CRYPTOCURRENCY MINING

By Hadrian Mâr Élijah Bar Israël

http ://w ww. ma re lija 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 repeatedl y 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 econom y seemed invincible. The west won
the Cold War in 1989 and started the Iraq War in 1991 over oil futures. Inflation
rose steadil y.

Electronic currency was originall y 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 onl y to issue the currency, but also to
verify transactions and reconcile transaction logs. Currencies made in that time,
such as e-Gold and Libert y Reserve, were not trul y ‘currencies’ in their own right,
but merel y novel means of exchanging and using gold, U.S. Dollar and Euros in

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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new ways. Both systems fell victim to persistent cybercrime and were eventuall y
closed down by government regulators. 3

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 non-centralised
network of distributed nodes to carry out this same function without the need to
have a central creation point or entit y to verify transactions.

These new currencies are called ‘crypto’, because they utilise algorithms and
techniques which were originall y invented for use by cryptographers, in order to
encode and decipher electronic transmissions online. However instead of appl ying
the technology to ciphers, this high level encryption is used to control the creation
of new ‘coins’ and to secure their transactions.

By 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 onl y hack-proof but also able to operate free of government or
commercial interference.

Instead mining occurs using the distributed proof of work principle.

Although originall y intended as a tool for gamers to be able to exchange the

money they made playing online games for cash in the real world, BTC’s abilit y
to make any transaction absolutel y secure has led to its growing popularit y.
Trading in BTC quickl y expanded beyond gamers and now includes a number of
CIO’s (Chief Investment Officers), Wall Street investors and other equall y risk
adverse experts in the field of economics. Articles in the Wall Street Journal,

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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Forbes and other prestigious newspapers, blogs and magazines have led to 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 secondl y,
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 onl y 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 exclusivel y by suppl y and demand
and aren’t 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 chemicall y extracting metal from ore
pulled out of the ground, the new meaning refers to the act of creating currency
b y running complicated cryptographic algorithms.

The actual mining takes place by members of the general public, who set up their
computers and AS IC machines to be able to compile the complex cryptography
necessary to process and validate transactions. Regular computers are not fast
enough to do the t ype 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 electricit y 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 t ypes of ‘miners’ which are capable of running these algorithms.
The first and most common t ype of miner is the ASIC (Application Specific
Integrated Circuit), which is a specialized computer processor designed
specificall y for the purpose of mining BTC and other cryptocurrencies using the
SHA-256 hash protocol which was originall y designed by the NSA (United States
National Securit y Agency) to verify the integrit y 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 successfull y solves a block of code, a new hash is

automaticall y 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 onl y once the last room is finished and verified. The supplies for each
new room don’t start to get delivered until it’s time to build, and some of those
supplies arrive during the building process, so you have to prioritize how you’re
going to build each room according to a careful formulation that won’t 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 they’re still alive, or even real people. All that they know is that in order

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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 it’s 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
quickl y. The difficulty in building depends on the overall abilit y 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 fift y virtual
coins for it’s 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 wallet’s 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 Block’s Hash
Nonce 00000001(+)
The Target

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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 b y
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 ‘difficult y’ 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 difficult y by changing the Nonce to make
it proportionatel y 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 s ystem. 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 suppl y b y 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
intentionall y 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

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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 onl y ever be 21,000,000 BTC issued, and because suppl y will
inevitabl y outweigh demand, the value (i.e. purchasing power) of BTC will likel y
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 approximatel y 1.69%
per annum, leaving you with onl y 10,961$ left from the value of your original
investment. This may be made up for in changes to the exchange rates (Canada’s
biggest trading partners are the United States and Taiwan) and changes in the cost
of goods over time; but basicall y represents an overall loss in purchasing power.

The real purchasing power is the quantit y of goods or services which can be
bought using a given unit of currency. This can be demonstrated using chickens
as an example. Specificall y the plucked, washed, and pre-packaged whole chicken
variet y 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 identicall y treated chickens on the shelves of supermarkets in other nations,
will tell you the real purchasing power of a nation’s currency compared to others.
Of course some local variation may exist, especiall y in places which have recentl y
experienced bird flu or other problems limiting the availabilit y 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 effectivel y 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.

The blockchain protocol is a platform that will eventuall y enable a whole suite of
other applications and financial instruments including trusts and escrow accounts,

5As 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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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 undoubtedl y 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 abilit y to open up previousl y 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
underl ying 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, especiall y in an
econom y 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 suppl y. Thus it could be a tremendous investment assuming that the
currency itself does not fail in the interim. By limiting the suppl y, the creators of
cryptocurrencies are causing intentional economic deflation. While economists
generall y consider deflation to be bad, they have never faced a 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 generall y.

6Jeffrey 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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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 separatel y. Some people also go the extra
mile to create a new wallet for each transaction, et cetera.

Cryptocurrencies are the first self-limiting monetary systems 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 mathematicall y
predictable and easily verifiable system which have great economic viabilit y over
other s ystems of currency.

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