Bitcoin and Digital Currencies

Does anyone here know about this peer-to-peer system of virtual currency? What is your opinion of it?

A friend asked me to check the paper which specifies the protocol for possible drawbacks, and from a purely technical point of view it looks good to me — but then again, I am not a computer scientist and certainly not a cryptographer.

However, I am a little concerned about some more, well, immaterial aspects of this system. For one, even if it is open-source and has no central authority, there still is a single organization which specifies the protocol (and decides on possible changes). As once the thing gets popular, if it ever does, it would be difficult to split without losing all the advantages of this sort of system, it seems to me that this might place excessive responsibilities over what is, after all, just a private organization.

Furthermore, an economy-related concern is that the protocol is set up in such a way that there will be a finite, fixed number of bitcoins in circulation — sort of like a gold standard, in a sense. I do not know nearly enough economy to be able to tell for sure if this would or would not be a good thing, but sometimes you do need to create a bit of inflation to encourage growth, is this correct?

So, what do you think? Potentially interesting idea or yet another pipe dream?

edited 13th May '11 5:50:36 AM by Carciofus

But they seem to know where they are going, the ones who walk away from Omelas.

This sounds interesting, but obviously the key critical problem is security. I would want to know what protection there is against forged records. Seems like a counterfeiters' dream come true. I don't understand how the "Largest pool of CPU power" thing works, so maybe that provides some answers.

As for your concern regarding centralization under a single private entity, that could be resolved if there are more than one such company offering this type of software. There could be dozens, and as long as the files they produce are inter-compatible, it wouldn't be a problem.

From an economic perspective, what the article doesn't address is where the money comes from. Currently on-line transactions are supposed to reflect transfer of funds in real bank accounts. the article doesn't say if this system is supposed to work that way, or deal in an entirely new electronic currency, like certain MOR Ps. If it's supposed to reflect real-world financial transactions, then limiting the number of bitcoins in circulation doesn't make any sense. If it's its' own currency, then yes, as the value of transactions increases, bitcoins will become more valuable over time, which is called "deflation" (the price of commodities will go down as the value of a unit of currency goes up). Ultimately this undermines the economy, because a shortage of money causes all sorts of problems (currency speculation, high interest rates, etc.).

So- interesting, but still needs work.

edited 13th May '11 7:22:54 AM by DeMarquis

"We learn from history that we do not learn from history."

De Marquis: That is fixed by the P 2 P bit.
If you have 100 coins, you must have earned them somewhere, and all nodes in the network keep track of that. Which means that it is impossible to forge bitcoin, unless you can somehow manage to infect all nodes and trick them into saying that "the dude had 100 coins from somewhere" :P

A guy called dvorak is tired. Tired of humanity not wanting to change to improve itself. Quite the sad tale.

Actually, all you need to forge coins and transactions is a bunch of computing power. So Google could literally mint money if it felt like it.

Another problem is that it looks like synchronization would be difficult. The method isn't very scalable since it requires the entire network to agree on every transaction. It'd be like trying to run World Of Warcraft as a P 2 P system.

Also, it's extremely computationally intensive.

edited 13th May '11 8:23:59 AM by storyyeller

Blind Final Fantasy 6 Let's Play

I thought you needed processing power to create new bitcoins, not to forge transactions. AFAIK, transactions were protected by public-key cryptography, which would be unbreakable.

Da Rules excuse all the inaccuracy in the world. Listen to them, not me.

You need processing power to validate transactions, if I understand it correctly. The "mining coins" thing is just an incentive to get people to provide that power, not an inherent result of people computing... something.

That's to prevent double spending, mostly — you know, you buy something somewhere, and then before the transaction has been fully processed you buy something somewhere else with the same money. In order to avoid that, you make it so that no transaction is accepted before some relatively huge amount of processing power has been used — to find a number which is in some difficult relationship with your transaction code, basically.*

As long as the "good guys" communicate and have more power than the "bad guys", this should ensure that that trick will not work.

As for the deflation thing, somewhere in the bitcoin site they say that this should not be a problem because bitcoins can be subdivided into extremely small fractions — and if one wants, it would not be very difficult to modify the protocol to allow for even smaller subfractions. Does this look vaguely sensible?

Thanks for your insights, everyone!

I think it is already implemented, actually. And in actual use, if Wikipedia is to be believed. Also, not every node needs to contain a record of every transaction, this can be distributed — you just pool nodes until you find one which has the signed record of the previous passages of the bitcoin whose transaction you are examining now.

edited 13th May '11 9:22:26 AM by Carciofus

But they seem to know where they are going, the ones who walk away from Omelas.

^^ Nope, all it takes to forge transactions is computing power.

Anyway, this system is not only horribly broken, it's too impractical to even implement in the first place.

Blind Final Fantasy 6 Let's Play

An interesting problem somebody pointed out on IRC is that since you can't put more coins in circulation, particularly, money that is lost/abandoned or hoarded can't be replaced, leading to general deflation.

And yes, it's already in use.

Oh, apparently the deflation thing is planned for, by allowing indefinite very very small divisions of coins. Eh.

edited 13th May '11 10:17:05 AM by Tzetze

[1] This facsimile operated in part by synAC.

Dividing the bitcoins just creates more problems. How much is something worth (a share, an actin figure, health insurance)? Do we have to keep repricing things as more goods are added to the economy? That's going to be so confusing, no one will know what anything is worth. I had 100 bitdollars of stock last week, now it's worth .75 bit cents, but it gained vslue? What?

"We learn from history that we do not learn from history."

Inflation and deflation aren't unique to this currency, and I doubt that it would be that fast.

Also, that isn't how it works - it would be more like, yesterday you bought your stock for $b1, today it's selling for $b.75, but its value is the same. Any change in the actual value of the stock would depend on the usual external factors, like how well the company's doing.

edited 13th May '11 11:02:08 AM by Tzetze

[1] This facsimile operated in part by synAC.

Right, but unless you can track the value of the currency exactly (and how would you?), you would have no way to know that. It's too confusing. I used a drop of 25% to illustrate the point, but smaller change in value would be no less a problem. For one thing, it will make financial planning almost impossible.

In a real currency, a country prints more money as the economy expands. It isn't perfect, but investors know that the central bank is pursuing policies designed to promote stability. That builds confidence, and encourages growth. Anyway, why limit the amount of currency in the system? Is it a technical issue?

edited 13th May '11 1:27:28 PM by DeMarquis

"We learn from history that we do not learn from history."

I don't understand your concern. You can't accurately gauge the value of a regular currency except by comparison with another currency, which obviously depends on others, etc. The deflation rate should be more or less constant, and the amount of bitcoins follows a simple geometric series, so approximation for future planning should be easy.

edited 13th May '11 1:30:24 PM by Tzetze

[1] This facsimile operated in part by synAC.

De Marquis: The argument is quite simple, it is that artificial inflation is bad.
In a normal coin there will be forgotten coins, so there is a need to replace those. There is also the silly idea of infinite growth.
Since nothing can be lost by definition(read: make a alogrythm that allows coin lost for long enough to be regenerated), then you have beat the first problem.
The second problem is beaten by the purpose of bitcoin: A online currency to act as something to replace paypal and lots of other instances. Something like wiipoints, or other stuff, except it is meant to be a currency.

A guy called dvorak is tired. Tired of humanity not wanting to change to improve itself. Quite the sad tale.

What?

I mean, for example, somebody mining a few bitcoins, and then deciding to stop using Bitcoin without bothering to buy stuff with them. As I understand the system, these coins can't be reclaimed.

[1] This facsimile operated in part by synAC.

There may be technical details that I don't follow, so please be patient with me and explain if I have missed something simple, however I am fairly confident regarding my take on the economic aspect of this. In a real world economy, the raw amount of goods and services changes over time (generally, unless something is wrong, it grows. There is no ultimate limit to this growth, although the rate of growth is limited in various ways). As the amount of goods and services grows, and are exchanged in the market, their value is determined by the familiar formula of demand and supply. But this assumes a stable currency. If the value of the currency is fluctuating in an unpredictable way, then no one will know exactly how much any one good or service is worth. If the amount of goods and services is expanding, while the currency is fixed, then obviously individual goods and services are worth fewer units of currency than before (because the same amount of currency is divided by the number of goods and services offered that day). How many goods and services are going to be offered on any one day in the market is inherently unknowable, let alone how many may be offered tomorrow, next week, next year. Thus, the price of any good or service at that time is also unknowable. That is not a sustainable state of affairs. The amount of currency in circulation must track changes in the economy. It doesn't have to track it exactly, just close enough so that prices can be estimated ahead of time, but it must track. The only way to do that is by a central bank expanding or contracting the money supply, based on measures of economic change.

How would bitcoin accomodate that?

"We learn from history that we do not learn from history."

It doesn't; instead, the amount of currency is completely predictable in advance.

Da Rules excuse all the inaccuracy in the world. Listen to them, not me.

Tzetze: That is correct.
However lets say your computer crashes, and you do not figure out a way to recover your wallet.
Then those coins will be "lost", and must at some point be "renerated".
The "banks" trick is to create large enough nodes, and enough backup nodes to make sure that some ludricrus must happen for a bank to obtain damage.

A guy called dvorak is tired. Tired of humanity not wanting to change to improve itself. Quite the sad tale.

Yes, but the amount of currency in circulation isn't, and if I understood De Marquis' argument, that might be a problem.

In the current economies, there is an external entity which strives to regulate the amount of circulating currency; with bitcoins, unless I am misreading something, such an entity is inexistent by design, and this might cause some trouble (though I got a bit lost at this point... ).

Did I understand your point correctly, De Marquis?

Again, thanks, everyone!

edited 13th May '11 2:44:04 PM by Carciofus

But they seem to know where they are going, the ones who walk away from Omelas.

Well, I think that the idea is that the deflation is roughly predictable.

@del diablo: Not everything is in a bank. Some loss is inevitable.

[1] This facsimile operated in part by synAC.

No, I am assuming that the amount of currency in circulation is completely predictable (although that is another set of problems if it isn't)- instead it is the amount of goods and services available for exchange that isn't predictable. If the amount of currency is fixed, and the amount of goods and services isn't, then prices are unpredictable.

If bitcoin the program cant address this problem, then it is a reason to beleive that a bitcoin-based economy wont work.

edited 13th May '11 2:57:45 PM by DeMarquis

"We learn from history that we do not learn from history."

I doubt this will replace paypal.

The system is rather confusing by comparison. Paypal I can tell to use money in my bank account which I can also use at my grocery store or other meat space locations. The source of value for pay pal is well real world money.

Who watches the watchmen?

^ Not to mention inherently broken.

Blind Final Fantasy 6 Let's Play

^^^ Ah, I get it now. Thanks!

edited 13th May '11 3:15:11 PM by Carciofus

But they seem to know where they are going, the ones who walk away from Omelas.

Tuefel Hunden IV: That would not actually change would it?
Basically the transactions would go trough bitcoin, and then exchanged into normal money, and then stashed on your bank account.
Now, the advantages is that you do no longer have paypal doing questionable things, but instead you have a mechanism that works only the way it is written to. That means the initial room for abuse by the 3rd party is removed.
Any fraud is not removed, but the frauds reliance on a corrupted questionable entity is.
Another advantage is that nothing can actually block it, which means that you can not have a 3rd party deny donations to something, or deny transactions.

Tzetze: Indeed.

A guy called dvorak is tired. Tired of humanity not wanting to change to improve itself. Quite the sad tale.

@del: If that is the way it is meant to work- as an extension of the regular economy, or just another avenue of exchange, then of course there are no objections to that (other than technical ones of course). But in that case the amount of currency isn't fixed, it's equal to the currency in the real economy.

"We learn from history that we do not learn from history."