interest, interest 2017

Cryptocurrency Intricacies

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By Dayrius Tay

Cryptocurrency is a topic that never fails to feature prominently in all forms of media, be it investment advice in financial magazines, reports of money laundering on the papers or even irate rants by PC enthusiasts on Reddit. This highlights the disproportionate amount of attention cryptocurrency has attracted from both speculators and the general public.

Cryptocurrencies are radically different from normal currencies, and some of its quirks may seem counterintuitive and absurd. However, this is the result of having a currency backed by math rather than gold, miners rather than governments. One of this oddities is that an entity with more than half of the network’s computational power acquires god-like powers. Termed a 51% attack, this hypothetical entity could potentially spend coins repeatedly, block transactions and earn all the rewards of mining. The repercussions of this phenomenon would be an erosion of confidence in the currency due to the potential to be manipulated.

You might be thinking, won’t the creators of cryptocurrency have thought of this? The creators probably have, as his vision likely was for that cryptocurrency to become so large that no single entity could own half it’s computing power. Although this holds true for large currencies, miners for these currencies also combine their computing power in a mining pool to improve consistency. These pools tend to grow so large that they surpass the 50% mark, posing a threat to the integrity of the currency. For smaller “alt-coins”, 51% attacks are not unheard of. Already two cryptocurrencies have fallen prey to this technique, Krypton and Shift.

If this sounds alarming, fret not. The second largest cryptocurrency, Ethereum, pioneered an algorithm that is resistant to ASICs (application specific integrated circuits), specialised processors extremely adept at only one task. Ethereum is mined using GPUs (graphics processing units), which typically processes graphics. As the GPUs used for Ethereum mining are consumer products, the computing power would naturally be spread out as the cost of entry is low. As speculators snap up suitable GPUs, the prices of certain GPUs are currently ludicrous and other PC components also suffer from marginally inflated pricing. Not a great time to build a gaming PC.

On the contrary, it’s a great time to build mining rigs – systems dedicated to mining cryptocurrency (typically Ethereum). Both brick-and-mortar and online retailers are seizing the moment and selling custom mining rigs. These systems claim to break even after approximately one to two years. Mining is simpler than ever with current software being as fuss-free as downloading and running the file. Gone are the days when mining was reserved for only the most advanced users with convoluted 40-step command line sequences acting as deterrents to the unacquainted. Effectively anyone with a decent computer can dabble in mining, especially useful for those exploiting free power.

Bitcoin used to be mined with GPUs sparking the first mining craze in 2013 and causing hardware prices to skyrocket. As the algorithm for Bitcoin is static (SHA-256), ASICs were created exclusively for this purpose. As these are specialised machines that sound like a jet taking off and guzzles power (they are designed for industrial deployment), most small time miners shun them in favor of GPU mining. This leads to centralisation of mining power in large-scale mining plants set up in locations with cheap power such as Iceland. These hyper-efficient plants stifle competition from small-scale miners in residential areas. For comparison, power prices in Singapore are approximately three times that of Iceland, making mining Bitcoin unfeasible locally due to the competitive nature.

As all cryptocurrencies are generated and secured by miners, it can be likened to an economic market. The barriers to entry for mining are hardware costs and power costs, which balances off the prospective rewards of mining. This is a system that regulates itself by supply and demand. For many currencies the supply of currency is fixed by the system and hence the demand will adjust appropriately as miners in higher cost areas become unprofitable and move their computing power elsewhere, reducing the difficulty for others in a system of negative feedback.

Like many promising ventures, cryptocurrency is an irresistible temptation until you are acquainted with its intricacies. The cut-throat world of cryptocurrency is like a brainless robot, mindless and merciless, but a golden opportunity for shrewd manipulation.

Disclaimer: This author owns some Ether