and run more efficiently.
Proof-of-work unfortunately requires a math problem that is useless other than proving Bill’s competency. Other consensus methods try to save that wasted energy, by having Bill do someone’s Math homework for instance, or a new system altogether.
In the real world, the miner, our Bill the accountant, is a server farm running massive calculations to solve those math problems and keep up with all the transactions, in order to earn those ten chips. Because the game has gotten so big this now takes huge amounts of electricity (about as much energy as the country of Denmark uses, as of this article’s writing), and giant server farms to keep up with all those moving pieces. More efficient systems of binders, in some of the new poker games, offer other ways to handle the job of keeping everyone up to date.
Proof of Stake (PoS) is another consensus method. In the case of Proof o Stake, the original ten players also decided that only someone who has a bunch of chips should be trusted with transactions, as in order to have gained a bunch of chips they must have interacted in a trustworthy way with all the binder holders. One must have an active stake in the game and in keeping it honest in order to be trusted with creating new blocks. It basically means that the amount of new currency you can mine is proportional to how much currency you own and control.
Other cryptocurrencies have other ways of dealing with this, for example a Delegated Proof of Stake model where everyone votes to trust a few people, like deciding as a group that we trust Bill to do it again this week.
Exchanges
A banker shows up, and sets up a booth in the basement, where he will buy any chips you want to sell for cash, and sell chips in return to new people. He’s not playing poker, just acting as an exchange, creating an easy way for new people to buy chips, and for others to sell them.
The banker is our exchange. Services like Coinbase, GDAX, and Kraken are exchanges and allow people to easily buy and sell their Bitcoins or other cryptocurrencies. Over time, these third parties will gauge the external value of the currency/poker chips, as how much someone is willing to pay for a chip or a bitcoin is based on supply and demand.
Gas
There is one more way that Bill can make money. Whenever he processes a transaction, let’s say some poker chips changing hands, Bill charges a tiny fee. The fee is based on the size of the transaction, like the rake in a casino.
This fee can be a static, or change, but in general it is a tiny percentage of transaction value. For example Bill might be paid 1 poker chip for every 1,000 that he records the movement of. That fee is paid for by the other players, so to transfer 1,000 chips, a player will actually have to pay 1 token fee.
This transaction fee is known as Gas. It’s the same kind of money as everything else in the system, whether that’s poker chips, Bitcoin, or Ethereum, but it is a way of paying transaction fees to the people doing the work to keep the network running and up to date. Depending on the system, gas prices can sometimes change based on how many transactions need to be processed.
Stick around, Kurt’s wife Myrtle is about to get involved. Also, you are almost there!
