Friday, May 18, 2018

How Can I Make a Unit of Currency?

I wanted to identify a question anyone can ask when they hear about a new currency.  It is likely that the U.S. will create a new currency at some point, and if you ask how you can make one, the answer will be: You Can't. You're not allowed to make one.  That's the point.  It's also the point of cryptocurrencies: You Can.  You may need to buy hardware and get software and configure it, but there's nothing illegal about doing any of that.

If you want to make a Bitcoin, you can enlist the help of a Bitcoin Mining company.  If it's a good company and you have enough patience, you will help to create a bitcoin.  You'll probably be helping to create 12.5 bitcoins.  You don't have to use a Bitcoin mining company though.  You can create a bitcoin by purchasing bitcoin mining hardware and running the software yourself.  If you do that, then you will be working on creating a package of 12.5 bitcoins - by yourself.  That's about $100,000 worth of Bitcoin right now, so you can expect to spend about that much to get the job done.  Caveat! The process involves a lot of randomness, so it's possible to spend millions and never actually make any bitcoin.  This is why most people go through a bitcoin mining company, called a "mining pool."

A lot of the money you'll be spending to make your package of bitcoins will be spent on electricity to run the hardware.  What the hardware does is to create a fingerprint for a bunch of data that is strung together in a "block."  I say "fingerprint" but the technical term is "hash."  You may be familiar with the fact that when you enter 16 random digits into a field on a webpage that asks for a credit card number, it usually responds right away that the number is invalid.  You might also know that this is because the first fifteen digits determine what the 16th digit should be, so only one out of ten random 16-digit sequences can be a valid credit card number.  That last digit is a kind of "hash" or fingerprint of the first 15.

The data being strung together into a "block" is transaction data.  Everyone who wants to spend bitcoin has software they use to do it.  The software makes a little packet of data that indicates what bitcoin is being spent and what the new rule is to spend it next time.  That new rule is identified by the bitcoin address to which the bitcoin is being sent.  The bitcoin address is based on the secret key that the receiver has; their "bitcoin private key."  The sender uses their own bitcoin private key to cryptographically sign the packet of data (a "transaction") and then it goes public on the Internet where bitcoin miners can collect it and add it to their block.

Here's why the miners fingerprint those blocks: A fingerprint, or hash, of a block is a number with about 77 digits.  Let's consider that it's between 0 and 1.  So, for example the fingerprint might be 0.123456...77, where that last 7 is the 77th digit.  The actual result is a very large integer, but if we divide it by 2 raised to the 256th power, it will be a number between 0 and 1, and it will have more than 77 digits, but the digits after the 77th one aren't important.  In order to create bitcoins, the hash has to be very small.  For example, the hash I suggested, 0.123456...77, regardless of what digits are represented by the ellipsis, is way too big.  If it were 0.0000...12345677, and the ellipsis represented several more zeroes, then it would be small enough.  What do they do if the fingerprint is too big?  Well, they change the data and recompute it.

The block contains a bunch of transactions along with a piece of data called the "nonce."  It's just a number that starts at 0, and they add one to it each time they get a hash that is too big, and then they recompute.  The block also contains a timestamp, and the nonce only goes up to about four billion (2 raised to the 32nd power), so when the nonce gets to the highest value it can be, it rolls back to zero and the miner has to change something else.  There are many things they change, but usually it's the timestamp, and it's really the software that changes it automatically.  If they've received new transactions to add to the block, they can restart their nonce back at zero.

The very first transaction in each block currently specifies that 12.5 new bitcoins, plus all the "extra" bitcoin from all the included transactions (called "transaction fees") now belongs to the bitcoin address entered by the miner.  So if you do "mine bitcoin" you can create 12.5 bitcoins and also earn some transaction fees.  I hope you're curious about the transaction fee because here's an explanation: If I identify exactly one bitcoin and declare that 0.9999 goes to your bitcoin address, that leaves 0.0001 on the table.  That's the transaction fee.  If I specified that you get the whole 1.0, then miners wouldn't bother including my transaction in their blocks, so no permanent, globally accessible and cryptographically protected record of the payment would exist and you will never be able to spend it.

Way back before I (or anyone else alive today) was born, anyone could make a unit of currency.  That was before the advent of "legal tender" laws which barred courts from ruling that the stuff anyone can make (like gold coins) must be handed over in a lawsuit.  If you want, you can still get some gold or silver and make a unit of currency, but the government will most likely pretend that what you made looks like a unit of currency that only the government is allowed to make and prosecute you for it.  That's what happened to Bernard von Nothaus who created the "Liberty Dollar."  So people who want to be free went digital.

Banks and governments are now scrambling to make something they can say is based on "blockchain," because they crave control.  My aim with this post was to arm you with a question you can use to avoid being under that control.  Whatever currency they make, ask them how YOU can make a unit of their currency, and see if it requires licenses or permits or privileges or whatever, or if they just ignore your question.  That's what the IRS does when you ask the important questions.

When a currency exists that anyone can make, currency production is "decentralized" and thereby protects those who use it from the corruption inherent to power.  This is why I love cryptocurrency.

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