John DiMarco on Computing (and occasionally other things)
I welcome comments by email to jdd at cs.toronto.edu.

Mon 11 Dec 2017 14:02

Bitcoin, Cryptocurrency and Blockchain

As the price of Bitcoin goes up and up, talk increases about Bitcoin and other cryptocurrencies, like Litecoin, Monero, ZCash, Ethereum, and many others. Plenty is being said, and it can be a bit confusing.

But there is no need to be confused. Bitcoin and other cryptocurrencies are basically simple. They are not coins. They are simply lists. Each cryptocurrency has a master list. The list typically contains information about who and what (i.e. amounts). The list is designed in a clever way, using computer software, so that people all over the world can have identical copies of the list and keep it up to date, without someone having to be the holder of the "master copy". But it is still just a list.

The sort of list used for cryptocurrencies is called a "blockchain", and it has some special properties. One particularly clever property is that you can't normally just add anything you want to the list, there is a scheme to control that. Instead, you need to arrange with someone already on the list to give up (some of) their place on the list to you.

So when someone says they bought some Bitcoin and they're going to make a lot of money, what they mean (whether they realize it or not) is that they paid somebody some money to put them on a list, and they hope that someone later will pay them even more money to get off it.

As for me, I haven't "bought" any. As I write this, cryptocurrency prices are rising fast. But I think what is happening is a kind of run-away positive feedback loop: people are buying in because it is going up, and it is going up because people are buying in. Eventually it will run out of people to buy in, and it will stop going up. Then some people will sell, causing the feedback loop to go the other way: people will sell because it is going down, and it will go down because people are selling.

That being said, one thing in particular about cryptocurrency is making me grumpy about it, even though I don't "own" any. Recall I wrote that you can't normally make yourself a new entry on a blockchain list, but there is a way. You can do an enormous lot of computations on a computer in an attempt to find new special numbers that can be used to create new entries on the list. This process is misnamed "mining", but it's more a sort of computerized brute-force mathematical searching. Those computations take a long time and use a lot of electricity. Moreover, even the ordinary transactions generated by people "buying" and "selling" a cryptocurrency is a computational burden, since there are so many copies of the list around the world. Each list is very big: Bitcoin's is more than 100GB, and every copy need to be updated. This uses electricity too. In fact, digiconomist.net estimates that Bitcoin computations alone presently use up enough electricity to power more than three million US households. Furthermore, the "mining" computers use GPUs that are really good for graphics and machine learning, but because cryptocurrency "miners" are buying them all up, those GPUs are getting harder to find for a good price. Personally, I am not happy with the challenges I am having in finding enough GPU resources for our computer scientists, who are hungry for GPUs for machine learning. While high demand for GPUs is maybe good for GPU manufacturers (for example, according to fortune.com, Nvidia made U$150M in one quarter in 2017 selling GPUs to cryptocurrency "miners"), surely all those GPUs, and all that electricity, can be used for something more useful than cryptocurrency.

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