Hashing Power and Contracts

Hashing power, or hashrate is a way of measuring the amount of mining for bitcoins or other cryptocurrencies that is performed in a second. Bitcoin is designed to require an increasingly high h/s in order to solve more complex algorithms , and so verify transactions on the blockchain digital ledger. Bitcoin uses a SHA-256 algorithm, the SHA standing for 'secure-hashing algorithm'. The function will yield a result that is 256 bits long. Actually, Bitcoin runs the SHA-256 function twice.

A hashlet is a cloud-based digital miner which can be purchased. The owner does not actually acquire hardware, but instead gets a stake in computing power which can be automatically upgraded and easily sold online.

Businesses such as Genesis Mining allow customers to sign up to perform cloud-based Bitcoin mining.

Some digital mining companies have sold hashlet contracts for hashing power which did not actually exist. A complaint filed by the S.E.C. in 2015 states that, "[i]n reality, defendants sold far more Hashlets worth of computing power than they actually had in their computing centers. There was no computer equipment to back up the vast majority of Hashlets that defendants sold." D.I. 1, ¶ 3, Complaint, S.E.C. v. Homero Joshua Garza, No. 3:15-cv-01780 (D. Conn. Dec. 1, 2015).

These hashet contracts made news this week when a jury in a similar case found that hashlet contracts are not securities or investment contracts, and so the digital mining companies could not be charged with securities fraud. See, D.I. 330, Verdict Form, at 2, Audet v. Fraser, No. 3:16-cv-00940-MPS (D. Conn. Nov. 1, 2021)

21M BTC Max

There is a theoretical limit to the number of Bitcoins that can be mined - which is tied to the data structural limits of a blockchain. Only about six new blocks (a reference to a new transaction, a preceding transaction, and the answer to a complex mathematical problem) of bitcoins can be generated each hour. The Bitcoin system is designed to reduce the number of Bitcoins that can be generated by 50% every four years. About 94% of Bitcoins will have been mined by 2024, however assuming that processing / mining power remains constant the maximum of 21,000,000 may not be reached until more than a century after that point.

Blockchain Guide

Even with the recent decline the value of Bitcoins, blockchains are still a widely discussed and yet poorly understood in the business and legal worlds. An excellent O'Reilly Blockchain Guide by Melanie Swan is available here. Here's a summary of the key points made in the guide, Blockchain: Blueprint for a New Economy.

A. General

1. Blockchain 1.0 - digital currency

2. Blockchain 2.0 - smart contracts.

3. Worldwide, public record for the registration and transfer of all assets - finances, property, votes, software.

B. Bitcoin 1.0 Currency

1. Three Layer Technology Strack

a. Cryptocurrency: Bitcoin; Logecoin; LItecoin

b. Bitcoin protocol and client: software programs that conduct transactions.

c. Bitcoin blockchain: underlying decentralized ledger.

2. Hundreds of cryptocurrencies exist, each may have its own blockchain or run on the Bitcoin blockchain.

C. Blockchain 2.0 Contracts

1. Bitcoin as conceived by Satoshi Nakamoto was designed to be more than a digital currency.

2. Decentralization of markets in general

3. Blockchain 2.0 includes:

a. Bitcoin 2.0

b. Bitcoin 2.0 protocols

c. smart contracts

d. smart property

e. dapps (decentralized applications)

f. DAOs (decentralized autonomous organizations)

g. DACs (decentralized autonomous corporations).

4. Can be used to transfer stocks, bond, mutual funds, annuities, land titles etc..

D. Blockchain 3.0 Justice Applications Beyond Currency, Economics, and Markets

1. Blockchain can also be used to organize physical assets and human activities.

2. Namecoin is used to verify Domain Name System (DNS) registration - not controlled by any government or corporation.

3. Digital Identity Verification - OneName and BitID - confirm a person's identity to a web site.

4. Digital art - registry of intellectual property.

E. Blockchain 3.0: Efficiency and Coordination Applications Beyond Currency,Economics, and Markets

1. Peer to peer distributed computing projects providing unused computing cycles for web based computing projects.

2. Bitcoin mining algorithm must make hashes verifiable in one direction but not the reverse. Use of blockchain for science could address the wastefulness of bitcoin mining which consumes a lot of electricity.

F. Advanced Concepts

1. Hayek's concept of a competitive private market for money.

2. MIT Bitcoin drop - free distribution - in Dominica to encourage adoption.

3. Demurrage Currency - carrying cost - losing value over time.

G. Limitations

1. Ethereum - alternative to the Bitcoin blockchain.

2. Ripple -- does not use blockchain.

3. Throughput - bitcoin can only process one transaction per second.

4. Latency - Each transaction block takes 10 minutes.

5. Bloat The blockchain is 25 GB and growing.

6. Security - 51 per cent attack - one entity could take control and double spend previously transacted coins into its own account.