For today’s column, I adopt as my two-part column, an article on cryptocurrency written by my daughter, Ivy Lopez Cabaltica. She is a lawyer from Ateneo Law and took up a year of courses at Wharton.
Cryptocurrency is an invented virtual money transferred directly from one computer to another. The first and most famous is called bitcoin (BTC). Virtual payments are protected by codes that need to be decrypted, so it’s called cryptocurrency.
A user downloads the Bitcoin software which gives you an account (public key) and private key (like your password). It is also your ledger to keep track of your BTC payments, account balance, and the accounts of everyone who has the Bitcoin software (the network). It records every transaction ever made with the BTC. Anyone in the network can see it and update it, that’s why it’s a decentralized public ledger.
Computers that decode transfers are called miners or nodes. Each transfer decoded is a block in the ledger which links to a previous transaction or block that involves each particular BTC and account number. Miners race to solve the code and the first successful decoder wins some bitcoins and adds the solved block to the chain. Once a block has been added to the ledger, it cannot be reversed or changed.
A fraudster can try to create a fake block, meaning he is transferring BTC he doesn’t have. To do so, he has to beat all the other miners in the network so he can solve his block first and add it to the chain.
If there is a conflict between two blocks (a fork), the valid chain will presumably have more blocks added to it because many nodes in the network are presumably working on the same valid block. The fraudster has to keep outrunning the whole network so he can keep validating his own fake blocks and adding then first to his fake chain.
If there is confusion, the network has to reach a consensus on which chain to adopt. The rejected chain is trashed and the fraudster’s efforts are all in vain. Such is the power of blockchain to prevent fraudulent transfers or the payment of BTC you no longer have.
While blockchain guards against double payment, its maintenance comes at great cost. If the system aims for wide adoption, it needs to overcome many hurdles that our present financial systems have already achieved.
Cryptocurrency requires decryption. It has created an industry that supports the mining of virtual currency (VC). Miners are usually involved in the different value chains like manufacturing mining hardware and mining pool operations. Mining hardware stores have opened in Singapore, Russia, China, and South Africa.
Miners maintain the blockchain because their work creates BTC as their reward for keeping the network trustworthy. Thus, they are most invested in ensuring that Bitcoin continues and grows. But they do not merely validate transactions.
“Rather, miners preserve the distribution of power—the power to decide which transactions to include in each block, the power to mint coins, the power to vote on the truth.” (Don Tapscott & Alex Tapscott, Blockchain Revolution, 2016)
Mining is a laborious computation that is done with GPUs (graphics processing units), the electronic equivalent of shovels. The more GPUs you have, the faster the computing. We’re talking hundreds of GPUs if you want to be the first to solve a block. GPUs cost $3,000 for a six-pack.
Unlike in the beginning, most home computers now cannot sustain the mining required to earn a bitcoin. There is too much volume and the BTC reward halves every four years; the last one was in 2016. That’s why miners join a pool of miners to increase their chances of decoding first and then split the reward.
GPUs need a computer to run, not a few but hundreds as well. A warehouse-full is ideal. The world’s major miners in China have many warehouses crammed with rows of shelves filled with computers, very similar to the sprawling data centers of Internet companies like Facebook.
These computers run continuously to win the decoding race. Like any machine, they need to be kept cool to prevent overheating. They also need constant maintenance and security.
Since Bitcoin is an online payment, miners need fast and cheap Internet connection.
“Determining where to set up a cryptocurrency mining facility is generally based on three key factors: miners need to have access to low-cost electricity to run their operations profitably, they need to have a sufficiently fast internet connection to quickly receive and broadcast data with other nodes on the network, and mining equipment must be kept from overheating to function optimally, which is why locations that have low temperature zones offer substantial advantages as cooling costs can be kept low.” (University of Cambridge)
Mining is done continuously because global transactions don’t stop. If you want to earn those bitcoins, you have to keep running. So computers need a continuous and strong supply of electricity. Power outages will waste efforts and can harm hardware. You also run your cooling fans on electricity.
To reduce cost and increase profit, miners need the cheapest power source. Remote cities like Washington, US cost 2-3 cents/kWh. China and Iceland have geothermal power so electricity costs only about 4 cents/kWh.
One US miner spends $100,000 a month on electricity and earns 5-7 BTCs.
One Bitcoin transaction consumes 927 kWh, enough to power 31 US homes for a day. There are about seven BTC transactions every ten minutes, or a total of 1008 a day.
NBR reports that Bitcoin mining uses up 7.5 megawatts of electricity (7,500 kilowatts) which can power 10,000 homes. Right now, the Bitcoin network has a total energy consumption of 5.4 million US homes, and it’s still growing.
Land area and cost are also critical. Major miners are located in North America, Northern and Eastern Europe, and China. China leads the world with the most mining facilities and the highest power consumed. Its facilities are mainly in the Sichuan province which have hydroelectric power stations and cheap land. (To be continued)