I didn’t want to hijack the other thread about Bitcoin, so here we go.
I have very little knowledge about the whole Bitcoin thing, but I do remember in its’ early days reading about computer users "mining’ Bitcoins by using their computers to do something or other. So, connected with this, here are my questions:
What were those computer users doing that resulted in a Bitcoin reward?
Who benefitted from the activity that resulted in the reward (presumably the same entities that issued the reward?)?
Where were those Bitcoins coming from?
If there is a defined number of Bitcoins in existence, which cannot be changed, who issued them, and how did the act of issuing them not instantly create wealth out of nothing for the issuer? (i.e. If I decide to issue my own crypto-currency, am I not essentially saying “I have $100 billion worth of Billbucks which you can purchase and then use for your financial transactions”. And if I actually get people to do so, am I not now a multibillionaire? If I remain anonymous, as I understand the creator of bitcoin has done, no-one can come to me and force me to cash in their Billbucks, can they? Or do I have to place $100 billion in escrow somewhere to get people to buy them?
Why is the value of Bitcoin so volatile?
Is Bitcoin mining still a thing? And if so, is that not increasing the amount of Bitcoin in the supply?
In a nutshell, and in layman’s terms, bitcoins are ‘mined’ by solving mathematical challenges which are difficult to work - and increase in difficulty from one example to the next (in the same sort of way that finding prime numbers is generally harder the higher you go).
They were not exactly ‘issued’ in the sense that they need to each be discovered before they can be used. The ascending difficulty of finding them means that now, people have to apply quite a lot of processing power to the problem - and that costs money to do, so in that sense, they sort of acquire value because they are difficult to find - a bit like precious stones or gold.
As to why they have value at all - they have value for the same reason that paper money has value - it’s not intrinsically worth very much - but it works because people believe it will continue to work - you’re prepared to accept a piece of money in exchange for, say, your labour, because you believe that money can later be exchanged for food.
I’ll take a crack at some of these, and someone will be along to clarify or correct me, surely.
Transactions with Bitcoin have to be verified using a computer algorithm. Miners use their computers’ computing power to work on verifying these transactions. As a “reward” they receive a very, very small amount of Bitcoin.
The benefit of mining is the verification of transactions, so it benefits whoever is doing transactions with Bitcoin.
They are created (since they’re digital) and given to the miner. The reward keeps diminishing according to a mathematical formula until all Bitcoins will be in existence (around 2140; the limit is 21 million Bitcoins). I don’t know how transactions will be verified after all Bitcoins are in existence, since there will be no incentive for miners to have their computers do the work.
Participating on the Bitcoin network, by helping to process and validate transactions. Transactions are logged in a cryptographically proven ledger called the blockchain, which consists of a list of chronologically-ordered transactions. Each block has a finite size. Creating a new block requires a “proof of work” - the answer to a cryptographic problem which is extremely difficult to find but easy for other nodes to verify once someone claims to have found it. The first node on the network to find it gets to create the next block, which begins with a transaction awarding a certain number of bitcoins to themselves. (Currently 12.5 bitcoins per new block.)
Everyone participating on the bitcoin network. The reward is essentially an incentive for helping to process transactions.
They don’t really “come from” anywhere. They’re created when new blocks are added to the blockchain as part of the protocol.
There’s a reason they use “mining” as a metaphor. Finding a lump of gold in a hole in the ground doesn’t immediately create wealth for the person who found it, because digging the hole and buying equipment and paying miners is expensive. If you do it right, you have a positive return on investment. Mining bitcoins profitable requires a shit-ton of computing power and electricity costs.
No, you’re saying “I have X number of Billbucks.” What people choose to pay for them in terms of dollars is up to them. Most cryptocurrencies are not worth very much because very few people are using them. Bitcoin was not the first cryptocurrency idea, but it was the first with a reasonably good implementation that intrigued enough people to start using it.
Your cryptocurrency is not money. It’s bits on a network. If you can convince people to pay you money for those bits, great. If not, you don’t magically get money.
Because the whole idea is a bit ridiculous, there’s no regulation of the market, the value is currently in the midst of a huge asset bubble, and the system is inherently deflationary.
It is and it is, slowly. Currently a new block is created about every 10 minutes. Sometime around 2020, the number of new bitcoins awarded per block will halve, then halve again. 21 million bitcoins is the limit for the system, and that is projected to happen sometime around 2040.
The creator of bitcoin is known only by a pseudonym; his or her real identity is unknown. And at first, the value of bitcoin was very low, because the only people who did anything with it were doing so more or less on a lark, just as a toy. Eventually, though, the number of users grew to include those who took it seriously.
As for why it’s unstable, mostly it’s because there’s no reason it would be stable. It’s not backed by any government, almost nothing is priced in bitcoin, many of the uses of it are shady, few people (including most of those who use it) understand it very well, and public interest waxes and wanes with the fashion.
The service that bitcoin miners are providing is essentially accounting. Somebody needs to ‘validate’ that all the bitcoin transaction within a given periods of time add up correctly even though nobody has all the transaction details. Instead, as I understand it, miners can review partial details of encrypted transactions in a way that makes if clear if everybody got the money they should have. Whoever can prove that they have the transaction record complete first gets the mining reward.
Like many currencies, bitcoin has value because people believe it does. I’ll let someone else speak to how it earned that trust in the first place.
There is also at least one older thread covering this stuff.
It is a variant of Hashcash (originally designed to limit e-mail spam): find some data whose cryptographic has has a particular value.
The reward, which is some bitcoins, is supposed to be an incentive to keep your hardware up and running and connected to the Bitcoin network.
Some, originally all, come from nothing, and the remainder are charged to users as transaction fees.
They were/are not created instantly, rather at a defined rate. There was some randomness to the original distribution, but of course several individuals/organizations have huge piles of bitcoins because they were generated when there were not many users, or they threw a lot of computing resources at it, or other little tricks.
Dollars have nothing to do with it, except insofar that electricity, computers, and so on have to be paid for in hard currency.
Why on earth would it be stable?
Yes, some are still being created, though the rate at which this occurs will steadily taper down to zero.
Wow, people are quick typists. I will just add that I have noticed a flurry of recent questions about “cryptocurrency”, and, while Bitcoin is undoubtedly a type of crypto-currency, it is really a bit passe (though introduced in 2009) and suffers from various design flaws; anyone creating a new electronic money today would certainly not copy the 2009 Bitcoin design, and indeed on a technical level the system would probably not resemble Bitcoin in the least.
There’s something called a hash function with an important property. Going backwards is much, much harder than going forwards. Say you have a function that adds one to a number. F(x) = x + 1. If I tell you that the output was 6, it’s trivial for you to determine that the input was 5. Imagine that if I told you the answer was 6 and, even if you knew the formula, you’d have no way of computing the input in less than a year with a super computer.
Where this comes into play is that the Bitcoin miners are looking for to solve this problem:
In words, they want to take some data about the transaction, a number from the previous transaction on the chain, and a random value and spit out a number with a bunch of 0s on the front. The only way for them to do that is to guess a number, calculate the result, and check to see if it has the leading 0s. They have to do this millions (or maybe billions) of times before they guess a number that works.
There’s no benefit from the work. The solution exists only to prove that you did the work.
Solving the hash grants the miner bitcoins.
There is a maximum of 21 million bitcoins available. They were all generated by miners solving the problems from (1).
Anyone’s guess. From outright fraud, to pump and dump, to a bubble, to a brilliant innovation.
Still a thing. 16.5 million of the 21 million bitcoins have been mined.
I don’t want to hijack THIS thread, but my question piggybacks on one of the things I read while answering the OP.
Wikipedia talks about a coinbase transaction that is included when transactions are verified; it is this coinbase transaction that is the miners’ “reward.” The Wiki article states, “All bitcoins in existence have been created in such coinbase transactions.”
How is this possible, if such transactions are used as rewards for verifying past transactions? Mustn’t there have been at least one initial transaction for someone to verify?
Bitcoin does have one very important feature that’s shared by no other cryptocurrency created since then: People give a damn about it. Without that, none of the other features matter at all.
OK so is the work doing some necessary Bitcoin chain function or is it just to demonstrate that you did some work? Both views are here.
If it’s just busy work then that is not very ecologically sound or renewable, ISTM.
Why would the work be necessary to be granted coins? Why do we give coins to people who work? Is it a method to do a long roll out? Would there be any other way?
OK, so if Bitcoins are created by the act of verifying transactions, what/how was the first transaction that needed to be verified done? Was some small amount of Bitcoins assumed to already be in existence?
Is the current value of Bitcoins SOLELY based on the speculative trading that is apparently going on?
What determined the total number of Bitcoins? is it a function of the algorhythm used for the process, or is it arbitrarily set?
It seems to be implied that a transaction is not complete until some Bitcoin miner verifies it by solving the problem. What would happen if no-one’s computer did so? Is the transaction invalid? What about any products or services that may have already changed hands? Or do the persons involved only complete the transaction once it has been verified?
I am still so confused about this part that I can’t even generate a coherent question. Almost certainly because I don’t have the mathematical knowledge. I appreciate the effort though, and I’ll take your word for it.
OK, that makes a certain amount of sense. So it’s all about who gets there first, which makes it unlikely that a home user with an average PC would be successful to any great degree. No doubt there are people/organizations out there that have much better resources.
Has the anonymous creator of Bitcoin generated/set aside a certain amount for him/herself? Or is s/he set up to mine successfully? I don’t have a problem either way, s/he seems to have created something which people find valuable and should be compensated for that.
If the reward is diminishing, and as noted before, the cost of verifying the transactions is not insignificant, is it not possible that at some point before all bitcoins are created, it will make no financial sense for anyone to put their computers to work on the job? If so, will this not cause the whole system to come to a grinding halt? Or can the work of verifying the transactions be put on a different basis and perhaps paid for by a small tax on transactions, rather than by the issuing of new blocks?
Clear answer, but it still generates a follow-up question. Why does the transaction record need to be “discovered” rather than simply being generated by the transaction, as presumably happens with normal banking? Is this connected with making it theoretically un-hackable?
There is no central party confirming/controlling transactions, it’s decentralized, so there needs to be a method that the collective group of people involved in bitcoin can verify transactions.
And because it’s digital data that can be easily copied and changed, the method needs to be clever enough that someone can’t just make up new transactions or spend coins more than once or steal someone else coins by copying numbers etc.
And finally the rate of mining impacts the value, it’s best to keep it somewhat scarce otherwise they would all be mined in a short period of time and there would be little perceived value.
It’s believed that the creator of Bitcoin mined a whole lot of the first ones. Those bitcoins would be worth quite a lot if he sold them at today’s prices. But you can’t just dump all those bitcoins on the market because that would glut the market . Quite a pickle.
The reason is to give people an incentive to participate in the network. The system is designed to be distributed so that no one institution or person can exercise control. In order to do that, you have to give people a reason to lend their CPU cycles to the system. The mining system does that, and allows the Bitcoin economy to grow by introducing more coins as more people use the system for transactions.
In a sense, yes. The “genesis block” is the first block in the Bitcoin blockchain. The genesis block is the only block that does not have a pointer to any previous block. The award granted for this block (50 bitcoins) is mysterious, due to the way it was structured. Several blocks after the genesis block were generated with 50BTC rewards and those bitcoins appear to still be owned by their originator.
No; there are lots of people using it for real life transactions, including all kinds of shady shit. But they are definitely overvalued.
It’s a function of the algorithm; but the parameters of that algorithm are somewhat arbitrary. Basically:
You start with a block award of 50 bitcoins, and that award halves every 210,000 blocks. (Why 210,000? Because that created a curve that appealed to the creators.) That sets an upper bound of 21 million coins.
Generally, one waits for confirmation before completing a transaction, unless one trusts their counterparty or the amounts involved are trivial. Confirmation occurs when a block is finished, and that takes about ten minutes. For larger transactions, people may want to wait for additional blocks to be completed. (This helps to avoid double-spending problems as have occurred when people have occasionally forked the blockchain to create alternative currencies.) Six blocks is a widely-used standard for high-confidence confirmation that a transaction is good.
If nobody is processing transactions, then the thing doesn’t work.
Yes - there are people with massive GPU server farms doing nothing but mining coins. It’s nuts.
It appears that way. The first several blocks worth of coins were all sent to a wallet controlled by Satoshi and AFIAK those coins have never moved since they were created.
Yes. This is one of the major problems with the system and a regular source of criticism. Other cryptocurrency networks have tried to address this problem in various ways.
It’s not that the transaction record needs to be discovered. It’s that the piece of the ledger, which contains the record, needs to be cryptographically proven as a valid piece of the ledger. This cryptographic proof makes it impossible for someone to come along and insert their own ledger which says “all the coins were sent to MEEEEE!!!” Because there is no central authority maintaining the ledger (such as a bank or accountant) everybody has to agree on what is a valid transaction and what is noise. That’s what the blockchain does - it says “this block of transactions is valid because when we (the network) perform this mathematical operation on all previous blocks, we get an answer that points to this new block.”