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The Technology Behind Bitcoin | Touchstone Words

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The Technology Behind Bitcoin

By Katie Lee on 2018-09-18

Bitcoin has been the center of attention in recent time, considering it is pushing its way through to be the primary currency in the world. Many think it to be unsafe whereas others consider it to be a great investment opportunity. As of December, 2017, one bitcoin was valued at around $19,000. Considering the fact that one bitcoin in January of 2017 was under $1,000, it is safe to say that bitcoin is surging at a breakneck pace. Although this may seem like a great time to invest into bitcoin, a plethora of experts are actually warning against buying stock in bitcoin.

Many of these experts, including Ari Juels, a computer science professor at Cornell, suggest that bitcoin is not only a risky investment, but also it is not effective as a currency. Juels actually claims that bitcoin is not only risky, but actively harmful for the economy of this world.

"Bitcoin consumes an enormous - unconscionable from an environmental perspective - amount of electricity to achieve a transaction rate far lower than that needed for a real payment processing system," tells Juels. "One irony here is that my colleague Markus Jakobsson and I coined the term 'Proof of Work' in a 1999 paper that was partly about how to recycle the work."

The idea of “proof of work” is that difficult data (meaning data that is costly in terms of money and time) to produce, yet simple to prove. This is the basic principle of Bitcoin in the sense that bitcoin is simple to trust due to the fact that it is decentralized currency, but it is becoming a challenge to follow through with since one must “mine” for bitcoins through completing complicated calculations using their computer.

The problem is that it is nearly impossible to actually produce a full coin using bitcoin. One user used a bitcoin miner in 2014 and, after 33 hours of full performance mining, they had generated 0.00000001 of a coin. At the current rates with the same system, it would take about 100 days just to get 1 cent and about twenty seven years to reach 1 dollar.

To get around this problem, special groups have emerged that use hardware dedicated to bitcoin mining. These groups take precaution in order to balance the draw of electricity to gain in bitcoins. Basically, they ensure that the benefits outweigh the costs. And the only reason there is a rise in value is due to the fact that there are exchanges in which middlemen mimic the financial structures of others. These large groups who hold all the power in bitcoin are the reason why bitcoin, which was meant to be a decentralized currency (for all to use and gain something from) is not so.

"Bitcoin isn’t really very decentralised today, with massive holdings controlled by a single firm, Coinbase, and a high concentration in mining power," says Juels. Beyond that, there are also security concerns to using Bitcoin, he points out. "Bitcoin offers relatively weak confidentiality. The Transaction Graph, that is, record of who sent what money to whom, is publicly visible. This is helpful in limiting its criminal uses, but is problematic for a variety of reasons."

Juels suggest solutions for these problems plaguing bitcoin. He suggests that rather than exploiting the idea of proof of work, bitcoin could use proof of stake or proof or space. These alternatives do not have side effects like proof of work does.

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