Gerardo Lemus
Follow Following Unfollow Gerardo Lemus
Sign in to follow this author
Quantitative Finance Practitioner: Applying all available data to get an edge over the market.
Given my background, I am often asked my views on blockchain, so I decided to take some time to try to understand what is going on. First, I had to sort between extremes: either tons of fanatic drivel, ‘high-level’ presentations which left me with more questions than answers, and then extremely geeky material ( Satoshi’s paper anyone ?).
But finally I struck gold (pun intended) when I found Princeton’s Coursera course on Cryptocurrencies — If you want to understand the basics this is a course that explains them without any hype — from a dispassionate and critical academic perspective.
After viewing the lectures, I was able to identify many of the assumptions that the ‘high-level documents’ would parrot (because some else had written somewhere else)
Bitcoin mining consumes more electricity than Ireland …
For example:
… as the Guardian writes. Then they quote DigiEconomist, which has a very technical section explaining their assumptions (and burying the explanation with lots of jargon, references to other methods to compute energy, links to different reports …).
Well, in Week 5 of Princeton’s course, in the ‘ Energy Consumption and Ecology’, they explain in simple English how to really compute the energy consumption (a 15 minute lecture) using a top down and bottom up approach — at minute 9:30 they say (for 2015):
So again, our high end estimate, was still that Bitcoin is consuming less than 1,000 MW.
So the whole Bitcoin network is consuming less than a large power plant’s worth of electricity.
See the lecture — you will find out that as new mining chips are developed, they increase energy efficiency.
Bitcoin is anonymous
But what applies to bitcoin does not need to be generalised to all cryptocurrencies — in lecture 8 they introduce ‘Virtual Mining’ (proof-of-stake) as a way to get rid of the energy issue.
This myth already has been busted elsewhere (it is not anonymous, but pseudonymous — if you do not change your pseudonym for each transaction an ‘adversary’ can eventually identify you).
Bitcoin transactions are deterministic
Princeton’s course deals with the issue in Week 6 — showing some amazing examples of de-anonymizing. But the clincher is section ‘Zerocoin and Zerocash’. Just because bitcoin is not anonymous, there is no reason why another cryptocurrency cannot be made anonymous.
I mean — you would think once you have done a transaction it just happens, right ? It turns out ( Week 2, Distributed Consensus), that
consensus happens over a long period of time, about an hour in the practical system. But even at the end of that time, you’re not a 100% sure thata transaction or a block that you’re interested inhas made it into the consensus block chain.Instead, as time goes on,your probability goes up higher and higher. And the probability that you’re wrong in making an assumption about a transaction goes down exponentially.
Whoever has 51% of mining rigs controls Bitcoin
I was amazed when I learnt this fact — and it all comes from the way the blockchain is designed — as the peer to peer network needs to achieve consensus, the time required to validate a transaction becomes a function of network size — beware of projects claiming that blockchain can be used to reduce settlement periods !
Just read this blog ‘ How to destroy bitcoin’. The 51% number is also quoted in almost all ‘serious’ high level introductions to bitcoin.
Just flip to Week 5, ‘ Mining Incentives and Strategies’ — at minute 4:37 you have:
So sometimes people talk about a 51% attacker in bitcoin, but it’s a mistake to think that,that’s a magic threshold where as soon as you cross it all of a sudden you can do this attack. In reality, it’s more of a gradient where the attack gets easier, the further over 50% you go.
As a more new arises this attack is detectable and it’s possible if you’re doing it in a large scale that the community would decide to reverse it by refusing to accept your alternate chain even if it was longer.
So, it’s not clear and practice that this would actually work. And it is also possible that doing this would completely crash the exchange rate of bitcoin.
So the blogger above is right in the sense that to crash the bitcoin you need to have more that 50% of the mining rigs, but even then the community might decide to fork it out.
Well, there are more myths to be busted, but I’ll leave them for another post.
Quantitative Finance Practitioner: Applying all available data to get an edge over the market.
Looking for more of the latest headlines on LinkedIn?
Originally published at https://www.linkedin.com on February 1, 2018.
