That’s not really a fair assessment. It’s really more of a mass agreement than a delusion. Fiat currency has value because:
[ul]
[li]It is difficult to counterfeit[/li][li]It can only be created by a stable central authority[/li][li]It is the only viable method of paying your tax obligation to that authority[/li][/ul]
That’s pretty much how I see it, with a few more caveats, below.
Since the value keeps rising, this isn’t a problem. If the value stops rising, but they get harder to mine, then eventually mining will stop. But they’ll stop anyway, when we hit the limit. Who cares? Well, the system doesn’t need new bitcoins to continue working, but it does need “miners” to handle any transaction (if I understand it correctly). When there are no new bitcoins for whatever reason, anyone making a transaction will have to pay a commission to a miner. If the commission gets too high, this will discourage bitcoins.
A static money supply would be horrible for a national currency. If the economy is growing but the money supply isn’t, that would encourage hoarding rather than investing. Of course, lack of investment would forestall growth. If you want to discourage economic growth, then a static money supply is ideal. (sarcasm intended)
But bitcoins are not a national currency. The possibility that they’re ideal for hoarding is one of the big attractions, making them seem (and be) more valuable.
The additional pitfalls that I see:
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If it becomes too computationally expensive to transfer bitcoins, they’ll die. Since processing power keeps rising, and since the difficulty can be adjusted, I don’t see this happening, but that’s just MHO.
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It’s just a bubble. It has value only if people see the value. If the value plummets (as it has, and will again), a lot of people will be out a lot of value, and bitcoins could take a big hit. If the hit is big enough, the commission for miners won’t justify the expense. So far, the hits have not been big enough.
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Something similar but better comes along, and people jump ship. Something better has already started; sorry I can’t remember the name. Allegedly it’s based on some improved math and is more anonymous and more secure. IMHO, this is the biggest challenge to bitcoins. Furthermore, if this kind of thing (new currencies taking over the cryptocurrency market) keeps happening, people may lose interest in cryptocurrency in general.
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There might be a flaw inherent in the algorithms. There was a flaw in how transactions were managed, which caused quite a ruckus in April, but they fixed it and bitcoins have survived.
Regarding anonymity: this is often touted as an advantage to bitcoins, but my understanding is that you have to be very clever to really be anonymous. However, it has “enough anonymity” for most of us. That is, you or your bitcoin (including any bitcoin that passed through your possession) would have to be the target of an investigation to get “caught”. That’s enough for average people, especially average people trying to evade taxes or sidestep national currency laws and limitations. It’s not good enough for a billion-dollar money laundering operation. Somewhere between these extremes is the trade-off point, and I wonder where it might be.
Hopefully that’s answered above. The hash isn’t the identity of the bitcoin, it’s just the data check on the bitcoin: the stamp of validity. The identity of a bitcoin is its entire transaction history.
Just as when we use hashes for datastores, we use them to quickly locate something that might be what we’re looking for, but might not. We still have to check the entire key for a match. The key is the transaction log. The guys who designed this stuff were very savvy, as was the community that vetted the concept. If there was a flaw this obvious I can’t imagine that it would ever have gotten off the ground.
My understanding (which may be incorrect) is that you don’t just “mine bitcoins” in a vacuum and create new ones from nothing with no context. Instead, whenever there’s a pending transaction, miners try to become the first to provide the new cookie. The one that wins, and the first few that verify it, get fractions of bitcoins. So no matter how easy they are to mine, the supply won’t inflate dramatically.
However, that contradicts the statement about getting 25 bitcoins for a new hash. I can’t reconcile that with what I know. Perhaps that was true at the very beginning, to get the ball rolling. Or perhaps there are two kinds of mining: the kind I read about (which happens only on a transaction) and creating new coins.
In any case, the supply is limited, so even if there was such a problem, it would be limited in scope. Maybe not limited enough to avert disaster, though, since value is defined at the margin (the people ready to buy or sell, with their target prices in mind).
To explain what I mean by that: in a naïve theory, if we double the supply, the value would simply drop in half. This doesn’t happen, since there aren’t enough buyers waiting in line to snatch up the new coins, so the value plummets. Meanwhile, those holding bitcoins see the value plummeting, so they sell off, and pretty soon the bitcoins are worth their weight in bits (nada). Chronos, I’m sure you know this; I’m explaining it in case there’s a peanut gallery here.
What you’re saying is true. But in all of these cases, currency systems are created based on a commodity that has an established value. People wanted gold long before it became the basis for currency. Even fiat currency is based on the existence of a nation state.
But how was somebody able to start a system that apparently said, “There’s a bunch of hidden numbers. Go look for them. And other people will give you goods and services for any numbers you find.”
And you might need that currency to pay taxes in that nation state.
That’s been answered above.
It’s thought to be anonymous. (It almost is, and probably can be if you’re terribly clever and careful.)
It’s not controlled by any central authority. Only the market can dictate the value, and while governments can pass laws against it, they can’t effectively block it.
It’s something you can do in your mother’s basement between bouts of WoW. You don’t have to put on a tie or go to any office anywhere. Admittedly, that’s true of banking too, these days.
You can take it with you when you flee to someplace without an extradition treaty agreement.
You might even make a killing on it, if past results are any indication of future performance. [standard disclaimer here]
I admit that these reasons have more to do with fantasy than reality. When has that ever been a problem, marketing-wise?
Since the difficulty to mine is dynamically adjusted, I don’t see this being a problem. If the value of bitcoin falls, you’ll certainly see some miners exiting the market, but that will mean that the total computation effort applied to bitcoin has fallen, and the mining difficulty will readjust. When bitcoin started, there were people just running clients on their laptops, mining away. Now, of course, you need custom-designed chips (and a cheap source of electricity) to be competitive, but if the market cools off, then it can go back to being easy again.
Mining isn’t inherently difficult. It’s made difficult because that’s the only way to ensure that a single actor doesn’t compromise the network. You have to control a majority of the computing power to control the currency.
I think this is very likely in the long run.
Both are generally true, just at different levels.
Each block of transactions produces a chunk of bitcoins that goes to the address specified by the miner who first finds a hash that successfully links the block in the chain. So, at the protocol level, only one entity gets the reward, and they get a chunk of bitcoins, not fractions (yet. The reward will decrease over time).
However, because being the first miner to make a block is basically a big lottery, there are often pools of people who band together to break the problem up and each take a part of it. Those pools can be organized however you want, but generally they pay out according to the amount of computation you contributed. So, if you join such a pool, you’ll get a few fractions of bitcoins for every block that the pool successfully adds because you’ve been helping out.
Thanks, though I’m still a bit confused. If someone transfers .01 bitcoins, that takes a new hash, right? And miners will get 25 bitcoins for this one transaction, to buy a pizza?
If that’s true, it’s hard to see how transactions could get funded after there are no more bitcoins to mine. So I must be missing something here.
Transferring a bitcoin requires some hashing operations on the part of the person sending it, but it does not require solving the equation above in order to mine, and it does not produce bitcoins. A block of transactions is produced every 10 minutes (on average). That block is what requires mining to establish, and the block produces (currently) 25 bitcoins for the miner that solves it.
Note that computing a single hash to do a transfer is not particularly hard. Finding the magic number that, when added to some other data and hashed twice produces a value with certain properties requires brute-force trying of all possible values until you find a winner. That’s the hard problem that the miners are racing to solve.
I would say those are secondary elements. As I said, the only true need is a belief that you can exchange the currency later. Of course, traditionally the only way to make a stable currency is though a central agency that can enforce scarceness. Bitcoin does the same thing with math.
The tax aspects are only relevant to bootstrapping a new currency. US dollars are used in many places where they aren’t accepted for tax purposes. But still, it’s a reasonable question: how do you get people to use your currency if it’s not useful for anything yet? Bitcoin seems to show that it is possible if your initial client base (in this case, crypto-anarcho-geeks) values something else in the currency. Maybe those people that sold pizzas for bitcoins were irrational, but hey, it’s just a pizza.
I’ve been following bitcoins since Autumn 2011, I currently have about GBP 60k’s worth of them, I’ve mined them with a variety of hardware. There’s a hell of a lot of blowhard ignorance in this thread. OTOH I lack the inclination to spend such a hell of a long time combatting it. Educate people who want to learn. Don’t bother trying to educate people who don’t think they need to learn because they imagine they know all they’ll ever need to.
Luckily for those in the thread who ARE eager to learn, iamthewalrus(:3= is doing a damn fine job, so I don’t feel so bad about my laziness.
Oh, a couple of points then, can’t help meself:
Learjeff… the creation of new bitcoins in transaction blocks is indeed designed to taper off, so the number created in a block (currently 25) is halved every four years. This’ll get rounded down to the nearest 0.00000001 bitcoin when the block reward gets sufficiently small. In the last four year period, sometime around 2140, the reward per block will be 0.00000001 BTC. After that, it’ll be zero.
As you’ve spotted, this would leave miners with no incentive to mine. The solution to that is ‘transaction fees’. The block reward isn’t the ONLY bitcoins the miner receives. They also receive transaction fees from each transaction included in the block. So for example I might want to buy a new laptop for maybe 0.5 BTC at current prices. I would make a transaction sending 0.5 BTC to the laptop vendor and 0.0001 BTC as a transaction fee. If there are 200 or so transactions in the block, all including a similar fee, the miner gets 25+0.0001*200 = 25.02 BTC.
At the moment, and probably for the next decade or so, transaction fees are and will be a tiny part of the mining reward. As time goes on and the block reward goes down, the transaction fees will go up (or at least remain constant, which is fine if BTCs become more valuable, as they have been doing). The idea is, they’ll eventually displace the block reward as the miner’s principal reward. What if you don’t include a transaction fee? Then, eventually, miners will not bother to include your transaction in a block.
Actually, having read the thread more carefully :o it looks like you already know all that. Sorry.
There need be no sarcasm. I think encouraging hoarding is a good thing. You talk about discouraging economic growth as if that must ALWAYS and self-evidently be a terrible thing. The only other kind of entity that engages in growth-for-growth’s-sake is cancer. Cancer isn’t desirable.
There’s ‘investing’ and then there’s ‘splurging on crap’. One is good. The other isn’t really. Well it’s great for the makers of crap. Less so for the planet we live on. People seem to fall into binary thinking… either ‘everyone will hoard everything’ or ‘no one will hoard anything’. The truth is there’s always an equilibrium point. Static supply shifts the equilibrium towards hoarding. It doesn’t stop an economy. You can’t eat bitcoins, any more than you can eat dollars or pounds. If I have a choice between stroking my preccccioussss bitcoins or buying a new ipod (Same as the old iPod, but shinier!), I might think twice about the ipod. If I have to buy food with bitcoins or starve, I’ll probably buy the food. But I might only buy as much as I need. Civilisation will of course collapse… on the other hand maybe I won’t be a podgy couch potato who costs society millions in heart disease treatment either, so there you go.
My point is, spending is not an INHERENT good, in and of itself.
It’s the adjustable difficulty that keeps this is in a near-equilibrium state. Too costly to mine? Some people stop mining. No, NOT all people. Shifting equilibrium, remember? Difficulty adjusts downwards. Mining profitability increases again.
True, but I can’t think which other cryptocurrency you mean… perhaps Litecoin? I’m not aware of any that has definitively been shown to be superior to Bitcoin, notwithstanding their creators’ claims. Also there is some flexibility in the Bitcoin protocol, and as a last resort, even the ability to radically change it if a majority of miners and relayers accept the change. So if some other currency comes along that clearly shows an improvement, there’s some opportunity for Bitcoin to incorporate that improvement.
Your points about anonymity are good, it’s a complex issue. Bitcoin ‘as your grandma would use it’ is not nearly as anonymous as people think, but it has the possibility of being very anonymous indeed if you know what you’re doing. First tip, by no means sufficient but certainly necessary, is only use each address once. Never reuse an address if you’ve spent from it, and ideally don’t even send multiple payments to an address. Treat an ‘address’ less like a ‘pot of coins’ and more like a ‘transaction identifier’.
There’s a solution to this that I like very much. There’s a bitcoin wallet program called ‘Electrum’, from which you can generate a pseudorandom list of bitcoin addresses using a ‘seed’ consisting of twelve words. So as long as you can memorise a 12-word passphrase (and probably keep it locked in a safe somewhere as well in case you have a stroke), you can recover the bitcoins even if you trash your computer.
Note that it’s very important that you don’t try to choose the seed to be something you find memorable, since people are terrible RNGs. Either let the computer choose for you, or if you don’t trust the program (and really, why should you), buy some dice and generate it that way. I love the fact that I have my 60k stored in my brain!
Here’s what I don’t understand: There’s currently no incentive to include a transaction with no fee in a block, since the block reward is not dependent on the number of transactions in the block.
And, yet, transactions with no fees are being processed now. Why? Are the miners just being generous because they want the currency to succeed?
Wouldn’t you actually need to use each address at least twice? Once to transfer coins in, and once to transfer them out.
That, at least, I understand. The more permissive you are for what counts as part of a block, the quicker you can fill a block, and the quicker you can get paid for it. If you’re waiting only for fee-paid blocks to fill up, then a less picky miner who takes all transactions he can get will grab it up before you can.
Yeah. I should have said: only transfer coins out once, and ideally only transfer coins in once too.
Zero-fee transaction incentives: currently there’s no disincentive either. It makes no difference to the computation difficulty whether there’s a bunch of zero-fee transactions in there or not. However there is a limit on how many transactions can be included in a block, so when the network gets busy enough, transactions compete for the right to be included in the limited block space, so then the ones with fees WILL win out.
Actually the blocksize limit is quite a hotly debated topic on the bitcointalk forums at the moment. It works out to about 7 transactions per second. Which is fine for a small niche currency, but obviously unsuitable for an attempted global paypal-and-credit-cards-killer.
I don’t think this is right. You don’t get paid for a block depending on ‘how fast you can fill it up’, you get paid for ‘how fast you can find a suitable hash’. Blocks do sometimes come along which are completely EMPTY except for paying the miner. Obviously there were a lot more of those in the early days, but I recall even late last year there was much talk of some mystery miner who was just creating lots and lots of empty blocks. I believe people decided they were botnets. For one machine continually receiving transactions it doesn’t matter if you include transactions or not, so you may as well, but if you’re feeding a botnet it’s easier to just give the bots all the same empty block to solve. The advent of highly specialised ASIC mining hardware has pretty much ended botnets.
Thanks! Ignorance fought.
[QUOTE=Nancarrow]
I think encouraging hoarding is a good thing. You talk about discouraging economic growth as if that must ALWAYS and self-evidently be a terrible thing. The only other kind of entity that engages in growth-for-growth’s-sake is cancer. Cancer isn’t desirable.
[/quote]
Good point, but I disagree. I don’t think someone hoarding money should be rewarded more than someone investing in a viable concern. Furthermore, the size of the economy should grow at least in proportion to the increase in population. If there was ZPG, then maybe a fixed currency would make sense.
There’s clearly a small disincentive. You have to actually do something with the data for those transactions. Even though it doesn’t add to your per-hash costs, it is a very small amount of overhead.
I have been reading some documentation, and I think I have an answer for this, which is actually that many miners don’t actually process or relay fee-less transactions, or transactions with a sufficiently small fee. The reference implementation has a limit on them to prevent someone trying to DoS the network by sending umpteen billion tiny transactions with no fee. But since a few do, eventually your free transaction will probably get processed by one of them. So as long as you’re willing to wait a while, it will likely go through.
It looks like the miners who process free transactions are in fact doing so out of generosity.