12 The builders
Focusing on the price of bitcoin and its ups and downs, as tends to happen in media reporting about bitcoin, tends to miss out on the fact that an entire infrastructure has grown up around bitcoin. It’s fair to say that hardware infrastructure is not as sexy a story as a financially and politically volatile currency.
But since bitcoin’s launch in 2009, much of the infrastructure that supports the regular financial markets has also sprung up around bitcoin: dedicated media, exchanges, developer communities, secondary markets, storage services, vendors, hardware manufacturers, security services, legal services, software developers, conferences, regulatory bodies, consultants, educators, retail investors and corporate investors - and of course dedicated financial crime gangs, opportunistic fraudsters, and conmen.
First of all, there’s the developers, who now number in the thousands, and many of whom work on the development of bitcoin for no reward. Then there are the miners, a group whose purpose has largely baffled the financial media. The media often use stock photographs to illustrate stories, and we can take it for granted that designers and photographers who produce these stock photos are not always deeply educated about the ideas they are meant to be conveying. A common photograph used to illustrate a bitcoin story shows several miniature figures - some with jackhammers and others with pickaxes - attacking with gusto a recumbent physical bitcoin several times their size.
Bitcoin miners use computing power to verify new transactions by grouping the transactions into a block and then solving a complex mathematical problem that produces the required answer. The process takes around 10 minutes, and winner receives a set amount of bitcoin. The bitcoin protocol requires the halving of the reward every few years, anticipating a growth in the value of bitcoins. The protocol also changes the difficult level of mining the blocks in the ten-minute timeframe, to maintain consistency. Forecasting that the computing power available to create a block would grow, Nakamoto’s bitcoin protocol increases or reduced the rate of difficulty to keep the block time at around ten minutes.
Initially the reward was mining was 50 bitcoins per block; by the start of 2018, the reward for one block was 12.5 bitcoins. The bitcoin reward is the incentive for miners to stay in the competition, and the work of the miners serves to keep the blockchain valid. In the early years, anyone with an ordinary computer could download the bitcoin software and start mining for bitcoin, with rewards of 50 bitcoin per block mined. But as more people joined the bitcoin world, and the blockchain grew larger, miners required increasing power. Instead of standard CPUs (central processing units), miners switched to GPUs (graphic processing units) that are widely used in video games, and are useful for performing the same task again and again at high speed.
But by 2013, at least one genius realised that there was money in making the shovels for the miners, and the first ASIC (Application Specific Integrated Circuit) miners appeared, driven by the vision of Justin Wu, a Chinese entrepreneur who set up mining rig manufacturer Bitmain, which produces the popular mining rig called Antminer. In 2017, analysts estimated that Bitmain was producing profits of $3 billion to $4 billion. Bitmain controls around 75 percent of the mining rig market.
Another part of the infrastructure is provided by people and companies who host the network by running bitcoin nodes, which are basically computers acting as independent points within the bitcoin network. A full node involves a computer that runs 24 hours a day, leaving a port open for interactions with other nodes. There are thousands of nodes making up the network and when miners make new blocks, they broadcast the results to a selection of randomly chosen nodes which then update the public blockchain record. The nodes verify that the newest blockchain is valid. To host a full node, a user would download the entire bitcoin blockchain software, and then continue to download and verify every new block against the bitcoin core consensus rules. It’s not just enthusiasts who support nodes. A dedicated bitcoiner may for instance wish to hold coins in their own wallet, and having the blockchain on the user’s computer is one certain way to trustlessly perform transactions.
Then there are the exchanges, which grew out of the need for an easy way to actually obtain bitcoin, which for most people is to swap fiat money from their bank account for bitcoin. Often these exchanges also offer wallets where users can store their bitcoin. As we’ve seen, the first exchanges, such as MtGox, suffered alarming hacks and attacks, and in 2018, regulators are still getting around to providing guidance on exchanges.
Exchanges that show resilience, security-consciousness, and survival skills, can serve as platforms for other projects. Think about the Winklevoss twins, who at an early stage, seemed to have a longer-term vision for the bitcoin infrastructure than most of their fellow enthusiasts - albeit a quite Wall Street-friendly vision, as opposed to many other bitcoiners who hope for the collapse of Wall Street. The Winklevoss twins seemed to see bitcoin sitting comfortably in bank and investment portfolioes, and availing of the same financial infrastructure available for other financial instruments, from hedges to shorts, EFTs and futures contracts.
Already one of the biggest owners of bitcoin by early 2013, the twins applied that summer to the SEC for permission to establish an exchange traded fund (though the application was eventually rejected in 2017). In 2015, the established the Gemini cryptocurrency exchange, for price discovery among other things, and in 2017 they announced that the Chicago Board of Exchange would offer Bitcoin Futures based on the price on the Gemini exchange.
Dedicated cryptocurrency funds arrived in 2014, with Dan Morehead’s Pantera Capital an early instance, investing across a range of exchanges, crypto-media and bitcoin businesses. There’s now an entire cryptocurrency media, with sites such as coindesk.com attracting not only readers but experienced financial journalists. (In 2017 Mark Hochstein left his role as editor-in-chief of American Banker and took up a position as editor of Coindesk.) Max Keiser and Stacy Herbert, through their show on RT.com, were the first journalists to cover bitcoin extensively - with some lately suggesting that Keiser himself is Nakamoto.
Informal bitcoin gatherings soon turned into professionally run cryptocurrency conferences; at first bitcoin generally functioned within the broader fintech world. in 2018, there’s a bitcoin, cryptocurrency or blockchain conference happening nearly daily around the world.
The arrival of Etherum in 2015 and the series of ICOs throughout 2017 added over one thousand new coins to the cryptocurrency universe. Aggregators such as coinmarketcap.com arrived to offer comparative tracking of cryptocurrencies.
A new business grew up to provide storage solutions, from high-grade USB sticks to underground bunkers. Switzerland became an early state backer of the crypto infrastructure. As a long time player in the business of storing other people’s assets, Switzerland allowed some of its defunct military bunkers to be re-purposed as storage facilities for private keys to bitcoin wallets. The Winklevoss Twins were said to written their private keys on pieces of paper that were then cut up and stored at different facilities around the United States.