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Bitcoin: Techie comment?

Bitcoin. An anonymous somebody dropped this link into a recent comments sections. Would any of you techies or econ experts out there care to comment on it?

I’ve become so inherently distrustful of new online money systems after watching so many fall (and one fall with my money in it) that I admit I no longer even try to evaluate them. I figure they’ll eventually evaluate themselves via their success or failure in the real world. This one’s … different.

And of course, one day one or more of them will succeed. And change the world. Probably not this one. But someday …

Years ago, I heard libertarian economist Joe Furig (RIP) compare the the Federal Reserve to the Vatican. He said it’ll probably never go away, but eventually it will no longer rule the world and will be nothing more than a minor influence.

17 Comments

  1. Carl-Bear
    Carl-Bear January 30, 2011 12:32 pm

    I just read their FAQ.

    The coins are imaginary, so there’s no general acceptance or anything approaching intrinsic value in the coin’s makeup.

    The currency is… call it _minted_ sorta-semi-pseudo-randomly by sorta-semi-pseudo-random entities. So there’s no entity you can point to that stands behind the coins (at least FRN have faith in US jackbooted thugs to back them).

    This is like swapping homemade Monopoly money or coke bottle caps, and calling it “money” (except paper and rounds of steel can be used for other things, too). Sure, anything can be “money” (shorthand for barter) if enough people have faith that it is. But damned if I can see any reason why bitcoins would be adopted over pre-existing imaginary money systems that already have the support of mass delusion.

    In fact, I wonder if Bitcoin wasn’t actually dreamed up as a parody of the Federal Reserve: Imaginary money generated by mystical formulas that have nothing to do with reality.

    If these folks were serious (of which I’m not convinced), I think they missed the point of other alternate money systems: a non-FRN currency backed by _something_; gold, silver, labor hours, ownership shares, whatever. But _something_.

  2. Claire
    Claire January 30, 2011 12:52 pm

    Thanks, Carl-Bear. Yes, the lack of backing by something (other than P2P computer time) was also one of several elements that struck me. OTOH, plenty of off-line community money schemes aren’t backed by anything but people’s time and “good faith.” So sometimes the oddest things can work. Still, I’d also like to know about the guarantee that only so many BitCoins will be produced — ever. And well … a lot of other things the site doesn’t address.

  3. Carl-Bear
    Carl-Bear January 30, 2011 2:16 pm

    Sure, plenty of other systems are about as imaginary as Bitcoin. But as I said, they’re already established. What does Bitcoin offer to compete with the existing play money systems? “Buy Bitcoin! New, Improved, Even More Imaginary Than Your Current Paycheck!” Hell of a sales pitch.

    The assertion that one can protect against theft or loss of bitcoins by backing up your e-wallet was interesting. Your money can be stolen, and yo just whip out your virtual photocopies and keep spending? This differs from counterfeiting how? And given that, we come to your question: how are they going to limit the supply of bitcoins to a specific, preset quantity?

    Really, this looks like some bright but naive kids decided to copy the Fed on the cheap, while updating to be “decentralized” away from nasty capitalistic government. Or a cute joke.

  4. bit
    bit January 30, 2011 3:24 pm

    Actually, Bitcoin is well rooted in a Austrian school, free market principles. The system possesses numerous properties that make it an attractive medium for indirect exchange.

    1. Absolute, finite supply of ‘bitcoins’
    2. Infinite divisibility of individual bitcoins (currently down to .00000001BTC)
    3. Anonymous, electronic, almost free transfers of bitcoins
    4. Impossible to counterfeit and inflate supply
    5. Decentralized issuance and transfer of bitcoins (no single point of failure a la e-gold)
    6. Technical ease of secure storage irrespective of amount without reliance on third party (no need for goldsmith vault or bank)

    These properties are achieved by a mix of cryptography, peer-to-peer computing, and open source verification of code. They are the basis of the subjective valuation of bitcoins as a useful medium of exchange.

    For those interested in how subjective value of bitcoins can lead to full fledged monetization (become a money): http://www.bitcoin.org/smf/index.php?topic=583.0

    Technical information on how the system can be had at wikipedia and the Bitcoin wikis:
    http://en.wikipedia.org/wiki/Bitcoin
    https://en.bitcoin.it/wiki/Main_Page
    http://www.bitcoin.org/wiki/doku.php

  5. ZeroPoint
    ZeroPoint January 30, 2011 4:20 pm

    Excellent summary of Bitcoin’s pros & cons here by HowToVanish.com:
    http://www.howtovanish.com/2011/01/the-best-financial-privacy-is-here-probably

    Looks like they have the right idea, depending how strong their cryptography really is (versus NSA’s acres of supercomputers), and how easy or difficult it will be for governments to shut down our online access (like Egypt did this week).

    Bitcoin is certainly not far enough along to sink your life savings into, but certainly worthy of our support with a few $$ and by passing the word to others. There’s a lot more depth and value there than Carl-Bear’s derisive comments would indicate.

  6. Carl-Bear
    Carl-Bear January 30, 2011 7:55 pm

    (Sorry, Claire; the pro-Bitcoin posters have prompted me to go on at length.)

    The more I look at Bitcoin, the less comfortable I am with it.

    Bill Rounds, JD (“The Best Financial Privacy Is Here…Probably”) says this is a good way to protect financial privacy. But Bitcoin’s FAQ says, “A coin has its owner’s public key on it. When a coin is transferred from user A to user B, A adds B’s public key to the coin and signs it with his own private key. Now B owns the coin and can transfer it further. To prevent A from transferring the already used coin to another user C, a public list of all the previous transactions is collectively maintained by the network of Bitcoin nodes, and before each transaction the coin’s unusedness will be checked.”

    Let’s compare that to FRNs. Using the Bitcoin model, I’d have to sign my dollar bills when buyin a pack of cigarettes, then register the transaction with a distributed database which anyone can look at to see if/how I spent my dollars. Maybe I don’y know what “privacy” actually means.

    I will retract my statement on losing and still using backed up Bitcoins. I apparently misread the “Are my Bitcoins safe?” section the first time. But I don’t know… Losing my wallet or deleting a file didn’t kill my eGold; it took government action to do that. So I’m still not convinced of Bitcoin’s inherent superiority.

    It’s still imaginary money. All money is imaginary, beyond any value peple place in the medium itself apart from the “monetary” face value. A US penny is worth 1 cent, face value; but a pre-’82 penny can be melted down for almost 3 cents worth of metal. Gold and silver work the same way; people value the material, not just the face value. Besides being pretty, gold and silver are useful and… _valued_ industrial metals.

    Bitcoin says its currency has value if people will accept it.Yes. Anything has monetary value if people will accept it. You can instigating a mass delusion in which people are willing tom exchange their marks, dollars, pounds, what have you for pink cotton candy and swap it around. By the standard of general acceptance, the cotton candy would be money. So would Bitcoins. But what incentive would anyone have to trade in commonly accepted currency for one not commonly accepted, which also lacks anything approaching intrinsic value? Back in the day, a surprising (to me) number of people accepted eGold because you could “cash out” the gold, which itself had value to people.

    here’s where we see the real value of Bitcoins. To some people:

    “At the moment, though, you can generate new coins quite profitably, if you expect them to have real value in the future. If you choose to, be aware that Bitcoin is still experimental software.”

    This sentence from Bitcoin’s own FAQ screams “Ponzi Scheme!” Buy now while they’re cheap, and make money off people buying in later. At best, this looks like an investment scheme (investing in fairy dust, apparently), not a currency scheme.

    If they want to make a real alternate currency, instead of emulating the FED (but with a distributed database) they should emulate eGold (but distributed). Buy in with gold. Don’t record and track transactions for each serial numbered Bitcoin. Keep a distributed database of what (anonymous) user has how much gold. Don’t keep a centalized horde of gold; let individual users keep it on hand, payable to anyone with a Bitcoin issued by him (like pre-FED US banks used to do).

  7. Creighto
    Creighto January 30, 2011 11:54 pm

    We need skeptics to keep us grounded, but Carl-Bear sounds like a non-techie trying to talk bad about the technical aspects. I’ve been following Bitcoin for some time now, and despite a technical background, it took me about two weeks to wrap my head around this elegant system. I have no idea if it’s going to work or not, and really neither does anyone else. I am willing, however, to risk a little to find out. The Bitcoin forum is filled with newbies who take one look at the system and think they alone have discovered it’s fatal flaw. This happens so often that forum members get annoyed at so many of the misconceptions. No, Bitcoin is not anonymous between parties involved in a trade; but if you are careful, it can be anonymous to third parties. This is not a matter of it’s design, so much as it is a side effect of it’s cashlike properties. Even though all transactions are public, the signatures are digital hashes using public/private keypair crypto, not any kind of real signature that is normally linked to a particular identity IRL. As for the 21 million limit, how that is enforced is too technical to explain in a simple post; but nor is it particularly relevent, since it will take till 2130 or so before that limit is reached. It’s actually a limit in the ‘calculus derivative’ sense, as the 21 million mark could *never* actually be reached even if the divisability of the coins were extended into infinity. There is much thought that has already been thrown at this, and Bitcoin has already survived attacks and become more useful as a real currency than it’s regular detractors can account for. No, it’s not money; it’s only a currency. But it not a currency dependent upon the will of government to give it reality. It is a currency that all players participate of their own will, and no one can be compelled to engage in business against their own will. Despite the contradictions that would seem to imply, bitcoins have real value in real markets. It’s hard to argue with that reality, but I still would recommend caution.

  8. Carl-Bear
    Carl-Bear January 31, 2011 9:28 am

    “Carl-Bear sounds like a non-techie trying to talk bad about the technical aspects.”

    I’m a ‘techie’ (who has been around for more than 30 years) who hasn’t even touched on the technical aspects yet, because the nontechnical FAQ invokes no confidence.

    Damn, you mean all these years of using PGP and variants and successors, I didn’t really need to sign ’em with my Sharpie? [/sarc] Yeah, I know what a digital sig is; but if the sigs won’t be tied to any identity people can verify and trust, why bother with them? All you need is a serial number/sig issued by the distributed system to confirm a coin is legitimate.

    Sorry, since I (who keep an eye out for alternative payment systems) never even heard of Bitcoin until Claire’s mention, that’s a little hard to — no pun intended — buy. I might start believing it if and when people start offering or requesting payment via Bitcoin.

    I’m not opposed to Bitcoin. I just have questions (mostly idle, since it doesn’t generate huge interest in me) which mainly get answered by “that’s too technical to go into here” and doubts as to what makes Bitcoin a better choice than other faith-based currencies already extant, an question no one has addressed yet.

  9. Matt
    Matt January 31, 2011 10:16 am

    The concern over signatures is overblown, I think. The problem is network effects.

    The fact is that any payment system, in order to take off, will have to be denominated in and freely exchangeable for, on-demand, either the prevailing currency of its parent culture, or some hard commodity with a long historical track record of use as money. The former can be spent _today_, while the latter can be saved for the future in full confidence that whenever one needs to spend them, one will be able to exchange them for whatever is the common currency of the culture at the time.

    Closed-cycle systems face too much inertia to have any realistic chance of taking off.

  10. Carl-Bear
    Carl-Bear January 31, 2011 12:24 pm

    Exactly, Matt. There are already plenty of commonly accepted systems which relay on faith rather than commodity backing. So why adopt _this_ one over those? The two alternate systems I _was_ able to make significant use of were both backed: eGold and Liberty Dollars. I could use Liberty Dollars with non-gold/silver bugs, once I explained what it was.

    Now I just keep rounds on hand. Not much the guv can do about all the rounds already loose in the wild, and they don’t need serial numbers or digital signatures. Heck, I’ve swapped ammo for stuff I needed.

  11. Matt
    Matt January 31, 2011 2:25 pm

    The irony is that I’d rather have PayPal, which will at least redeem the full stated balance of my account in FRNs _on-demand_, than eGold, whose claims to being “backed” by gold do nobody any good when one is stuck with a number in a computer database that can no longer be converted to _anything_.

    I have no confidence in the long-term value of FRNs…I’m not stupid, after all. But if you give me FRNs today, I can _buy_ gold or silver (or ammo…or food…or iPods for that matter) with them, carry those home with me, and be absolutely confident that when I need them, they’ll be there. I may, from time to time, entrust part or even all of that collection of stuff to a third party for safekeeping. But if I do, it’ll be a third party I know and trust, and it’ll be for reasons of my own convenience, not because I’ve bought into a fundamentally new way of handling transactions that _depends_ on me trusting that specific third party.

    The bitcoin folks may be great people. They may be perfectly honest. They may be highly skilled programmers and sysadmins. Their legal team may be bulletproof. They may have world-class continuity-of-operations for their distributed database system, resilient against disasters both natural and man-made. They _may_ be all of those things. But I don’t _know_ that they are. And even if I were inclined to take their word for it, I have no _evidence_ (and no way to obtain any) which I could use to persuade a third party.

  12. Creighto
    Creighto January 31, 2011 3:17 pm

    ” There are already plenty of commonly accepted systems which relay on faith rather than commodity backing. So why adopt _this_ one over those? The two alternate systems I _was_ able to make significant use of were both backed: eGold and Liberty Dollars. I could use Liberty Dollars with non-gold/silver bugs, once I explained what it was. ”

    eGold and Liberty Dollars both have the same fatal flaw that does PayPal and any other system yet devised. A central authority that can be pressured, compelled or simply raided.

  13. Creighto
    Creighto January 31, 2011 3:28 pm

    “The irony is that I’d rather have PayPal, which will at least redeem the full stated balance of my account in FRNs _on-demand_,”

    That depends upon who you are. If you are presently linked to Wikileaks or the Anonymous activists group, you’d be screwed. Don’t assume that PayPal, or anyone else, will always remain independent of political influences. PayPal already is subject to the will of the feds.

    “But I don’t _know_ that they are. And even if I were inclined to take their word for it, I have no _evidence_ (and no way to obtain any) which I could use to persuade a third party.”

    Don’t take our word for it. The source code is available under open source licenses. If you have the skills, read the code and the ‘white paper’ and determine for yourself. If you don’t have the skills, either ask someone you trust who does, or sit it out until the outcome becomes obvious. Don’t bother trying to persuade anyone. If Bitcoin requires that others be persuaded, it must fail. I believe that it will be successful and widely used online within two years, but I could still be wrong. I gain nothing by posting anything here, I was simply trying to answer the questions.

    “I’m a ‘techie’ (who has been around for more than 30 years) who hasn’t even touched on the technical aspects yet, because the nontechnical FAQ invokes no confidence.”

    The nontechnical FAQ was written and maintained by a non-technical member of the community. It’s filled with errors, and most of us know it. If it fills you with a lack of confidence, try reading the technical papers or the wiki. How many people do you know could accurately explain a fiat currency regime such as FRN’s?

  14. Creighto
    Creighto January 31, 2011 11:19 pm

    The concept of using cryptographic hashes as the basis of a difficult to counterfit digital currency is not particularly original. HashCash used a similar concept, and the premise was known amongt cryptographers since at the latest 1996. The original concept with Bitcoin is the removal of the need for a trusted third party financial institution, by the use of a collective peer-to-peer style network to authenticate the validity of transactions. The 21 million coin limit is actually an arbitrary design decision on the part of the original programmer, who equated the concept to the physical limitation of the amount of gold available on the Earth; and the declining reward for participation in the clearinghouse network to that of the increasing difficulty and relative drop in ROI for gold mining. That is something that could be changed in the source code relatively easily, but the difficulty arises in convincing half or more of the existing peer network users to switch to such a client. Thus the mechanism that prevents the uncontrolled expansion of the monetary base is really a political one, as each user has a ‘vote’ relative to his own resources. This is the kind of political mechanism that has it’s own inertia; and as such, no one has attempted to develop a competing cryptocurrency without the maximum currency limit.

    Like so many other complex systems, the Bitcoin protocol is mostly just a set of simple rules that interact in ways that both incentivise following the intent of the system, and practically punish both the accidental and intentional misuse of the system.

  15. Creighto
    Creighto January 31, 2011 11:33 pm

    “Looks like they have the right idea, depending how strong their cryptography really is (versus NSA’s acres of supercomputers), and how easy or difficult it will be for governments to shut down our online access (like Egypt did this week).”

    The security of the system as a whole rests primarily in a massive collective ledger system known as the ‘blockchain’. Each new block is created by the p2p network, on average, about every ten minutes or so. Each new block must contain the SHA-256 hash of the block before it in it’s own header, and must contain it’s own SHA-256 hash that includes it’s own header; which also contains a “Merkle Root” hash of all the transaction hashes contained within the block itself. These blocks, all hashed in a series to those that have come before it, create an ever increasing proof-of-work system that is orders of magnitude more difficult to overcome with brute force than any other common form of crytography most people have experience with. Although it’s not impossible for the NSA to have supercomputers capable of rewriting the blockchain, the ever growing difficulty of the problem makes it astronomicly unlikely. It also would require the commitment of such resources not likely under the command of a single command structure. Also, as the popularity of Bitcoin grows, and more users join the network, the collective computational power of the network grows, and the difficulty of the proof-of-work problem is increased accordingly; increasing the difficulty for anyone to be able to overwrite the blockchain further.

  16. Carl-Bear
    Carl-Bear February 1, 2011 8:40 am

    “Don’t bother trying to persuade anyone. If Bitcoin requires that others be persuaded, it must fail.”

    Says the person trying to persuade me.

    FAIL.

    “The nontechnical FAQ was written and maintained by a non-technical member of the community. It’s filled with errors, and most of us know it.”

    OK, we’ve offered advice in other areas. Here’s some nontechnical advice on marketing: A FAQ is an introduction to a product. It should answer basic questions and initiate a sense of faith in your product. It should make people want to learn more. If you know it has serious errors, and people are telling you that your FAQ is what turned them off of your product and _dissuaded_ them from learning more, then you should fix your FAQ. If your FAQ makes your product sound crappy, no one is going to bother to examine your no-doubt-beautiful source code.

    Maybe you should decide exactly what you want Bitcoin to be. Is it going to be an anonymous payment service, or an an alternate currency where people can safely hide money from their governments? The two are not the same thing, and require differing types of trust.

    “How many people do you know could accurately explain a fiat currency regime such as FRN’s?”

    Maybe you should take a virtual look around at where you’re posting. This is _Claire Wolfe’s_ blog. I happen to know some of the other posters and readers here. More than a few can give you a lecture on finance and currencies that would make your eyes glaze over. These are people who understand the problems of fiat currencies, look for alternates, and want to know what makes your distributed fiat currency better than existing centralized currencies. To satisfy them (and myself), the answer had better be better than “but we aren’t a government”.

  17. Creighto
    Creighto February 1, 2011 12:10 pm

    “Says the person trying to persuade me.

    FAIL.”

    I’m not trying to persuade you, or anyone else. I really don’t care what you do.

    “The nontechnical FAQ was written and maintained by a non-technical member of the community. It’s filled with errors, and most of us know it.”

    “OK, we’ve offered advice in other areas. Here’s some nontechnical advice on marketing: A FAQ is an introduction to a product. It should answer basic questions and initiate a sense of faith in your product. It should make people want to learn more. If you know it has serious errors, and people are telling you that your FAQ is what turned them off of your product and _dissuaded_ them from learning more, then you should fix your FAQ. If your FAQ makes your product sound crappy, no one is going to bother to examine your no-doubt-beautiful source code.”

    1) bitcoin is not a product.

    2) I have zero influence upon the owner of the faq site.

    3) I didn’t write the code

    4) and again, I really don’t care.

    5) and you are a rude individual.

    “Maybe you should decide exactly what you want Bitcoin to be. Is it going to be an anonymous payment service, or an an alternate currency where people can safely hide money from their governments? The two are not the same thing, and require differing types of trust.”

    I don’t get to decide what Bitcoin is intended to be, but it doesn’t much matter. It’s a currency, the rest is just details. The outcome depends upon how people use it.

    “How many people do you know could accurately explain a fiat currency regime such as FRN’s?”

    “Maybe you should take a virtual look around at where you’re posting. This is _Claire Wolfe’s_ blog. I happen to know some of the other posters and readers here. More than a few can give you a lecture on finance and currencies that would make your eyes glaze over. These are people who understand the problems of fiat currencies, look for alternates, and want to know what makes your distributed fiat currency better than existing centralized currencies. To satisfy them (and myself), the answer had better be better than “but we aren’t a government”.”

    Yeah, well we aren’t talking about the educated freemen who frequent this site. It’s still a FAQ, and it’s aimed and the common netizen, who does not really have much of a grasp of what money or currency actually is, nor what the differences are.

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