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How to cryptocurrency: I read all the internet so you don't have to

Updated: Mar 24, 2023



My interest in blockchain, like most people, started through cryptocurrencies, about four years ago. I was reading Adam Greenfield’s book Radical Technologies when I came across this passage:


“This is the first information technology I’ve encountered in my adult life that’s just fundamentally difficult for otherwise intelligent and highly capable people to comprehend”


And, naturally, I thought to myself “I’m gonna comprehend the hell out of the blockchain”. And that escalated quickly. I read the chapter on cryptocurrency with the utmost attention, took notes, watched YouTube videos made entirely with infographics, and generally spend a fortnight living and breathing blockchain. And then I forgot all about it.


When NFTs came to be vox populi at the beginning of March, I thought about writing about it, but that implied revisiting all my knowledge about blockchain because I want to know its inner workings. I wasn’t feeling particularly drawn to the idea.


But then again, I invest in cryptocurrencies. If I knew more about them, I could be rich! (as rich as you can be when your investment is £10). So, still not fully invested in the idea, I picked up Greenfield’s book again. I read the sentence quoted above, again, and felt personally challenged, again. I know you might think I’m smart, but I sometimes display the intellectual sophistication of a bull charging against a swirling cape.


Anyways, I was doing research for an article on NFTs when I realised: Do people really know how cryptocurrency works? Because for me, now that I’ve forgotten all about them, cryptocurrencies and NFTs very much feel like black magic.



I posted a poll on Instagram and apparently, I’m not the only one who feels this way. So I'm going to explain what is this all about. For your consideration, I will keep it as short and sweet as I possibly can. My intention here is to tell you the basics about cryptocurrencies and explain their complexity in the easiest possible way. I want for you to understand it, but also I want you to feel like superheroes because after this article you will actually know how cryptocurrencies work!



Digital Cash


You know, cryptocurrencies - the ones that work - are a bit more complicated than just transactions happening on the internet. We wished it was as easy as that. The innovation of cryptocurrencies is that they are untraceable, sort of like cash, but digital.


When we talk about digital transactions, the meaning is quite boring. Whereas a cash transaction implies money changing hands, digital transactions are no more than an entry in a database. Because is not about physical money changing hands, the way they do it is just “make a note of it”. “X amount of money has left this particular account at this time to be deposited in this other account”. That’s it.


Problems? You’d think there’d be none, but actually, this system has lots of them. Digital cash presents, overall, a trust problem. Unlike paper money changing hands, digital transactions require a third party who runs the database. Someone has to be there recording the transactions and making sure that the money goes from one party to another securely. This entity, the intermediary, is called the mint.


And the mint is the most problematic entity, for one simple reason: How can I trust it?


In films about kidnapping, the exchange is always the most delicate moment. You never know if the kidnapper is going to shoot the hostage once they get the ransom money. That’s why they usually meet in the middle or use a third party to do the exchange. But you can never know if the third party has other interests of their own, you don’t know if they are truly neutral, or trustworthy. That’s why we all hold our breath when the exchange happens, knowing that something can always go wrong.


thief bitcoin mint intermediary
My mental image of the mint misbehaving.

In digital transactions, the mint is problematic for several reasons. First, they have way too much personal information about the parties making a transaction, and since Facebook and the 2016 U.S. elections, we know how dangerous that is. Before bitcoin, digital cash transactions implied trusting that the mint will act in good faith, but the danger was real.


For example, the mint has the power of stopping transactions. That happened in 2011 when several banks prevented Wikileaks from receiving donations. The mint can also favour one of the parties allowing them to spend the same money twice, just by “forgetting” to include certain transactions on the ledger. And lastly, having all the information about the transactions centralised leaves your system vulnerable to hacks.


And the end of the day, the value of currencies depends on the organisation that issues that currency: the country. Devaluation of the currency points to economic trouble. Devaluation was a problem that Bitcoin wanted to tackle, creating a currency free from any country. Did you know that in Venezuela in 2018 the price of a chicken was 14.6 million bolivars? If currency tanks, we all lose.


Blockwho? Cryptowhat?



Here is when Satoshi Nakamoto, the mysterious creator of Bitcoin, comes into play. Bitcoin ditches the ledger or institutional third party. The middle man in our imaginary kidnapping. that was making us worry. Instead, Bitcoin uses the blockchain as a ledger.


Blockchain hosts all the information about users and transactions. Say, every bitcoin has an identifier, and so does a Bitcoin user. And when a transaction happens, another identifier is created. In other words, Bitcoin users and transactions have sort of IDs or signatures. If you look at a single bitcoin, you can check its entire chain of custody, the “hands” that it has passed through. The maths magic that allows us to create digital signatures is called cryptography, and thanks to it, we can be sure that the transactions are legitimate.


Summarizing:


Blockchain is a ledger for cryptocurrencies, a database that hosts digital transactions. Instead of being centralised in the servers of a private company, this ledger is distributed across the network of users. That means that users can download the entire ledger and have information about the history of ownership of every existing bitcoin and transaction.
Cryptography is the way to give a unique signature to every bitcoin, every user and every transaction to ensure ownership and allow secure transactions.

How it works


So far we have the infrastructure that makes cryptocurrency possible. Now let’s talk about how the process works.

Bitcoin did something different. Instead of asking the users to trust the blockchain as you did with banks, it decentralised it, so every transaction would be all over the network of users. A group of users check the transactions to confirm they were legit. Instead of asking people to trust the system, Bitcoin did the opposite: it gave users the means to confirm the legitimacy of transactions themselves, hence creating a trustless system.


In other words, trust in the distrust of strangers. No one is more aware of whether you are breaking the covid19 rules than your neighbour, because he is watching you. He doesn’t trust you won’t bring a party of 10 to your house, hence threatening his life.


Let me be more concrete.


Imagine this: to do a transaction, there is a buyer and a seller. They both digitally verify the exchange using their unique signature. Details of the transaction (time, value, participants) are compiled along with information about previous transactions. This information all bundled up, forms a “candidate block”, a block that has been verified by the exchanging parties but not yet by the network. This block was then confirmed by several users of the network. When confirmed, the block is added to the database of the rest of the transactions made, creating, alas, the blockchain.


Mining


Mining consists of creating the blocks that make the blockchain and then confirming the transactions. Thanks to those users who mine, the network is secured and up-to-date. Not every Bitcoin user is a miner, miners are volunteers. It’s called mining as an analogy with gold mining because, in exchange for their services, miners obtain newly minted bitcoins.


However, it is no easy job. In the early days, mining could be done on a regular computer, but now it’s done with special equipment (ASIC) by professional miners.


mining rig ebay sale bitcoin miners cryptocurrency blockchain
Bitcoin mining rig, for sale on eBay, only $18,495

Besides, miners need to present first a proof-of-work. This is an extremely taxing calculation that consumes as much electricity as possible, so much so that miners lose money in the process. And I am not talking about a power bill that will get you grounded by your mum. I am saying that collectively, miners consume the same energy as entire countries.


It’s clever, because this discards the possibility of forgery, as nobody would pay such a toll to then not have their block confirmed.


After passing the proof of work, then they make the necessary calculations to confirm the transaction, and they have to be the first ones to complete the calculation. Only the winner of this race gets those new bitcoins. I’m just saying this in case you were thinking of quitting your day job. On the other hand, as I am writing this, one bitcoin is worth £44,685.


Beyond Bitcoin


Right when the fascination with bitcoin was at its highest, the tables turned. Suddenly, the interesting proposition was not Bitcoin itself, but the idea of blockchain. Blockchain innovation, as we know, was to decentralise information. When information is dispersed all over the network, we eliminate the problem of having a single point of failure. The potential of the blockchain for decentralising everything (government, applications, contracts) fueled the wet dreams of futurists around the world.


Bitcoin was born at a moment in which the distrust of government and institutions was at its height, and many saw in Bitcoin and the cryptocurrencies that came after the possibility of a brighter tomorrow. But if you have read my writings before, you already know what I’m going to say. No just society was created by unjust humans.


So I would warn you against being seduced by the idea of an equal, more democratic and postcapitalist world achieved through the blockchain. We need to come to terms with the idea that the blockchain might have more capability of reinforcing the actual system rather than changing it.





REFERENCES


Castor, Amy. “Proof of work – the reason behind Bitcoin’s horrendous energy consumption” https://amycastor.com/2021/02/17/proof-of-work-the-reason-behind-bitcoins-horrendous-energy-consumption/

Greenfield, Adam. Radical Technologies: The design of everyday life. (London: Verso, 2018)

Kirkland, Justin. “Okay, here’s what you actually need to know about Bicoin”, Squire, 27 December 2017 https://www.esquire.com/lifestyle/money/a14500146/beginners-guide-bitcoin-what-is-bitcoin/

Phillips, Tom. “Venezuela devalues currency and raises minimum wage by 3,000%”, The Guardian, 20 August 2018. https://www.theguardian.com/world/2018/aug/20/venezuela-prepares-to-devalue-currency-amid-fears-it-may-worsen-crisis-bolivar

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