Who is Satoshi Nakamoto? It is still a mystery to this day. It could be a single person or an entire company behind the name. What is certain is that it was under this name that at the end of the last decade a detailed concept of a decentralised system has been published. This system reveals how to store and move money without the involvement of the classic monetary players (e.g. banks, clearing houses) and thanks to digital signature technology, without the risk of counterfeiting or subsequent modification. In order to achieve this, a data structure called a blockchain was developed and also a protocol for adding new transactions. Thus, it became possible to handle money electronically with no third party.
A blockchain is a chain of blocks, or packages, that contain hundreds of financial transactions that have occurred all over the globe. Each block contain a reference to the previous block and are linked so that you cannot take one out and connect its neighbours with each other. To edit one block would create a knock-on effect which would be noticeable. This means that there is a secure ledger of transactions, imagine the blockchain is a huge accounting book and each block, a page.
Creating a block and linking it to a chain is possible only by solving complex algorithms which result in a transaction. New transactions get added to the blockchain network’s transaction list when about 350 of them are collected (originally 1 megabyte, but this varies from blockchain to blockchain), then they are all linked to the chain as a block.
And that’s where block miners come into the picture.
Miners set up high-performance computers to solve these ever increasingly complex mathematical problems. What does the algorithm look like? First, we need to understand hashing.
A hash function takes an arbitrary amount of input data and by using a mathematical process creates a string, which is output data of a fixed size hash. The “mining machine” first calculates the block’s hash and the process begins as such: find the number (the nonce) which, if integrated into the block’s hash, will create a new hash that will meet certain characteristics, e.g. it will start with four 0s. Of course, the number is quite difficult to find. However, as the blockchain mines of the world perceive that a block of transactions has been executed, they then start to compete with each other in solving the current puzzle.
A world-wide competition begins. And what is the purpose? The reward!
That is, an amount of cryptocurrency awarded to the miner who was the fastest in puzzle-solving. Cryptocurrency (Bitcoin, Ether etc.) has a current rate fixed in dollar, euro, etc.
Bitcoin is a blockchain based digital currency. With its protocol and software, a shared ledger is operated by the computer network, through the internet. Although Bitcoin’s market capitalisation is currently the largest, there are now hundreds of cryptocurrencies. These systems can not be stopped or removed, due to their global decentralisation. There is no such geopolitical situation or secret service that could stop their operation. The blockchain can not be turned off.
And who is behind the mining machines?
Anyone who is able to build a target machine that is worth about two or three thousand dollars.
Larger mines however, are huge machine rooms, hangars, where tens of thousands of machines endlessly whir, solving complicated mathematical puzzles. The owners are individuals, companies and even states with an access to cheap and reliable energy to meet the ongoing and enormous energy requirements of mines. It seems that at the moment it is China where the most suitable conditions are available, but according to the news, Russia is preparing for mining cryptocurrency on a state level. Electricity companies try to cooperate with miners there, providing them with cheaper electricity. In recent weeks, North Korea has started a massive mining project. In Austria, two sisters founded a company called HydroMiner a couple of years ago. They’re mining with energy produced in hydroelectric power plants, which is cheaper and environment friendly.
But how good is this business anyway?
At the beginning of this decade, Bitcoin mining was easy, and many people started it simply out of curiosity. According to an urban legend, Bitcoins mined by a former IT student from Budapest during his university years this early summer are now worth more than 300 million forints and he is planning to retire if their worth reaches 1 billion forints.
Today, Bitcoin mining is difficult and it is much easier to mine other currencies, such as Ether. However, you can easily purchase cryptocurrencies on the market where the exchange rate is based only on supply and demand and is not influenced by legitimate means of a central party. Of course, this has a downside. For example, at present the exchange rate is extremely volatile. In a single day it can move thirty percent in one direction and then next day twenty in another. The cryptocurrency market is a playground of speculators now, just under one percent of the Earth’s population is involved in this popular game.
However, this statistic will surely rise.
Forecasts indicate that Bitcoin’s exchange rate will explosively grow in the next ten years, and according to some estimates a single Bitcoin will increase to the worth of 50 thousand dollars. At present, however, we are still far away from that. Yet, although it is still typically an investment tool, it will be accepted as a payment at more and more places.
In Japan, most places readily accept Bitcoin. Cash machines display transaction details in a QR code (amount, Bitcoin address, transaction identifier), the wallet on the phone reads it then initiates the payment. The transaction – as we talked about earlier – is written into a block. The bank account is the ‘address’ where the payments will be accounted to. The sum of the phone payment will be sent to the shop’s address.
But what does any of this have to do with tulip mania?
The flower bulbs mentioned in this title were brought to Europe by the Austrian emperor’s ambassador to the Turkish sultan. Then in the late 1500s, a Dutch botanist started to cultivate them in Holland. People went crazy for them, and the tulip mania made tens of thousands rich. Some rare tulips sold for more than several times the price of an average house, that was until buyers decided to start to avoid auctions. The reason for this was a bubonic plague, and with that, the bubble burst and that was the end of the tulip exchange trading. Many people cite this story in the context of Bitcoin.
Yet the developments so far suggest we are soon entering the era of cryptocurrency.