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)

The Origin of Bitcoin

In order to get a better idea of what Blockchain technology is all about it's a good idea to take a look at Bitcoin: A Peer-to-Peer Electronic Cash System, published in 2008 by Satoshi Nakamoto. (Nakamoto apparently being a pseudonym of some person or group of people.) This paper is the origin of the bitcoin cryto currency, and the first representation of the blockchain concept.

The basic idea is for digital signatures to be used for electronic cash transactions without the involvement of a third party institution. Double spending is prevented through use of a public ledger that hashes timestamped transactions.

On the second page of his (her?) paper, Nakamoto demonstrates the basic idea of electronic currencies in a chart that shows how use is made of public and private keys.

The trouble is that an institution must issue an electronic coin for each transaction in order to avoid double spending. Nakamoto's proposed solution is to use a timestamp server to hash a block of items and publish it. Each timestamp includes the previous timestamp in its hash.

The integrity of the chain depends on CPU power, since altering any one block would require altering all blocks in the chain, and then catching up with new genuine blocks. The very fact that computing power generates Bitcoins protects the blockchain against attacks:

"If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth. "

While the blockchain model makes transaction public it maintains privacy by keeping the identity of the parties anonymous. The paper includes another chart illustrating the difference between public trades on a stock exchange and blockchain transactoins:

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.