“The greatest trick the devil ever pulled was convincing man he didn’t exist.”
Satoshi Nakamoto wrote the code and created Bitcoins, the digital currency that works without any bank.
But who or what is Nakamoto? We still don’t know whether it is a pseudonym, a person, a group, a secret sect of the world’s elite, or a group of organisations working together. We are so excited about this new currency, but don’t have a single concrete fact — except the software programme. Everything is not what it may seem to be. In the current craze for Bitcoins we have even forgotten the fundamentals of a currency system, why something is, or can be used as currency, and ultimately what gives it its value.
Where does Bitcoin come from? The answer is that it gets “mined” into existence. Any person with the requisite hardware and an Internet connection can participate in the mining. Simply put, the mining process involves solving complex computational puzzles. Once solved, this transaction is verified and added to something called a ‘block chain’, a public ledger. A newly released Bitcoin and the transaction fee (also in Bitcoins) can then be claimed by the first person to solve the puzzle and place it on the block chain.
Who decides how much reward is released each time? Nakamoto’s software, of course. Bitcoins are released with each mined block (block rewards), and the amount of Bitcoins released is inversely proportional to the increase in mining. That is, the block reward is halved every 210,000 blocks; it currently stands at 25 Bitcoins and had started at 50 Bitcoins in 2009. According to the current protocol, the cap is at 21 million, and no more can be mined. Nakamoto decided an arbitrary number for the amount of Bitcoins that will finally be in circulation. Simple economics then suggests the block rewards reduce over time, and will eventually reach zero.
Is it difficult to mine these things? Nakamoto has stipulated that the difficulty will increase proportionally with the amount of Bitcoins mined. So the more people are mining, the more difficult it gets, and vice versa. Unlike in the early days when relatively simple hardware and an Internet connection were enough to do the mining, it now requires dedicated and custom-built hardware. The hardware that runs this is called ASIC (Application-Specific Integrated Circuit). This is so taxing that most times the amount of electricity consumed is greater than the revenue in Bitcoins!
Putting it succinctly, the more Bitcoins that are mined, the fewer are available in each subsequent mining, and the more people mine, the more complex the puzzles get. This results in each subsequent mining using more and more energy. That is why, theoretically, the 21st million Bitcoin will need infinite computing power and energy to mine, and its price, theoretically, will be infinite.
As far as security goes, the mining of Bitcoin is decentralised and the security of the Bitcoin is decentralised. All decisions are made by consensus and a simple majority. This means the moment someone has greater than half the Bitcoin network’s mining power, he or she or it will have complete control. That is not decentralised anymore. Since we don’t know who controls the system, we still don’t know how to rectify this.
So the more exquisite the tulip bulbs, the greater the price paid for those: that led to the Tulip mania in 1637. The ultimate use of the bulb was for beautiful flowers; however the greater fool theory proved otherwise, till such a time that the cost of one tulip bulb became more than a professional’s annual salary. Who wanted the flowers from these bulbs? The arbitrary complex puzzles being solved to mine Bitcoins are useful to what end? The price of the tulips skyrocketed because of speculation in tulip futures. This was among people who really couldn’t tell a tulip from a daffodil.
Bitcoins are exciting the same nerve centre in the brain, and we still don’t know who Nakamoto is, and why we solve these complex puzzles.
In this race, the miners have gone crazy, getting the latest technologies and setting up infrastructure in locations with cheap electricity, to mine that last Bitcoin hidden by Nakamoto somewhere deep in the programme.
The coins are not real, the puzzles are arbitrary, solving for their complexity gives results that are equally arbitrary. You are a miner in a software game, where each level gets progressively harder, and the game finishes at level 21 million.
Have we finally figured out that Nakamoto and Kaiser Soze is the same person, and what happened to the last few people left standing with the tulip bulbs? Is there a fundamental flaw that exists somewhere?
bhavesh@insuringindia.com
