Mining the Blockchain, Part I
2018-08-23 | 9 min read
Cryptocurrency news roared in like a lion in 2018. As 2017 came to a close, Bitcoin shares briefly peaked over $19,000 USD. It got me to thinking, a lot.
I made a mental note: I should have bought BTC a year earlier at the bargain price of $997 a coin. I also made a note to research how Bitcoin and other blockchain technologies would impact networks and businesses in 2018. This blog series is the result of that research.
Underneath the success of Bitcoin and Monero is a fundamental technology shift, called Blockchain. Understanding why bitcoins didn’t implode in the first year requires understanding how digital ledgers work. If you want that understanding, this primer is for you. Starting where it all began, out of necessity, blockchain became a method for allowing a new cryptocurrency to emerge and evolve, all designed to avoid middlemen.
In an article called A Brief History of Blockchain, Harvard Business Review calls blockchain a “quiet revolution.” Bitcoin and the underlying digital ledger technology that made it possible were introduced as an alternative to government-backed currencies nearly a decade ago. Today, cryptocurrency transaction volume is over $1B a day.
Blockchain is what is called a digital, or distributed ledger, essentially acting as a distributed database with no centralized data storage. Bitcoin was the first and most popular application of blockchain technology, though it is gaining momentum in a lot of other business applications. That underlying technology allows Bitcoin to be decentralized and fully transparent – this is one of the fundamental principles of the currency. Any person can trace the history of transactions through the blockchain at any time.
Bitcoin client discovery resembled earlier peer-to-peer protocols like BitTorrent, but the similarities ended there. Bitcoin does not need much bandwidth, and while the client accepted connections on port 8333, the client could participate in a limited fashion even without inbound connectivity. A one-time blockchain transferred several gigabytes of data, but subsequent activities were only small flows of a few hundred kilobytes.
Transactions are crowd processed on the Internet, where individuals can opt into processing individual blockchain transactions in exchange for bitcoin compensation. Those transaction processors contribute their computer’s CPU power, bandwidth, and electricity, and when they deliver an answer, they earn their own Bitcoins. We can call that the processing fee. The “work” they are providing is validating transactions, ultimately creating security by computing complex math problems. And what is the reward? In 2010, the value of the coins was negligible; Laszlo Hanyecz famously exchanged 10,000 of them for two Papa John’s pizzas, pegging their value at roughly a quarter-cent each. I am sure he wished he kept those.
The Value of Bitcoin
In 2010, a blockchain processor, often called a cryptominer, could earn 50 BTC for solving the complex problem. That reward was worth about 12 cents. Today, one Bitcoin is worth thousands of US dollars, and the solution rewards 12.5 BTC, or $87,500 given a target price of $7,000 per coin. You can always look up today’s bitcoin value. But how can a virtual currency gain value? It gains value because of trust, and that trust comes from the transparency and security of blockchain.
Compute Power Required
It is a race to the prize. Finding the solution to win the block prize of 12.5 BTC is approximately 3.5 trillion times harder than it was in 2010. Bitcoin, and all crypto-currencies like it, has a built-in mechanism that makes mining harder as more resources are thrown at it. This keeps the supply of new coins constant, while incentivizing further investment in coin mining hardware. Difficulty will continue to increase as long as miners can sell a coin for more than the cost of finding a coin.
Bitcoin’s proof-of-work is based on the SHA256 algorithm, a hashing function commonly used in security protocols. SHA256 can be massively optimized, and this has been exploited in the Bitcoin community. Miners turned first to GPUs, then FPGAs (field programmable gate arrays), and finally ASICs (application specific integrated circuits), seeking ever-higher performance.
Today, an ASIC miner can deliver 140,000 times the performance of a desktop PC (see table below on relative Bitcoin mining performance). Even pooling thousands of PCs proved inefficient vs. a single ASIC miner, thus nearly all Bitcoin mining is done via ASIC-miners today. However, other currencies are growing in popularity, and some are highly suited to distributed mining efforts.
Bitcoin SHA256 hashing performance
|Intel i7 CPU system||100 MH/sec||$300|
|Nvidia GTX 1080Ti GPU||1,000 MH/sec||$400|
|Antminer S9 ASIC miner||14,000,000 MH/sec||$2,320|
One of the biggest changes in the blockchain world is pooling of resources. As the work function to process a blockchain transaction grows more difficult, it becomes harder to find the next solution. To increase the odds of quickly finding the next solution, creative miners have turned to load balancing. Cybercurrency work functions can be easily distributed across large numbers of clients, a process called “pooling.”
Pool operators incentivize individuals to join a pool in exchange for a share of the profits. As mentioned earlier, pooling workstations is ineffective for Bitcoins due to the sheer performance advantage of ASIC miners. However, other blockchain applications utilize different proof-of-work algorithms, and some of these can provide very competitive returns when mined in pools.
Of course, whenever there are transactions being conducted in what are considered public forums, such as the internet, there will always be those looking to exploit system vulnerabilities for personal profit. Because of this, continuous active monitoring of your network is vital.
The Simple Equation
As of June, 2018, 0.32% of the world’s electricity is used to process bitcoin transactions at a cost of nearly $3B a year. In April, that number was 0.27%. That’s a big jump. This marks a shift in how transaction processing is being done. It also marks a shift in how distributed processing is changing the landscape of enterprises as they adopt blockchain for everything from B2B purchase orders to international corporate funds transfers to supply chain management. We can learn a lot from cryptocurrencies as they are innovating blockchain processing in new and exciting ways.
In the next chapter, we will look more closely at how these currencies work, and the reasons why new currencies rise and become viable. This is important when considering how to craft corporate policies not just for cryptocurrency, but using blockchain operations in your business and on your network. We may also explore threat vectors bad actors use to compromise systems, and how a network visibility architecture can ensure you have only legitimate transactions within your business network.