using excess conduit hydrogeneration power for bitcoin...

Using excess conduit hydro-generat ion power

for Bi tcoin mining

Neil Croft University of Pretoria

Department of Informatics EBIT

[email protected]

Copyright © 2016 by Dr Neil Croft. Published and used by INCOSE with permission.

Abstract. Bitcoin (BTC) is the first successful implementation of a distributed crypto-currency (Nakamoto, 2009). Bitcoins, by design, are sent easily through the Internet, without needing to trust any third party (bank or government). There are a variety of ways to acquire Bitcoins, most commonly purchasing BTC through an online exchange or to mine via specialised hardware equipment. Conduit hydroelectricity (or conduit hydropower) is a method of using mechanical energy of water as part of the water delivery system through man-made conduits to generate “green” electricity (van Dijk, 2012). Generally, the conduits are existing water pipelines such as in public water supply. As Bitcoin mining machines are “power” hungry, green power provides a mechanism to make use of otherwise underutilised or excessive electricity. In doing so, the ROI (against the initial cost of the hardware to mine BTC) is greater. Calculations show as much as a 25-50% reduction in the break-even point. A number of factors influence the break-even analysis, these include the total problem-solving capacity of the Bitcoin network, the USD:BTC exchange rate (and USD:ZAR exchange rate), the cost of running the machines (electricity, Internet bandwidth, setup and maintenance costs). Setup and maintenance along with Internet bandwidth are negligible in the cost calculation due to the fact that once configured the machines are left to run so long as there is Internet connectivity and a constant power supply. This paper focus is on the ability to utilise excess electricity in conduit hydrogenation power facilities for a quicker ROI in Bitcoin mining profitability.

Introduction

Bitcoin (BTC) is a considered the world’s first crypto currency, however it may best be described as a digital asset and a payment system invented by Satoshi Nakamoto, who published the invention in 2008 (in a now famous white paper) (Nakamoto, 2008 and Nakamoto, 2009) and released as open-source software in 2009. The system is a peer-to-peer network using the RPC protocol (Srinivasan, 1995) for broadcasting transactions. The major benefit of Bitcoin is in that the users can transact directly without an intermediary (bank, government or third party). Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain (Swan, 2015). The block chain is arguably the greatest

12th INCOSE SA Systems Engineering Conference ISBN 978-0-620-72719-8

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invention as the underlying technology. The block chain is defined as a permission-less distributed database based on the Bitcoin protocol that maintains a continuously growing list of transactional records hardened against true identification, tampering and revision. Bitcoin and crypto currencies are part of a technology “megatrend” that could change the fundamental mechanics of transactions, according to a new report from Goldman Sachs' equity research analysts. Bitcoin, along with improved payment security, “big data” analytics and faster payment networks are the components of a technology trend that will disrupt the current payment infrastructures. The disruption will be driven by converging trends in regulation, global demographics and relatively high costs of value exchange. Innovations in peer-to-peer technology and cryptography could change the speed and mechanics of moving money. Consumer payments, according to Schneider and Borra (The report: “The Future of Finance: Redefining the Way We Pay in the Next Decade”) (Goldman, 2014), Bitcoin’s major impact will be enabling the transfer of assets without a central clearing authority. The large public companies that will benefit will be merchants, who will reap savings on payment costs. Firms who might lose out are traditional money-transfer firms like Western Union, MoneyGram and Xoom. The report names Coinbase, BitPay and Ripple Labs (Rosner, 2016) as the leading firms in the Bitcoin space. Bitcoin's impact will be felt in the field of consumer-to-consumer payments. This market includes all payments made between consumers, with examples of leading vendors being mobile wallets like Venmo and Square Cash. Disruptive entrants to the consumer payments space are limited to earning revenue from international money transfers. These entrants include Bitcoin exchanges and the peer-to-peer platform for foreign currency exchange TransferWise. Exchanges named in the report include Coinbase, itBit, Circle, Trucoin and CoinCorner whereas locally in South Africa, the preferred exchange is Bitx. Bitcoin could also play a significant role in global remittances and for pension and salary payouts. Distributed networks are, in principle, more secure and reliable due to their open source nature, and there is no single point of failure. Given the low transaction fees associated with virtual currencies, there is potential for significant dislocation in the profit pools associated with money transfer. A survey with the Electronic Transactions Association that found 23% of merchants planned to accept Bitcoin within the next 24 months. The report estimates that more than 100,000 merchants currently take Bitcoin payments globally and continues to grow each quarter. Overstock, Amazon, CVS, Subway, Victoria Secret, Virgin Galactic, Paypal (for their merchants, not eBay), Tesla, Tiger Direct, Expedia, Bing, Sears, Apple, Dish Network, Alibaba and many more already accept Bitcoin with more companies adding or looking to add Bitcoin as a payment method for their products and services. The opportunity for Bitcoin-linked companies is miniscule compared to the potential gains available in other sectors. With a current market capitilisation of $6bn, Bitcoin could accrue to firms like Bitcoin exchanges operating in the consumer-to-consumer payments space and yield a definitive market place for cryptocurrencies (White, 2014). These and other factors influenced the funding of Bitcoin mining as a viable business operation as Bitcoin continues to establish itself as a new currency and receive wider acceptance. It may seem surprising that Bitcoin’s basis is cryptography. Isn’t Bitcoin a currency, not a way of sending secret messages? In fact, the problems Bitcoin needs to solve are largely about securing transactions — making sure people can’t steal from one another, or impersonate one another. In the world of atoms we achieve security with devices such as locks, safes, signatures, and bank vaults. In the world of bits (or the Internet) we achieve this kind of security with cryptography. And that’s why Bitcoin is at heart a cryptographic protocol. Some argue that


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Bitcoin is simply “digital cash”. So what exactly are the properties of cash? Is Bitcoin fulfilling the requirements of digital cash?

• Cash has a value

o It can be traded for goods or services.

• It is anonymous (unlinkable anonymity).

o Previous owners of the cash are not known and in general it is not possible to

keep track of by whom and where the cash is spent.

• It is secure

o Cash currency is specifically designed to deter counterfeiting.

South Africa has relatively cheap power supply grid (in comparison to the rest of the world), making it one of the most viable locations for BTC mining to operate in. Combined with the fact of the ever increasing amounts of technology companies developing and situating in South Africa this will be the ideal location for any Bitcoin mining operation. The BTC price peaked at nearly $1200 a BTC coin with a low of $200 recently, Bitcoin is designed using the “gold” standard of limit supply. Demand grows due to global acceptance and continues to increase due to scarcity (only a maximum of 21M Bitcoins will ever be mined). There will be a need for Bitcoin mining up until a predicted year 2140 end date. An advantage to having a Bitcoin operation is that it will generate revenue from day one, which can either be held onto or spent to supplement the monthly costs of operation. This re-investment strategy has been implemented by a number of the bigger mining operations today. Bitcoins that are mined will be sold or can be traded through supplementary services such as exchanges.

Bitcoin Market Analysis

Industry Analysis Bitcoin mining is the process of earning Bitcoin in exchange for running the

verification to validate Bitcoin transactions (also known as proof-of-work). These transactions

provide security for the Bitcoin network which in turn compensates miners by giving Bitcoins.

Miners can profit if the price of Bitcoins exceeds the cost to mine. From Sathosi’s white paper

(Nakamoto, 2009):

“The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the

hash begins with a number of zero bits. The average work required is exponential in the number

of zero bits required and can be verified by executing a single hash. For our timestamp

network, we implement the proof-of-work by incrementing a nonce in the block until a value is

found that gives the block’s hash the required zero bits. Once the CPU effort has been expended

to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As

later blocks are chained after it, the work to change the block would include redoing all the

blocks after it.” How does a Bitcoin mining business generate profit? There are several factors that determine whether Bitcoin mining is a profitable venture. These include the cost of the electricity to power the computer system (cost of electricity), the availability and price of the computer system, and the difficulty in the proof-of-work calculation (block discovery). Difficulty is measured in the hashes per second of the Bitcoin validation transaction. The hash rate measures the rate of solving the problem— the difficulty changes as more miners enter as the network is designed to produce a certain level of Bitcoins every ten minutes (currently 25 BTC). In other words, the hash rate is the measuring unit of the processing power of the Bitcoin network. When more


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miners enter the market, the hash rate increases and as a result the difficulty increases to ensure that the level remains as close to the constant 10 minute mark for each block generation. A block contains data referring to all confirmed transactions in the Bitcoin network. The last factor for determining profitability is the price of Bitcoins against standard, fiat currency, for example USD:BTC spot price. Furthermore, when a block is discovered, the discoverer may award themselves a certain number of Bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 Bitcoins; this value will halve every 210,000 blocks found, or approximately every 4 years (refer to Figure 1). As more and more miners competed for the limited supply of blocks, individuals found that they were working for days, weeks and even months without finding a block and receiving any reward for their mining efforts. This made mining unpredictable for investors. To address the variance in their income miners started investing in pools, where collectively miners combined mining power so that they could share rewards more evenly. Due to Bitcoin’s limited supply (like for example gold), it is considered scares in nature and deflationary by design. In other words, in a deflationary environment, goods and services decrease in price, but at the same time the cost for the production of these goods and services tend to decrease proportionally, effectively not affecting profits. Price deflation encourages an increase in hoarding — hence savings — which in turn tends to lower interest rates and increase the incentive for entrepreneurs to invest in projects of longer term. This in turn leads to investors using a deflationary commodity to hedge against other commodities, essentially retaining value.

Figure 1 – Bitcoin controlled supply (Anon, 2015)

The Components of Bitcoin Mining Prior to the advent of new Bitcoin mining software in 2013, mining was generally done on personal computers (PC) using the Central Processing Unit (CPU) and later the Graphics Processing Unit (GPU). These processing units have an upper bound limit on the number of calculations they can perform. This lead to the introduction of application specific integrated circuit chips (ASIC) which offered up to 100x the capability of older personal machines, rendering the use of personal computing to mine Bitcoins inefficient and obsolete. When miners used PCs, the difficulty in mining Bitcoins was in line with the price of Bitcoins at the time. With the introduction of these new mining machines (ASICs) came


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issues related to both the high cost to obtain and run the new equipment and the increase in the proof of work required to successfully mine a block. Profitability Before and After ASICs Introduced In 2010, mining Bitcoins using just personal computers were able to make a profit quickly for several reasons. Firstly, these miners already owned their systems, so equipment costs did not factor into the profitability equation. Secondly, users could change the settings on their computers to run more efficiently when processors were not being used. These were the days before professional Bitcoin mining centers with massive computing power entered the game. Early miners only had to compete with other individual miners on home computer systems. The competition for Bitcoins was on an even footing. Even though electricity costs varied based on geographic region, the difference was not enough to deter individuals from mining. ASICs miners arrived in the market and changed the playing field. Individuals were now competing against large Bitcoin mining centers that had more computing power. Mining profits were getting chipped away by expenses like purchasing new computing equipment, paying higher energy costs for running the new equipment, and the continued increase in difficulty of mining. Table 1 refers to the difficulty change and network growth over the 3 months. Table 1: Summary of Bitcoin network difficulty and hashrate

Date Difficulty Change Hash Rate

Feb 19 2016

163,491,654,909 13.44% 1,170,318,852 GH/s

Feb 07 2016

144,116,447,847 20.06% 1,031,625,717 GH/s

Jan 26 2016

120,033,340,651 5.89% 859,232,121 GH/s

Jan 13 2016

113,354,299,801 9.12% 811,421,684 GH/s

Dec 31 2015

103,880,340,815 11.16% 743,604,444 GH/s

Dec 18 2015

93,448,670,796 18.14% 668,931,642 GH/s

Dec 06 2015

79,102,380,900 8.77% 566,236,898 GH/s

Nov 24 2015

72,722,780,643 10.44% 520,569,941 GH/s

Profitability of Bitcoin today Bitcoin mining can remain profitable for some miners; however there are a number of considerations to factor into the ROI. Equipment is more easily obtained and various efficiency machines are now available. For example, some machines allow users to alter settings to lower energy requirements, thus lowering overall costs. Prospective miners should perform a cost/benefit analysis to understand their breakeven price before making the fixed-cost purchases of the equipment. The factors needed to make this calculation are:

• Cost of power

• Hash rate

• Time to implement


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• Bitcoin exchange rate

• Difficulty of network

• Cost of ASIC (mining equipment)

• USD:BTC trading exchange rate

• Hosting space and ASIC cooling

There are several web-based profitability calculators, such as ones provided by www.vnbitcoin.org or www.miningprofit.org that would-be miners can use to analyse the cost benefit equation of Bitcoin mining. Profitability calculators differ slightly and some are more complex than others, however none will factor in the risks involved in mining. Intrinsic Value of Bitcoin Bitcoins are designed to retain value as it is regulated through time-bound algorithms while at the same time costing electricity to produce. If factoring in Bitcoin has an intrinsic value to produce it, the argument that Bitcoin is printed out of thin air, is indeed unfounded.

Conduit Hydro Generation Power

Green Power Generation Conduit hydropower is where excess energy available in pressurised conduits (pumping or gravity) is transformed into clean, renewable hydroelectric energy by means of a turbine. The excess energy is normally dissipated by means of pressure control valves but by conveying it through a parallel dissipating system, the water turbine, the pressure head and flow is utilized to generate hydroelectric power. Pierre van Ryneveld Conduit Hydropower Plant Case Study The first closed-conduit hydropower pilot plant in South Africa was constructed at the Pierre van Ryneveld reservoir, situated in the Country Lane Estate, south of Pretoria. It is a ±15 kW installation that utilises a cross-flow turbine discharging through the roof into the reservoir. A controlled flow is supplied to the turbine from the main supply line into the reservoir. Electricity utilization The Pierre van Ryneveld Conduit Hydropower Plant produces around +-15kW used on site for the lighting, telemetry system, alarm system and electric fence. Larger systems (higher kW output) could be connected to the electrical grid thus reducing the demand from Eskom. Some load bearing systems consume electricity in an adhoc fashion. Annually ±131000 kWh could be generated with this unit, enough to supply 10 households. Failure response actions The plant is designed to accommodate the full electrical load via a “heat sink” in case there is an electrical demand failure. The heat sink is water cooled utilizing water from upstream of the turbine discharging into the reservoir. In other words, excess power is dissipated into heat energy.


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Figure 2 The Pierre van Ryneveld Conduit Hydropower Plant (van Dijk, 2012)

Cost The preliminary cost for the pilot plant totaled R550 000.This was for the turbine and generator, electrical work, pipework, valve chamber, enclosure/plant housing, monitoring system, data logging and communication system. Annual income would be in the order of R78 000 for electricity generated, based on 60 c per kWh. Assuming a discount rate of 10% and very optimistic energy escalation rate of only 8%, the payback period would be estimated at approximately nine years. Selling excess power to Eskom Eskom is subject to the Electricity Regulation Act and its New Generation Regulations. In terms of these regulations Eskom can only procure power through a procurement programme. Currently the only procurement programme on the cards is the REFIT programme. The renewable energy feed-in tariff (REFIT) implementation process has not yet started. Who is looking into conduit hydrogeneration power (van Dijk, 2012):

• Rand Water Board (4 sites total 15 MW)

• Bloem Water (2 x 350 kW)

• Umgeni Water

• Lepelle Northern Water (3 sites total 370 kW)

• City of Tshwane (5 sites total 1.6 MW)

• Ethekwini Municipality (various)

• George Municipality (various)

• Amatola Water

• ESKOM (5-7MW)

• City of Cape Town South Africa therefore has huge potential for the role-out of conduit hydrogenation power facilities all over the country.


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Bitcoin Mining Farm

Establishing a Bitcoin mining operation utilizing green energy drastically reduces the break-even point for ROI. Power utilization costs can be as high as 50% of the mining operation. Making use of excess “green” power (of which cannot be sold back to the government power utility Eskom) effectively means a very small operational cost. Eliminating electricity costs means the cost bearing portion of everyday operation is narrowed down to bandwidth costs and maintenance costs. On Stratum (the Bitcoin pool mining protocol) with variable difficulty, mining should need a minimum of ~1kbps (0.125 kB/sec). It doesn't matter how many miners are running in the farm, which is why the new protocols were implemented. 1 GH/s, 1 TH/s, 1 PH/s, with proper server implementation it should all use the same bandwidth per connection. Capital Requirements Establishing a BTC Mining farm starts with the calculation for capital investment. All our calculations are based on 1 x ASIC BTC mining machines (latest) at a test conduit hydro generation power facility in South Africa, utilising unused electrical capacity. Financial projections presented are based on the current market trends and industry’s statistics. The hardware requirements are provided for in Table1.

Table 2 – Mining Farm Hardware Requirements and Costs

Number Hardware Cost Rand (ZAR) Cost

1

Antminer s7

1.65 BTC (720USD) +- R11 500 (each)

1

PSU 1600 Watt Power supply

0.32 BTC (140USD) +- R 2240 (each)

1

MikroTik 24 port cloud router

R 2000 (each)

1

airconditioner

R 4000 (each)


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1

2nd hand 12 foot shipping container

R 12 000 (each)

1 Import Duties (Shanzeng, China)

+- R1000

1 Truck Transport to Facility (container truck)

R 5000

1 Setup and Configuration (1 person)

R 1000

TOTAL R 38 740

The above configuration provides roughly +-5TH/s of computational power. A guideline payout is provided below using an attrition rate of 5%, a BTC:USD rate of $450 (as of time of writing) and a ZAR:USD rate of 16:1. Mining will take place as part of an existing mining pool, for example: mining.bitcoin.cz or www.antpool.com. Pools do charge a minimal fee to use the facility usually around 1-2% of payouts. These are two well established pools with a good uptime and payout record. The attrition rate of 5% is calculated on the average percentage increase in the network difficulty over the last year (period January 2015 to February 2016). Table 3: ROI calculation for BTC mining farm (1x ASIC)

Difficulty

Earnings per BTC

reset @ 5TH

/s Month Conversion

Payout

Price (USD)

163491654908 0.24 1 BTC USD 450 108

171666237653 0.228571429 1 USD ZAR 16 102.8571429

180249549536 0.217687075 2

Attrition Rate % 5

97.95918367

189262027013 0.207321024 2 93.29446064

198725128364 0.197448594 3 88.85186728

208661384782 0.18804628 3 84.62082598

219094454021 0.179091695 4 80.59126284

230049176722 0.170563519 4 76.75358365

241551635558 0.162441447 5 73.0986511

253629217336 0.15470614 5 69.61776295

266310678203 0.147339181 6 66.30263138

279626212113 0.140323029 6 63.14536322

Total

BTC

2.233

USD

1005.09

Or

ZAR 16081.48


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All things being equal, Table 3 is an executive summary of the capital outlay costs in setting up a Bitcoin mine farming operation. If we are to take only the mining costs and none of the peripheral costs of air-cooling, container, truck transportation and only focus on the ASIC mining as a ROI, we can show the following.

Initial setup costs equal R17740, calculated from (R11500 + R2240 + R2000 + R1000 + R1000) or (miner + psu + router + tax + setup). We can assume a cost saving on electricity using the following calculation. The power utilization of 1x ASIC miner is 1200W. The energy E in kilowatt-hours (kWh) is equal to the power P in watts (W), times the time period t in hours (hr) divided by 1000: E(kWh) = P(W) × t(hr) / 1000. Therefore, 1xASIC miner consumes 28.8 kWhs. South Africa features at #10 in the highest global electricity prices 2015 (Global, 2015) at 8.46 USD cents per kWh per day. Therefore, the electricity cost to run 1xASIC for a month is calculated at (8.46 x 16(USD:ZAR spot rate) x 28.8 (kWh) x 30 (days) / 100 (cents)) = R1169.51 (ZAR). Over a period of 6 months, a total of R7017.06 (ZAR) is saved on electricity charges per ASIC miner. Over a period of just over 6 months the break-even point is reached. In other words, using excess conduit hydro generated power provides a ROI in a little over 6 months. These calculations may change over time of which the variables of trading price; network difficulty may have a direct impact on the expected ROI.

Using the Pierre van Ryneveld Conduit Hydropower Plant in its entirity for a Bitcoin mining operation would yield the following initial outlay and ROI. The number of ASIC miners is determined by the available electricity avaialbe for use. The capacity of ±131000 kWh could support a total of +- 12.5 ASIC miners with a total hashrate contribution of +-65TH/s. We extend Table 2 to show the initialisation costs.

Table 4 – Mining Farm Hardware Requirements and Costs

Number Hardware Cost Rand (ZAR) Cost

13

Antminer s7

1.65 BTC (720USD) +- R11 500 (each) Total R 149 500

13

PSU 1600 Watt Power supply

0.32 BTC (140USD) +- R 2240 (each) Total R 29 120

1

MikroTik 24 port cloud router

R 2000 Total R 2 000


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1

airconditioner

R 4000 (each) Total R4 000

1

2nd hand 12 foot shipping container

R 12 000 (each)

1 Import Duties (Shanzeng, China)

+- R10000

1 Truck Transport to Facility (container truck)

R 1000

13 Setup and Configuration (1 person)

R 1300

TOTAL R 208 920

The expected ROI calculation is shown in Table 5.

Table 5: ROI calculation for BTC mining farm (13x ASIC)

Difficulty

Earnings per BTC

reset @ 60TH

/s Month Conversion

Payout

Price (USD)

163491654908 2.799333333 1 BTC USD 450 1259.7

171666237653 2.666031746 1 USD ZAR 16 1199.714286

180249549536 2.539077853 2

Attrition Rate % 5

1142.585034

189262027013 2.418169384 2 1088.176223

198725128364 2.303018461 3 1036.358308

208661384782 2.193350916 3 987.007912

219094454021 2.088905634 4 940.0075351

230049176722 1.989433937 4 895.2452714

241551635558 1.894698987 5 852.6145442

253629217336 1.804475226 5 812.0138516

266310678203 1.718547834 6 773.3465255

279626212113 1.636712223 6 736.5205006

Total

BTC

26.05175553

USD

11723.28999

Or

ZAR

187572.6398

The expected ROI is a roughly 6 and a half months.


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Conclusion

Bitcoin is the world’s first crypto currency which relies on a distributed network of miners. These miners are heavily reliant on electricity in order to mine blocks and generate Bitcoins. Using the unique situation of utilising excess power from conduit hydro generation power plants can substantially reduce the break-even point in Bitcoin mining profitability calculations. Instead of misappropriating excess power this paper shows a mechanism to deploy a Bitcoin mining farm with an initial capital investment that will in a little over 6 months produce a return on investment (ROI) provided enough space is available to deploy the 12 foot steel container near to the conduit hydro-generation facility at zero cost.

References

Nakamoto, S., 2009. “Bitcoin: A Peer-to-Peer Electronic Cash System”.

https://bitcoin.org/bitcoin.pdf . Retrieved 5 March 2016. Nakamoto, S., 2008. “Bitcoin P2P e-cash paper”. http://article.gmane.org/gmane.comp.encryption.general/12588/. Retrieved 1 March 2016.

Anon, 2015 “Bitcoin controlled supply”. https://en.bitcoin.it/wiki/Controlled_supply. Retrieved 1 March 2016.

van Dijk, and M. van Vuuren, and F. Bhagwan and Kurtz A., 2012. “Tapping untapped renewable energy”. http://repository.up.ac.za/handle/2263/19672. Retrieved 1 March 2016. Srinivasan, R., 1995. RPC: Remote procedure call protocol specification version 2. http://tools.ietf.org/html/rfc1831.html. Retrieved 1 March 2016. Swan, M., 2015. “Blockchain: Blueprint for a New Economy”. O’Reilly Media, Inc. Rosner, M.T. and Kang, A., 2016. “Understanding and Regulating Twenty-First Century Payment Systems: The Ripple Case Study”. Mich. L. Rev., 114, pp.649-649. White, L.H., 2014. The Market for Cryptocurrencies. Global, 2015. “Highest global electricity prices 2015”. http://businesstech.co.za/news/energy/99494/electricity-prices-south-africa-vs-the-world/. Retrieved 1 March 2016. Goldman Sachs, 2014, “Global Macro research: Top of Mind” http://quibb.com/links/pdf-full-goldman-sachs-report-on-bitcoin/view. Retrieved 1 March 2016.

Biography

Dr Neil Croft received his PhD in Computer Science at the University of Pretoria in 2011. He currently lectures from the Informatics Department at the University of Pretoria on topics such as mobile technologies, Bitcoin, blockchain and fintech. He has a passion for disruptive technologies both from a social and technical perspective.


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using excess conduit hydrogeneration power for bitcoin...

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