The dirty secrets of cryptocurrency explained
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Loading... - Collins Wayne
- 22 Feb 2023
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The very nature of cryptocurrencies makes them incredibly hungry for energy. Can they lower their impact without losing their anti-establishment appeal? Olivia Wannan reports.
Bitcoin was the first, and still the best-known, cryptocurrency. Today, there are thousands of alternatives.
As we’ve seen from headlines, speculators who bought into a cryptocurrency during the early days transformed – on paper at least – thousands of dollars into millions. But sudden crashes in the value of major currencies and the recent bankruptcies of major crypto firms mean the fledgling industry is also responsible for wiping out people’s savings.
And as crypto has grown, so has its outsized carbon footprint.
The design of the system – based on blockchain technology – is responsible for both its environmental impact and its consumer flaws.
Essentially, blockchain is a type of database, recording a list of transactions. The transactions could be for anything: it could record the changing ownership of an artwork or a car. For cryptocurrency, it’s money.
Rather than being held in a bank’s data centre, the blockchain database is freely accessible. Everyone in the blockchain network holds a copy of the ever-growing list of transactions.
How it works – and why it’s so energy-hungry
When you sign up to cryptocurrency, you receive a dedicated security code (often known as your “wallet”), essentially a secret signature. You’ll need this every time you want to make a transaction.
When you run your secret signature plus the details of the transaction through a cryptographic puzzle (a complicated algorithm), the puzzle spits out a public signature.
It’s a string of numbers and letters. When you send 10 Bitcoin, the puzzle produces a result that bears no resemblance to the one produced when you send 11 Bitcoin.
This is a fundamental security element: no one should be able to take the public signature and work backwards to crack your original secret code.
These transactions are then bundled together into a list – called a block. Each block must be added onto the chain one after another (hence the name blockchain).
To do this, the system again relies on the cryptographic puzzle plus people known as Bitcoin miners.
Mining might make you think of gold mines – where the miners’ task is to find gold.
That’s not the same for Bitcoin. The miners’ key job is to process Bitcoin transactions. If they successfully complete this, they receive a small nugget (about 6 brand-new Bitcoin, creating additional currency).
It’s like a gold mine that only offers one nugget every 10 minutes, and every miner works to be the first to complete a maths problem to be awarded the gold.
Work is the operative word. The Bitcoin designer deliberately made the process resource intensive, for security reasons. The founder theorised that, by requiring a lot of computer processing, a single hacker would need more computing power than all the other honest miners combined to successfully hijack the system.
Bitcoin miners are in a race to produce a tiny number.
Each miner puts the list of transactions (the block) plus a code of their choosing through the cryptographic puzzle, which of course spits out a number. If that number’s not small enough, they select a new code and try again. Read More…
