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How Bitcoin works, and why it’s a menace
Source: Barbara Marshman

With the price peaking at nearly $18,000 and ‘stabilizing’ around $15,000, Bitcoin has rapidly become latest trending investment. By all appearances, investment in the currency is a surefire way to get rich and mining remains one of the most reliable ways to profitably invest in Bitcoin.

The currency that has been touted for months as a ‘bubble’ and an unwise investment has time and again defied all expert expectations and brings to mind a quote from Miles Johnson’s Financial Times op-ed: “Bitcoin is a faith-based financial asset for a populist era.” Given this, I feel it is important to discuss the implications of people jumping on the Bitcoin train and driving the currency’s rapid growth.

This came up as I was chatting with some friends recently when one suggested that we invest in an ASIC (application-specific integrated circuit) Bitcoin miner. Upon hearing this suggestion, my only question was to ask if any of them actually understood how the Bitcoin system works. Unsurprisingly, this was met with half-baked answers and blank stares, prompting my further research into the issue and highlighting a real problem that has critical ramifications: the uninformed Bitcoin investor.

Bitcoin has grown in popularity but understanding of the currency has not scaled accordingly. Millions of people (CPU nodes) operate on the Bitcoin network, but few understand the system and even fewer have tried reading Satoshi Nakamoto’s paper proposing the technology. There are serious implications to this, least of which is uninformed investment.

For starters, let’s go into a little bit about how the technology works. Bitcoin was developed as a method for validating transactions to remove third-party vulnerabilities by creating a system based on cryptographic security that allows two parties to transact directly. The Bitcoin network creates a public ledger of transaction data, so every time a transaction is announced, it is added to a database that stores the information. After some time, all the transactions published during that period are combined into a block and used as an input for a complex mathematical problem. The first node to solve the problem distributes the solution and the others verify it. Upon verification, the block is added to the ‘honest’ chain of verified transaction blocks and the nodes begin the process again, with the node that found the solution receiving a Bitcoin reward. In this way, the Bitcoin system is able to outpace attackers attempting to defraud the system on computing power alone; to mount a successful attack an attacker would need to have a CPU at least as powerful as the collective power of the system’s nodes.

Because the mathematical problems are increasingly complex, ASIC miners run constantly and the result is an extreme amount of energy consumption that is only slated to rise. Digiconomist’s Bitcoin Energy Consumption Index estimates a rate of around 32 terawatt hours of energy a year, which, for scale, is closest to Serbia’s annual rate (meaning it’s larger than that of 159 other countries).

Digiconomist also reported that one Chinese Bitcoin mine emitted carbon dioxide at the same rate as a Boeing 747. Eric Holthaus, a meteorologist, expects that at the current rate, the Bitcoin network’s energy consumption will be at US levels by mid-2019 and by 2020 will be comparable to that of the world. With this trajectory, Bitcoin mines causing frequent blackouts (as they already do in Venezuela) will soon become commonplace. This troubling unsustainability can no longer be ignored and potential coin connoisseurs ought to look towards utilizing more energy-efficient consensus algorithms for transaction validation or, at the very least, reinvest their revenues in development of more environmentally-friendly mining technology.

Sahil Hegde is a graduate of Prospect High School in Saratoga and is now studying Physics/Computer Science at Columbia University.


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