Money Rehab with Nicole Lapin - Bitcoin Thieves Part 3: How Cryptocurrencies Are Made

Episode Date: February 23, 2022

When you hear cryptocurrency explained, you’ll hear it’s “decentralized.” But what the heck does that even mean? It’s a complex topic; and to get to the heart of how it works, Nicole explains how cryptocurrency is made. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Welcome back to Cryptocurrency Week.

It's like Shark Week, but better. So let's dive in. Yesterday, we talked about the cryptocurrency network. Remember Carl and his car dealership? Today, we're going to be talking about how that network works. In order to do that, I'm going to walk you through how cryptocurrency is created. We talked about this a bit on the show already, but in case you missed it, cryptocurrency is created in a process called mining. But I promise you, crypto mining is not what you think when you picture traditional

mining. When you think of mining, you probably think of, well, a mine with hard hats and caves and canaries and whatever else are in mines. But cryptocurrency mining doesn't happen in an actual mine. It happens on a computer. This is the interesting part of cryptocurrency. Anyone can mine it and you can do it from anywhere in the world so long as you have access to a computer. That makes cryptocurrency completely different from government-backed currencies like the U.S. dollar. Can you imagine if anyone could print dollar bills? Not only that, but imagine if you could print dollar bills and do it from home without even getting out of your PJs. If that was a thing, I would do it. Wouldn't you? So why isn't everyone making Bitcoin?

Well, here's the catch. While you can mine crypto through a computer, it's a pretty complicated process. In order to create one coin, you need to program your computer to solve billions of calculations per second. So to quote the great poet Hilary Duff, if you can't do the math, then get out of the equation. But if you can do the math, you can mine crypto. Calling the process crypto mining is a bit misleading. To me, mining implies that you're doing some work to find something valuable and then you get to keep it. With crypto, miners are doing work to upkeep the entire cryptocurrency network. The work they're doing is what those community members were doing to help you confirm you weren't getting scammed at the car dealership. They're checking and updating the ledger. And in exchange for their work,

they sometimes get a reward in the form of that cryptocurrency. It's a really brilliant system when you think about it. Cryptocurrency creators wanted their new currency to be defined by this decentralized network that keeps the currency system running. But how could they get people to sign up to monitor this network? How many people are so passionate about decentralized currency that they'd volunteer their precious time to verify crypto transactions? Not many, the crypto founders thought. actions? Not many, the crypto founders thought. So they created a system where the incentive to upkeep the whole crypto network is the promise of earning that coin. So let's double click on that. At the most macro level, the incentive of mining is similar to a food co-op model. At a co-op, you donate your time to do work for the store, and in exchange, you get some of the goods from the co-op, like veggies and fruit and coffee and

whatever. Similarly, crypto miners upkeep the network, and in exchange, they hopefully get some crypto. When you read articles about crypto, you'll likely hear network upkeep and cryptocurrency mining described as two distinct processes. But that's not an entirely accurate picture. Upkeeping the crypto network is part of the mining process. For the most part, the folks monitoring the crypto network are the crypto miners, which transitions us ever so smoothly into breaking down the process of crypto mining. Mining crypto happens in two steps, confirming transactions and creating blocks. So let's break it down. Number one, confirming transactions. The first step of crypto mining is confirming transactions that folks have recently made with the cryptocurrency.

So remember, crypto founders really wanted a decentralized currency, but they didn't necessarily want an unchecked currency. While crypto fans eschew banks, banks do perform essential functions that prevent fraud. For example, if I went to Bill Gates and I said, hey Bill, I'll take your $127 million home and pay for it in cash, Bill Gates would be able to go to his bank and say, hey guys, does Lappin have this cash ready to roll? At which point my bank would call me and say, Lappin, you are the rich bitch, but you don't have $127 million in cash just free to spend. So without a bank or any other central figure guaranteeing whether someone is actually good for their money, how would crypto founders prevent fraud?

Crypto founders solve this problem with the network. Let's use the example of the Bitcoin network. Each time there's a transaction made with Bitcoin, the record of that transaction is sent to the network to be verified. Before the transaction is verified, it hangs out in transaction limbo, known as transaction pools or memory pools. It's the miner's job to review the transactions in the memory pools and confirm whether they're legit. The miners are essentially checking that the person spending Bitcoin actually has Bitcoin.

Let's not forget that miners aren't confirming these transactions out of the goodness of their hearts. To return to our co-op metaphor, people who work at co-ops aren't just working there because they're passionate about broccoli. They're working there because of the promise that they will get some of that broccoli to eat yum yum in return. Miners aren't just confirming Bitcoin transactions because they want to prevent fraud and they're passionate about that. They're confirming transactions because it's the first step on the road to earning them Bitcoin.

And that brings us to the next step. Number two, creating a block. At a top level, the next step is for miners to take some transactions that are chilling there in the memory pools and group these transactions together in a unique combination. That unique combination of transactions acts as a secret password that opens a spot on the cryptocurrency ledger. Once a transaction is on the ledger, it has officially been validated. In other words, a crypto miner has said, yep, this transaction was legit. These cryptocurrency ledgers are built with super cool, ultra secure blockchain technology that acts as a database to store records of crypto transactions. Okay, I'm just going to pause here and acknowledge something.

In my experience, understanding blockchain technology is a little bit of a roller coaster. At first, it's confusing. Then it makes sense. Then it gets confusing again. Then it all comes together. Right now, we're in the most zoomed out level and approaching a bit of a confusing spot. Part of what makes cryptocurrency confusing is because there is jargon that isn't used outside of the crypto space, like blockchain.

What the fuck is a block? What the fuck is a block? What the fuck is a chain? A blockchain database simply allows these confirmed cryptocurrency transactions to be recorded. Here's where we zoom in and things get a little bit more clear. Blockchain tech was actually named somewhat intuitively. The blockchain technology holds these verified transactions and stores them in virtual compartments or blocks, and those blocks are strung together in chains. Let's zoom back to make sure we're understanding the big picture of this step in the mining process. Once miners confirm transactions, their next goal is to add these transactions into the next block on the Bitcoin blockchain,

thereby creating a record of the transaction on the Bitcoin ledger. Here's where mining gets extremely competitive. Remember when I said that miners group transactions together that form a key to unlock the next block on the blockchain? Not every group of transactions will make a key to unlock the next block on the blockchain, not every group of transactions will make a key. So miners need that supercomputing power to generate a ton of different combinations of transactions. The goal is to beat all other miners in making a combination of transactions that successfully unlocks the next block on the blockchain. If you can do this, you'll earn your payment, Bitcoin, plus any transaction fees that were

associated with the confirmed transaction that you grouped together. More on Bitcoin transaction fees in tomorrow's episode. Get excited. When a block is added to the chain, it gets a digital timestamp. This helps miners verify and track transactions by allowing them to keep track of timing and reference previous transactions. But how much can cryptocurrency miners actually make from mining? Let's use Bitcoin as an example again. Unlike how the Fed can influence the amount of money in circulation, Bitcoin has strict limitations on how many coins can be mined. There is a finite number of Bitcoins, 21 million, FYI. Once the 21 millionth coin has been mined, that's it, guys. No more coins. that's it, guys. No more coins. At the time of writing this, 18.8 million Bitcoins have been mined. But by the time you'll listen to this, that number will be higher. A new Bitcoin is mined

approximately every 10 minutes, and it's estimated that all 21 million Bitcoins will be mined by 2140. Bitcoins will be mined by 2140. Here's the deviously smart thing. Not only is mining hard, but it actually gets harder depending on how many people are on the network trying to mine. Cryptocurrency founders built the mining system this way to prevent against the value of the currency swinging haphazardly. Their thinking was if, for example, it took one minute to solve the math required to get a block added on the Bitcoin blockchain, and 1 million people were mining all at once, then all 21 million Bitcoins will be mined in 21 minutes. That would mean that the entire finite supply of Bitcoin would flood the market all at once, which would drive the value of the currency down.

Remember, excess supply means lower value. Because Bitcoin creators are purists when it comes to value, they wanted a way to keep the pace of mining in check. Therefore, they programmed Bitcoin mining difficulty to be dynamic. The more people that are mining, the harder it is to get a block added on the blockchain. Another way Bitcoin founders built for steady pacing of the new currency is to ensure that over time, fewer coins would be awarded for each block added to the chain. would be awarded for each block added to the chain. In the earliest dates of Bitcoin mining,

there were 50 Bitcoins awarded per block added to the blockchain. At the time of recording this, there are 6.25 Bitcoins awarded per block. Bitcoin blockchain is programmed so that the number of bitcoins awarded per block is cut in half every time 210,000 blocks are added to the blockchain. It takes around four years to add that many blocks to the blockchain. The next time the reward will be halved is 2024, when miners will only be able to receive 3.125 Bitcoins awarded per block. And that is really everything you need to know about crypto mining. Are you with me? If so, congratulations! You understand cryptocurrency mining,

debatedly the most complicated financial topic of our time. Meet me back here tomorrow and I'll fill you in on what this whole mining process looks like from the perspective of folks who actually use the coin and need their transactions validated. And on Friday, we'll have our deep dive finale where we'll dig into the recent report of the married couple that stole billions of dollars of cryptocurrency and answer the question, how well does cryptocurrency address the problems it's sought out to solve? See you then. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are

Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.