![]() They are bits of computer code that automatically make something happen: upon receipt of X ether from person Y, transfer asset Z to person Y, for example. Smart contracts are a little more difficult to understand, because they are neither smart nor contracts. Between 20 Ethereum switched completely to proof of stake, which the developers claim has reduced their electricity consumption by 99 percent-before that, the network was using about as much electricity as Finland. That system has the advantage of eliminating the redundant calculations but means that players with a lot of cash to deposit are continually rewarded with new ether, and it introduces a bottleneck, since transactions have to go through relatively few verifiers. Like Bitcoin, Ethereum has its own currency, ether, but it has two crucial innovations: “proof of stake” and “smart contracts.” Proof of stake is the easier of the two to explain: instead of the wasteful and redundant proof-of-work system, Ethereum transactions are verified by a lottery of the users who have deposited collateral (stake), with larger deposits increasing the odds of winning. He announced his Ethereum project in early 2014, and since 2018 it has been the second-largest cryptocurrency by market capitalization, after Bitcoin itself. While Bitcoin was running into technical and legal constraints, a nineteen-year-old computer programmer and writer for Bitcoin Magazine named Vitalik Buterin had an idea for expanding and generalizing the cryptocurrency technology to more aspects of economic and social life. In late 2013 the FBI shut down Silk Road, the main online black market, meaning bitcoin holders couldn’t even buy drugs anymore. For those reasons, Bitcoin was of limited utility: a speculative investment for some who watched its price oscillate, and a means of payment for people doing things that were so illicit that the slow transactions, unpredictability, and illiquidity were worth it. The network could process just a few transactions per second, relative to thousands for companies like Visa, and some transactions could take hours, during which time the price of bitcoins, and thus the value of the transaction, could change.Ĭashing out and returning to real money has also been very difficult: bank fraud officers look askance at untraceable anonymous transactions. Proof of work meant everyone in the network raced to verify every transaction, but there could only be one winner, generating a huge amount of wasted, redundant effort and truly appalling consumption of electricity and computer chips as participants engaged in an arms race to build bigger and more powerful computers. Thus from the ruins of 2008 was cryptocurrency born.īut Bitcoin (the network is capitalized, the “currency” is not) was and is terrible. With no centralized authority there was no bank that could fail-and no CEO to prosecute. This system is called “proof of work.” In this way, new bitcoins would slowly be created, or “mined,” up to an eventual limit, because the computations needed to verify the chain of transactions would continually require more and more processing power, gradually driving the production of new coins to zero, which would also eliminate the potential for inflation. When a transaction happened, the participants would race to do the difficult computational problems the system required to verify it relative to all previous transactions in the ledger, and the first participant to verify would be awarded with new bitcoins. Instead, every participant in the network would hold a copy. Unlike banks, there would be no central repository, no single authoritative copy of the ledger. Anytime someone made a payment, it would get added to the ledger, and the ledger would be a permanent, open, transparent record of all payments. In the “white paper” proposing the system, initially circulated to a cryptography mailing list, Nakamoto claimed that it would “allow online payments to be sent directly from one party to another without going through a financial institution.” In order to avoid the problem of users spending the same intangible electronic cash twice, Nakamoto proposed something called a “distributed timestamp server,” now generally known as a “blockchain,” which is a kind of digital ledger. In the fall of 2008, amid the great shipwreck of the international financial order, an anonymous person or group of persons writing under the name Satoshi Nakamoto proposed a new electronic cash system called Bitcoin.
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