What Is a Bitcoin, Really?
preshing.com
preshing.com
From this follows several consequences, like there being an infinite supply of cryptocurrencies which share every advantage of Bitcoin, the Satoshi client being really freaking important relative to the "protocol" (whose only authoritative description is the Satoshi client, since in the case of disagreement with the Satoshi client the network will reject you no matter how "correct" your decisions are), and the fact that the ledger which is anointed as consensus at T1 is not necessarily the same ledger which will be consensus at some future T2 when looking back at history.
I can maybe see where it'd be useful in minimizing electronic transaction costs. But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin. And, I guess I can see that it'd be useful to maintain anonymity, but I don't have that use case. Isn't it just easier to buy things with Dollars?
I also don't understand the dynamics of it. Doesn't it require increasingly more capital to mine coins and to maintain the ledger? What happens when the value of a coin is less than the mining costs or ledger maintenance? Or, does the coin just keep continuing to increase in value? And, if so, what's to stop people from just using another crypto-currency?
And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people).
It's not common yet, but I have in fact saved money by buying with bitcoins, because the merchant passed on some of the savings.
>Isn't it just easier to buy things with Dollars?
Sure, if you're allowed to, and you have that preference, why not? Bitcoin can facilitate the circumvention of censorship (a la Wikileaks). And once you have bitcoins, sending them is faster than paying with a credit card online.
>Doesn't it require increasingly more capital to mine coins and to maintain the ledger?
Yes, if you ignore hardware advances. It might even be true if you don't ignore that.
>What happens when the value of a coin is less than the mining costs or ledger maintenance?
There are transaction fees that go to the block miner.
>Or, does the coin just keep continuing to increase in value?
Hopefully not too quickly!
>what's to stop people from just using another crypto-currency?
Network effects. People do use other crypto-currencies. Just not as much. For now.
>And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people).
Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion.
There are historical examples of currency which was neither a debt derivative nor an intrinsically useful object being used as currency.
Ultimately, anything sellable is "worth" what other people will pay for it. Bitcoin provides a means of transferring information in a cryptographically signed manner. We happen to use that fact to transfer information about value. Other people are willing to buy bitcoins. The price is capped by the fact that there is a finite number of bitcoins and a finite number of people. Beyond that, it's pretty much new ground we're breaking here.
Bitcoin is not perfect. I don't know the future. But if you have other questions, I'm happy to answer them from the perspective of a bitcoin holder.
I still don't understand how economists can say that BTC has no "intrinsic value," so should be worthless, but the fiat currencies around the world are just dandy.
The whole concept of "intrinsic value" is nonsense. If you can make a Bitcoin transaction faster, cheaper, and with fewer people knowing about it (if you value anonymity), then BTC has value. You can send Bitcoin to someone overseas without anyone else knowing. How powerful is that?
> Ultimately, anything sellable is "worth" what other people will pay for it.
Precisely. I wish we could teach people this before they dismiss Bitcoin for unfounded reasons.
The issuer^H^H^H^H^H^H ledger algorithm of bitcoin collects taxes^H^H^H^H^H transaction fees in that same currency.
I'd rather have bitcoin than Zimbabwe's fiat currency.
Taxation definitely gives legitimacy, but so does the ability to pay for things anonymously. If enough people are willing to take a currency, than it gain value - period. The gov't wanting it in taxes is just a really big provider of liquidity providing those network effects.
Bitcoin doesn't have the advantages of having a government backing it, but some would probably argue that that is an advantage.
For that reason, I recommend listing the specific things that make the USD valued: in this case, the need to pay USD in taxes, and a very wealthy entity (US government) prefers to trade in that currency, or whatever specific thing you mean with "backed by" in that statement.
It really annoying to me that people keep putting up this straw man. What economist is saying that BTC has no intrinsic value and is thus worthless? Really? You learn in ECO101 that currency only has value because of what you can exchange it for. Money demand is not a fringe concept in economics--its a core concept that anyone in any branch of economics that deals with currency and money thinks about several times a day.
The fact that you can only do business with the vast majority of american society in USD is what gives the USD value. We got to that point because the US government said that US currency should be acceptable to pay off any debts in the US, including taxes. The fact that dollar exists and is the common currency in the US is tied to the law, but its exchange rate and purchasing power is (aka its 'value') is tied to other factors completely.
You can make the argument that the long term value of BTC is zero because there's nothing that guarantees it continued existence, like US law guarantees the existence of the dollar. But thats totally separate from the value and exchangability of BTC to US.
http://smilingdavesblog.blogspot.hk/2012/08/bitcoin-all-in-o...
The Internet guarantees the continued existence of BTC.
> There are transaction fees that go to the block miner.
The issue here is that they go to the person who mined the block originally, but they aren't passed on to those who are simply running the client to maintain the ledger. With the increased difficulty in mining, it's very unlikely for anyone without a large investment in hardware, that you're ever going to make money on the fees. It provides no incentive to run the full client to help the network confirm transactions.
>they aren't passed on to those who are simply running the client to maintain the ledger.
The word "maintain" is ambiguous here. When I run bitcoin-qt on my computer, I have the whole blockchain locally, and I relay blocks created by others, but I do not "maintain" the blockchain in the sense of adding or subtracting from it beyond the transactions I create myself to spend my own money.
>With the increased difficulty in mining, it's very unlikely for anyone without a large investment in hardware, that you're ever going to make money on the fees.
Correct, so I don't mine.
>It provides no incentive to run the full client to help the network confirm transactions.
Again, "help" is a bit ambiguous. When I run bitcoin-qt, I relay transactions, but I do not contribute any processing power to confirmations. "Confirming" a transaction means including it in a block, an d only miners create blocks.
Now, it is a bit of a problem that there is little to no incentive to run a validating client, i.e. one that accepts transactions, verifies that they are cryptographically and monetarily valid, and passes them on to other people. We shall see if another cryptocoin solves this issue.
I would really like to see another crypto currency come out that addressed the validating client issue. I think that could also get more people interested in it too, since they would be earning money just by running the client.
I don't either. Which brings me to a point, is it even intended for a mass audience and wide-spread adoption?
How could I explain Bitcoin to my mother for instance?
I'd end up down the rabbit hole just to explain the words and concepts used in the definition of Bitcoin...cryptography, private keys, wallets, addresses, miners, the block-chain, and on and on
I think it is possible to understand bitcoin as a financial system if you have some background in financial concepts (my dad was able to pick up the open ledger concept pretty easily). But to understand the technical details you really need an implicit understanding of a lot of different technologies.
You don't have to be embarrassed. Surprisingly 99.9% of the people doesn't know how our monetary/banking system works (creating money out of thin air) but that doesn't prevent them from using $ or €...
Henry Ford once said: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning"
IMO, the speculation comes from the enormous potential of the idea. What is something you can do with an electronic currency, not tied to a single government, which has a great deal of value to the average person?
I don't know the answer to that question, but I see most altcoins as people trying to crack this nut. It seems likely to me that someone will find a use, partly just because the cost of attempting it is quite low.
For instance, I just learnt recently that there's transaction cost associated with each transaction, and if you set the transaction cost to zero, the transaction may take a while to get accepted (or never) into the blockchain because of the reduced incentive to miners.
This comes as a bit of surprise to me because one of the popular benefits of bitcoin touted by advocates is the reduced transaction fee over traditional means of monetary payments, but I guess that's a fault in my own understanding as 'reduced' does not mean 'none'.
The complexity of the concept is a barrier to the mass adoption of bitcoin. Wallet and payment merchants make it easy for people to use bitcoin without understanding the underlying technology, however I believe there's still a perception problem. People are hesitant to use things they can't wrap their minds around, especially when it's tied to money.
We need more articles like this that can ELI5 to lower that barrier.
Mining is really a terrible term for the layperson that evokes thoughts of real mines that produce resources at a continuous rate. It should be called "Distributed transaction verification. And, oh yeah, by the way, verifiers have a chance to win a prize, lottery-style."
"A private key is nothing but a large pseudorandom number roughly between 1 and 2^256"
Not sure how the "pseudorandom" came in there - the private key might be random, or pseudo-random, or entirely deterministic - it's essential property is that it's just a 256 bit sequence that is unknown to others.
"It’s perfectly safe to give your Bitcoin addresses to other people, but extremely important to keep your private keys secret. "
The essential point trying to be made here is that the Bitcoin Address won't allow people to determine your private key. but there are a lot of reasons why you would not want to give your Bitcoin address to other people - the key reason being that it allows to track you. There is one philosophy that suggests you should change your Bitcoin address on every transaction.
Overall, though, a nice introductory article to Bitcoin - I'd recommend it to others.
Note: Nearly every 256-bit number is a valid private key. Specifically, any 256-bit number between 0x1 and 0xFFFF FFFF FFFF FFFF FFFF FFFF FFFF FFFE BAAE DCE6 AF48 A03B BFD2 5E8C D036 4141 is a valid private key.
The range of valid private keys is governed by the secp256k1 ECDSA standard used by Bitcoin.
Source is the Bitcoin wiki, https://en.bitcoin.it/wiki/Private_key which surprisingly isn't listed as one of the references in the post.
Some talk about decentralized currency, anonymous payments, money laundry... Shenanigans. All shenanigans.
Economies that fall have struggles to control the price of their currency. The correlation is there, the causation is not so clear.
I wish I could supply a link to it - maybe someone else has the article?
https://www.igvita.com/2014/05/05/minimum-viable-block-chain...
If so, I agree it's a great intro to the topic.
Edit: Nvm that article is only from 3 months ago.