Open your free digital wallet here to store your cryptocurrencies in a safe place.
At the end of April, mining hardware manufacturing company started shipping a whole stack of their products. It was the same time when the Litecoin hashrate was somewhere around 173,225 MH/s. The increasing exposure of Scrypt ASICs mining machines further influences other manufactures as well. In just two months since April, the Litecoin hashrate went up to 200$, while its mining difficulty also tripled.
The next Scrypt ASICs to hit the market will have the hashing power between 200 and 400 MH/s; indicating the possible surge in Litecoin mining difficulty and network hashrate as well. Some companies are also building hardware that can sustain hashing power up to 650 MH/s. As many believes, these events will somewhat impact the Litecoin standings in the market. The question however is, in which way?
The Litecoin community seems to have divided on this question. There is a section which believes that the increasing hashrate will have a fruitful impact on Litecoin prices, citing Bitcoin as a key instance; while another section does not acknowledge any relation between the Litecoin prices and its hashrate.
Explanations are coming from both sides, each with a unique perspective. The ones that support the prediction of Litecoin’s escalation believe it to be the network’s strength that will multiply by over 1,000 times in future. It is the economics of scale in mining that will play a major role in boosting the Litecoin’s stand in the market.
On the other hand, there are those who do not support this theory even in thoughts. They outright rubbish the history that certifies increasing hashrate proportional to the coin’s market cap. Their logic dictates a scenario in which miners are faced with increased selling pressures in order to cover their investments on such expensive mining hardware. This aims at a lower demand and higher supply rate that will eventually cause a huge drop in Litecoin prices. They event say that the current imbalance of Litecoin market is caused by such selling pressures.
Considering both the sections, we believe that market conditions have changed a lot since the launch of new cryptocurrencies in the market. The reason why BTC did so well after the increased hashrate was it being used only for trading. Litecoin too cashed only because of the bubble fuelled by China. The moment these coins were introduced to the real merchant world, its basics changed completely. Seeing today’s scenario, Bitcoin is backed by multiple major organizations while Litecoin is still far away from reaching this point. In short, the continual acceptance of BTC over LTC thickens the latter chances to repeat history. Hashrate increased or decreased, it won’t hold any meaning until Litecoin grabs some major investments from big players.
Open your free digital wallet here to store your cryptocurrencies in a safe place.
As Bitcoin’s first-mover momentum spreads the digital currency’s adoption, the “proof of work” model it uses to confirm transactions is coming under scrutiny within the crypto-community.
The proof of work algorithm rewards the individuals, called miners, who confirm blocks of transactions in exchange for an amount of the digital currency. Individual miners join pools to mine collectively as a group, increasing the computing power available to confirm Bitcoin transactions.
This model seems to benefit by encouraging a large number of participants, but it is vulnerable to what is called a 51% attack. A miner or pool that holds 51% of the total computing power could in theory control the blockchain, which is the public ledger of Bitcoin transactions. This control could enable double-spending bitcoins as well as blacklisting certain users or computing equipment. Until recently, the 51% attack was widely considered an unrealistic threat.
“The proof of work algorithm is robust and has been resilient in the face of continuous attacks for the past five years,” says Andreas Antonopoulos, a technologist and entrepreneur who is active in the Bitcoin community. But a mining pool called Ghash.io gave the community a scare when it took over 51% of the network for 12 hours on June 13.
If a pool used its control for nefarious purposes it would only hurt Bitcoin’s use and, in turn, its price. This result would hurt any miners who become attackers, since they are rewarded for their mining efforts in Bitcoin and likely hold a generous amount of the digital currency. Since the incident, Ghash control has decreased substantially, hovering now at around 35%.
“Certainly miners didn’t sign up for unfair play and they would abandon that pool,” lowering the percentage of its control, Antonopoulos says. The 51% attack “is a theoretical attack that’s narrow in scope and goes against the incentives for the miners and owners of the pool.“
Last year, Ghash said it would try to prevent itself from capturing 51% of the network power and that it would not do any damage even if it did reach this level of control. And since the power is split over the many individuals who mine in the Ghash pool, it’s unlikely the pool could reach a consensus among its members to damage the network.
Nevertheless, some in the Bitcoin community are calling for a splintering, or “fork,” in the Bitcoin blockchain, and the forked version of Bitcoin would add features that discourage pooled mining. Others are talking about the benefits of a “proof of stake” algorithm, which secures cryptocurrency networks by asking users to show ownership of a certain amount of the currency.
BlackCoin is an alternative digital currency that uses a pure proof of stake model. It was created about five months ago and has generated enough support to be integrated into CoinKite’s merchant point of sale system.
“A user chooses to ‘stake’ his coins to generate the next block in the chain, and his chance of doing so is proportional to the weight of his own coins,” says Adam Kryskow, U.S. representative for the BlackCoin Foundation.
Proof-of-stake algorithms enable faster payments. BlackCoin transactions confirm in under a minute, whereas Bitcoin transactions usually take about 10 minutes. And proof of stake is also more eco-friendly, consuming far less energy than proof of work algorithms.
Image: Peercointalk.org |
Peercoin is one of the most recognized altcoins that uses a hybrid proof of stake/proof of work model. New coins are awarded to miners who do work to authenticate transactions, but are also given to users who hold a higher stake in the system.
“The current proof of work system that is in place incentivizes centralization,” says Kryskow. “Specifically as mining payouts decrease, small mining operations will be forced to close up shop. With little to no incentive to continue mining, network power will fall dangerously low and security will be severely threatened.“
But proof of stake has its own vulnerabilities. Kryskow admits that since proof of stake algorithms are not completely decentralized, they are susceptible to a “nothing at stake” attack, where older coins could be used to fork the blockchain to create a competing one.
The proof of stake model hasn’t been stress-tested enough over a long period of time, and it worries Antonopoulos when proponents argue that the nascent mining algorithm is better than Bitcoin’s proof of work.
Bitcoin has survived a number of attacks over the years, says Antonopoulos. “There is much better monitoring and tracking [of the network]…a lot of DDoS protections and countermeasures built into the core client because of Bitcoin‘s experience with widespread attacks over the years,” he says.
Proof of stake was created in 2011 with the launch of Peercoin. “It was attacked and beaten; bugs were found, security issues were rampant and countless vulnerabilities were exposed,” Kryskow says. That’s when Peercoin moved to the hybrid proof of stake/proof of work model.
BlackCoin‘s developer argues that, like Bitcoin’s proof of work, proof of stake will be stress-tested in real-world use. BlackCoin “is a great proof of stake experiment,” Kryskow says.
Antonopoulos agrees that the development of new proof models is advantageous. “I don’t think we’ve found the perfect solution yet,” he says. “Everything comes with compromises…so you just have to identify which ones are the good compromises to make.” Other algorithms include “proof of burn,” in which a small portion of a cryptocurrency is destroyed to create value through scarcity; and “proof of resource,” which takes a resource, such as bandwidth, and assigns it a certain value for sharing.
“The real issue, though, is until we see a problem in Bitcoin that impacts the price, knowledge of Bitcoin is so much higher than [all other altcoins] that any other solution out there will be irrelevant,” says Tim Sloane, vice president of payments innovation at Mercator Advisory Group.
Sloane doesn’t expect everyone using the Bitcoin protocol to switch over to another digital currency just because there’s a threat
of disaster. But it may happen if a disaster actually strikes.
“As Bitcoin gets bigger and bigger, the problem gets bigger and bigger,” he says.
Open your free digital wallet here to store your cryptocurrencies in a safe place.
“To date, this incident is the single most profitable, illegitimate mining operation.”
Open your free digital wallet here to store your cryptocurrencies in a safe place.
Tim Swanson is an educator, researcher and the author of ‘Great Wall of Numbers: Business Opportunities and Challenges in China’. Here, he explores the mining systems of dogecoin and litecoin to show how the dogecoin economy can thrive.
(CoinDesk) The key ingredient to the success of any decentralized public ledger, such as bitcoin, is incentivizing its transactional network to simultaneously secure the network from attackers and process transactions.
In the case of bitcoin, and in the case of virtually all other cryptocurrencies, this incentivization process is handled through seigniorage. Every 10 minutes (or 2.5 minutes for litecoin, or one minute for dogecoin) a fixed amount of bitcoins is paid to the labor force called “miners.” These miners are computational systems that perform never-ending mathematical calculations dubbed hashing. This hashing in turn creates security for the network; so as long as more than 50% of the hashrate is maintained by “good” systems, bad actors are prevented from manipulating the ledger.
The other key role these miners also fill is processing and including transactions into packages called blocks. Every 10 minutes, one miner is rewarded for processing these blocks with fixed income. Last month David Evans published a good overview of how this process looks from a labor input and supply output perspective.
For some advocates, one of the purported advantages of cryptocurrencies is that their money supply creation rate is actually deflationary (or contractionary) in the long run – in the short run, bitcoin’s expansionary rate is quite high, with inflation at 11.1% this year alone. That is to say, it is a hardcoded asymptote, tapering off over a known time period. In the case of bitcoin, the wage for the labor force (miners) is split in half roughly every four years (every 210,000 blocks), for approximately the next 100 years – until its money supply is exhausted at a final 21 million bitcoins.
Roughly 12.7 million bitcoins have already been paid to miners. With dogecoin’s 100 billion dogecoins, this process is accelerated, with the mining income dividing in half every two months. While it took about five and a half years for about 60% of bitcoin’s total monetary base to be distributed, as of today 78% of dogecoin’s reward (income) has already been divvied out to its workforce in less than six months.
While this frenetically fast money supply has provided a psychological motivation for early adopters to partake in the dogecoin ecosystem, economic law suggests that this network will probably cease to exist in its current form within the next six months probably through a 51% attack.
The reason is simple: with every block reward halving, also called “halvingday”, the labor force is faced with a 50% pay cut. The contractors (laborers) incapable of profitably providing hashrate at this level can and will leave the work force for greener pastures. This same issue has impacted other altcoins in the past, such as MemoryCoin, which died after nine months due to a combination of factors including diminished block rewards (it attempted to divvy out its entire monetary supply in two years).
Early advocates of dogecoin like to point to outlier events such as the Doge bobsled team or sponsored NASCAR driver at Talladega or even a vaunted tipping economy (which is actually just faucet redistribution) as goal posts for growth and popularity, yet after two halvingdays the actual dogecoin block chain has lost transactional volume each month over the past four months and the labor force has also left for new employment elsewhere.
This is visualized in the following two graphs.
The first chart shows dogecoin’s collective hashrate. The black lines indicate when the “halvingday” or rather “income halvingday” occurred. Because the price level of a dogecoin remained relatively constant during this time frame, there was less incentive for miners to stay and provide labor for the network. If token values increased once again, then there may be incentives in the short-term for laborers to rejoin the network. Yet based on this diagram, roughly 20-30% of the labor force left after each pay cut.
The second chart shows on-chain transactional activity. The first three months are erratic because of how mining pools (similar to lottery pools) paid their workforce (miners). Following the first halving day in February, the network transaction rate fell to roughly 40,000 transactions per day and then leveled off to around 20,000 until 28th April 2014, when another halvingday occurred and the subsequent transactional volume remained relatively flat to negative. It is currently at 12,850 transaction per day, or roughly the same level it was during the first week of its launch five months ago.
Now, some readers may claim that a lot of the transactional volume such as tip services and tip bots are being conducted off-chain and thus the total number of transactions is likely higher. And they would be correct. But that would completely defeat the purpose of having a block chain in the first place – a trustless mechanism for bilateral exchange that negates the need for “trust-me” silos (as Austin Hill calls them).
Also, while this topic deserves its own series of articles, there is little literature that suggests that tipping can grow
an economy; it is not a particularly good signaling mechanism or way to grow a developing economy (i.e., “China, you need more tipping activity to grow and prosper”).
However the key issue is this: if the trend continues and the network hashrate continues to fall 20-30% after each halvingday, then within the next two to four months it will be increasingly inexpensive for competing mining pools on other ledgers to conduct a 51% attack on dogecoin’s network, destroying its credibility and utility.
For instance, the chart below is the litecoin hashrate over the past six months. Litecoin is dogecoin’s largest competitor based on its proof of work (PoW) mechanism called scrypt:
One of the reasons the litecoin hashrate is not rising or falling at a constant rate but is instead jumping up and down erratically is that miners as a whole are economically rational actors. When the cost of producing security is more than the reward (block reward income), the labor force turns towards a more profitable process such as another alternative scrypt-based “coin” (note: bitcoin’s hashing method uses SHA256d whereas litecoin and dogecoin use scrypt). The same phenomenon of hashrate jumping up and down occurs with the bitcoin network.
For the sake of simplicity, the litecoin network can be viewed as roughly 200 GH/s versus the dogecoin кошелек network which is roughly 50 GH/s. To conduct a 51% attack on dogecoin today, an entity would need to control roughly 25-26 GH/s which is roughly one eighth the processing power of the litecoin network. The current ‘market cap’ for dogecoin is $35 million, assuming marginal value equals marginal cost, ceteris parebus on paper it could cost $17.5 million in capital and operating expenses to successfully attack the dogecoin network.
The chart above shows both the hashrate of litecoin (in red) and dogecoin with the vertical black lines representing the dogecoin “halvingday.” What this shows is that while dogecoin, for roughly one month in early 2014 was more profitable to mine than litecoin, the halvingday led to an exodus of labor.
If current prices and trends continue, which they may not, in two months the litecoin collective hashrate may hit 240 GH/s and dogecoins hashrate could shrink due to halvingday by another 20% to 40 GH/s. At this rate a successful 51% attack on dogecoin would require just one twelfth of the hashing power of litecoin which at the same prices levels would entail less than $10 million in capital and operating expenses to do.
While the development team could theoretically switch its proof of work algorithm (to X11 as used in Dash), the doge community is really faced with six options:
While any or all of these may be tried out, it may be too little, too late. With that said, stranger things have happened. A rising tide lifts all boats and thus in the event that “bitlicense” approved exchanges on Wall Street come online this summer and new capital actually flows into bitcoin and other alternative ledgers, perhaps similar speculative funding will flow into dogecoin as well. However, this is not something that can be known a priori.
I contacted Jackson Palmer, creator of dogecoin for his thoughts on the situation. In his view:
“It is definitely a challenge that dogecoin (and all current-gen crypto currencies) will face in the future. As we discussed recently, it’s kind of a sad reality that people are purely profit driven and these decentralized networks we’ve built are reliant on profit-mongers to power and secure their viability. I’m very concerned about the impact of centralized mining and reliance on transaction fees could hold for bitcoin as it becomes less enticing to mine – really, the network can be held at ransom to attach hefty transaction fees if the mining pools are cherry picking as they create blocks. At the end of the day, I think the viability of cryptocurrency really hinges on a move away from PoW-based mining to something new and innovative that doesn’t just stimulate an arms race and put all the power back into the hands of the fiat-wealthy. I don’t have a solution unfortunately, but hopefully someone will find one and bring about a new generation of digital currencies in the coming five to ten years. That being said, cryptocurrency as a space is very unpredictable so it wouldn’t surprise me at all if dogecoin beats the odds and overcomes these challenges in some weird, wacky way. It’s in the community’s hands, and they’re certainly passionate about seeing it reach the moon, as am I.”
To be balanced, below is the network hashrate for the Bitcoin network following its first halvingday on November 28, 2012:
The following two months, from December 2012 through January 2013, the hashrate stayed flat and in some weeks even declined. There were three reasons why the network did not decline precipitously like dogecoin:
While more research will be conducted and published in the following months and years before the next bitcoin halvingday (estimated to occur probably before August 2016), the bitcoin network faces a similar existential hurdle, though perhaps less stark once more ASIC processes hit similar node fabrication limitations. That is to say, in the next couple of years there will no longer be performance gains measured in orders of magnitude. They will likely compete on energy costs. Since most participants do not like paying transaction fees, incentivizing miners to stay and provide security will likely be problematic for the same income reduction issues. This scenario will likely be revisited by many others in the coming months and years.
From a marketing perspective Dogecoin has done more to bring fun and excitement to this sub-segment of digital currencies than most other efforts – remember, USD can also be digitized and encrypted. In turn it brought in a new diverse demographic base to block chain technology, namely women. While some of the more outlandish gimmicks will likely not be enough to on-ramp the necessary token demand which in turn leads to token appreciation, this project has not gone unnoticed.
For instance, two weeks ago I had coffee with a bank manager in the San Francisco financial district. As we were wrapping up he asked me to explain dogecoin. I mentioned that what sets doge apart from the rest was its community was much more open towards self-ridicule, self-parody, less elitist and most importantly, women actually attended meetups.
He quickly surmised, “Oh, so it’s the wingman currency. It’s the friend you bring to the bar who is willing to look goofy to help you out.”
That is probably a fair enough assessment and it will likely need a wingman to survive.
Open your free digital wallet here to store your cryptocurrencies in a safe place.
Open your free digital wallet here to store your cryptocurrencies in a safe place.