Article By Ian Sherratt, Services Director – Cloud Centres
When the US government recently seized an estimated $1 billion worth of bitcoin connected to darknet marketplace Silk Road, it was the largest seizure of cryptocurrency in history. It was also a sign that bitcoin would no longer be the preserve of criminal gangs shifting assets on the darknet.
Silk Road was one of the most notorious online criminal networks and, at its peak in 2013, accounted for almost 20% of total bitcoin economic activity.
The marketplace brought together sellers and buyers of drugs, fake IDs and other illicit goods and services, and was largely responsible for giving bitcoin its reputation as a currency for criminals and data hackers – a reputation that it’s only now shaking off. The seizure, carried out by the US Department of Justice, was helped by Chainanalysis
, a blockchain analytics firm working with the US government to uncover criminal gangs’ cryptocurrency activities.
With such a high-profile haul and clear state intervention to move against criminals such as Silk Road, the reputation of bitcoin is now being taken more seriously by traders, governments, businesses and consumers. And the benefits of bitcoin’s transparency by using the blockchain will soon outweigh its negative darknet past.
But what is bitcoin and why is it so important?
To understand bitcoin, you have to go back to beginning. Bitcoin is the largest cryptocurrency in the world and was created by Satoshi Nakamoto in 2009, at the height of the banking crisis. The idea for bitcoin was to create a distributed form of digital cash – often referred to now as cryptocurrency – that operates independently of financial institutions. It’s raison d’etre was as a method of payment free from third party supervision, and with far lower transaction costs as a result.
Since then it’s mostly been used as a form of investment – by perfectly legitimate businesses as well as criminal gangs – but most companies and consumers have yet to adopt bitcoin as a form of payment because of its volatility compared to traditional currencies. Nevertheless, its independence beyond the influence of any economy and monetary policy dictated by a state or jurisdiction is the reason for its growing popularity.
Bitcoin and mining
For bitcoin to function properly it relies on the blockchain and the mining process. These two mechanisms will feature in future blogs, but briefly the blockchain is a shared, highly secure digital ledger – based on trust and transparency – that holds records of all bitcoin transactions. These transactions are grouped into blocks by miners (like a person on a computer, but on a large scale) and the blocks are then secured and linked to the overall blockchain. To ensure total transparency this blockchain is accessible to everyone in the chain at any time and can’t be altered.
Mining is when you add transactions to the blockchain, confirming each transaction and making sure that every one of those is legitimate. Each time a block is added to the blockchain, a miner gets a reward.
To begin mining, the miner has to set up a mining rig. Ten years ago this could be a normal domestic computer, but with progress and scale comes cost and competition. These days miners have to invest in expensive hardware and ensure they have access to a huge amount of electrical power to harvest the bitcoin.
Choosing the right equipment largely depends on the hash rate, which is a measure of the huge number of calculations the hardware performs each second – so a high hash rate will increase the chances of finding solutions to the difficult mathematical problem that helps seal the block on the blockchain and give the miner their reward. No surprises that mining has become hugely competitive, which means that miners need to invest more in the hardware with a higher hash rate to gain a competitive advantage over rival miners.
These hash rates measure in terahashes, petahashes- and exahashes per second and the more powerful the miner’s hardware the more power will be needed – so electricity supply for mining bitcoin is absolutely key to a successful operation.
Mining farms and data centres
In the UK mining has been traditionally more of a hobby; entrepreneurs historically set up their rigs at home but soon found the electricity needed was that of a small power station. Consequently, successful miners need to consider their electricity consumption – for example, how many hashes the miner will need for every watt of electricity.
The industry has become so lucrative that huge bitcoin mining farms have emerged using different mining hardware, liquids and coolers. And it’s no secret that China is home to hugely profitable bitcoin mining rigs as it has vast and cheap supplies of electricity. The alternative to these farms, especially here in the UK, are data centres. The rising demand for mining has led to a growing need for data centres to help harvest bitcoin by using immersion cooling, which is a liquid cooling technology for high density hardware. The hardware racks are placed into tanks of liquid, such as Novec dielectric fluid, and as the hardware heats the liquid provides the surrounding cooling as it converts from liquid to gas.
Such data centres – and that includes us here at Cloud Centres – are usually in a 1MW-5MW range and can hold up to 90 blades in a single liquid tank.
To conclude – and back to the future – criminals will flourish wherever there is money to be made. But with the US government now taking more strident steps to crack down on darknet cryptocurrency activity, the popularity of bitcoin has started to increase significantly among entrepreneurs, digital investors and technologists. Along with the help of the blockchain to guarantee transparency with transactions and data centres to help with the power infrastructure needed, bitcoin is fast becoming a worthy investment and a way to carry out business for companies with an eye firmly on the future.
Bitcoin Explained – Podcast #010