What is really going on with Bitcoin and other cryptos?

In the first installment of this week’s podcast, “Web3: The next generation of the internet” (August 4, 2022), Walter Bradley Center Director Robert J. Marks spoke with graduate student Adam Goad about Web3, the coming Internet of More Privacy on one side and a metaverse of avatars on the other. So, only as wild as you want it to be, maybe. Now postdoc Austin Egbert joins the discussion as they continue with how Web3 could at worst be a bit like the sci-fi movie Ready Player One. (2018).

Note: As for the metaverse, this week’s news reveals that Facebook executives are leaving Mark Zuckerberg’s metaverse in droves: “ … recent retreats point to deeper unrest inside Meta. Some suggest it lies in the current visions of Facebook founder Mark Zuckerberg, and his growing reluctance to be challenged.” (MSN, 3 August 2022)

This part starts around 15:00 min. A partial transcript, notes and additional resources follow.

Robert J. Marks: Tell me about Ready Player One. I am not familiar with it.

Adam Goad: It’s in the near future and a fully immersive metaverse technology has been released called The Oasis for people to plug into and fully experience. Well, actually, the full experience comes later in the series I think, but it starts with just a VR experience, but then you can buy a haptic feedback glove so you can try to touch things and stuff. And basically the largest company in the world that provides the service. Most people live in absolute misery, but they spend all their time in The Oasis and have a good time.

Robert J. Marks: I wonder if people have done any work on the psychological and social implications of this metaverse…

Adam Goad: I’m no expert on psychology, but I think it would be similar to, and perhaps more extreme than, the current problems and addictions we see with things like social media, people posting all day just scrolling through Facebook or Twitter. This would be a fully immersive version where they have far more shiny buttons to click.

Robert J. Marks: Yes. I just read an article by Andrew McDiarmid, who has been hosting Thoughts are important podcasts for us. He just wrote an article about one of the stars of a sitcom called Fresh off the boat, who went through a period where she tried to commit suicide because of social media, and she realized that it was because of social media that she had these mental problems.

Note: Social media can literally kill. It killed Cheslie Chryst. Andrew McDiarmid discusses how Chryst’s suicide – and Constant Wu’s thwarted attempt – shines a spotlight on the toxic cyberbullying inherent in BigTech’s formula for success. Many are now asking whether teenagers who can’t drink, drive or own a gun should even be on social media, given the rise in teen mental health issues since 2010. (July 25, 2022)

The conversation then turned to blockchain and Bitcoin

Robert J. Marks: Let’s talk a little about blockchain. I don’t know if we got into it, but my understanding is that it’s a chain of small pieces of software that are linked together. I do not know. Can you elaborate a bit? Why is it so important, especially for privacy?

Adam Goad: Yes, so a blockchain is a chain of blocks. Each of these blocks for Bitcoin contains the ledger of the most recent transactions. Once blocks are added to the chain, the transactions become official. To ensure privacy, and to ensure that these transactions are valid, a large amount of cryptographic security is put into this. It happens through “mining”. What the miners do is solve cryptographic problems, fight for the rights to add the next block in the chain. When they add that block to the chain, they get a flat reward in Bitcoin just for adding it. I think right now it’s about 6.25 Bitcoin.

Robert J. Marks: I know Bitcoin goes up and down, but what is it worth?

Adam Goad: Today, one Bitcoin is worth approximately $21,000.

Robert J. Marks: So if you succeed in this mining, you get six times 21, or $120 some thousand dollars. Is that correct?

Adam Goad: Yes. And that’s why so many people get involved. Entire companies are built around Bitcoin mining.

Austin Egbert: One thing to note is that with Bitcoin mining specifically – and Adam might get to this in a moment – they have to keep increasing the difficulty of generating a block to keep this artificial level of difficulty in it – to keep someone from to be able to take over the network…

You can’t just mine Bitcoin on your computer at home like you used to be able to a decade ago. It has gotten to the point where people have to special order dedicated chips that are specifically designed to calculate the algorithm used to mine Bitcoin. It takes significant capital to purchase this specialty hardware and burn through massive amounts of electricity.

So you get $120,000 if you succeed at one, but it’s a lot of money to have a shot at it in the first place.

Robert J. Marks: As you mentioned, their power consumption is just huge. And some of them have heat sinks to get rid of the heat generated by their computers. I have heard they have moved near the arctic circle where it is cold.

Adam Goad: But here in Texas, I have some friends who work with electricity distributors, and they tell me that we have a lot of companies trying to move here and open Bitcoin farms. Basically, you buy a giant warehouse, you fill it with these specialized computers Dr. Egbert talked about, and you just plug in a ton of power, and you cool it down, and it’s mining Bitcoin all day.

Robert J. Marks: Wow. But it’s getting harder and harder. It’s a situation where the more mining you get, the less return you get. Obviously, some of these companies just get to the point where they say, well, it’s not worth it anymore, it’s just too hard to find the new difficulty. Do you see it coming or are the investments in these Bitcoin farms still on the rise?

Adam Goad: With Bitcoin, there is only a certain amount of Bitcoin, so there will come a time in the next few years when Bitcoin is over, basically. The rewards for mining will basically disappear and there will be very little incentive for people to continue mining.

So where is the money in the industry after all the Bitcoins are mined?

Austin Egbert: I think miners get money from two sources, really. It is the actual mining reward of new Bitcoin entering the system. But I believe that there are also transaction fees that the miners take that are passed on to whoever makes a transaction. So if I want to send money to you, Adam, I have to pay a small fee. It then goes to whoever succeeds in mining the block, is that correct?

Adam Goad: Yes. These fees are known as gas taxes and, depending on which blockchain you use, some of it may go to the chain itself and be burned or destroyed to create a small deflation. Part of it was also supposed to go to the miners themselves, yes.

Austin Egbert: I think long term, these gas taxes are what end up providing the incentive to keep the network running.

Adam Goad: Yes, they could. And it will also mean, however, that they are likely to rise significantly when that time comes.

Robert J. Marks: Is gas an acronym?

Adam Goad: It is not. It’s just like gasoline makes the car run; “gas” makes the blockchain run.

Robert J. Marks: I understand. So this reminds me of actors in sitcoms, like Seinfeld. They used to be paid a salary for their weekly shows, but now they still get residuals in all the reruns. And that’s basically what gas taxes are, isn’t it? It gets leftovers from the replays, from reusing Bitcoin.

Adam Goad: Yes. You only receive it when you put a block on the chain. You can’t make it continue, but yes.

And what about the emerging market for non-fungible tokens (NFT)?

Austin Egbert: One thing to note is that I think if I want to send money to Adam, I can choose how much gas I want to spend on that transaction. It will motivate people to choose my transaction to focus on putting on the blockchain.

Adam Goad: Yes. And that can be a very competitive thing, especially with NFT’s non-fungible tokens.

A new exciting NFT will enter the market through what is known as a coin. To characterize this NFT, it is a chain transaction. So whoever is willing to pay the most petrol taxes gets it first. If there’s only a limited amount and a lot of people want it, people are willing to pay thousands or tens of thousands of dollars in these fees to make sure they get it.

Some examples of NFTs:

Robert J. Marks: Well, we’re going to talk about non-fungible tokens, which I tell you, I don’t understand, in the next podcast…

Last subject. Bitcoin was the first cryptocurrency. Cryptocurrencies are just biting the dust today. I’ve read that many of the companies are declaring bankruptcy, that they just didn’t catch on… Any thoughts?

Adam Goad: I’m no expert on economics, but it came with the downturn for pretty much everything else, too. It tracked with the fall of the stock markets and all other commodities. So we see several smaller projects not succeeding, but people just aren’t investing money right now.

I think that the bigger projects, Bitcoin, Ethereum and such, they will manage and they will rise again, most likely. A lot of them, actually, if you look at the value of them, they’re still higher than where they were a year, a year and a half ago. It’s just that they were so high about six months ago that we’ve seen this decline of 60-70% in some cases. It just feels like it’s gone down so much, but really it’s still very high.

Robert J. Marks: Could it just be a property of a bubble? That everyone became interested in it, and then the bubble popped?

Adam Goad: I think it is. In particular, we’ll get more into that here, but NFTs, I think we’ve definitely seen a bubble and that bubble has popped. But I believe that the technology is still there and that there is a great chance of a comeback.

Next: The mysterious market for non-fungible tokens (NFTs)

You may also want to read: How can non-fungible tokens (NFTs) be made to work better? Bernard Fickser offers twelve steps to handle NFTs in a way that avoids cryptocurrency-based blockchains and works on mainstream online marketplaces like eBay. In Fickser’s view, NFTs can work if they avoid self-serving cryptocurrency blockchains like Ethereum and enable real-world legal transfers of ownership.

Here is part 1 of the episode: Why do some tech moguls dislike Web3, the new Internet? Web3 is a decentralized, less controlled version of the Internet, as George Gilder predicted in Life After Google. However, some developers want to go further and make Web3 a virtual reality that our avatars can live in, like in the movie Ready Player One.

You may also want to read: Take control of your technology before the metaverse hits. Soon you will be lured on all sides by a variety of virtual worlds. They will look and feel very real and very cool. SOS: If technology makes you forget everyone’s phone number, cut it. If it messes with your sleep, sell it. If it prevents contact with others, dump it. (Andrew McDiarmid)

Additional resources

Download podcast transcript