What Is Cryptocurrency: Everything You Need to Know
blockgeeks.com
blockgeeks.com
1. Why is it becoming harder to mine new Bitcoins? Is this an artificial constraint imposed by the eventual finite supply (i.e., it's controlled by the Bitcoin client software), or is it just a natural consequence of that?
2. If it's simply to do with the client, why couldn't one fork it with different parameters, but while still manipulating the same blockchain?
3. Is having an upper bound on Bitcoin, to be reached sometime in the next 25 years, a "good idea"? Will this be 2040's equivalent of "640KB should be enough for anyone"?
4. I would be interested to hear more about the "real life" problems that Bitcoin faces, particularly (as I understand it) the increasing verification time which makes it less-and-less attractive to use as currency.
5. What the spat between the developers was all about a few months ago? I don't remember the details, but it was about increasing/changing the parameters of the software, so may be related to my above question.
6. It mentions that the Ethereum blockchain supports "complex contracts and programs" and that this was its novel feature. I was under the impression that the Bitcoin blockchain also had some kind of contract/script support, but no one (at least when I read of this a few years ago) had done anything useful with it. Is this the case? Moreover, what sort of neat things could be done with such a feature?
7. Again I might be wrong about this, but I read that there were a small number of really big mining farms, with specialised hardware, that have somewhat disrupted or put an unnatural bias on supply. Is that such a problem, or do people not really care? Similarly, it would be interesting to hear about the "crashes", like the Dutch Tulip-esque crash in late-2013 and the whole Mt. Gox thing.
8. How are people utilising blockchain technology (i.e., distributed ledgers) to do other things, not necessarily to do with currency? Such things often appear on HN and generate a lot of hype, but the fact that I can't remember any examples suggests that they quickly fade into obscurity (i.e., it was the wrong buzzword for their problem!)
9. While it'll obviously vary between jurisdictions, it would be interesting to hear how various governments view Bitcoin with regards to things like legitimacy, taxation, etc.
#2: It's not just a client parameter.
#3: The supply cap and underlying deflationary bias were conscious design choices. Maybe in analogy to precious metals.
Of note, the US money supply, even including 2 decimal places, creates a space of 331 trillion units [3], as of 2016 [4].
[1] http://www.wolframalpha.com/input/?i=(21+million)+*+(10%5E8) [2] https://en.wikipedia.org/wiki/Year_2038_problem [3] http://www.wolframalpha.com/input/?i=3317+billion+*+10%5E2 [4] http://www.tradingeconomics.com/united-states/money-supply-m...
The hard part will be handling enough transactions without becoming centralized. Currently, the blockchain is ~90GB. With most users on mobile devices, very few will be running full clients, because syncing the blockchain will move too much data.
So increasing block size is very contentious. One camp is OK with centralization. The other basically wants to make Bitcoin like gold, and create currencies based on it.
Recovery from the Great Depression correlates closely to how quickly a country left the gold standard.
It's a standard mode of pseudoscience to vociferously advocate a discarded idea. This applies to economics as much as science.
In the Bitcoin 0.1 release notes, Satoshi Nakamoto said:
> The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
Bitcoin failed at every one of Nakamoto’s aspirations here. The price is ridiculously volatile and has had multiple bubbles; the unregulated exchanges, with no central bank backing, front-run their customers, paint the tape to manipulate the price, and are hacked or just steal their users’ funds; and transaction fees and the unreliability of transactions make micropayments completely unfeasible. Because all of this is based in crank ideas that don’t work in practice.
So failure (not anonymous, not wide acceptance) is "worked just fine"?
So maybe you base currencies on Bitcoin. Some people can keep using Bitcoin for trade, just as some use gold now.
In my understanding this is a major design flaw which might break the currency in the future. (Please correct me if I'm wrong.)
Having a limited amount of currency improved early adoption akin to a gold rush because you could obtain a large amount of currency (relatively speaking) for a comparatively low amount of work. This worked very well in my opinion.
To my understanding you need active miners to keep the currency alive. (Is this really true?) But the returns for those miners vanish with time. This makes the monetary investment in the miners go down and a single group could take over and manipulate the whole system by majority vote. (Is this also true?)
In my opinion a currencies value should vanish with time because currency is not something that really holds value as physical investments do. Fiat currency as we now have in the "real world" now reflects the monetized value of contracts expressed in that currency. A currency like bitcoin should be used mostly to settle transactions and not to store vast amounts of wealth. Therefore a steady inflation with a rate like e.g. 10% p.a. would be good to thwart money hoarding and ensure a steady supply of new currency.
With an inflation of 10%, each year 10% of the stored value gets taken away and redistributed to the miners. This means that it's wise to not store too much value in that currency but to quickly and efficiently use it for transactions such that the total sum of transactions us much much higher than the stored value.
The current implementation of bitcoin does not reflect this idea at all and I'm very convinced that it cannot play a huge economical role due to its design. In its niche, however, it currently works very well. I see it as a good design study for future cryptocurrencies which can be adopted at a larger scale.
1. Bitcoin runs on proof of work, nodes agree on solved blocks by an increasing number of zeros on a sha256 hash of the block header. This is a mechanism to keep the supply roughly constant despite increases or decreases in total network capacity so that the rate of increase in the money supply is consistent. Difficulty is adjusted every 2 weeks, or 2016 blocks, so that we have 10 minute block times.
2. You can fork bitcoin, but manipulating the blockchain would break consensus. If I have a custom client that changes the rules concerning how much bitcoin I made or whatever, that will not affect other people because their clients will disagree.
3. This depends on what Bitcoin becomes, it could go either way, remember the upper bound is separate from divisibility. So right now its divisible to 8 decimal places, but could be more if needed later. If bitcoin is a store of value then this is probably a reasonable design decision, if it becomes a generic transport of value then we may have to investigate other options.
4.The verification time is a function of the capacity limits of the network, tests have shown that we can handle many more transactions than are currently being verified, but the block size limits the number to 1mb worth of tx data every ten minutes, which equates to roughly 3 or 4 verified transactions per second on average. There are also numerous ways this is being addresses, but its a very contentious and on going subject.
5. The spat is about the block size. Should it be increased, or should alternatives be developed. The heart of this is whether you think bitcoin is a store of value network or a transaction network. The current core developers work at Blockstream and have developed SegWit as an intermediate step since it allows for decreasing the space that each transaction takes up, and has other benefits with regard to support for more sophisticates smart contracts and side chains. Blockstream has a monetary incentive to see side chains succeed versus strictly on chain scaling. That conflict of interest and the direction bitcoin has taken has been highly contentious within the community, and has created some fractures.
6. Bitcoin does have a scripting language, it is at the heart of how bitcoin works, but for various security reasons it has been substantially curtailed. Right now its being used for multi signature support, normal payment, time locked payments, and for adding additional meta data. Ethereum has a "turing complete" implementation, it has some serious limitations, but promises to do more. So far that promise has been tempered by numerous serious security problems in various smart contract platforms using Ethereum like the DAO. Its an interesting experiment, and the lessons learned are going to help us develop other systems as time goes on.
7. The mining farms haven't changed the rate of supply, but they have shifted the "control" of the network, mostly to China which has subsidizes or near free electricity in several regions. Coupled with close access to asic development and delivery it has become a prime location to build server farms. This gives them the ability to hurt the network in various ways.
8. Nasdaq and other financial firms are experimenting with it for low volume transactions as a sort of distributed shared database. R3 is building a consortium backed digital currency again for settlement. There are lots and lots of interesting potential applications, but we haven't seen a killer application beyond bitcoin itself which is pretty amazing when you think about it.
9. Most governments have taken a hands off approach, with the exception of New York state which is actively regulating entities as part of their Bitlicense legislation. There are also various overlaps with traditional money transfer that makes licensing complicated in the United States, and gives first mover advantage to other countries that are more permissive.
But doesn't it miss something important: whence cometh the value? Why would I, or anyone, actually want to own Bitcoins?
Lots of people don't see the value of bitcoin when they pay for their coffee with their credit card and go about their day.
There are many uses but just to begin, bitcoin has already outlasted several countries' currencies (Venezuela, Zimbabwe) and it has no boundaries. It can't be controlled by a government (India, Cypress) and it's inflation will slow and stop (unlike Russia, Argentina, Japan).
Some ideas are big picture ideas. They don't help people take selfies, find a restaurant or communicate with celebrities, but their impact will be massive over a longer timeline.
Yes, assuming that others will pay for it. And perhaps an increasing number of productive individuals will. But that just pushes the question back one step. Why do those other people want to own Bitcoins? You see the infinite regress problem here?
(With fiat currency, there's a finite regress. It terminates with specific facts like historical government actions, gold, taxes.)
I don't speculate in Bitcoin. I just use it.
(I will investigate 'regression to the mean')
I'm sure there's a better answer, but that's the best I can muster with my current knowledge on the matter.
I think a better question is "given the rarity of bitcoin, why wouldn't people value it?"
Also, as for the confidence thing, bitcoin is no different than anything else in our economy. Our economy is built on confidence.
>Our economy is built on confidence. Yes, but not only that. Use of fiat currency is made legally compulsory.
Maybe Bitcoin-demanding ransomware plays a useful role in the BTC economy, as it gives people a negative/fear-based reason to obtain BTC.
Regarding drivers for using Bitcoin, consider that 99% of Bitcoin is now traded in CNY.[0] I doubt that ransomware plays a substantial role there.
By 'regression to the mean', I just meant that Bitcoin prices come to reflect average desirability. So even huge events like the pump/dump bubble that Mt Gox (or its infiltrator) created eventually damp out.
Right now, I gather that it's largely Chinese investors who are pushing Bitcoin prices up.
Bitcoin is useful against capital controls.
One then wonders if that was the real motivation behind Bitcoin. It's maybe not a coincidence that it has widespread use in China. I don't want to speculate any further. Just having this thought right now.
True if any only if, and the degree to which, possession of BTC is considered desirable. If it's a sought-after 'commodity'. Otherwise it's just a decentralised simulation of money, no matter how many desirable qualities it simulates. MMO games have simulated internet money, and various transfer features too.
People who got into BTC early, did so because they wanted it to fulfil its potential as a better sort of modern money. They knew nobody else would accept it as payment at the time. They hoped it would become valuable in the future... and it has. The early adopters essentially gave it its initial kick start by role-playing as if it was money. I don't know if this basis of playing pretend can be a solid foundation for an invented money's value.
It seems too ephemeral. It's based on belief in belief, ultimately based on pretending.
Maybe it would be beneficial, for the sake of stability, to invent a powerful mythological origin story for BTC. Maybe that's what they are trying to do with this still-mysterious Satoshi avatar.
As far as I can see all useful monetary systems are essentially backed by consensus and belief.
Centralization enabled government take-down :(
Obviously it wouldn't be anonymous. It might not be able to be international. But liberal Western governments want their citizens to be able to interact economically with each other easily (but taxed), don't they?
I recall some messaging from the EU about their interest in establishing ways for ecommerce to work over the continent, without relying on foreign credit card companies.
I guess I should read up on the history of failed microtransaction systems.
So anyway, it's arguable that no anonymous digital money system can remain law-abiding. And if it's centralized, it will be taken down.
Bitcoin isn't anonymous. But for small amounts, it can be effectively anonymized. However, it's very hard to anonymize large transactions. It's the "snake eating a pig" issue. So maybe that's why governments cut it some slack. Punters have decent anonymity, but hardcore money laundering is unworkable.
And to actually address your question, I gather that many digital money systems are in development, which are designed to be strongly non-anonymous and law-abiding. But it's a hard problem, without ungameable online identity authentication.
Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible.
Satoshi proved it was.
I assume there are other algorithms like paxos exists for distributed consensus. Also not sure if Satoshi proved consensus by proof of work.