In spring 2010, the programmer Laszlo Hanyecz ordered two pizzas and just for fun paid for them with ten thousand bitcoins, it was almost unknown currency. If Laszlo had not spent that money then, he would possess about $30 million these days.
The Bitcoin appeared in autumn 2008 when the programmer Satoshi Nakamoto (his identity is still not declared, it might be the pseudonym of a group of people) published a brief document in the Internet describing the algorithm of quasi-money work. After almost nine years, the Bitcoin ecosystem’s capitalization achieved almost $53 billion, and it’s used for transactions by almost 40 million individuals. There are other cryptocurrencies: their total number is more than 200.
In the Bitcoin ecosystem, there are two categories of participants: ordinary users and miners. The first ones make transactions, the second ones convert them with the help of specific software. A great many of people expected that blockchain technology, the base of the system, would turn the world inside down. Though the revolution has not happened yet, people are still curious to know where to implement these cryptocurrencies.
The startups that had to compete for the investors’ attention then started collecting millions of dollars on the emission and by selling cryptocurrencies (ICO, Initial Coin Offering on the analogy with traditional IPO, emission on the company’s shares). According to the research company Smith & Crown, at the beginning of 2017, blockchain startups attracted more than a billion dollars through ICO, which was 10 times more than in 2016.
New digital ventures attracted thousands of miners, the “retail cryptocurrency miners”, who introduced changes in their vocabulary and substituted the word “boom” into the fashionable “hype”.
Algorithms instead of agents
The Byzantine army besieges the city. The generals have to develop a single strategy of action, which will lead to victory, and even if there are traitors intentionally disfiguring the information about the size of their troops and the time of attack.
This is not an extract from Historical Chronicle. This is the way “the task is set for the Byzantine generals”, which is a standard in cryptology. It is about how to reconcile participants’ activities in the system if they are united by one goal but with no trust to each other.
Choosing to use no math tools, it seems obviously possible to create a single controlling and supervising body which will guarantee the authenticity of information to the system’s participants. In the case with the Byzantine generals, it might be a loyal committee to the Emperor which supervises all the armies and coordinates their plans.
Blockchain technologies change habitual logic and there’s no more need for agents. This is achieved through a specific form of storing information about transactions on all the computers of the system, in its registers and databases.
In 2008, Satoshi Nakamoto created a new way to achieve the social consensus allowing confirming all the transactions without agents assistance. The easiest way to demonstrate it is to briefly explain the sense of blockchain technologies under the example of transactions in Bitcoins.
Each transaction takes place online and is just a message where a user transfers a certain number of bitcoins. As soon as the transaction is completed, all the miners can see it.
Not a single transaction will be considered complete until it’s included in the so-called block, this is what miners do. Each block contains information about thousands of converted transactions. To consider it generated, the miner should calculate the hash-function, which is the alphanumeric line where the inbound data amount is converted.
The hash-function contains information about the previous block, which means about all the transactions made since the Bitcoin appeared as the cryptocurrency. In case of changing at least a bit of information in the previous chain, the hash-function will be unrecognisably changed. It turns out that the distributed database in the blockchain is a chain of blocks where each makes relation to the previous.
The saved history of the operations with bitcoins is the guarantee that users will not be able to transfer the money they don’t possess. Blockchain technology helps avoid double spending, i.e. the situations when individuals try to spend the same amount twice. The key here is a large number of users and economic motivation for miners.
The motivation of miners who spend time and money on hash-function calculation is quite easy to comprehend. Once the block takes its place in the chain, the miner who has generated it receives some number of bitcoins, and this is the way their emission takes place. Miners also get the commission from each transaction. According to the rules set by Nakamoto, the size of the award can be twice reduced for every 210 thousand blocks.
In 2008, the ready block delivered 50 new bitcoins, and in 2017 there were more than 477 thousand blocks generated, and the payment for every new block fall down to 12.5 bitcoins. The next reduction up to 6.25 bitcoins was expected in 2010. By 2140, as it’s considered, the size of reward would have been so small-scale that the emission would basically stop and the number of bitcoins would not exceed 21 million (at the moment there are 16 million in circulation).
In the ecosystems of other cryptocurrencies, generally, the ones that follow the Bitcoin such as Ethereum (its capitalization is more than $24 billion at the beginning of August 2017), there’s a fixed award for miners with no emission fixed.
Mining turned into the real business. According to the research by Cambridge University, since the bitcoins appeared, miners have earned more than $2 billion at the expense of calculations and $14 billion from commissions of transactions.
The mining equipment manufacturers have felt strong market request growth. In the past, the Bitcoin could be mined on home computers, and by 2017, this process has been fulfilled on “farms”, in huge sheds full of processors.
High equipment requirements resulted in the Bitcoin market division between the largest pools that unite computing powers. About 70% of cryptocurrency farms are based in China.
The main mining business model is simple: to invest into the equipment and as new virtual currency units are mined, to change it into fiat (traditional credit) money. It can be done on the endless cryptocurrency stock exchanges and in the Internet exchange points.