Currencies: Demystifying bitcoin

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 3, 2017 - April 09, 2017.

The bitcoin network is not operated by a single computer, but by many across the globe and none of these trust each other. They all assume that the others are cheating and have to validate everything.

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Not many people know that bitcoin expert Andreas Antonopoulos came to Malaysia for the first time last month to address investor concerns about the cryptocurrency. The author of Mastering Bitcoin: Unlocking Digital Currencies and The Internet of Money — two of the seminal books on the subject — was at Technology Park Malaysia for “A day with Andreas M Antonopoulos: Discover, Engage and Connect to the Future of Blockchain and Cryptocurrencies”. 

The event, co-organised by Bloktex Sdn Bhd and the Malaysian Industry-Government Group for High Technology (MIGHT), was attended by a select group, including government officials, start-up owners and bitcoin investors. After Antonopoulos’ talk, he fielded questions from the audience about bitcoin’s security, centralisation and future. The following are the key points he made.

 

1 Bitcoin exchanges are not really safe

“There are two types of bitcoin exchanges — those that have already been hacked and those that are going to be,” quips Antonopoulos.

He says this is because bitcoin is decentralised as opposed to how traditional currencies work. The bitcoin system allows participants to store and transact bitcoins independently without going through intermediaries. 

Traditional currencies require intermediaries, such as financial institutions, to guard the wealth and make transactions. These intermediaries cause the centralisation of wealth. 

“If every one of you in the hall have a digital wallet and each wallet controls one bitcoin, the hackers will have to attack 500 wallets to get all the money. But once you centralise them, you create a honey pot and it will be attacked [sooner or later],” he says. 

 

2 Software that runs bitcoin has not been hacked in eight years

The software that runs bitcoin, which now caps the supply of the cryptocurrency at 21 million by 2041, has not been hacked in the past eight years. “The same cannot be said of banks,” says Antonopoulos.

However, there was a bug in the system that allowed a software engineer to add 92 billion bitcoins to the blockchain in 2010. As the bitcoins in the block will only be distributed after the block (that contains the bitcoins) is validated by the majority of the participants in the bitcoin network, the person had successfully tricked the participants into validating the block, instead of rejecting it. And so, 92 billion bitcoins that were not supposed to exist flooded the network.

Antonopoulos says a bug in the bitcoin software was exploited rather than the system being hacked. The extra supply was deleted after 10 minutes, based on the consensus of the participants.

“Today, I guarantee that the bug that created the extra bitcoins no longer exists. Bugs have been sorted out because the software is under continuous attack and attackers are finding fewer ways to do it,” he says.

It is impossible to launch an attack and destroy the full blockchain with today’s technology, says Antonopoulos. That is because hacking the blockchain is uneconomical, as it would require hackers to spend a huge amount of money on computers and sophisticated hardware just to hack one block. They would also need to fork out a fortune for the electricity costs. 

It is estimated that one gigawatt is needed to hack just one block, he points out. “If they wanted to revert the chain, they would have to overwrite all the blocks. That is why as time goes by, you would need to go further back in history to effect this change and you would need more energy to do it. Yes, they can revert the block chain, but it would require an enormous investment in hardware and energy [which makes it uneconomical].” 

However, it is worth noting that as technology advances, the more uncertainties there are.

 

3 Bitcoins are highly concentrated in the hands of a few

Some 95% of traditional currencies may be concentrated in the hands of only 5% of the people. But with bitcoin, it is worse. “A lot of early adopters earned a huge amount of bitcoin,” says Antonopoulos.

That is because a group of people invested in bitcoin mining technology between 2009 and 2012, when they were not even sure it would pay off. “They invested a significant portion of their wealth in a technology that had a good chance of going south. And if it failed, no one would pay them back. They did it solely based on their vision of where the technology could go,” he says.

Moving forward, this could lead to a situation where bitcoin prices are controlled by a small group of people, says Antonopoulos. “Today, one bitcoin is worth more than US$1,000 and [even if you are willing to pay that much] you cannot buy one easily.

“At some point in the future, there may be a time when the bitcoin price is set by a few people. [If the price goes up,] it will make the early adopters wealthier. This is a bit of a problem and I do not know how it can be solved.”

Will this hinder the wider adoption of bitcoin? He does not think so. Bitcoin is very divisible, he says. People can even buy a satoshi, which equals 0.00000001 of a single bitcoin.

Ultimately, the future of bitcoin is up to the participants. “It is not the technology that creates inequality. It simply magnifies what exists in society. Not everybody has access to this technology or the financial means to invest in it. And that is unfair,” says Antonopoulos.

“Bitcoin does not solve human problems. It does not make society fairer. No technology can. At the end of the day, we hope there are many good people out there and they do good things with the technology.”

 

4 Most of the bitcoins are now mined in China

This is because the country has cheap electricity and the capability to manufacture the mining equipment. Antonopoulos says China has built a huge number of power plants that run on coal, wind, hydro and biomass to meet the rising demand for power. However, the power cannot be equally distributed throughout the country as the network is still uneven.

“Let’s say the government builds a huge hydroelectric plant in Tibet and generates a lot of electricity there, how much of it can be used by the average 

Tibetan? Not much. And because they do not have a good distribution network, the power does not go anywhere. The energy is wasted,” he says.

Wherever there is excess power, bitcoin mining companies will go to the power stations to sell them bitcoin mining equipment. “They will say, ‘Look, I will sell you a device. You put all the energy you are not using in it and bitcoins will come out at the other end. That is how we are seeing a growing number of energy companies mining bitcoin in China,” says Antonopoulos.

“Bitcoin is funding environmental energy in China. It is the ultimate irony.”

 

5 Regulating bitcoin exchanges will not curb illegal activities such as money laundering 

Governments around the world have started to regulate bitcoin exchanges. The Japanese government will start regulating its exchanges this month while countries such as China, Singapore and the Philippines are looking into regulating them.

However, Antonopoulos says there is no point doing so as regulating bitcoin will not curb money laundering or other similar activities. “There are so many ways to transfer bitcoins. Only the few innocents use exchanges. It will only cause leakages of the personal information of regular people.”

On the regulation of bitcoin as a whole, he says since the cryptocurrency was created to be decentralised, it cannot be regulated like traditional currencies. “The bitcoin network is not operated by a single computer, but by many across the globe and none of these trust each other. They all assume that the others are cheating and have to validate everything,” he says. 

“Each of them validates the block independently, simply by following the rules that exist in the system. It also validates the parameters of the system itself and communicates everything to each other.” 

As such, there is no need for the authorities to regulate the network as it is self-regulated.

 

6 Will bitcoin be replaced by other cryptocurrencies in the future?

Antonopoulos says there are more than 1,500 cryptocurrencies today and there will be more in the future when they are more commonly used. Instead of economic value, the cryptocurrencies will become a form of personal expression and some of them will take off if the issuers have a large number of followers. For instance, artists and other celebrities could issue their own cryptocurrencies to their fans, who can use them to gain rewards. 

“It will no longer be about economic value but social value and popularity. What will happen if Taylor Swift or Beyoncé creates a currency? You may think it is funny, but it could be bigger than a country’s gross domestic product,” he says.

“We will start seeing cryptocurrencies being used as tokens of loyalty between artists, celebrities and fans. It will be a measure of loyalty, a form of social interaction and expression. And most of them will have zero economic value.”