The Antifragility of Bitcoin

Haven’t you heard? Bitcoin is dead.

No more hodling, no more lambos, no more dreams of a decentralized cryptocurrency allowing you to send money to anyone anywhere in the world without any intermediaries taking a cut.

Bitcoin is dead and gone.

In fact, it’s so dead, it’s not the first time it dies.

Say what?

Night of the Living Dead

In fact, Bitcoin has been proclaimed dead hundreds of times, the first time in December 2010 and the latest (as of the date of this post) in March 2018.

All of this may remind you of somebody’s grandma who is told she only has five years left at seventy and goes on to live to one hundred. But Bitcoin isn’t like that either. It isn’t a stubborn weed that just refuses to die.

Bitcoin is antifragile.

What is antifragility?

Whereas the concept of fragility is very easy to understand (think of Humpty Dumpty falling off the wall, shattering to a million pieces), antifragility is often confused with resiliency, and they are not the same thing. Nicholas Nassim Taleb, who coined the term “antifragility”, uses mythology to explain the difference.

Something that is resilient is something that can withstand damage. The example Taleb uses is that of the phoenix, which, dies in a burst of flames, only to be reborn again from the ashes. For antifragility, one must turn to a more exotic beast:

Hydra, in Greek mythology, is a serpent-like creature that dwells in the lake of Lerna, near Argos, and has numerous heads. Each time one is cut off, two grow back. So harm is what it likes. Hydra represents antifragility.

And so does Bitcoin. In fact, when you take a look at BTC’s colorful history, there hasn’t been a single time when it hasn’t been under attack from either hackers, the media, or bears. Put more broadly though, what Bitcoin has always been exposed to are disordering events. This is precisely what strengthens it.

In the words of Taleb:

Wind extinguishes a candle and energizes a fire.

Likewise, with randomness, uncertainty, chaos, you want to use them, not hide from them. You want to be the fire and wish for the wind.

The antifragile grows stronger when its exposed to disordering events. Just like muscles in a bodybuilder, stress makes them grow. And like every bodybuilder worth its salt knows, the old lady machines at Planet Fitness won’t cut the job. Real strength is built by using free weights, where your muscles have to move and stabilize the weights across different planes of motion.

The exact way in which your muscles must work every lift can’t be predicted, and so your body overcompensates the unpredictability by building stronger muscles.

Bitcoin has also been exposed to the unpredictable and has thus managed to face quite a few disordering events. The first person (to my knowledge) to make the case for Bitcoin’s antifragility was Jimmy Song in the following presentation. In the following paragraphs we will discuss the essence of Song’s arguments.

Technological Antifragility

According to Song, Bitcoin is antifragile from a technological standpoint. At $8,000/1BTC, Bitcoin represents a $161 billion prize for any hacker who can crack it open. And Bitcoin has always been under siege from different technical disordering events such as:

· Protocol Level Attacks, which could be hacks due to bugs in Bitcoin’s code;

· Denial of Service Attacks, in which thousands of diminutive transactions are sent over the network to clog it and render it unusable; and

· Different technologies, such as more innovative cryptocurrencies which could make it obsolete.

Each time Bitcoin is exposed to these disordering events, it grows stronger, as the core developers upgrade Bitcoin’s code or other solutions are developed on top.

Protocol level attacks led to developers fixing problems such as transaction malleability, DoS attacks have led to a more expensive to use Bitcoin, which subsequently led to the development of the Lightning Network, and Hard Forks have allowed the community to experiment with different versions of Bitcoin to choose the best.

Safety in Redundancy

Some sceptics might still be wondering how Bitcoin has been able to withstand these attacks and what makes us think that it will continue to do so and learn from the attacks.

The answer lies in nature.

Have you ever wondered why you have two lungs, or two kidneys, when one would do just fine? The reason is that nature has recognized that redundancy is safe. Again, quoting Taleb:

Layers of redundancy are the central risk management property of natural systems.

A core feature of Bitcoin are its redundancy layers. The Blockchain is stored on every node, when one copy would do just fine, and every miner is trying to solve the same block. That makes it more expensive, inefficient and costlier than other transaction networks such as Visa.

It also makes it safer: From Antifragility:

Redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens – usually.

Which is why Bitcoin also has a better shot at surviving than any other alt-coin – but more on that in a second.

The great thing about Bitcoin is all the experimenting it has fostered. Although the Bitcoin core itself is static and hard to change, anyone is free to implement second layer solutions to any and all problems any Bitcoin user may face:

The process of discovery (or innovation, or technological progress) itself depends on antifragile tinkering, aggressive risk bearing rather than formal education.

Besides the famous Lightning Network, other examples of second layer solutions are being built constantly, such as Drivechain’s side chain project which allow for the creation of altcoins or RSK labs smart contract capabilities.

Although we can expect that many of these solutions will fail, they will not affect the value of Bitcoin one bit, as the experimentation is going on at a different level. However, any successes will boost the value of Bitcoin, which grants Bitcoin an option-like quality, as articulated in this article by Steven Mckie.

Bitcoin vs. the Alt-Coins: The Lindy Effect

Before we continue with Song’s arguments, have you ever heard of the Lindy Effect?

Lindy is a delicatessen in New York, where way back in the sixties, actors would gather to discuss the success and failure of Broadway shows.

They came up with a fascinating finding.

They found out that if a Broadway show lasted, let’s say one hundred days, it’s future life expectancy was another hundred more. If the show had lasted two hundred days, the show could be expected to go on for another two hundred more.

That is the Lindy Effect, which Taleb has also applied to ideas, books, technology and everything nonperishable.

We all learn early on in life that books and ideas are antifragile and get nourishment from attacks – to borrow from the Roman emperor Marcus Aurelius (one of the doer-Stoic authors), ‘fire feeds on obstacles.’

What does this have to do with crypto?

Well, Bitcoin has been around for nine years, longer than any other cryptocurrency out there. Over the course of the past nine years, Bitcoin has been under all sorts of attacks. And yet it is still thriving.

The same can’t be said of any other alt-coin.

As Taleb says, “the only effective judge of things is time” – sure, a new ICO may be hyped to the moon but how likely is it to still be around five years from now. In addition, what could be seen as improvements on the simple Bitcoin model could turn out to be liabilities as alt coins grow more sophisticated.

Sophistication, a certain brand of sophistication, also brings fragility to Black Swans: as societies gain in complexity, with more and more ‘cutting edge’ sophistication in them, and more and more specialization, they become increasingly vulnerable to collapse.

But Bitcoin is dead simple in its objectives and ambitions, and with the Lindy effect, we can expect it to be around for at least nine years more. Every month Bitcoin is still thriving adds up to its life expectancy.

When it comes to long-term investing in crypto, there is no beating Bitcoin.

Of course, by the same extension, one could consider that the Lindy Effect means that Bitcoin will have a hard time dethroning fiat currencies and remittances services such as Moneygram and Western Union.

And to some extent this is true.

Can anyone envision a world without fiat within the next ten years? How about within the next twenty?

Fiat currencies have been the main currency type for the past fifty years. Although crypto may dethrone all fiat currencies as the main currency type, it isn’t hard to imagine that some governments will hold on obstinately to their money printing machines for a long time to come.

Economic Antifragility

The second way in which Bitcoin is antifragile according to Song is economically. Specifically, this refers to how Bitcoin grows stronger from economically disordering events such as:

· The collapse of companies in the Bitcoin ecosystem.

· Entire governments banning the use of Bitcoin; and

· Irrational exuberance and Boom-Bust cycles.

Although many Bitcoin related companies have crashed, there is perhaps none as infamous as Mt. Gox.

Mt.Gox actually stands out for Magic the Gathering Online eXchange, and that’s just what it was in the beginning. But that idea didn’t pan out, so in a few years Mt. Gox did a complete 360 and became the first Bitcoin exchange. In a few years Mt. Gox was handling most Bitcoin trades worldwide.

Yet the site never grew out of its playing card game mentality. It failed to meet regulatory requirements or establish adequate security measures. Without anyone noticing, hackers stole 744,408 Bitcoins from Mt. Gox’s wallets, worth over $6 billion today! The site eventually filed for bankruptcy in 2014, causing a 34% crash in the market price of Bitcoin.

Panic followed in the wake of the Mt. Gox fiasco, and although hindsight is 20/20, its is now easy to see that that event was necessary to produce a stronger ecosystem.

There are now several Bitcoin exchanges, most of them use heavy encryption and monitor compliance with applicable regulations closely. Hackers continue stealing Bitcoin from the exchanges, but each time it happens, the amount stolen is less. The impact on the market is less pronounced. HODLers don’t even blink an eye.

Ultimately, some or all of the existing exchanges may fail. But the community is quickly getting around that problem with the development of decentralized exchanges.

And everyone now know that you can’t have your coins lying in the exchange.

(You do know that, right?).

Economic disordering events can also come in the form of government bans. China, for example, has been trying to ban certain aspects related to Bitcoin and other Cryptocurrencies such as exchanges. One of the first crackdowns came in 2017, when Chinese exchanges accounted for 45% of the global total trading volume. After the announcement by Chinese authorities, Bitcoin prices suddenly dropped 20%.

Other crackdowns have followed, through 2017 and 2018, but don’t tell BTC. The price of one Coin quadrupled in the months following the first China ban, and the price is still over double what it was at the time of the announcement of the China ban.

Bitcoin investors have found that, even if a very significant player in the crypto-sphere moves to ban Bitcoin, the effect will be short lived as exchanges and user move to more favorable jurisdictions. This has prompted some forward-thinking governments (and individuals) to strive for crypto-friendly regulations.

Even without those, we now know that Bitcoin is antifragile to government intervention.

Finally, Bitcoin has exhibited antifragility towards irrational exuberance.

Irrational exuberance was a term coined by the famous (or infamous to the crypto-community) economist Alan Greenspan to describe the high P/E ratios of the dot com bubble. Bitcoin has also exhibited irrational exuberance more than once, however with every boom and bust cycle HODLers have learned to ignore the price and just hold on to their coins.

There are few groups of investors as stolid as Bitcoin investors. Hard core HODLers could see the price of Bitcoin fall below $1,000 and most won’t sell, as they have faith in the long-term possibilities of BTC.

Social Antifragility

Finally, the third way in which Bitcoin is antifragile is from a social or community standpoint.

The first disordering event anyone who joins the Bitcoin community has to face is the fear, uncertainty, and doubt attack, a.k.a as bitcoin is a tulip attack.

As I mentioned at the start of this article, Bitcoin has been called a tulip, a bubble, or an outright fraud from the start, by both well-known economists, investors, politicians and businsmen; regular Joes and Janes at the bar, the hair salon; and the ubiquitous well-meaning family member at the dinner table.

Let’s look at just a few famous Bitcoin bashers:

Paul Krugman – Nobel-Prize Winning Economist.

Joe Weisenthal – New York Times Columnist

Mark T Williams – Finance Professor at Boston University School of Management

Robert Shiller – Nobel-Prize Winning Economist and Author of Irrational Exuberance

Warren Buffet – Value Investor and Real Life Scrooge McDuck

Jeffrey Robinson – Author of Bitcon – The Naked Truth about Bitcoin

Axel Weber – UBS Chairman

David Yermack – Finance Department Chairman at NYU’s Stern School of Business

Jim Rickards – Author

Jamie Dimon – JP Morgan CEO

Ben Bernanke – Former Head of U.S Federal Reserve Bank

Chances are slim that the titles of these anti-BTCers compelled you to cash out of your Bitcoin holdings. These so-called experts are appealing to their authority to make claims about Bitcoin’s future, but they have no idea of what that will be like. No one does.

But who’s going to believe in a bunch of old rich guys who have no skin in the game and probably haven’t tried one single Bitcoin transaction?

More substantial than famous people bashing Bitcoin are governance takeover attacks. Although the Bitcoin community is composed of many different types of individuals and business, they each have their own interests. Although this is an inherent feature of any democracy, organized minorities have usually found a way to bend the situation in their favor.

This was a deliberate threat to Bitcoin when over 50 businesses joined in the New York Agreement to dictate a solution to the Bitcoin scaling debate which naturally favored them.

These business owners expected to have things their way, but unexpectedly the community fought back and, unlike regular democracies, no one is hard bound to trading a cryptocurrency.

The result? The famous Bitcoin – Bcash fork.

And whereas forks may be seen as flaw in Bitcoin, as it represented a significant disordering event, now that the dust has cleared, and preferences have been clearly signaled, it is clear that the BTC community is stronger and more united than ever.

Which leads us to the final point in which Bitcoin is socially antifragile, the ability to fork and choose alternatives. This has allowed Bitcoin to grow stronger as different models are tested at the same time and only one survives. Let’s quote Taleb, quoting Jean-Jacques Rousseau, quoting Machiavelli:

Jean-Jacques Rousseau wrote, citing him: “It seemed, wrote Machiavelli, that in the midst of murders and civil wars, our republic became stronger [and] its citizens infused with virtues… A little bit of agitation gives resources to souls and what makes the species prosper isn’t peace, but freedom.”

No Guarantees

This brings us to the end of our study of the antifragility of Bitcoin based on Jimmy Song’s interpretation of Nicholas Nassim Taleb’s work. An important point underlying all of Song’s discussion is the importance of the lack of guarantees. There are many ways in which you can lose Bitcoin. And price fluctuations are an ever-present threat.

And this breeds prudence, judiciousness and temperance in every individual Bitcoin investor. The problems faced by the community also breed creativeness and out of the box solutions to problems we didn’t know we have. That makes Bitcoin and us HODLers antifragile.

If we have skin in the game, what doesn’t kill us will make us stronger. But that’s the subject of a future article.

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What is Cardano: A Cardano Beginner's Guide

A decentralised public blockchain

In a world where everything moves at a really fast pace and the word “innovation” is now commonplace, there’s been a revolution in the decentralised technology space. Over the past couple of years, we’ve witnessed technological innovation, namely cryptocurrency and Blockchain technology—the first of its kind. There’s a promising cryptocurrency you need to know about, named after one of the most prominent scientists of the Renaissance period: Gerolamo Cardano.

Dubbed “blockchain 3.0”, Cardano is a fully open-source, decentralized public blockchain and cryptocurrency project. It’s in fact the first blockchain platform to be built from peer-reviewed academic research, featuring some of the world’s foremost universities (among which are the University of Edinburgh and the Tokyo Institute of Technology).

It was founded by Charles Hoskinson, former Ethereum CEO and early founder. Its official launch was on September 29, 2017.

Believe this: the Cardano platform has shown a lot of promise by living up to huge expectations, being the first of its kind. The Cardano team consists of a large global collective of software developers, researchers and engineers. They’re all working together with the sole aim of developing a smart contracts platform which is capable of delivering more scalability and improved performance and – at the same time – featuring advanced functionality than most blockchain platforms.

The Cardano platform is fully open-source, and its entire code is on GitHub.

History of Cardano

Cardano has an exciting history.

Hoskinson was an early founder of Ethereum before the project launch. He worked with Jeremy Wood who was in charge of operations.

Later on, both of them left Ethereum but they caught up once again and had the chance to work together, this time starting up a company called IOHK. IOHK builds cryptocurrencies and provides innovative blockchain solutions for institutions, government agencies, and enterprises.

In 2015, a group of Japanese investors approached IOHK’s executives. They wanted to build a blockchain which would operate both as a cryptocurrency and a smart contracts platform, but with more advanced features than other blockchains. In essence, they wanted to build a blockchain which offered better security and was also more reliable than any other blockchain out there—IOHK was the perfect fit for the idea.

https://www.youtube.com/watch?v=r0Rkdg_ip_M

Cardano Roadmap

After over 3 years extensive research and development of the blockchain platform by a global team of experts in various fields,  Cardano was officially launched on the 29th of September, 2017.

Its development is split into eras, with each era featuring major improvement and introduction of some features. It’s currently in its bootstrap era, which they have named the Byron phase. In this current era, IOHK is working on stabilizing and tweaking its blockchain, and making significant improvements to the Cardano core.

In next one, Shelley, the main goal is to ensure that necessary features for a decentralized blockchain are in place. This would allow the platform to grow into a full-blown decentralized and autonomous blockchain platform. The Shelly phase is expected to kick-off mid-2018.

After that, the Goguen phase will feature development and implementation of smart contract functionality into the blockchain.

Next is the Basho phase, which will be mainly focused on performance improvements. And lastly, in the Voltaire phase, IOHK will add a treasury system and governance.

Features and Value Proposition

According to Cardano’s website, “The scientific rigor applied to mission-critical systems such as aerospace and banking has been brought to the field of cryptocurrencies, with a high assurance implementation. We believe this is the first time that this has been done.”

Cardano uses a custom proof-of-stake (PoS) algorithm called Ouroboros—which they developed themselves. The proof-of-stake is better than the proof-of-work algorithm; it doesn’t waste much energy and also processes transactions much faster than proof-of-work.

Of the numerous benefits of the proof-of-stake algorithm, it has a single flaw: security. PoS algorithms are very hard to develop securely. Majority of blockchain platforms – Bitcoin and Ethereum included – use proof-of-work algorithms, partly because of this security issue with PoS systems.

However, with Ouroboros, Cardano has somehow managed to fix this issue. The algorithm comes with a mathematical proof of security that’s been carefully peer reviewed, and it was presented at Crypto 2017, the popular annual cryptography conference.

The main goal is to build a platform for developing decentralized applications and smart contracts. The smart contracts will then be processed using a process called formal verification. Formally-verified code can be tested the same way scientists test their theories.

The advantage of this is that Cardano’s code and smart contracts are provable, and this makes them more secure and reliable than other blockchain platforms. Also, this is realizable because the core of the Cardano platform is written in Haskell, which is one of the most secure languages in existence.

Pre-sale and ICO

Cardano’s ICO was targeted at Asian markets, with 94.8 percent of investors holding ADA vouchers who participated in the ICO being Japanese.

This was actually a brilliant idea, considering the fact that the European and American markets were saturated with cryptocurrencies already. The token sale began in September 2015 and ran till January 2017. It raised a total of $62 million USD. During the token sale, the average price for 1 ADA was $0.0024 USD.

The circulating supply is the 30 billion ADA tokens which were sold during the ICO (25,927,070,538 ADA, actually), with 45 billion tokens representing the maximum supply of ADA.

An amount equivalent to 20 percent of the about 30 billion ADA sold during the ICO was  distributed to the three components of the Cardano ecosystem which are part of the Technical and Business Development pool, namely IOHK, Emurgo and Cardano Foundation.

With the amount distributed to the Cardano team and those sold at the ICO, the total supply of allocated tokens stands at 31,112,483,745 ADA.

Screen Shot 2018-02-05 at 4.35.38 PM.pngADA

On October 1, 2017, Cardano’s ADA token was made available for trading on the Bittrex exchange.

As of February 5, 2017, ADA is valued at $0.328677 USD, with a market capitalization of $8,521,631,763 USD.

Meet Team Cardano

Cardano is made up of three companies, each having distinct roles in the project: IOHK, Cardano Foundation and Emurgo.

IOHK is a world-class engineering and technology company committed to using peer-to-peer innovations to provide financial services to three billion people that don’t have them. The group is contracted to design, build, and maintain the Cardano platform until 2020.

The Cardano Foundation is non-profit organization based in Switzerland. It acts as the guardian of both the Cardano ecosystem and community.

It aims to proactively partner with governments and regulatory bodies, as well as forming strategic partnerships with enterprises and other open-source projects to further global adoption of the technology.

Emurgo is a company formed to integrate, develop and support businesses who want to utilise Cardano’s decentralised blockchain.

If you’re interested in learning about other projects, check out our other posts on Ripple, Litecoin, Dash, Stratis or EOS.

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What is Proof of Work? Crypto 101

What you need to know:

  • Proof of Work is a solution to the so-called Byzantine General’s Problem.
  • The Byzantine General’s Problems describes the difficulty that distributed computing systems have in reaching a consensus when communications channels are unreliable.
  • Proof of works solves the problem by requiring a significant amount of computing power to find a valid hash for each message through a process called mining.
  • An attacker would have to have more computing power than the rest of the mining network to produce a succesful attack.

Have you ever wondered what makes Bitcoin so special?

Or perhaps you have heard the term Proof of Work and wondered what it means?

Proof of Work Meme

Proof of work is one of the key measures underpinning Bitcoin and most other cryptocurrencies. This post will explain what it all means.

Byzantine Solutions

Bitcoin was designed by the mysterious Satoshi Nakamoto as a proof-of-concept for a solution to a previously unsolved problem in distributed computing called the “Byzantine General’s” problem.

The problem describes a group of Byzantine Generals who have encircled an enemy city, each commanding a portion of the Byzantine army, and each trying to decide whether to attack or retreat. Only a coordinated, simultaneous action (either Attacking or Retreating) would be successful, an uncoordinated action would be disastrous as anything less than the army’s full strength would be insufficient to storm the city and a retreating army at less than full strength could also be effectively routed.

Each general must cast a vote on the correct course of action and send it to each of the other generals. As the armies are spread out, communication is difficult, and the decision must be relayed via messengers. However, the messengers could get captured by the enemy city, which may replace them with new messengers with different messages to disrupt the coordinated attack.

The Generals must send some messengers across enemy territory, where the chances of getting caught are very high.

Can’t we just hash this out?

How can this problem be solved? Imagine that the Byzantine Generals own modern computer which allows them to use hash functions. A hash function is simply a function that receives a string of words and generates a seemingly random 64 alphanumeric number (called a “hash”).

For example, if I input a string such as “LET’S ATTACK ON WEDNESDAY” the function will generate the hash bee215a407b438cc74511780049e8013fa1b5d0136840bd71e912b20363f585e. The key to hash functions is that the same string will always generate the same Hash.

You can actually check this by using an online hash function calculator and checking that “LET’S ATTACK ON WEDNESDAY” will always generate the hash
bee215a407b438cc74511780049e8013fa1b5d0136840bd71e912b20363f585e.

So the Generals agree that for a message to be valid, the hash of the message must start with a fixed number of zeros (let’s say eighteen). To do this, they append a random number to their string (called a number only used once or nonce) so that “LET’S ATTACK ON WEDNESDAY 7dfh6r7f7w” generates the hash 000000000000000000fbf4c8996fb92427ae41e4649b934ca495991b7852b855 (this hash is completely made up, and you’ll soon understand why).

There are two characteristics about hash functions that make them great for this sort of task. The first is that there is no easy way to know which string will generate which hash. The only way to find which string will generate a hash that starts with a fixed number is to guess over and over again.

If you want to know how hard it is to generate such a hash, may I suggest you try coming up with a string that generates a hash starting with eighteen zeroes? Go on, I’ll wait…

Did you give up? I can’t blame you. It is estimated that the Bitcoin network currently has to make almost one octillion computations or guesses to find the appropriate nonce for a Block. That’s one followed by 30 zeroes! If it took you 10 seconds to make a guess, that’s still 31 million trillion years to find the nonce!

Modern computers excel at this type of repetitive task, and they would take only a couple of hours to guess the appropriate string.  Custom-made mining rigs are even more efficient, and they can find nonces in minutes. In fact, the combined computational power of the Bitcoin network allows them to make 10,000 quadrillion guesses every second! Of course, modern Bitcoin facilities are massive computer warehouses like the one below:

The other great thing about hash functions is that they only work one way, meaning that given any Hash, it is impossible to know which string generated it.

What is proof of work?

So the generals start appending the nonce to their messages (such as “LET’S ATTACK ON WEDNESDAY 7dfh6rhas86as97as097f7w). Although it was very difficult to come up with the correct nonce, it is very simple to check if the string and nonce generates the correct hash.

The generals now have a way to send messages which can’t be easily tampered with, as even if the enemy city intercepts the messengers, and even if they also have the same computers, it would take them a couple of hours to modify the message. If the generals send a couple of messengers each carrying the same message, the time it takes to modify the message ensures that at least one messenger with an untampered message will get to the other messengers before the enemy city is able to send a tampered message.

Let’s take things a step further. Let’s give the enemy city a supercomputer which can outperform the General’s puny computers. Let’s also assume that there are thousands of generals trying to lay siege to thousands of cities, all at the same time. The generals could then group their messages (we will call groups of messages “Blocks” from now on) and pool their computer’s hashing power to find the appropriate nonce.

Although it is very difficult for a single computer to guess the correct nonce, once one computer in the network has found it is very easy to share it with the rest of the generals, and everyone can validate that the correct nonce has been found in seconds.

As long as the combined computing power of the generals exceed that of the cities under siege, the odds will be strongly stacked in their favor. This is what proof of work is all about.

So what does this have to do with Bitcoin?

Its time to go back to Bitcoin. Have you ever wondered why somebody just can’t Copy Paste Bitcoins and make themselves rich?

The answer is the Blockchain. The Blockchain is essentially a public ledger where anyone can see who owns Bitcoins at any moment in time. The key to the Blockchain’s security is that Blocks containing new transactions will only be added if they contain the nonce that generates a satisfactory hash, proving that a significant amount of processing power was spent in figuring the nonce. That is Proof of work in action!

How does this all work in practice?

Let’s say I have one Bitcoin and I want to duplicate it by sending it to different people at the same time. I send two transactions, one where I send my Bitcoin to Bryan to purchase an online good and another where I send the same Bitcoin to Gregg to purchase another online good. For simplicity’s sake, assume I’m trying to buy very expensive digital books. This is what is known as a “double spending attack”. Let’s assume I also have a state-of-the-art mining rig to help me with my fraud.

What happens next?

Both transactions enter the mempool, which is a midway house of sorts. There they sit until they are picked by a Bitcoin miner, grouped into a Block, and mined. Mining is simply the act of finding the nonce for the Block which generates a satisfactory hash. After a Block is mined, it is added to the Blockchain.

Now, my two transactions aren’t the only two transactions waiting to be confirmed. The mempool contains at any one-time thousands of transactions. You can check the size of the mempool here, which is the aggregate of all transactions. A transaction is on average 495 Bytes and a single Block can contain 1,000,000 Bytes (1MB) worth of transactions.

So back to my attack. I first wait for someone else to validate one of my transactions. After a couple of minutes, the first transaction is confirmed, Bryan receives his Bitcoin and sends me my online book, I then furiously set my mining rig to mine the second transaction. Since it’s a powerful standalone rig, it takes it about an hour to mine the transaction. What happens next?

Well, a couple of things. Since the Blockchain’s ledger recorded an hour ago that I already sent the same Bitcoin to Bryan, I have to go back and insert my fraudulent Block before that Block and all Blocks validated by honest miners after that. I would then propose an alternate Blockchain to the rest of the network.

Here is where my con fails. The network will only recognize the longest Blockchain as the valid one. So I would have to generate a longer Blockchain than the existing one. That means that my puny individual mining rig would have to out-speed the entire Mining network, finding the proper nonce for the Block containing my fraudulent Block and all Blocks after that! And so, the second transaction is never recognized as valid and my plan is thwarted.
Therein lies the power behind proof of work. Any would-be attacked has to have at his disposal greater computing power than the rest of the combined miners.

Of course, it is not inconceivable that someone with malicious intent could acquire that amount of computing power. This is what is known as a 51% attack. However, that would require a significant investment in the Bitcoin network. And who in their right mind would try to undermine a system in which they have made a significant investment?

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