Once upon a time, there was an unassuming little invention called “Bitcoin.” Bitcoin was invented by Satoshi Nakamoto, a gentleman for which we have no records—no proof that he ever existed. Or perhaps it was a group of developers working under the Nakamoto name, but this cannot be proven either. Though the origins of the 2009 invention remain (forever?) shrouded in mystery, one thing remains absolutely certain: the cryptocurrency was born and is growing into an undeniable force in the modern computing landscape.

 

JUST WHAT IS A CRYPTOCURRENCY, ANYWAYS?

A cryptocurrency is a digital system of currency that relies on cryptography to verify transactions and generate new currency for the cryptocurrency economic system.

 

That’s still a bit stiff, so let’s look at it another way: someone (or a group) created a currency that records every financial transaction to a public record. Let’s call this record the “blockchain.” Every trade, every donation, every purchase, every financial transaction is a matter of public knowledge.

 

crypto.png

This blockchain is an enormously complicated bundle of data. Thousands or potentially millions of people are contributing to it every day, so maintaining the integrity of that data is vitally important. Cryptocurrencies maintain integrity of that data by asking users to donate the horsepower of their computer to help solve puzzles. The first user to successfully complete the puzzle (i.e. verifying a transaction) generates new currency in the system and receives Bitcoins as a reward. Contributing compute power to solving these puzzles is called “mining,” and the reward goes into a secure file on your system called the “wallet.”

 

AN INTERLUDE ON HASHING

The puzzles solved by a user’s PC are “cryptographic” in nature, which is to say that they are based on the same encryption algorithms you might use to secure sensitive information. A basic principle in an encryption system is the concept of the “hash,” or a fabulously complicated string of numbers and letters that anonymously represents your data, but is reversible by the person that originally encrypted that information. Cryptosystems are used by these currencies as the method of proving a transaction was legitimately completed. This is called “proof of work.”

 

There are many sorts of encryption systems out there: AES, SHA-256, Scrypt, Blowfish, and many more. Each cryptosystem uses different mathematics to achieve the creation of a hash. For our primer today, we can stop a little short by stating that Bitcoin exclusively uses two rounds of the “SHA-256” system for creating the hashes that encrypts its transactions, whereas alternatives like Litecoin (and many others) use 12 rounds of SHA-256 followed by a 13th round with Scrypt. The act of creating hashes is intuitively known as “hashing,” and this work is best done by a GPU in many of today’s cryptocurrencies.

 

Finally, before we can show the process of a transaction, you must know that a single piece of information, like the information associated with a transaction between two parties, can generate thousands of different hashes when you begin to encrypt that data with a given cryptosystem. No two hashes are ever alike. Cryptocurrencies rely on that randomness by forcing systems to repeatedly compute new hash values for the information contained in a transaction until one is created that matches a specific pattern expected by the currency. The first user to create a hash that matches the expected pattern wins the prize: coins! And coins are the general name for a unit of money in a cryptocurrency.

 

EXAMPLE: A USER’S FIRST CRYPTOCURRENCY TRANSACTION

  1. Bob installs software related to the mining of a specific cryptocurrency (let’s call it  the “ExampleCoin”) and creates his first wallet file. The file is stored on his PC, and contains a record of his ExampleCoin addresses.
  2. ExampleCoin addresses are strings of letters and numbers that refer to a quantity of ExampleCoins owned by Bob. Bob can create a new address for each transaction to help improve security, and Bob can always check the value of his ExampleCoin addresses by inspecting his wallet file with the ExampleCoin software.
    1. NOTE: Each new address generated by Bob creates two lines of text: a “private key” that must never be shared with anyone, and a “public key” that Bob may freely share to engage in transactions. These addresses are called “key pairs” in cryptocurrency parlance.
  3. Bob’s friend Sally is also an ExampleCoin user, and wants to send him one ExampleCoin as a welcoming gesture.
  4. Bob generates a new ExampleCoin key pair for this transaction. The ExampleCoin software automatically and securely stores the private key, while Bob gives the public key to Sally.
  5. Sally enters Bob’s public key into her own ExampleCoin software and tells her software to transmit one coin to Bob.
  6. Once the transaction is committed, all of the data associated with that transaction is publicly broadcast to every user in the ExampleCoin network. This information includes: Sally’s public key, Bob’s public key, the transaction amount, and a digital signature based on Sally’s private key.
  7. Before the funds become associated with and available to Bob, the ExampleCoin network must prove their transaction was legitimate. The funds are essentially placed in escrow, secured with a “puzzle” that other users must solve to release the funds.
  8. That puzzle is the creation of a hash for the Sally/Bob transaction that matches a certain pattern. The matching pattern verifies the digital signature from step 6, and proves without a shadow of a doubt that Sally really owned the coins she sent to Bob. This is “mining” in action!
    1. NOTE: Every user will generate thousands of hashes before luckily happening upon one that matches the desired pattern.\
    2. NOTE: Hashes are created by a separate application, called a “miner,”that is different from the ExampleCoin software. Users must have both a miner and the wallet software installed to effectively participate in mining. The below image is cgminer 3.7.2, one of the most popular applications for mining cryptocurrencies with a graphics card.
      cgminer.png
  9. A matching hash value is eventually found to verify the transaction, which usually takes about 10 minutes. The ExampleCoin network reassigns the funds to the public key Bob provided, and the entire transaction is added to the end of the public blockchain.
  10. The lucky user that generated the matching hash with his mining application receives a significant share of ExampleCoins as a reward for being first to solve the puzzle.
    1. NOTE: Dedicating more hardware to mining helps increase the likelihood that you can be first to verify a transaction and receive your own coins as a reward. This is why a great GPU, like an AMD Radeon™ R9 Series product, is so important.

 

Just in case you missed it, here's how mining plays its role as the central mechanism in cryptocurrencies: mining is the lone authority in validating legitimate transactions, and it also creates new coins that enter into circulation. Mining is the process that makes any cryptocurrency system trustworthy and grow, and it's a never-ending process as users are constantly committing new transactions.

 

Finally, it’s worth mentioning that cryptocurrencies do not always deal in whole coins, as we have demonstrated here in our example transaction. Because cryptocurrencies are purely digital, users can own fractions of a coin out to eight decimal places: 0.00000001 ExampleCoin. This is no different than the US dollar, which tracks fractions out to two decimal places in everyday transactions (e.g. 0.05 dollars, or five cents).

 

WHAT TO DO WITH CRYPTOCURRENCIES

Once you have some cryptocurrency on-hand, you can, under certain limited circumstances, spend it! For example, internet retailer Overstock.com just began to accept Bitcoins as an acceptable form of payment alongside the US and Canadian dollars. Or you can visit a cyrpto currency exchange and cash your cryptocurrency out for “real” money, just as you would convert one currency to another on your way out of the airport in a foreign country. Others are useing cryptocurrencies to “tip” users as a “thank you” for services rendered or information provided.

overstock.png

 

More recently, users mined and donated $30,000 US dollars’ worth of Dogecoins to the Jamaican bobsled team, which couldn’t afford the trip to Sochi after qualifying for the Olympics for the first time in 12 years. The donation of $30,000 put the Olympic hopefuls within spitting distance of their $40,000 goal, and inspired the Jamaican national Olympic committee to sponsor the team’s travel in full. Additional funds, including the Dogecoins, were used for equipment costs and other upkeep at the 2014 games in Sochi!

 

Based on the rousing success of the donation drive with Team Jamaica, Dogecoin users also rallied in January to support members of the Indian Olympic team, donating $6,500 USD in just three hours.

 

AN UNCERTAIN AND UNDENIABLE FUTURE

2013 was a momentous year for cryptocurrencies, as evidenced by the shift from “obscure hobby” to “subject of debate in US congress.” Media coverage, currency speculation, and gold rush mentality all helped contribute to the exponential growth of Bitcoin, which surged from just $30 US at the start of 2013 to more than $1100 US at its peak. As of the date of this article, one Bitcoin trades for a not insubstantial $548 US.

 

Correspondingly, Bitcoin’s explosive popularity erected barriers to entry that triggered the boom for the Scrypt-based currencies like Litecoin or Dogecoin, which have now become famous and popular in their own right. Users not content with the form and functionality of these coins have gone on to make their own derivative cryptocurrencies—a seemingly never-ending process that has ultimately spawned hundreds of varieties.

 

The ultimate goal, form or function of cryptocurrencies in our digital society and economy is equal parts unknown and inescapable. In fact, it’s unclear if cryptocurrencies will survive at all, and anyone investing in this form of exchange does so at their own risk.  But it’s a future shaped by all of us, and the free spirit of self-made progress has always struck a chord through the narrative of humanity. And this once-strange pet project sent anonymously in the world may have a significant role to play in the years ahead.

 

Please stay tuned for part two where we’ll explore in detail how AMD Radeon™ hardware helps provide a technological advantage for users participating in cryptocurrency mining!

 


 

Robert Hallock handles Technical Communications for Desktop Graphics & Gaming at AMD.His postings are his own opinions and may not represent AMD’s positions, strategies or opinions. Links to third party sites are provided for convenience and unless explicitly stated, AMD is not responsible for the contents of such linked sites and no endorsement is implied.Additionally, AMD does not endorse, recommend or promote the use of any peer-to-peer Internet currency or the “mining” thereof. Internet currencies are highly speculative and participation in the use or collection of such currency is undertaken at the users own risk. Please ensure that your hardware (and in particular your cooling solution) is sufficient for the processor-intensive nature of Internet currency mining.

 

MAGE PERMISSIONS:

Licensed under CC-BY-2.0 for commercial sharing and adapting. Original photo property of Flickr user btckeychain.