It's the state-of-the-art in money. It's a new form of electronic money. It's already become "the gold standard" of digital currency.
Based on some old technologies, and some very new technologies... Bitcoin is the result of combining... cryptographic encryption security + the idea of a limited quantity commodity, similar to gold and silver (where there's only so much of it), and using it as money + the idea of massive numbers of computers connected by the internet... forming a strong, resilient, indestructible network. It's called a cryptocurrency. Since the invention of Bitcoin... Money will never be the same.
Interview about bitcoin on One Radio Network - MP3 file
Source: http://www.oneradionetwork.com/
Two questions who determines the amount of bitcoin circulation ? Secondly even though the servers are connected all over the world via the internet, if one day bitcoin usage started getting big, the governments could simply seize the servers the bitcoins are running on and thus gain access to the private key encryption and be able to tax, inflate etc. the bitcoin.
The software, which is open-source will determine the amount of bitcoins in circulation. The software is configured such that the network will create 50 bitcoins every 10 minutes and after 4 years this will be 25 bitcoins, after 8 years 12,5 bitcons, etc. This process makes sure that never more than 21,000,000 bitcoins will be created. Here is an explanation:
Bitcoins are created by bitcoin mining, which is exactly the process by which the transactions on the network are being verified, stored and kept safe. Mining is the process of creating blocks of transactions with a proof-of-work, algorithm. which takes CPU power. Currently every created block is rewarded with 50 bitcoins. The process of block creation is essentially probabilistic. The network adjusts the difficulty of this process such that on average every 10 minutes one block is created by some computer on the bitcoin network, even when the total amount of computers (and hence the total amount of cpu) power increases or decreases. Hence the chance of finding a block is equal to (power of your cpu)/(total cpu power in the bitcoin network) every 10 minutes. Besides that every 4 years the reward for block creation is reduced by a factor 2. Since people invest in bitcoin the price of bitcoins will increase, but the reward will gradually decrease. This reduction ensures that never more then 21,000,000 bitcoins will be created. As the reward mechanism becomes less and less an incentive to participate in mining, the fee mechanism will take over. Here people pay fee for every tansaction. Again the mining computer that finds the block can claim all fees that belong to the transactions in the block.
Since the network is world-wide, shutting down part of the network can never eliminate the created bitcoins. Bitcoins are only destroyed when a person deletes his cryptographic private key to his bitcoin balance, which can be done by deleting your wallet.dat file. By seizing computers the government may gain access to the bitcoins of the owners of the computer, but not of the rest of the bitcoins. But this also holds for seizing of gold, etc. Shutting down computers will not eliminate the bitcoin network, since, like bittorrent, it will simply keep existing on the remaining computers. Note that all transactions are stored in the block chain which is stored on every computer on the bitcoin network. The government can indeed participate in bitcoin mining and may even corrupt the the network. As long as the majority of cpu power on the network consists of computers with honest bitcoin software the bitcoin network will maintain integrity. To corrupt the network will take an awfull lot of cpu power, considering that the network grows larger and larger. Also there is no economic incentive for corrupting the network with cpu power, since it is more profitable to use the cpu power to mine bitcoins.
Very interesting.
My question: What validates that the bitcoin I receive is genuine, and not simply a fake (say, something somone made up)?
By using the bitcoin public key to verify that the bitcoin has been cryptographically signed using the bitcoin private key?
If that's true, what prevents someone from either cracking the key, or simple what prevents the person knowing the private key from abusing his power?
Well, the whole network verifies all transactions. When your start your bitcoin client up, it tries to download the block chain from the bitcoin network. The block chain consists of all the transactions that have ever taken place. Where each transactions is signed by the the sender with his private key. The public key of the receiver is part of the transaction. So the public key of the sender is known to the network, because a sender must first have received the bitcoins in the first place, to be able to send them to someone else. Note that multiple chains may exist on the bitcoin network, since two nodes may find a block at approximately the same time, and broadcast it to the network. But every bitcion client will always consider the longest block chain on the bitcoin network, the most reliable chain and use that chain. Your client scans the block chain and, besides verifyig the whole chain, it will find all transactions that belong to its bitcoin address. From that it can derive the bitcoin balance. Since blocks are constantly broadcasted over the network, nodes will notice when there exists a longer chain on the network. It is also possible to use the blockexplorer to check the balance of a bitcoin address, as follows: http://blockexplorer.com/address/<bitcoinaddress> This way, you do not even have to expose your wallet.dat file to a computer that is connected to the internet. Most banks use RSA keys to authenticate peers (usually 1024-bit or 2048-bit RSA keys), Bitcoin uses EC (elliptic curve) keys of size 160-bit, which most experts consider more secure. If it would be possible to extract the private key from a public key of a receiver of coins, that have not jet been spend, then it is indeed possible to spend those coins by the thief. I don't know how long it takes to do that with a super computer right now. Probably very long. But if you were concerned over that, you could receive your bitcoins with multiple private keys. In practice only the rightful receiver of the bitcoins will know the private key, and the only bitcoins he can spend with that private key are the bitcoins he received.
Thanks for your reply. I was discussing about it in their forum here:
http://www.bitcoin.org/smf/index.php?topic=2055.0
I think I found some problem that makes bitcoin fundamentally unsuitable to be used as money:
How can one re-appropriate bitcoins that was fraudulently acquired? Say, someone sells for millions of $ worth of bitcoins through fake ebay auctions, and get convicted by a judge of that action. How can the victims be compensated if the thief simply refused to give his private key (or has destroyed it)? With real money, his bank account is simply frozen/ confiscated. Doesn't the fact that bitcoins can't be re-appropriated by force make it fundamentally unsuitable to be used as real property in general, and money in particular?
Even without considering the world we live in today (which is already a stretch), in a free society there would still be judges that adjudicate disputes, and thieves that need to be expropriated to compensate their victims. How is this possible in a system where no one can take away the money illegitimately acquired by a thief or fraudster? This is a major problem that I see with bitcoin being suitable as money. Realistically, this problem could cause bitcoin to be made illegal in all major countries, the same way e-gold went. No legally abiding business could accept it in a transaction, and even though no one could completely eradicate it due to its peer to peer nature, it would be relegated to some black market usage, and loose significant market value, along with any credibility of becoming a real currency.
Then, bitcoin would never be adopted as currency by a market choice, because of it being unsuitable to be used as money.
Basically, my thinking is that bitcoin attempts to solve by using technology a problem created by the state - the sorry state of the financial system we have today.
In a free society, you'd have banks where you have gold dust accounts, and clearance systems where transaction cost is very low, so electronic payments would be easy, cheap, and safe anyway.
I'm sure if gitcoin gets any traction, it will be make illegal right away, since it violates so many laws already ( not complying with money laundering regulations, if that's all it takes).
People investing their money in it should cash in as soon as they can, I'm afraid, or they'll loose it all in the same way e-gold customers lost.
If government could make private ownership of gold illegal, they would also do it. It wouldn't surprise me if steps will be made against bitcoin. Maybe they will pick it up together with bittorrent :-) In a free society, maybe bitcoin would not be usefull, but I am not convinced. Bitcoin does take care of the problem of the trusted third party. This way a free society may be safe from the emergence of a state that monopolizes currency creation.
Bitcoin would never fly in a competitive currency market, so I don't see anything in it to get excited about.
Clayton -
First of all, this leads to the question whether fraud is force? For example, is being late fraud? I would say, that it is a violation of an agreement (or contract), which may lead to damages. But the participants were able to avoid the situation, so can you really speak of violence or force, when someone makes a breach of contract? You do not have to do business with someone without reputation. Anonymous reputation and escrows are sollutions to the problem of not being able to enforce agreements. It is the tit for tat strategy.
Anyway, in a free society bitcoin should not be considered immoral (or morally illegal), since participants voluntarily participate in these transactions.
But bitcoin is just in its early stages. Who knows what competing currencies will come into existence. Lots of problems must be solved, like for example how can transactions be confirmed more quickly by the network, so that micropayments work better. Right now bitcoin is a currency that is kind of free. It seems to be an experiment in free market digital currency...
Marek K Nowak:How can one re-appropriate bitcoins that was fraudulently acquired? Say, someone sells for millions of $ worth of bitcoins through fake ebay auctions, and get convicted by a judge of that action. How can the victims be compensated if the thief simply refused to give his private key (or has destroyed it)? With real money, his bank account is simply frozen/ confiscated.
erm...how would you do it if he burned the dollar bills or deep-sixed the gold? the only thing new here is that you could have someone who refuses to give the key. well then, throw him in jail if you consider his actions fraudulent...but most likely he will prefer to pay up rather than go to jail. really no problem here at all.
alex3000:If government could make private ownership of gold illegal, they would also do it.
Er... if I'm not mistaken, the government has done that once already, so I would say that yes, they could.
However secure one thinks the digital money supply is, and however good the encryption may be, there is always a way to hack the system or manipulate the money supply. I am a firm believer in a gold/silver standard, since the quantity is fixed by physical laws, not man-made ones. In other words, gold is God's money. :-)
Though banks always have and always will attempt to cheat the system through fractional reserve calculations, a free market and a gold standard ensure that banks who overextend will die out quickly. This only works if the government can't inflate the currency to bail out bad banking institutions.
I also prefer, as I think most people would, to be able to move and spend money without an internet connection. Besides, what if governments were to nationalize internet and tax you to use it? It would mean a global sales tax, and you might end up paying two or three different governments, depending on what you bought and where.
I am also a proponent of gold as money, but I do not support a gold standard. A gold standard means that the government is going to formulate some laws regarding gold as money. This is bad.
Besides that, gold does not propagate very well over the internet. I would like to know more about the fate of e-gold. What is exactly the regulation that was put on e-gold. Are shops allowed to do transactions in e-gold? If there are restrictions, what are they?
But bitcoin is just in its early stages.
So I should feel bad for picking on it?
Who knows what competing currencies will come into existence.
Maybe we don't know but we can make some very well-educated guesses. And there's a lot of things we can be sure won't be money... salt, dried pelts, dried tobacco leaves, and so on. All of those things were once used as money and have the additional advantage over Bitcoin that they have commodity value. Bitcoins have no commodity value. They're supposed to be "scarce" but the originator of the system has himself expressed concerns that, perhaps, 21,000,000 Bitcoins is too few and larger runs would have to be issued, meaning that Bitcoins are not inherently scarce, they're scarce as a matter of choice. US dollars are also scarce by choice of the Federal Reserve.
Clayton - "Bitcoins have no commodity value. They're supposed to be "scarce" but the originator of the system has himself expressed concerns that, perhaps, 21,000,000 Bitcoins is too few and larger runs would have to be issued, meaning that Bitcoins are not inherently scarce, they're scarce as a matter of choice. US dollars are also scarce by choice of the Federal Reserve."
I suppose, what you mean with commodity value, is the value that a commodity would have if it would not be used as a means of exchange or investment. So you want to make a clear distinction between monetary value and commodity value. If a commodity becomes popular as a means of exchange the market value tends to increase.
Bitcoin is a commodity, because it is scarce. The first people exchanging it, valued the bitcoins, but only very low. Who knows why they valued those bitcoins... maybe it had emotional value to them. The point is that it was enough for exchange to happen. From that point on bitcoin was evaluated by the market for its monetary properties. And those seem to be very good, which increased its value.
Here is more on bitcoin and the mises regression theorem:
http://www.bitcoin.org/smf/index.php?topic=583.0
Bitcoin is a commodity, because it is scarce.
A commodity is not defined by its scarcity. Bitcoins have no use apart from being Bitcoins, period. Even hashcash is more valuable than Bitcoins because at least it has a use.
Bitcoins are not consumer goods, you cannot directly use them to satisfy any of your wants. Bitcoins are not producer goods, either, because they cannot be used to produce something else that satisfies people's wants.
I used to think Bitcoin was a nice experiment but the more I hear about it the more I think that Bitcoin embodies all the worst fallacies of money rolled up into one big ball. Bitcoin isn't just a bad idea, it's a horrible idea built on fallacious monetary theory.
A commodity is not defined by its scarcity. Bitcoins have no use apart from being Bitcoins, period.
The use or utility of a good is completely subjective. It is not you who is to decide this for others. The fact that bitcoins are valued at this moment, and that the value has increased gradually, means that, at some point in the past, people started to value bitcoins! You cannot deny this.
What worst fallacies does bitcoin embody?
Bitcoin does have its pro's and con's, but I think it is an interesting experiment in anarcho-capitalism. The rules of the bitcoin network are subject to the market. In the future there may be different types of bitcoin with different rules. Anarcho-capitalism is similar in the sense that it also wants to have its rules being subject to the market.
interesting. alex, you seem to be saying basically that the value of bitcoins are backed by the "full faith and credit" people place in the bitcoin system, just like dollars are backed by the people's faith in the federal reserve system or US gov't. if it ever builds up a critical mass of faith in the system, then it could work (??).
The most important thing is that we are not forced to use Bitcoin and so if there is fraud or loops in the digital money it will eventually fail.
"just like dollars are backed by the people's faith in the federal reserve system or US gov't"
The dollar is backed up by more than just faith. The government only accepts dollars for taxation. The dollar is legal tender. Many other currencies that would have existed are either bullied out of the market, made illegal, or are subject to capital gains taxation that make them untenable to use as money.