Op-Ed by Georges Haydar, Staff Writer

February 23rd, 2021

It’s a bright and sunny day. The Spring birds’ singing intertwines with the cacophony of car horns and pedestrians rushing to get to work. As per your usual routine, you get up, get ready, and prepare yourself to survive your daily excruciating task of listening to your boring hexagenerian tech dinosaur boss talk about how his dull wife brightens up his even duller day. You can’t wait for lunch time to come soon enough to chat with your co-workers and have your daily fix of bliss in this otherwise grim world. It’s been two years since the COVID-19 pandemic ended. Lebanon is still recovering, and the financial system isn’t in shackles anymore but it’s only a shadow of its former glory. Since it’s Friday, you decide to order a pizza, but, as it’s the world’s mission to make your life a miserable hell, you don’t have enough cash to make it to the end of your day and your credit card is not working. Lo and behold, you decide to use your Bitcoin wallet! Since the beginning of the end of the crisis, businesses have not been trusting the banks as much as they did, and they decided to gradually switch to crypto. Elon Musk loves it, Tech wizards love it, so why not give it a go? So, when the pizza comes, you pay the delivery guy with a single swap, leave him a nice tip, and get back to your co-workers. Sounds cool, right? 

This still a bit far-fetched, but not science-fiction far-fetched. It’s more of a “Red Bull gives you wings” or “Marlboro makes you cool” far-fetched. Although blockchain and cryptocurrencies are an impressive technological (and financial) prowess that will undeniably go down in history as the first major attempt to virtualize finance, it still doesn’t have the bedrock foundation of the mighty greenback- and the real question is if it will ever have it. To attempt to answer this financial existential question, it serves our purposes to try and understand the technology behind it - even if it’s at a high level.

It all started back in January 2009 when a certain Satoshi Nakamoto sent a paper about a digital peer-to-peer electronic cash system called Bitcoin to some of his acquaintances on a cryptography mailing list[1].The idea behind it was very attractive: a digital currency that is peer-to-peer and decentralized (no central authority to oversee it), distributed (all transactions are public), and -here’s the catch- tamper evident and tamper resistant.[2] Is that for real? A digital Panama? The whole scheme was very straightforward: thousands and thousands of transactions would be grouped into blocks, and these blocks would then be linked - or chained - together to form what is now known as a blockchain. This blockchain would also serve as a digital ledger where you could trace back every transaction that has happened anywhere in the world since the launch of Bitcoin more than ten years ago.[3] The Bitcoin system is a collection of computers (also called nodes or miners, a very important term we will get back to shortly) that all run the same bitcoin code and store everything on the blockchain. Since all nodes run the same blockchain, they have the same list of all blocks and transactions, and can all see every new block and new transaction that is being added as bright as day. Thus, in order to counterfeit a transaction and commit fraud, you would need to dupe all the nodes in the system (which stand at around 12,000 as of January 2021) which is almostimpossible.[4] Trying to rob Fort Knox might prove more probabilistically advantageous. In addition to that crucial role, miners also turn their attention to another equally important task which intrinsically ties to their first role: mining bitcoins [5] (as the old saying goes: اسم على مسمّى). To ensure the tamper-resistant characteristic of bitcoin, the independent nodes of the system are incentivized to check the validity of transactions in a block in exchange for Bitcoin rewards and transaction fees. This is what is known as mining. So if I mine Bitcoin 24/7, I’ll make so many of them I’ll become a billionaire when I sell them the moment they hit $50,000 right? Not really. The main point of divergence between Bitcoin and other fiat currencies (like the US Dollar) is that Bitcoin’s supply is fixed from the very onset: there will only be 21 million Bitcoins ever produced (which is expected to be attained some time around 2140)[6]. In contrast, the Federal Reserve can print as much Dollars as it wants but of course within realistic constraints since printing Ben Franklins left and right will turn your dollars into even more worthless monopoly money than your lollars. Hence, the reward for mining is declining at a periodic rate: it is halved every 210,000 blocks. Currently, it stands at 6.25 BTC (almost $300,000 at today’s price). [7]

Mining is a very tedious process. It requires solving a computationally challenging mathematical puzzle (the fancy formulation is: find a nonce, which is a binary number, whose hash is less than a certain target number, all while respecting some constraints on the form of the hash). Only solving this mathematical puzzle will get you the Bitcoin reward, and this is where things get challenging. This requires possessing strong computational power. Some devices known as “mining rigs” go as far as using special hardware like ASIC chips and GPUs to increase their chances, and this is where the stronghold of the technical anti-Bitcoin camp lies. Even with a couple hardware gimmicks, your chances of mining the block are around 1 in 17 trillion. Winning the lottery, getting bitten by a shark, eradicating corruption in Lebanon and scoring a Panenka in a World Cup Final are more likely to happen. The main drawback of Bitcoin is that the energy that ends up being consumed to mine a block is astronomically high: 12,500 MW[8].

However, using Bitcoin for transactions is much, much simpler. Before diving into the specifics of a transaction procedure, it is important to note that you can send and/or receive less than one Bitcoin. Unlike fiat currencies, one Bitcoin can be divided up to 100 million smaller denominations (referred to as a Satoshi)[9]. Hence, you can trade 0.6481394 Bitcoin in all peace of mind, making day to day transactions possible, especially in times where one Bitcoin is worth tens of thousands of dollars. The way a transaction works is the following: each user has his own unique ID as well as two keys: one private to keep for himself and one public to share with everyone. This is known as public-key cryptography and there is no way of figuring out the private key from the public one (the inverse however is well within the realm of possibilities and this is why a user must never reveal his private key). Once the transaction is ready, the sender signs it with his private key and ships it to the other party. Then, the receiver, who knows the public key of the sender, checks that said public key and the document containing the transaction are compatible. This is done to ensure that the transaction wasn’t fraudulently changed by a malicious user while in transit. If the signature matches, then the receiver knows that all is good and he or she can safely accept the transaction. It is also important to note that the smallest transaction possible is 546 Satoshis, although that’s an infinitesimally small amount. And this is how, without the need of any central authority, this peer-to-peer network makes transactions happen [10].

Finally, perhaps the most attractive aspect of Bitcoin is its anonymity. Although this is somewhat of a misconception, it has incentivized the use of cryptocurrencies for very nefarious reasons and motivations such as money laundering and terrorist financing, but that’s a whole other issue we plan to cover very soon.

To conclude, Bitcoin seems like a very attractive prospect: decentralized, safe, anonymous, and cool. In fact, it is so attractive that it was the precursor to a whole new sensation: cryptocurrencies. You now have Litecoin, Ripple, NEO, etc... You even have, in all seriousness, Dogecoin which is based on an internet meme (the Shiba Inu dog from the “Doge” meme). Some cryptocurrencies like Ethereum even go the extra mile: instead of running ledgers of transactions, it runs virtual computer programs. Although Bitcoin might be a vivid source of controversy and the Lord of the Nerds and part-time billionaire Elon Musk’s favorite Twitter trend, it is nonetheless an impressive technological feature that can revolutionize economy and finance, but it has to fill in some financial gaps first to be no longer seen as an internet joke but as a true legitimate contender for the succession of the long-standing king: cold hard cash.

[1] https://bitcoin.org/bitcoin.pdf

[2] https://www.investopedia.com/news/how-bitcoin-works/

[3] https://www.investopedia.com/news/how-bitcoin-works/ So how does it work?

[4] https://bitcoin.stackexchange.com/questions/181/can-bitcoins-be-counterfeited

[5] https://www.investopedia.com/terms/b/bitcoin-mining.asp

[6] https://decrypt.co/33124/what-will-happen-to-bitcoin-after-all-21-million-are-mined.

[7] https://www.livemint.com/money/personal-finance/what-is-bitcoin-halving-and-will-it-affect-the-rate-11610295621496.html

[8] https://cbeci.org/. To give you a little context, it takes 3,000 MW to light up all of Lebanon, so you can imagine the immense energy footprint Bitcoin entails. And in times of warmer climates and rising seas, this is a big red flag.

[9] https://en.bitcoin.it/wiki/Satoshi_(unit).

[10] This is based on lectures I watched from MIT OCW. Course link is https://ocw.mit.edu/courses/media-arts-and-sciences/mas-s62-cryptocurrency-engineering-and-design-spring-2018/