Monday, 11 December 2017

Curious Bitcoin curiosities

Time for a cup of reality?
Say yesterday, you meandered into a diner near Wall and Broad as you plotted your future Bitcoin futures strategy. It was a rare diner that takes bitcoin for food. Your lucky day!

You get your Morning Joe and it costs you $3 buckaroos.

Magic happens. You pay by bitcoin.

Or did you?

Did you wait the average of ten minutes for your transaction to be processed?

I thought not. It wasn't a real bitcoin transaction. It was just a promise. Probably through someone like Coinbase, the big mama of bitcoin broking. There's nothing wrong with that, it is just not really the libertine free-wheeling anarchy that most people think it is. It's just another layered financial service.

If your underlying vendors comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations then you're known, watched, traced, observed. Every bitcoin transaction is completely traceable until the exit points run afoul of illegal anonymity. Tumblers may tumble, but your Merkle tree with its double sha256 is an inviolable truth despite its leading zeros.

That ten minutes you would have to wait is baked into the system design. If miners process your transactions faster they get asked to find more zeros to maintain the 10 minutes. That is how it works.

Do you know how much your $3 coffee cost in fees?

Let's look at that last 24 hours:

Capture from https://blockchain.info/stats
(click to enlarge)
Yep, the cost per transaction was $121.55 in fees yesterday. Your coffee cost $3 plus $121.55 for a total of $124.55. And that excludes the processing fee which may have been absorbed by the retailer. Makes retail fx spreads look like a gender neutral young choir participant , no?

But, but, you didn't really pay that much I hear you say? That's right. That is the clever trick. Whilst the miners earned nearly $40M yesterday for processing just 160 blocks or wee little hashes, 18% was the optional fee embedded into the protocol, and the vast majority of the rich rewards were just new issuances. Free bitcoin for all lucky miners! A dilutive gift from the protocol God. An economics PhD is not required for further analysis - just a couch.

Look at the awesome power of the bitcoin processing:

Bitcoin Hashrate on a log scale from https://blockchain.info/charts/hash-rate?timespan=all&scale=1
(click to enlarge)
That's right 12.653 billion GigaHashes per second. Colour me impressed! That is, a bunch of hardware throwing random bits at a hashing function to combine with the tree that is called a chain so that 160 blocks can complete during that day. Pesky little hard to find runs of zeros. It is about 2500 binary operations to do an SHA256 double hash to see if you have enough zeros on the left of the slot machine to be a winner. That makes a supercomputer with roughly 31.6 x 10^21 binary operations a second or about 17.1 x 10^24 ops per block. Phew. That's 17.1 yotta ops or ~17,100,000 exaops, or 17100000000000000000000000 ops: to process a block.

Puts the power bill into perspective, no?

(don't click to enlarge this one)
Feel the POWER ... bill!


Email thought about doing proof-of-work before bitcoin came along. It was a thought bubble about preventing spam. Perhaps if you make sending email cost a tiny amount then spammers sending millions of emails may think twice? Hmmm. Fortunately, we are not so burdened with our email.

Well, at least it is secure?

There are some shady and simply unknown characters in the mining industry. It is best to keep your head down rather than invite regulation if you can, so let's emphasise unknown.

In bitcoin land, the majority and the longest chain, or tree branch, or direct acyclic graph, or whatever the thingy with the hash in the Merkle tree wants to be called today, is the law. The most popular and biggest wins. As long as there are lots of people it is hard to overrule the majority opinion. So how many people would it take to subvert the transaction truth?

Four:

Mining pool share for the last 24 hours
(source: https://blockchain.info/pools) 

(click to enlarge)
Four is enough for a majority. I'm sure they're fine upstanding citizens. All with a AAA rating from the Moodster and Poor Standards no doubt. In the past, there were times when only one dudette controlled the mining flow - or 50% of the power. Bitcoin survived that despite the violation of safety. It shouldn't have to trust the humanity of one as that was never the point.

It is a bit hard to work out a discounted cash flow model on all of this. Especially as we don't know how it ends, or rather we know it does end. No more coins will be issued. There will be no incentive to mine. There is a finite horizon, the bitcoin event horizon, that is its own y2k, 2038, problem to solve with a twist that there is no tomorrow.

Not to worry, your bitcoin will likely be stolen before then. IBM and others are hoping quantum supremacy will be next year. Maybe not. It is not decades away though. Whilst your hashes will be safe, your wallets will be open for all to pilfer thanks to the quantumtastically hackable public key encryption that protects your transactions. Even the ASX's so-called perfect forward secrecy will be broken by the very same Digital Asset monster.

At least everyone has their own copy of the database?  Well, it grew to over 100GB in 2016. Feels efficient that everyone should have a copy, no? No wonder the financial system keeps growing from 2% of the economy a bit over a hundred years ago to the 6-10% of GDP it represents in most modern estates. Fintech be damned. We keep finding inefficient ways to shoot ourselves in the foot.

So, now your cup of coffee is making someone else rich with a C note of fees; the transaction could be foxed in its recording; its processing faith rests with four people from a self appointed few agreeing not to collude; you're polluting the world and killing people via the pollution from your excess electrickery consumption; and you're supporting a criminally inefficient transaction system with bloated databases replicated everywhere that is favoured by child pornographers, mobsters, cyber hackers, and terrorists. You and your bloody morning coffee!

*Shrug*

In cryptography we trust. In Bitcoin we place our faith. Pass on the ICO. Amen.

Happy "efficient" trading,

--Matt.

PS: Worth reading, Is your exchange for real? Kipp Rogers on Bitcoin exchanges, "Some questions for Crypto-Exchanges"

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