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  • Currency, in its many forms, has been part of human civilisation for thousands of years.

  • A natural evolution of trade from the the arduous process of bartering, where traders

  • needed to find an equivalent exchange of goods to complete a transaction.

  • The advent of metal coins, which had a known and reliable value, allowed trade to flourish.

  • It facilitated the diversification of jobs, and even invented a new one, the banker.

  • As trade flourished, and coins were minted, the wealthy needed a secure location to keep

  • their money safe.

  • Banks became common place, where vasts amount of money was stored, and the responsibility

  • of keeping track of it fell into the hands of these bankers.

  • The banker could facilitate trades between people, without the physical coins, from which

  • the currency gained its value, ever needing to be seen.

  • This evolved to the world we now know where electronic and paper money is commonplace,

  • a system based on trust.

  • Trust that this money has intrinsic value, trust that became tarnished by the global

  • financial crisis where bankers created excessive amounts of another new form of currency debt,

  • a currency based on assumed future earnings.

  • When this system fell apart with the crash in property prices, many ran back to the tried

  • and true method of using gold as a safe and reliable currency, resulting in the prices

  • peaking at the height of the crash, but one clever individual started to wonder is there

  • are better way.

  • That person was allegedlySatoshi Nakamatothe mysterious founder of the first cyptocurrency,

  • Bitcoin.

  • Satoshi released this statement conveying his motivation for creating bitcoin:

  • The root problem with conventional currency is all the trust that's required to make it

  • work.

  • The central bank must be trusted not to debase the currency, but the history of fiat currencies

  • is full of breaches of that trust.

  • Banks must be trusted to hold our money and transfer it electronically, but they lend

  • it out in waves of credit bubbles with barely a fraction in reserve.

  • We have to trust them with our privacy, trust them not to let identity thieves drain our

  • accounts.

  • Their massive overhead costs make micropayments impossible.

  • Cryptocurrencies were invented primarily to eliminate the banking system middle men from

  • this trust system.

  • To ensure the security of people's hard earned money and allow for cheap accessible transactions.

  • A beautiful idea, that in practice has its flaws.

  • In order to eliminate these middle men, we need to find a way of creating a trust system

  • between individuals using the currency.

  • A way of ensuring that someone cannot simply write a transaction crediting their account

  • with bitcoin, without permission.

  • This is where the blockchain comes in.

  • In its purest form, Bitcoin is a currency that uses a system of complicated keycodes

  • to verify transactions between individuals.

  • Batches of transactions are filed into something called a block every 10 minutes.

  • For bitcoin the max amount of transactions per block is around 2,400, so bitcoin has

  • a max transaction speed of 4 transactions per second.

  • Each of these blocks needs to be verified in order to verify the transaction history

  • and cryptocurrencies do this in a pretty surprising way.

  • By guesswork.

  • Bitcoin uses a system called a cryptographic hash function, in this case Sha-256. to verify

  • each block and it works like this.

  • SHA-256 simply outputs a string of 256 bits, that's a 256 long string of 1s and 0s, for

  • a given input.

  • The output seems random, but it's not.

  • SHA-256 will always give the same output for a given input, BUT, as far as we know, it's

  • impossible to take the output and figure out what the input was.

  • It's a one way street.

  • That means, in order to generate a specific desired output, the only way of doing it is

  • by trial and error.

  • Guessing inputs and checking the output.

  • And to do this quickly requires a significant amount of computational power.

  • Essentially employing millions of little monkeys in your computer to type numbers until one

  • manages to get it correctly.

  • So how does this apply to the blockchain verification of Bitcoin?

  • For a block to be added to the chain it needs to be signed with a SHA-256 input that will

  • result in a predetermined string of zeros at the start.

  • The number of zeros needed is determined by how much computational power is trying to

  • verify the blockchain.

  • The more zeros needed, the more computational power is needed.

  • We want the blockchain to be verified every 10 minutes, so in order to maintain that verification

  • time, the number of zeros needed keeps rising as more computational power is dedicated to

  • the network.

  • It is through this huge dedication of computation power that ensures security of the blockchain.

  • It would be unfeasible for an individual to rewrite the blockchain with false information,

  • as they would first need to dedicate enough power to sign previously written blocks, and

  • manage to keep up with the blocks currently being written by the rest of the network.

  • A herculean task, as we are about to see.

  • There are more nuances to this system, and I highly recommend you watch 3blue1brown's

  • video on the subject if you want to learn more.

  • This blockchain technology is fascinating, and has a huge amount of potential outside

  • of just cryptocurrencies, but it has negative side effects, which have been exacerbated

  • by the hijacking of the bitcoin hype train.

  • The blockchain is verified by miners, these are people who guess the inputs for SHA-256

  • to generate the desired output, and they are rewarded for doing so with some bitcoin.

  • To increase your chances of being the first person to correctly guess an appropriate input,

  • you need to maximise your computational power, basically employ more monkeys, but obviously

  • this has a breakeven point.

  • Computation requires expensive equipment, and equipment prices have only risen as the

  • demand for blockchain verification tech increases, and it also requires electricity.

  • There are giant mining farms in the wastelands of Iceland that use the cheap geothermal energy

  • and the abundance of cool air to minimise their electricity costs for this very reason.

  • But the price of Bitcoin has inflated so dramatically that it's still profitable to dedicate a

  • huge amount of computation power to mine, and it has risen to damaging levels.

  • One Chinese mining facility was reportedly spending 80,000 dollars a month on electricity,

  • but was turning over 1.5 million per month.

  • With returns like that, it would make perfect sense to expand and increase your electricity

  • demands, and this is exactly what we are seeing.

  • Digiconomist have constructed a Bitcoin Energy Consumption Index which has estimated that

  • the network of computers that verify bitcoin transactions draw 3.4 Gigawatts (GW) That

  • 3.4GW adds up to 30.1 terrawatt hours (TWh) of energy per year.

  • That is on par with the energy use of the entire country of Serbia, or roughly 0.8 percent

  • of total energy demand in the United States, equal to 2.9 million US households.

  • To put the energy consumed by the Bitcoin network into perspective, we can compare it

  • to another payment system like VISA.

  • According to VISA, the company consumed a total amount of 0.19 terrawatt hours of energy

  • globally for all its operations.

  • This means that VISA has an energy need equal to that of around 17,000 U.S. households.

  • We also know VISA processed 111.2 billion transactions in 2017.

  • Vastly more than the Bitcoin network's 100 million transactions, at a fraction of the

  • cost.

  • Comparing to VISA may be unfair, as they require those pesky middle-men that we are striving

  • to eliminate and move towards decentralisation.

  • You should however consider that the brunt of Bitcoin verification is not being performed

  • by individuals like you and me, we simply cannot compete with our consumer level technology,

  • but by a small group of large mining facilities.

  • Centralised facilities where the power is in the hands of a few.

  • So is there any hope for Bitcoin?

  • We need consider that the system is not in equilibrium.

  • The Bitcoin network is limited to a production of 21 million coins.

  • Over time there will be fewer bitcoins left to mine, a feature of the original plan by

  • bitcoin's mysterious founder Nakamoto.

  • Once the majority of bitcoins have been mined, the block reward will become an insignificant

  • percentage of miners' overall earnings.

  • Instead, miners will get their reward from small transaction fees, which are already

  • part of the network.

  • So in equilibrium, the energy demanded by the network will only be driven by these small

  • transaction fees, which is currently significantly below coin-value.

  • Making it even less profitable to flood the market with computation power.

  • This is where we come to our next point in why Bitcoin isn't working.

  • Cryptocurrencies have been hijacked by the hype.

  • The vast majority of transactions occurring for bitcoin are not to buy goods and services,

  • as currency was invented for, but are simply trades of currency.

  • Swapping traditional currency for a share of the bitcoins on the market.

  • This may sound familiar to you, because it's exactly what gold is used for.

  • This is not what Bitcoin was created for.

  • Bitcoin was created so that you would never have to use dollars again.

  • That you would trade your dollars for bitcoins, and never trade back.

  • But Bitcoin is too volatile for anyone to use it like that.

  • Bitcoin has become an incredible volatile investment vehicle, with thousands of people

  • attempting to trade on speculation and achieve this dream of becoming a bitcoin millionaire.

  • But in order for a currency to work in a society it needs stability, people need to trust that

  • the money the own today will be worth the same amount tomorrow, this is why the dollar

  • is so successful.

  • Several countries around the world use the dollar because their own currency has become

  • so volatile no-one can put their trust in it.

  • How can we expect Bitcoin to become a useful currency when it's value jumps so dramatically

  • between dates due to irrational speculation, and market manipulation.

  • For now Bitcoin is largely a useless environment damaging investment vehicle, which was not

  • the vision Satoshi had for it.

  • Even if the bitcoin prices manage to stabilise as equilibrium is reached, it's limited

  • transaction time of 4 transactions per second will likely prevent it from ever becoming

  • a useful currency, and will more likely become a wealth storage method similar to gold.

  • Blockchain technology and cryptocurrency are a fantastic idea in theory.

  • Just as paper money and debt are, but they're flawed for the same reason.

  • People.

  • If there are ways of exploiting a system for financial gain, people will find it.

  • The only way stopping that is to set up systems to prevent exploitation, and this is what

  • other currencies like Ethereum are trying to do, while building upon the foundation

  • Bitcoin laid, but if history has proven anything, if there are ways of exploiting a system for

  • financial gain people will find it.

  • You can learn how to manipulate system for your personal gain by starting this course

  • on the Math of Quantitative Finance on Brilliant.

  • Which will take from from an introduction to Quantitative Finance, through to probability,

  • statistics and finally Markov Chains.

  • Anyone who follows me on twitter will know that I enjoy tracking the stock market and