Bitcoin death spiral

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Sigh.

Another day, another slew of negative, fear-inducing, factually-inaccurate cryptocurrency reporting in the mainstream media.

The focus of my wrath is this article in Market Watch, titled Bitcoin is Close to Becoming Worthless.

Written by a professor of finance, it carries some weight.

But it’s also wrong on many technical levels.

The author’s basic claim is this:

With the price of bitcoin dropping, bitcoin mining has now become unprofitable.

If mining produces no profits, he says, miners will abandon the network. It will grind to a halt and bitcoin will become worthless. This phenomenon is known as the “bitcoin death spiral.”

Here’s why he’s wrong…

It’s true that bitcoin mining is currently unprofitable (we reported as much recently). However, the Bitcoin system is designed to adapt and morph to account for this.

It does so by altering the “difficulty” of mining.

This gets a little technical but bear with me.

Bitcoin Mining Background

In very simple terms, bitcoin miners process transactions in “blocks” by using extensive computer power.

That computer power directed towards the Bitcoin network is known as hash power. When lots of miners are working on the network, the hash rate goes up.

One Block Every Ten Minutes

The system is designed to produce one block every ten minutes.

Everything else being equal, if miners throw more computer power at the network, blocks will be produced faster. 

Too fast, actually. Miners get a reward (in bitcoin) for every block they produce. If blocks are produced too quickly, too much bitcoin is released.

That’s where the self-adjusting algorithm comes in.

When hash power is high, the algorithm automatically adjusts to make it more difficult to mine a block, slowing down production to meet the ten-minute block target.

The Problem Today

The problem we face currently is that miners are leaving the network. Some mining facilities are closing and throwing away equipment.

Hash power on the network is now lower, but the difficulty remains somewhat high.

In other words, the remaining miners have to work incredibly hard (using much more computer power) to produce the same block – hence the lack of profitability.

The “Difficulty” Just Readjusted

But it works both ways. With fewer miners contributing hash power, the algorithm will automatically adjust to make it easier and ultimately return to profitability.

That readjustment happened this week, with Bitcoin’s difficulty dropping 15%. 

Every Two Weeks

Bitcoin’s difficulty is set to re-adjust after every 2016 blocks (roughly every two weeks).

The “death spiral” is only possible if block production slows down so much that we don’t make it to the next difficulty adjustment.

Worst Case Scenario

If that reality plays out, there’s another option.

Bitcoin could execute a “hard fork” and form a new blockchain where the difficulty is lower.

Still confused? This tweet from Nic Carter sums it up quite neatly.

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As blockchain expert Andreas Antonopoulos explains: “The chances of [a death spiral] actually happening are pretty low. The chances of it happening and nobody doing anything to fix it is near zero.”

So, as usual, the mainstream and financial media are blowing things out of proportion without explaining the full picture or technical background of bitcoin. 

Intrigued? Here are some more resources:

Proof of Work Explained: How Cryptocurrencies Keep Block Production in Check (Block Explorer)

Bitcoin Difficulty Targeting and the “Death Spiral” (Andreas Antonopoulos video)

A version of this article first appeared in our exclusive newsletter. If you’d like Block Explorer’s cutting-edge analysis before it hits our website, sign up now.

Monero cryptocurrency best privacy coin

The US government is tentatively exploring ways to forensically analyze privacy coins like Monero and Zcash. 

That’s according to a document published by the Department of Homeland Security. Specifically, the document “seeks applications of blockchain forensic analytics for newer cryptocurrencies, such as Zcash and Monero.”

Unlike Bitcoin, transactions on the Monero network are completely private, utilizing “burn-after-reading” stealth addresses and decoy transactions to obscure the true sender’s information.

Zcash offers the choice between transparent and fully private transactions, using zero-knowledge-proof cryptography to obscure the data.

The Department of Homeland Security document wants to analyze Monero and Zcash for criminal activity. The document reads: “There is similarly a compelling interest in tracing and understanding transactions and actions on the blockchain of an illegal nature.”

How exactly they will achieve it is not yet outlined in detail and the report stresses that it is not an explicit request for proposals. However, the report tentatively suggests: “[Designing] a blockchain analysis ecosystem or modify an existing one, that enables forensic analysis for homeland security.” Further, it invites interested parties to comment on the topic.

Further reading: Best Privacy Coins: Monero vs Zcash (Ranked Against 5 Privacy Criteria)

Lei Chen, CEO of Xunlei Technology

Speaking at Fortune’s Global Tech Forum in China last week, one panelist outlined the roadmap to a blockchain future. Lei Chen, CEO of Xunlei Technology, said that a $30 billion blockchain company is not impossible, but it must meet three big milestones:

  1. One million transactions per second.
  2. One “somewhat unified, well-thought-out regulation framework.”
  3. A blockchain application with 10 million users.

This combination of factors could trigger the first major breakthrough company in the blockchain space.

Chen says her company’s blockchain platform, ThunderChain, is capable of the necessary transaction speed by harnessing the unused processing power of idle computers.

However, creating a blockchain application with 10 million users will be the largest hurdle. Current applications on the Ethereum blockchain, for example, struggle to reach 1,000 daily users.

Finally, Chen discussed the possibility of blockchain changing the way personal data is owned and shared with others. “Blockchain will challenge the data ownership models of today because data should be of the people for the people by the people.”

(Source: Fortune)

Block Explorer news bytes. We bring you the most important, world-changing developments in fast, short bursts. For deeper reading: Most popular blockchain applications right now.

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Mining crypto currency. Farm for mining bitcoins. Vector flat illustration
  • Proof of Work is the algorithm that powers various blockchains, like Bitcoin, Ethereum, Litecoin, and Monero.
  • Miners solve complex mathematical puzzles using computer power to produce a “block” of transactions.
  • When a block is produced, the miner is rewarded with the native cryptocurrency: bitcoin, ether, or litecoin, for example.
  • Proof of work ensures that blocks are produced at a stable rate and are accurately verified.

Cryptocurrencies work on the principle of a blockchain, where blocks containing transactions are added to the chain to make transactions happen. 

The issue is, the speed and validity of blocks must be kept in check. Proof of Work solves this issue, let’s check out how.

The Problem

Blocks on the blockchain are quite powerful as they confirm the transaction of money between addresses. They also distribute new currency by issuing rewards to the block creator. 

For these reasons, there are two important rules for block production.

  • Blocks need to be verified some way, so that we know what order transactions happened, among other things.
  • We need to control the speed at which blocks are added. If the speed is not controlled, block rewards are added to the network quickly and the worth of the currency plummets.

Bitcoin, for example, has a target block time of ten minutes. If blocks are created too fast, too much bitcoin will be given out to miners, thus flooding the market. Something has to keep that block time regulated.

Enter Proof Of Work

Proof of work solves both of our issues. It’s based on the idea that we include some data in the block that is hard to calculate, but easy to verify. 

In most proof of work cryptocurrencies, this comes in the form of a cryptographic hash.

What is a Hash Function?

A hash function takes a message or piece of data and scrambles it into a long cryptographic, alphanumeric code. 

But the smallest change to the message or data creates huge changes in the code. 

For example:

The SHA1 hash of “Armin Davis” is: 397d23a20e7cf5065238d7cdda5430d62a68445b

But change the capital letters to lower-case…

The SHA1 hash of “armin davis” is: b1371918c95f4693273757a2bc51514dcdfd1697

The hashes are completely different and seemingly random.

But it’s not random. The same input data will always return the same hash. Meaning that we can easily verify that a given hash is right for a given block easily. 

And, if we include the hash of the previous block in ours, we can prove order too.

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proof of work
Proof of work compared against alternative algorithm “proof of stake” Credit: CryptoTechies

What About the Timing Issue?

Hash algorithms are perfect for our verification problem but don’t fix the issue of timing on their own. 

Hashes are designed to be fast to compute, very fast in fact. The time it took to calculate the above two hashes was less than one-hundredth of a second.

But we need to regulate the time, so blocks aren’t produced too quickly.

We have a simple solution to this: network difficulty. 

Simply put, you can change how long it takes to create a block by making it harder to solve the cryptographic puzzle.

bitcoin difficulty chart
As more and more miners devote hash power to the Bitcoin network, the “difficulty” has increased dramatically to keep block production in check. Source: Bitinfocharts

Usually, that means including a constraint that the hash must be below a specific number. And that that number is calculated at specific intervals. 

Now miners have to hash their blocks many times, with each one taking up some time and lots of computer power. In order for the block creator to change the hash of their block, an additional bit of information is added to the block called the nonce. 

A nonce is simply a number that can be modified as the block creator sees fit to change the output hash.

Each time a hash is calculated and does not meet the requirements of the network at that time, the nonce is incremented or otherwise changed and the hash re-calculated.

Often a miner will try a very large number of different nonces before they find one that will be accepted by the network. The total time all miners take to find a block should be somewhere around the block time (ten minutes for Bitcoin). 

And if not, the difficulty is adjusted to keep the timing in line.

Not all Proof of Work Algorithms are the Same…

The hashing algorithm a cryptocurrency uses directly affects how difficulty will work, and what hardware you can run the mining software on. 

To use Bitcoin as an example again; Bitcoin uses the algorithm SHA-256, which is an industry standard hashing algorithm used in many places. 

If you’ve saved a password on a website, odds are it was hashed with Secure Hash Algorithm (SHA)-256 before it was stored. Using industry standard hashing algorithms means they are proven secure and worked on by massive communities.

However, using industry-standard algorithms is both a blessing and a curse. 

A blessing because most hardware will be able to run your software. But a curse (depending on how you look at it) due to one word: ASICs.

ASIC (Application Specific Integrated Circuits) are mining hardware that gives your network a massive amount of mining power. That increases centralization due to price and power demands. The more ASICs you own or control, the more of the network you command.

Some other cryptocurrencies, like Monero, use their own hashing algorithm specifically designed for use in proof of work systems. These have the advantage that developers have complete control over what hardware the algorithm works on best.

Downsides to Proof of Work

There are a few downsides to Proof of Work when compared to other solutions.

First, Proof of Work requires a lot of computing power. And, the more mining power on the network, the higher the difficulty. Meaning that you very quickly run into a situation where those with the cash to buy hardware do. And when you have a lot of hardware, you tend to store all their hardware in one place, leading to centralization.

At worst, this could lead to a 51% attack, whereby one actor, or group of actors, control more than half of the network. If that happens, they could theoretically “double spend” the cryptocurrency on the network.

And second, that computing power needs a lot of electricity to run, and at the high end, miners go looking for the cheapest power possible. This means that miners start to congregate in cities or countries where the power is cheap, again leading to centralization.

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htc-exodus-1 blockchain phone

Sirin Labs has unveiled its flagship product, the FINNEY blockchain phone, after raising $157 million earlier this year in the fourth-largest initial coin offering (ICO) ever.

Named after the iconic computer scientist and early bitcoin develop Hal Finney, the new phone is available to pre-order now (just in time for Christmas delivery).

It comes just a few weeks after the launch of HTC’s blockchain phone, the Exodus 1. So how do they stack up against each other? Which blockchain phone should you buy? We dive into the details of both so can make a better decision. But first…

What is a blockchain phone?

A blockchain phone is a device that incorporates blockchain and cryptocurrency features. Most notably, a hardware wallet for storing crypto safely and access to a “decentralized app” store where you can access blockchain “dapps.”

HTC was the first to launch a commercially available blockchain phone, the Exodus 1, but Sirin Labs followed up with the FINNEY. Others include the Sikur phone.

Sirin Labs FINNEY

Sirin labs finney blockchain phone

Pre-order here.

The much-anticipated FINNEY is the first in a line of blockchain products planned by Sirin Labs which will also include a blockchain PC. What do you need to know about the new phone?

Price

The phone launches for pre-order at $999. However, you can only pay with the Sirin Labs token, SRN. More payments options are coming soon, but SRN holders will get a 10% discount.

Cryptocurrency Storage

The Finney features cold wallet storage for your cryptocurrency. It’s essentially a second device built into the same phone case. It operates completely separate to the phone’s processing system.

There’s even a separate LCD screen which slides up out of the phone to enter your seed phrase.

The reason for this separation is simple. The cold wallet should not be accessible to the main phone processor, which connects to the internet and therefore vulnerable to hacks.

Siring Labs Finney Blockchain phone

Operating System

The Finney runs on a modified version of Android, called SirinOS. It is an “ultra-secure, Google-certified fork of Android.”

Access to Dapps

Just like your smartphone has access to an app store, the Finney will bring you easy to access to “dapps” (decentralized apps) through its dCenter.

Sirin Labs has also anticipated the problem of using requiring different cryptocurrencies for different dapps. The Finney will automatically convert BTC, ETH, or SRN to an app’s native token when required. The idea being to streamline the user experience.

Further reading: There’s a Dapp for that! 10 Best Dapps in 2018

Storage and processing

The Finney features 128GB storage, 6GB RAM, and a Qualcomm Snapdragon 845 Chipset (exactly the same as the HTC Exodus 1, if you’re wondering).

Other features?

The Finney blockchain phone also features a unique artificial intelligence intrusion detector and a cybersecurity suite. The phone is built with security and safety in mind.

Bottom line

The Sirin Labs Finney is built by, and for, the blockchain community. It puts security at the forefront with a super-modified OS, security features and a separate cold wallet. Whether the user experience is as enjoyable as a traditional smartphone remains to be seen.

HTC Exodus 1

HTC Exodus 1 blockchain phone

Pre-order here.

The Exodus 1 is HTC’s big play in the blockchain space. Some of the security features fall short of the Finney, but it may offer a better user experience.

Price

The Exodus 1 blockchain phone is available for 0.15 BTC (about $633 at today’s price). That makes it slightly more affordable than the Finney unless crypto prices change dramatically again.

Cryptocurrency Storage

The Exodus 1 also features a separate hardware wallet called Zion. It works by ring-fencing the storage outside the main processor, again to prevent the wallet from being “online” and vulnerable to threats through the main operating system.

It uses a “quarantined” system called Trustzone, but this is not without its vulnerabilities. Exploits are theoretically possible and early critics may give the edge to the Finney here when it comes to crypto storage.

HTC Exodus 1 blockchain phone front

Operating System

The Exodus 1 blockchain phone will use the basic Android operating system. The Finney may offer a little more security thanks to its modified OS with additional security features.

Access to Dapps

We are promised a trusted and user-friendly interface for accessing decentralized apps but we are yet to see exactly how this will function.

Storage and Processing

The processing specs here are identical to the Finney: a Snapdragon 845 processor, 128GB storage, 6GB Ram.

Other Features?

The Exodus 1 features a 16-megapixel dual rear camera (and a forward facing camera for selfies).

Additional security features include a “Social Key” recovery system. In case the phone is lost or stolen, you can give three-five friends a piece of your private key. When brought together you can access your crypto again, even if the phone is lost.

Conclusion

The Sirin Finney is developed by blockchain enthusiasts for blockchain enthusiasts. Security and crypto storage is the number one priority. You could look at it as a hardware storage device with smartphone capabilities.

The HTC Exodus, on the other hand, is very much “smartphone first,” with additional crypto storage capabilities as a bonus. 

The Finney is likely to be the phone of choice for the crypto community right now. But the HTC Exodus 1 could be the phone that takes blockchain mainstream.

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