CRYPTOCURRENCY MINING

By Hadrian Mr lijah Bar Isral

h ttp ://w w w.ma re lij a h . org

We live in a time when financial markets, national economies and currencies all
over the world are either failing or very much on the verge of collapse - this fact
has led to currency markets , and in many cases whole economies taking steps to
redefine themselves in unexpected ways. In some European countries 1 and New
Zealand 2 , governments have even begun seizing private bank accounts in order
to pay down their national debts. Several nations have posted negative interest
rates, and stock markets have repeatedly crashed. As these changes become more
and more widespread, people have begun seeking out ways to protect their
money.
Throughout the 20th Century, politicians sought the power to create money free
of constraints such as the gold standard, so that they could increase military
spending without raising taxes. By replacing money backed by gold and other
commodities with fiat currencies, they were able to fund a whole century of war;
with central banks printing cash at the whim of politicians and the
corporatocracy. Over this same time, the entire market economy seemed
invincible. The west won the Cold War in 1989 and started the Iraq War in 1991
over oil futures. Inflation rose steadily.
Electronic currency was originally invented in the 1980 s. However at that time
it was necessary to secure these currencies by having a single source both create
the individual units of currency and to verify each transaction. Ownership of
these digital assets required third parties not only to issue the currency, but also
to verify transactions and reconcile transaction logs. Currencies made in that
time, such as e-Gold and Liberty Reserve, were not truly currencies in their
own right, but merely novel means of exchanging and using gold, U.S. Dollar
and Euros in new ways. Both systems fell victim to persistent cybercrime and
were eventually closed down by government regulators. 3
1 Steve Forbes, Why A Cyprus-Like Seizure Of Your Money Could Happen Here, published at
http://www.forbes.com/sites/steveforbes/2013/03/25/can-a-cyprus-like-seizure-of-your-money-happen-here/ on March
25th 2013
2 New Zealand Plans to Seize Bank Accounts, Small depositors lose some of their savings to fund big bank bailouts,
published: 03/19/2013 at 12:35 PM, http://www.wnd.com/2013/03/new-zealand-plans-to-seize-bank-accounts/

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However at the end of the 20th Century, the number of transistors which could
be put in a computer processor doubled just about every two years 4 . This
increase in computer power led to serious advancements in computing and
enabled mathematicians and cryptographers to create a new tool known as a
blockchain. With the invention of the blockchain it became possible for a noncentralised network of distributed nodes to carry out this same function without
the need to have a central creation point or entity to verify transactions.
These new currencies are called crypto , because they utilise algorithms and
techniques which were originally invented for use by cryptographers, in order to
encode and decipher electronic transmissions online. However instead of
applying the technology to ciphers, this h igh level encryption is used to control
the creation of new coins and to secure their transactions.
B y advancing these tools a whole new category of currency came into existence.
Digital currency that can be traded, borrowed, bartered and spent, much the
same as a credit card. There is no doubt that the cryptocurrency revolution
represents the most important and disruptive technology introduced into the
field of economics since the introduction of the worldwide Internet back in
1996.
Bitcoin, which is abbreviated as BTC, was the first true cryptocurrency. In
2009 a pseudonymous developer named Satoshi Nakamoto proposed this method
as a way that money could be traded online using a secure cryptographic
algorithm that is not only hack-proof but also able to operate free of government
or commercial interference.
Instead mining occurs using the distributed proof of work principle.
Although originally intended as a tool for gamers to be able to exchange the
money they made playing online games for cash in the real world , BTCs ability
to make any transaction absolutely secure has led to its growing popularity.
Trading in BTC quickly expanded beyond gamers and now includes a number of
CIOs (Chief Investment Officers), Wall Street investors and other equally risk
adverse experts in the field of economics . Articles in the Wall Street Journal ,
Forbes and other prestigious newspapers, blogs and magazines have led to

3 Sarah Jane Hughes, et al., Developments In the Law Concerning Stored-Value Cards and Other Electronic
Payments Products, Maurer School of Law: Indiana University, Faculty Publication, published 1 January 2007
4 Gordon E. Moore, Cramming More Components Onto Integrated Circuits, Proceedings of the IEEE, Vol 86, No 1,
published January 19989p8

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greater and greater recognition for this now disruptive and industry changing
technology.
Currencies, in whatever form they take, are judged on two factors. The first,
whether or not they are able to be used for day-to-day transactions ; and
secondly, whether or not they can be used as effective vehicles for investment.
Like so many other disruptive technologies the cryptocurrency marketplace uses
old and familiar words in new and possibly unfamiliar ways, to describe what it
is doing. For instance a coin used to refer to metal currency which you might
carry in your pocket, but in the cryptocurrency marketplace refers to any one of
the many hundreds of currencies which have been created using the same or
similar crypto graphical techniques: BitCoin, LiteCoin, MazaCoin, et cetera.
You can even hire a geek to make you a new coin named after your aunt
Francis and call it Fracescoin , if you want You could even obtain quite a
windfall if your coin achieves a large enough market share.
Not only the coins, but also the encryption that produces them are all
decentralized, and operate independently of the control of national banks,
corporations and government. Anyone with the right equipment can mine them;
which means that their values are determined exclusively by supply and demand
and arent attached to the political or economic prospects of any nation, or
controlled by any government or industry.
Mining is another term which has taken on a new meaning in the
cryptocurrency marketplace. Rather than mining meaning chemically extracting
metal from ore pulled out of the ground, the new meaning refers to the act of
creating currency by running complicated cryptographic algorithms .
The actual mining takes place by members of the general public, who set up
their computers and ASIC machines to be able to compile the complex
cryptography necessary to process and validate transactions. Regular computers
are not fast enough to do the type of parallel calculation necessary for mining
cryptocurrency. For example, an average computer can mine 1 BTC every two or
three years, which taking into account the cost of the equipment and the
electricity involved, isn t enough to make it lucrative for the average consumer
to justify mining on their home PC or work computer . However special
computers can be built which are able to do mining much faster using small
arrays of video processors instead of standard CPUs.

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There are two types of miners which are capable of running these algorithms.
The first and most common type of miner is the ASIC (Application Specific
Integrated Circuit), which is a specialized computer processor designed
specifically for the purpose of mining BTC and other cryptocurrencies using the
SHA-256 hash protocol which was originally designed by the NSA (United
States National Security Agency) to verify the integrity of data in a system.
Litecoin, abbreviated LTC was opened up to mining in 2011, and uses the Scrypt
hash algorithm instead of SHA-256. Coins using the Scrypt protocol can be
mined used GPUs (Graphic Processor Units), which are specialised video cards
made for doing high end simultaneous calculations. Other coins are now being
mined using the X11 and X13 encryption algorithms. Other algorithm will be
used as time goes on.
The power of a mining rig is measured in hashes per second. A hash is no
longer a potato and meat dish, but a crypto -graphical function, which turns
regular written text into code , using encryption. A mining rig that can process
one thousand hashes per second is said to be capable of 1kH/s; whereas 1gH/s is
one billion hashes per second.
Every time a miner successfully solves a block of code, a new hash is
automatically created and the workers get paid. This algorithm turns the long
string of data into a fixed length on the blockchain, thus labelling the new
block.
Imagine being a builder and being asked to build a very long building, one room
wide, one room at a time. The Blockchain Motel. The contract says that each
room must contain certain elements in order to be considered to spec, and each
room must be finished before a new room can be started. Because the building
will be very long, each room in the building must have its own number to
identify where in the building it is. And no matter where in the building it is,
each number must be 128 characters long. You as the contractor get paid for
each new room that is built, but only once the last room is finished and verified.
The supplies for each new room dont start to get delivered until its time to
build, and some of those supplies arrive during the building process, so you
have to prioritize how youre going to build each room according to a careful
formulation that wont leave anything out.
Just like in cryptocurrency, the contractors of the motel working on the motel
never get to see the people who commissioned the building and nobody even
knows if theyre still alive, or even real people. All that they know is that in

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order to get paid, they first build the room and verify that it is to spec. Then
they leave all of the receipts and a log of their transactions in the finished room.
The log includes the list of suppliers, expenses, and the names of all those who
will get paid for working on the room. They then create a code which is
produced from all of the transaction in that log in order to give the next room
its unique 128 digit identifier for ordering the parts necessary to build the next
room. Everyone who participated in the work on the room then gets paid; and
the process starts all over again.
The contract for the motel says that 2016 rooms will need to be built every two
weeks, which sounds like a lot, but the workers building these rooms work very
quickly. The difficulty in building depends on the overall ability of the work
pool.
The technical work of mining is a very complex system by which new blocks
are generated in the blockchain , similar to the rooms mentioned above in the
overall building . A block is a series of transactions, whereas the blockchain is a
transaction log with a digital signature at each end to determine where each
block stands in numerical sequence in the chain. Each block is allocated fifty
virtual coins for its construction. Mining is done is pools, or groups, who
work together to build each block and thereby get a part of the payout for the
next block.
Every client has a numbered wallet contained on the blockchain. A wallet isn t
a chunk of leather in your pocket, but a virtual place , with a numbered
identifier where digital money is stored. The wallets address is unique and
makes it possible to read the transactions, and thus do the arithmetic necessary
in order to obtain the account balance for each client using their private laptop
or desktop computer. Wallets are secured using very strong encryption; which
makes them impossible to trace, track or tax.
The hash is the signature for each individual block, and also the value that the
miner needs to find. In this way, each block constitutes a confirmation of the
previous block and confirms the previous block s transactions.
Each block contains the following information, which can be compared to the
construction of the room:
Transaction (From XX to YY, VALUE, DATE, TIME)
The Previous Blocks Hash

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Nonce 00000001(+)
The Target
Mining involves taking all of that data, and finding a Nonce that works to best
describe the block. Doing this is the goal of mining. To do that the miner gets
the target from the previous block, which determines what the maximum hash
should be. The block header contains a handful of fields that describe that block.
The first field in the header describes the protocol version being used; followed
by the hash of the previous block, written backwards.
The next field contains the Merkel root which is used to calculate the hash for
the new block it is building. Next is a timestamp of the block, followed by
several value bits describing the mining difficulty. This ensures that transactions
cannot be changed once they are part of a block. It then rehashes the block until
it finds the correct hash which will create the new block in the blockchain. Each
block thus contains the hash of the previous block as well as the transaction log
of the new block being created. Each time the miner tries to hash the block it
increases the Nonce number by one. If the number is lower than the target of the
previous block. The Nonce which is an eight digit number which is increased on
each hashing attempt, in order to provide a new value. Once the Nonce is
discovered, the hash is known, the room is built and the block becomes part of
the blockchain.
A new difficulty is compiled every 2016 blocks based the last two weeks which
occurs approximately every two weeks hash rate. If you add more computing
power it will increase the cryptographic difficulty by changing the Nonce to
make it proportionately harder for the machine to find the solution ( or key) to
the block. Thus , regardless of what computing power is being used the solution
is always ten minutes hard.
Unlike fiat currencies, cryptocurrencies have a fixed rate of issuance and thus a
predictable value curve. The network has a ten minute heartbeat, whereas the
entire network achieves consensus every ten minutes, and says that the
transactions up to this point are verified and agreed to by everyone participating
in the system. By 2140 all BTC will be issued, and no new coins will be made.
However transactions will still need to be compiled and new blocks will still
need to be created . At that time the demand will forever exceed the supply by a
minimum of 100%.
Many nations have chosen to print more money, leading to inflation in places
like Canada, and the USA. Unlike fiat national currencies, cryptocurrencies are

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intentionally designed with built in limits. For instance there can never be more
than 21 million BTC in circulation. So even though more money can t just be
made, the value of the existing currency can appreciate; a fact that is making it
possible for regular people to access the kinds of opportunities, providing the
cryptocurrency marketplace everything it needs to ensure their long term steady
growth.
There will only ever be 21,000,000 BTC issued, and because supply will
inevitably outweigh demand, the value (i.e. purchasing power) of BTC will
likely go up over time. Compare this to an investment made in say Canadian
Dollars. Right now if you invest 12,000$ CAD in a five year CD (Cash deposit)
at a Canadian Bank, the note will earn 1.14% 5 per annum. That means that over
the space of five years, when your CD matures, you will have made 699.77$
CAD. However the rate of inflation in Canada has been running approximately
1.69% per annum, leaving you with only 10,961$ left from the value of your
original investment. This may be made up for in changes to the exchange rates
(Canadas biggest trading partners are the United States and Taiwan) and
changes in the cost of goods over time; but basically represents an overall loss
in purchasing power.
The real purchasing power is the quantity of goods or services which can be
bought using a given unit of currency. This can be demonstrated using chickens
as an example. Specifically the plucked, washed, and pre-packaged whole
chicken variety found in the supermarkets of most countries. Figuring out how
much it costs to buy one of these chickens compared to the exchange rate of the
currency for identically treated chickens on the shelves of supermarkets in other
nations, will tell you the real purchasing power of a nations currency compared
to others. Of course some local variation may exist, especially in places which
have recently experienced bird flu or other problems limiting the availability of
chickens. However a suite of other common value added commodities may also
be examined in order to make a clear determination of currency value.
You can effectively do fractional reserve banking with cryptocurrency.
Fractional reserve banking is when you hold a wallet in the name of the other
financial institution and then create individual accounts represented in the local
ledger of the institution rather than the blockchain. This kind of thing is very
normal in industry, where transactions relating to goods and services are paid on
local accounts, rather than with the bank or blockchain.
5 As of 27 August 2015, TD Banque listed interest on a 5 year note at 0.85%, RBC listed 1.5% and Banque Scotia a
variable interest between 0.4-1.5%

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The blockchain protocol is a platform that will eventually enable a whole suite
of other applications and financial instruments including trusts and escrow
accounts, and the digital notarization of their assets. It is also possible that a
blockchain could also be developed for and used as an accounting ledger.
The digital currency marketplace is expanding every day and now includes a
basket of various cryptocurrencies, the first and most popular and most lucrative
of which is undoubtedly Bitcoin, followed by LiteCoin. There are others, but
these are the three most well-known coins being traded in the global
marketplace. Together these coins represent a whole new ability to open up
previously closed markets to investors.
Much of the change which cryptocurrencies now represent is still being worked
out. Exchanges for BTC and other cryptocurrency transactions have popped up
around the world. Like other disruptive technologies, the limits of these
exchanges and have been tested in a number of high profile legal actions; and
show no signs of disappearing. High level arrests of some of the earliest
adopters of BTC and the closure of several exchanges have tested the
wherewithal of the Bitcoin market over the past several years. The
cryptocurrency market and BTC in particular have recovered from these
challenges without needing to modify its underlying practices or technologies;
and BTC is now regarded as either a lawful currency or valid mode of exchange
everywhere on the Earth.
Many of the aspects of cryptocurrencies are so new that they are difficult for
economists to project and define. For instance, there has never been a
deflationary currency where the deflation was not caused by catastrophic
collapse in demand. Economists see deflation as a negative, because it increases
the real value of debt, and may lead to a deflationary spiral. 6 However it is
difficult to project what effect intentional discount inflation would have on an
economy, especially in an economy where there was more than one currency
active in the marketplace.
It is projected that at the end of its mining cycle in 2040 the demand for BTC
will far exceed supply. Thus it could be a tremendous investment assuming that
the currency itself does not fail in the interim. By limiting the supply, the
creators of cryptocurrencies are causing intentional economic deflation. While
economists generally consider deflation to be bad, they have never faced a
6 Jeffrey Rogers Hummel, Death and Taxes, Including Inflation: the Public versus Economists, Econ Journal Watch,
Vol. 4 Number 1, January 2007, pgs 46-59

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situation like the one which is being created now, when there is a potential for a
new currency to overtake fiat currencies in value and thus make the loans easier
to pay, loosing tremendous money for the bankers, but benefiting the people
generally.
If you have the blockchain of the particular currency , then you have a record of
very transaction which has ever been recorded for that currency, and the IP
address of every transaction - which means that you can trace the transactions .
This complete lack of privacy is now being addressed with a number of different
new coins encrypting the transaction log separately. Some people also go the
extra mile to create a new wallet for each transaction, et cetera.
Cryptocurrencies are the first self-limiting monetary s ystems in the history of
humankind, and could be our greatest chance to check the growth of political
power since the Magna Carta. Cryptocurrencies represent a mathematically
predictable and easily verifiable system which have great economic viability
over other systems of currency.

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