Cryptocurrencies; Mining for digital gold

After just over a decade since their genesis, the resurgence of cryptocurrencies is bringing along with it a new slew of debates and ambitions regarding the future of digital currency. With significant news coverage on the contesting top cryptocurrencies, the potential of NFTs and concerns over the environmental impact of minting, this energized interest highlights the capabilities of cryptocurrencies as a promising form of investment.

Bitcoin (BTC) is and continues to be the largest cryptocurrency in the world. Created by Satoshi Nakamoto in 2009, the purpose of Bitcoin was to deviate from our current use of centralized currency. Flat currency (what we used in our day to day lives) requires a third-party organization that demands fees to carry out the processes of, well, carrying out a transaction. These fees can amount surprisingly quickly, for example in 2020, Visa alone generated an annual revenue of $21.8B.

Cryptocurrencies such as Bitcoin solves this issue by removing the need for conglomerates like Visa, making sure that the transaction is direct from person to person.

Essentially a worldwide digital ledger, the blockchain records all transactional exchanges rather than having a third party or bank regulate. ‘Miners’ are then the ones to confirm these transactions by working out the algorithm and producing these ‘blocks’ that contain the verified information as part of the ‘Proof of Work’ (PoW) system. Validated hashes (long strings of numbers that match the inputted data) are the proof that miners have contributed to this process and new blocks are rewarded depending on the level of difficulty to produce a valid hash - the lower the target, the smaller the set of valid hashes, and the harder it is to generate one.

A lucrative operation, miners often cooperate with one another to form mining pools, sharing their computational resources in order to reap the shared benefits. According to Investopedia “miners gain 6.25 bitcoin for every new block mined—equal to about $294,168.75 based on February 24, 2021, value. This effectively lowers Bitcoin's inflation rate in half every four years.”

The potentials

Cryptocurrencies are a high risk, high reward commitment and a little trip down memory lane reminds us that although the current value of Bitcoin rose exponentially with a 224% from the start of 2020 in one year, it remains a flawed enterprise. Highlighting this was the Mt.Gox scandal where the renowned cryptocurrency exchange site accounted for 70% of all Bitcoin transactions until it was hacked in 2014 losing all its power and declaring bankruptcy.

Since the emergence of Bitcoin, hundreds of new contenders are developing to capitalize on the trend of digital currency. Looking at the top two cryptocurrencies, Ethereum is the second most popular cryptocurrency by market cap and is similar to BTC in that they are both decentralized and use the blockchain system.

A fundamental perk of ETH is that in contrast to Bitcoin, Ethereum’s volatility is a little more stable. This means that while the value of BTC can dramatically inflate, it can also drop just as easily due to the Bitcoin currency having a lower finite coin supply (only 21 million Bitcoins can be mined in total). Not only is Ethereum more stable, assets to ETH cheaper fees and faster transactions.

Despite this, ETH was never really meant to compete against BTC, with the main distinction being that its primary goal is to establish itself as a facilitator for decentralized finance (DeFi). You see, the integral criticism against Bitcoin was the reality of whether it would ever fully achieve its goal to replace national currencies as a medium of exchange and store of value. Ethereum on the other hand, doesn’t really concern itself with this goal. Instead, it was supposed to act as a complementary system focusing more on the potential of smart contracts with the added bonus of non-fungible tokens (NFTs).

Non-fungible whats?

Increasingly mentioned by artists capitalizing on the resurgence of digital art, NFTs can be bought using ETH. Completely unique and unexchangeable, NFTs serve as a stamp of ownership and are commonly used in the digital art community to as a form of authenticating work. NFTs recently skyrocketed in their demand as the tokens can be a worthwhile investment functioning as potentially rare collectables.

One of the most expensive NFTs to ever be sold was actually a character from on the online video game Cryptokitties, selling for the immense value of 600 ETH which amounts to more than $1.8m. New blockchain games are continuing to make use of the versatility of NFTs, including them in advanced virtual reality platforms like Decentraland, an interactive world featuring hundreds of NFTs attached to things like the land itself.

Right now, notable digital artists using NFTs include Mike Winklemann AKA Beeple who sold a collage tributing his ‘Everyday’ project. Creating a piece every single day without fail since 2007, the first 5000 pieces were included in the collage and sold online by the British Auction house Christies. The final price added up to a colossal $69.4m, making it the third most expensive artwork created by a living artist.

NFTs aren’t limited to just the art. Games platforms like Atari are hopping onto the NFT bandwagon with their recently announced partnership with Bondly. Atari, the company responsible for pioneering the arcade business with legendary games like Space Invaders and now more recently Rollercoaster Tycoon are minting their own NFTs to include in the Atari Metaverse. Available for purchase using Atari’s cryptocurrency $ATRI, their collaboration with Bondly (known for their branding with YouTubers like Logan Paul) demonstrates how cryptocurrencies are continuing to establish themselves as an exciting and worthwhile investment.

The setbacks

While the prospects of cryptocurrencies are certainly celebrated, multiple artists have pointed out a critical issue with digital currency that is arguably far more ne new blocks. According to the BBC, Cambridge researchers identified that Bitcoin’s energy consumption is around the yearly national energy use of Argentina, standing at 121 terawatt-hours (TWh).

Argued to be completely anti-efficient by David Gerard author ‘Attack of the 50 Foot Blockchain’, as the price of Bitcoin increases then so does the harmful environmental impact there is more of an incentive to continue mining. It is only recently that cryptocurrencies like Ethereum because are suggesting alternatives to PoW by trying to implement Proof of Stake (PoS) to reduce energy consumption.

The main difference to PoW is that rather than having everyone compete in the mining process, only validators are randomly elected to mint/forge a new block. Becoming a validator requires an individual to place a ‘stake’ in the network. For Ethereum 2.0, this is 32 ETH which is equivalent to around $12,000. This may seem like a lot, however the common alternative of PoW are mining pools which is a lot more expensive to set up due to the equipment needed to mine and proposes a more decentralized system as it encourages individuals rather than groups to set up their own validator nodes.

To infinity and beyond

Of course, the PoS system doesn’t completely eradicate the problem of investors buying a majority stake in a network and effectively controlling and approving fake transactions. The threat of an oligopoly is very much real and is an issue brought up by the Indian Finance Ministry in 2017, likening cryptocurrency to a ponzi scheme. As a consequence, India is proposing a ban on miners and traders in apprehension of the stability of cryptocurrencies especially after banks dealing with digital currency were swamped with investors.

Like all technological advancements, cryptocurrencies reflect the aptitude of human innovation and thinktanks who are diverging from regulated society, closer and closer to accomplishing the fantasy of a digital utopia. Cryptocurrencies not only provide a look at how digitality is seeping into our everyday lives, but also how attitudes towards a permissionless system of transactions brings with it its own critiques of having such a neolistic ethos.

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