Sovereignty through mathematics CHAPTER FIVE

CHAPTER FIVE — PROOF OF WORK

Zoom out of time for a while and imagine how the antlers of a magnificent moose buck evolved into being. The main purpose of big antlers in nature is believed to be a way for the buck to impress potential mates. They’re somewhat akin to the feathers of a peacock, or the shroud of any male bird for that matter. The animal is trying to signal that it can thrive in its environment despite its enormous appendage. It’s there to tell the potential mate that this specific specimen will bring her strong, healthy offspring. These are all evolutionary metaphors of course, the animal itself is probably unaware of signalling anything. For such antlers to evolve into being, a whole lot of moose will have to die early, or at least not get a chance to reproduce, over thousands of generations. In other words, a lot of resources need to be wasted. All of this for the animal to prove its value to potential spouses. Therefore, from the surviving moose’s point of view, the aforementioned resources were sacrificed rather than wasted.

The Proof of Work algorithm in Bitcoin does a similar thing. It enables miners to sacrifice a lot of electricity, a real world resource, to find a certain number and thereby proving that they had to commit a lot of time and effort to do this. Time, by the way, is the scarcest of all resources. Because of all this, a Bitcoin miner is very reluctant to sell bitcoins at a net loss. The electricity has already been used when the bitcoins pop into existence and the miner has no other means of getting his money back than by selling the bitcoins for more than the cost of the electricity it took to produce it. This is assuming that the mining rig itself has already been paid for. Proof of Work is a way of converting computing power into money in a sense. Yes, these rigs consume a lot of energy, but the energy consumed correlates directly to the value of the created token. Any decrease in the energy expenditure would also lead to a decrease in the value of the token, which is why mining algorithms can’t be less resource consuming or more energy efficient. “Wasting” energy is the whole point. No “waste”, no proof of commitment.

The fundamental principles of Bitcoin were set in stone in 2008 and block #0, the so called genesis block, was mined in January, 2009. In Bitcoin, a block of transactions is created every ten minutes. In its first four years of existence, these blocks included a 50 bitcoin block reward, given to the miner who found the block. Every four years, this reward is halved so that the maximum number of bitcoins that can ever be claimed can never exceed just short of 21 million. Every 2016 blocks, or roughly every two weeks, the difficulty of finding a new block is re-calibrated so that a block will be found every ten minutes on average. The value of this feature, and the impact it has on coin issuance, is often understated. It is one of the features of Bitcoin that separates it from gold and other assets in one of the most subtle, yet most powerful ways. When the price of gold or silver or oil or any other asset goes up, producing that asset becomes more profitable and more resources are allocated to produce more of it, faster. This in turn evens out the price as the total supply of said asset increases. Gold has been able to maintain or increase its value long term over time because of its high stock-to-flow ratio. Stock refers to how big a share of the total supply of an asset that has already been produced. Flow represents the share that is yet to be found and sold on the market. The bigger the stock in relation to the flow, the less of an impact on the total supply an increase in the price of a specific asset has. In Bitcoin, a price increase has virtually no impact at all on the coin issuance rate, or flow, since the difficulty of finding the next block in the chain is constantly being optimized for a strict issuance schedule. No other asset has ever behaved like this and we are yet to find out what impact its existence will have on the world economy.

So how does one mine a block in the Bitcoin blockchain? In short, the mining process goes something like this. Every active node in the Bitcoin network stores a copy of the mempool, which contains all bitcoin transactions that haven’t been validated yet. The miner then puts as many transactions as the block size allows into the block, usually selecting those with the highest fee first. He then adds a random number, called a nonce, and produces a hash of the entire thing using the SHA-256 hashing algorithm. A hashing algorithm turns data into a string of numbers. If the resulting hash begins with a specific number of zeros decided by the current difficulty of the network, the miner wins the block reward, collects all the fees and gets to put the block on the blockchain. The beauty of the system is that it is trivial for the nodes in the network to compare the transactions in the winning block to those in the mempool so that no fraudulent double spending can occur, but it’s near impossible to forge a fake hash since the probability of finding one that begins with as many zeros as the difficulty of the Bitcoin network demands is extremely low. To a layman’s eye a hash beginning with a bunch of zeros just looks like a random number, but a person who understands the mathematics behind it sees a different thing. The zeros act as proof of an enormous commitment to trying out different nonces and trying to find a perfect match. If you have an understanding of huge numbers you quickly realize that this number must have been created by devoting computing power to doing just that, on an absolutely massive scale. The proof is in those zeros. If you compare just the hash rate of the top five so called cryptocurrencies, it is obvious that Bitcoin is on a different level security-wise. From a hash rate to security perspective, the Ethereum blockchain is about five times as ineffective and the Litecoin blockchain about ten times as ineffective as the Bitcoin blockchain at the moment (Source: howmanyconfs.com). This in addition to the obviously more centralized nature of these “alternatives”.

Some of the aforementioned futurists and doomsday prophets, the people most likely to warn us about the dangers of the impending Artificial Intelligence singularity, believe that we already live in a simulated reality. The main argument for this world view is that since simulations and computer graphics seem to be getting better at an ever accelerating rate, we can’t really know if we already live in a simulation or not. To put it another way, we simply have no way of knowing if we live in The Matrix or if our perceived reality is all there is. A really mind-blowing counter argument to this theory is that Bitcoin’s Proof of Work algorithm would eventually slow down the simulation since Proof of Work is verifiable and can’t be simulated itself. Computing power would have to be sacrificed by some entity somewhere, regardless. One question remains though. Can the inhabitants of a simulated reality actually feel or measure a slowdown of the very simulation they live in?

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