This story is originally written in Russian and can be found on this site «Можете не пересчитывать» (dimus.me). The present translation is made by ChatGPT with very few corrections, hope native English speakers will appreciate the quality.
I've been meaning to figure out bitcoins and cryptocurrencies, how they are mined, and what this beast called blockchain is all about, but somehow my hands didn't reach the keyboard to start typing. Then suddenly, such an interesting scandal happened with FTX, that I couldn't resist and spent an hour or even an hour and a half researching it. If there are readers who are also interested in this topic, I am eager to share, and I promise that it will be as simple as possible, and maybe even useful, especially if you already have a digital wallet.
The idea of virtual or digital money has been in the air for a long time, and its meaning is to carry out transactions without the participation of banking institutions, that is, not to pay banking fees for money transfers and to carry out these operations as discreetly and anonymously as possible. Obviously, there are many people who value only one thing, for example, secrecy. At the beginning of the 21st century, the idea of cryptocurrency was finally implemented by a person or group using the pseudonym Satoshi Nakamoto, who wrote the necessary software and named these digital currencies Bitcoin. The developers had to solve three main problems: reliability and security of operations and storage, the origin of bitcoins, that is, where they come from, and the ability to exchange them for goods and services, the main function of any money.
Let's start with storage: every owner of a cryptocurrency has their own electronic account, called a wallet, to which they can receive payments and from which they can transfer bitcoins to their counterparts. The problem is how to make sure that no one spends more than they have in their wallet. In the real world, the bank controls this, but here all transactions are anonymous, otherwise the secrecy (crypto component) is lost. To solve the problem, the concept of blockchain was invented, which involves all participants in the "game" knowing the wallet numbers and the amount of each transaction in this cyberspace, so anyone can check the balance of each wallet and establish possible overspending. In reality, not everyone wants to spend time and resources on these audits, so voluntary auditors receive small payments for these checks, naturally in bitcoins, and the rest are calm that they are not being fooled. Since there are so many transactions, checks are performed by groups of accounts or blocks, which are linked by internal references in chains, hence the name blockchain. Overall, despite the very significant technical difficulties, the scheme works, although the internet is full of cases of all sorts of falsifications and million-dollar thefts from crypto wallets - nothing gives an absolute guarantee of deposits (except for savings banks), and sometimes you won't even complain if there are reasons to hide the source of income.
The sacred question of where the money goes in the case of cryptocurrency sounds like the opposite: where did it come from and who worked for it? Of course, the developers understood this and came up with a process called mining, which can be translated as the extraction of ore or other valuable minerals. Remember how Mayakovski in his poem explained to the finance inspector:
Poetry is the same as the extraction of radium,
A gram of ore - years of work.
For the sake of a single word
You process thousands of tons of verbal ore.
The same goes for Bitcoin: you have to mine, but virtually. Those who want to do it with the help of a computer have to solve some "very difficult tasks," and whoever solves it first gets a few coins like Pinokkio, and then the process starts all over again. The complexity can obviously deter some miners - not everyone likes or knows mathematics, and very few will take on Fermat's theorem, and this is not the intention of the organizers of the enterprise - the more players in the casino, the better for the casino, so knowing any math is not necessary. In one place, I read a very understandable analogy of the process: everyone who wants to join the network, downloads and runs the program, which randomly "rolls a virtual dice with a thousand sides," that is, generates numbers from one to a thousand many-many times. Whoever "throws" all the numbers from one to five first gets a "new" Bitcoin. It's really not that difficult! Work hard and get a prize, if you are lucky of course.
The program always knows the number of players "at the table" and automatically adjusts the difficulty of the task: today there are many players, so to win, you already need to collect numbers from one to seven or ten. The main thing is that the prize draw takes no more than ten minutes, or the audience will get bored. Interestingly, the total number of bitcoins is finite and amounts to 21 million. Why, no one knows for sure, but there are several theories that interested parties can familiarize themselves with. As of today, nineteen million have already been mined, so two million are left. As new bitcoins are getting scarce the price goes up.
You can play individually on your computer or in a group, but then the winnings are divided among everyone. There is a participation fee for mining players, but the main expense is the electricity consumed by computers, which is quite significant, and its cost can make mining unprofitable. Therefore, the main computational power that mines bitcoins is located in Canada and Kazakhstan, where there is cheap electricity. According to some estimates, mining bitcoins accounts for about one percent of global electricity production. For example, all of Ukraine consumes half a percent.
And finally, the use of cryptocurrency - how to determine its value, how many bitcoins should be given for one sheep? Here, the organizers have provided users to solve this issue themselves by releasing bitcoins on the currency exchange for $0 per piece. Nonetheless, at the first trades, a negligible price of $0.0008 was established, and the first deal was concluded in the purchase of two pieces of pizza for 10,000 bitcoins. Everything is built on faith: I buy something hoping that it will become more expensive. And many believed, and it did become more expensive: now the price of one bitcoin is about $20,000 (twenty thousand dollars!), and it has even reached $69,000. It is worth building your own hydroelectric power station and starting to mine crypto money, like gold once was: quickly turning a virtual cube in the hope that the coveted combination will come up.
So far, it is still possible to buy a very limited range of goods with bitcoins, although not just pizza, but they are not accepted everywhere as payment. Most buyers acquire bitcoins and various other cryptocurrencies, of which, by the way, there are already about ten thousand(!) solely for speculative purposes, hoping to sell them later, but for a higher price, much like most stock market participants. And the promised benefits of digital transactions have dwindled significantly: to open a crypto-wallet, personal data including SSN, is now required, so if desired, the owner can be identified, and might even be asked to pay taxes. Transactions themselves are not free: a fee is charged on each operation, and it is larger than in regular banks, and more importantly, the exchange rate of cryptocurrencies fluctuates so quickly that the price can change significantly during the transaction, which can be very unpleasant. - Who benefits from this? - Those who provide all these digital services: maintaining wallets, continuous blockchain monitoring, and "ore mining" - a small percentage is taken for all of this, which is why there are thousands of these digital currencies. Well, also programmers, manufacturers of supercomputers, and electronic chips. In general, a cryptocurrency is a new form of a casino: someone, of course, wins, and for everyone else, it's a scam, excuse me, herein I figured it out.
And now, about the scandal associated with the cryptocurrency of the bankrupt FTX company, led by the young businessman Sam Bankman-Fried, or SBF, who was arrested in the Bahamas recently. I think many have heard about it, but it is interesting to take another look at the mechanism of this fraud - where did 13-15, and perhaps even more, billion dollars disappear? It must be said that he did quite well for a thirty-year-old financial genius, who would have gone further if he had not been stopped by the relevant authorities.
As always, everything was designed for the benefit of humankind: and a species belonging to this group registered a digital wallet, and bought or mined some bitcoins, but didn't quite understand what to do with them, poor thing. You can sell them, but what if the price goes up? It's a pity. And then suddenly, the big company FTX offers 15% annual interest on deposits in cryptocurrency, at a time when you can't even get 1% in a regular bank. The guarantees are one hundred percent: on the first demand, you can receive your deposit in any currency, even in rubles, although you have to pay some service fees. And if you bring in a new client, the company will give you a big bonus. If anyone remembers about Madoff's pyramid schemes you are on the right path.
FTX was successful, and in three years, the combined amount of deposits reached 32 billion, and the organizers didn't know where to put the profits. However, the promised 15% had to be paid, but where to get the money? Everything was fine until Bitcoin was rising like crazy until mid-2021. And then suddenly, China took action and banned cryptocurrency operations entirely, supposedly undermining the leading role of the Communist Party, and there's no reason for an honest person to hide their income and expenses. Elon Musk also suddenly stopped selling his Tesla for Bitcoins, why was that? And cryptocurrencies lost half of their value overnight. Smarter depositors started to withdraw their money from FTX. Many wanted to get a stable currency, which meant they had to sell their digital deposits on the exchange, and the Bitcoin rate fell even lower.
All of this smelled bad, so the SBF decided to protect itself and started donating millions to various political figures and organizations, mostly of a left-leaning persuasion for some reason. The congressmen were mostly backward-looking people born in the last century who preferred dollars to bitcoins but thank God they took the donations. Because of these retrogrades, FTX had to sell even more crypto money from depositors' accounts. This was done just in case: maybe some legislation will be passed in support of the Bitcoin industry, or maybe they'll get off the hook to prison. Let's see how this charity will help the SBF, but some recipients are already giving their donations to charitable organizations: stolen money is repugnant to us politicians, but they don't care.
Here is where the reader caught the storyteller in a lie: "On the first page, you wrote that all cryptocurrency transactions are strictly monitored in the blockchain, the amounts are calculated and double-checked by activist depositors, and it's impossible to steal anything from crypto accounts, especially without the owners' knowledge!" That's right, you can't, and Sam knew this better than you and me albeit solved the problem. In this situation, he came up with a system of tokens - FTX's special internal currency. All depositors were offered to convert their bitcoins into these tokens, which are absolutely reliable as payment instruments but bring in much more profit than bitcoins, and transactions in tokens are also free. Many people liked this freebie: whether bitcoin or token - it's all virtual, and they voluntarily converted their deposits. - Do you feel sorry for them now? - Me too.
If bitcoins were somehow monitored through the blockchain mechanism, the tokens were counted solely by SBF and his accomplices. After the declared bankruptcy, there were no dollars or bitcoins in FTX's accounts, only these tokens, which creditors will likely have to settle for after many years of legal battles. As a famous literary character, Ostap Bender once said to Kisa Vorobijaninov: "You don't have to recount. You're not in church, you won't be deceived."
Dimus, December 2022
© English translation by Chat GPT 3.5
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