Bitcoin

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a new open source P2P e-cash system, originally developed by Satoshi Nakamoto

URL = http://en.wikipedia.org/wiki/Bitcoin

Download Bitcoin v0.1 at http://www.bitcoin.org ; Design paper at http://www.bitcoin.org/bitcoin.pdf

Clearing up Bitcoin misconceptions, Let's clear up some common Bitcoin misconceptions.


Definition

1. Bitcoin is a leader in distributed P2P Currency. Each participant can be part of a network as wide as they can reach, or as small as they choose to make it. The only drawback of Bitcoin is the necessity to use the Bitcoin currency. This is offset for many by the fact that, because the currency is 'in force' and widely used, a number of exchanges have popped up, allowing users to trade coins for other currencies. Bitcoin may be useful for a P2P Network as an immediate replacement for cash with low infrastructure requirements for implementation.


2. From the Wikipedia:

"Bitcoin is an open source peer-to-peer electronic cash system developed by Satoshi Nakamoto. The system is decentralized with no central server or trusted parties. Bitcoin relies on cryptographic principles to create unique, unreproducible, and divisible tokens of value. Users hold the cryptographic keys to their own money and transact directly with each other, with the help of the network to check for double-spending." (http://en.wikipedia.org/wiki/Bitcoin)


3. Springwise


"Bitcoin bills itself as “the first digital currency that is completely distributed.” In essence, that means that it’s managed collectively by a global network of users, so no bank or payment processor is required between buyers and sellers in any transaction. Users begin with Bitcoin by downloading its client program for Linux, Mac or Windows, thereby creating a digital wallet and associated Bitcoin address for themselves. Next, very small quantities of Bitcoins are available for free from the Bitcoin faucet, but to get larger ones, users can visit various currency exchanges and sites. They can also accept Bitcoins as payments for goods and services. Either way, once they have Bitcoins — abbreviated “BTC” — users can spend them at various participating online merchants for a wide variety of goods and services. It’s free for merchants to accept Bitcoins, and there are no chargebacks or fees. Currently, there is no charge for processing Bitcoin transactions, but eventually a small fee of about one bitcent will be charged every transaction to one of many competing Bitcoin “miners,” who create Bitcoins in a controlled way by running a dedicated program." (http://www.springwise.com/financial_services/bitcoin/)

Description

1. Satoshi writes:


"It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.

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.

A generation ago, multi-user time-sharing computer systems had a similar problem. Before strong encryption, users had to rely on password protection to secure their files, placing trust in the system administrator to keep their information private. Privacy could always be overridden by the admin based on his judgment call weighing the principle of privacy against other concerns, or at the behest of his superiors. Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically impossible for others to access, no matter for what reason, no matter how good the excuse, no matter what.

It’s time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

One of the fundamental building blocks for such a system is digital signatures. A digital coin contains the public key of its owner. To transfer it, the owner signs the coin together with the public key of the next owner. Anyone can check the signatures to verify the chain of ownership. It works well to secure ownership, but leaves one big problem unsolved: double-spending. Any owner could try to re-spend an already spent coin by signing it again to another owner. The usual solution is for a trusted company with a central database to check for double-spending, but that just gets back to the trust model. In its central position, the company can override the users, and the fees needed to support the company make micropayments impractical.

Bitcoin’s solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the first transaction to spend a coin. It takes advantage of the nature of information being easy to spread but hard to stifle. For details on how it works, see the design paper here at http://www.bitcoin.org/bitcoin.pdf.

The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double-spending."


2. Aran explains:

Bitcoin is an open source peer-to-peer (a.k.a "p2p") electronic cash system that's completely decentralised, with no central server, trusted authorities or middle men. The availability of bitcoins can't be manipulated by governments or financial institutions. Bitcoin already has a number of exchanges for converting to and from other currencies; BitcoinFX, New Liberty Standard, Bitcoin Exchange and Bitcoin Market.

Bitcoin may last for years and become a popular global currency, or it could be just a flash in the pan, but either way I think this is an important sign of the times to come. This is one of the first truly decentralised currencies and has paved the way for hundreds more to compete together in the new arena of Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in The Sovereign Individual.

In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running instance offers a small amount of processing and storage resource to the network so that it can deliver the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.

In the case of a p2p currency system, some of the services the network is designed to offer are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they offer by making the coin-creation process part of the network protocol itself instead of being handled by a central trusted authority. This creates a natural and incorruptible link between the supply of currency in the network and the demand for it.

Even aside from the ability to exchange bitcoins for other currencies, it still makes a very useful tool for independent organisations and groups because it allows them to trade and settle accounts amongst themselves independently and privately. It effectively gives them a "bank" that has a trustworthy system of accounts that can't be tampered with and requires no corruptible central authority to operate. See the Bitcoin Whitepaper for more detail about how it works.

To try Bitcoin, download the Bitcoin software, then once it's running, click 'Generate Coins' which will pay you bitcoins in exchange for your computer working to validate bitcoin transactions. Check the exchange rate to calculate how many bitcoins need to be sent. The payer can purchase additional bitcoins if needed. The payer's previously generated bitcoins allow for a lower out of pocket payment. The payer then sends the bitcoins to the receiver using the Bitcoin software. The receiver can then sell their bitcoins for dollars. The receiver's previously generated bitcoins allow a higher dollar payout." (source?)

Details

"The total number of bitcoins is programmed to approach 21 million over time. The money supply is programmed to grow as a geometric series every 210,000 blocks (roughly every 4 years); by 2013 half of the total supply will have been generated, and by 2017, 3/4 will have been generated. To ensure sufficient granularity of the money supply, bitcoins are divisible down to eight decimal places (a total of 2.1 × 10^15 or 2.1 quadrillion units)." (http://en.wikipedia.org/wiki/Bitcoin#Monetary_differences)

Note: the eight decimal places are only an artifact of the datatype used in current implementations. Should the need ever arise, this can be changed in the code. [1]


Context

Rainey Reitman (EFF):

"To understand digital currency, one must first note that money in the digital age has moved from a largely anonymous system to one increasingly laden with tracking, control and regulatory overhead. Our cold hard cash is now shepherded through a series of regulated financial institutions like banks, credit unions and lenders. Bitcoin, created in 2009 by Satoshi Nakamoto, is a peer-to-peer digital currency system that endeavors to re-establish both privacy and autonomy by avoiding the banking and government middlemen. The goal is to allow individuals and merchants to generate and exchange modern money directly. Once the Bitcoin software has been downloaded, a user can store Bitcoins and exchange them directly with other users or merchants — without the currency being verified by a third party such as a bank or government. It uses a unique system to prevent multiple-spending of each coin, which makes it an interesting development in the movement toward digital cash systems.

The model proposed by Bitcoin is in many ways a response to some of the privacy and autonomy concerns surrounding our current financial system. Current money systems now increasingly come with monitoring of financial transactions and blocking of financial anonymity. A peer-to-peer currency could theoretically offer an alternative to the bank practices that increasingly include sharing information on their customers who don't actively opt-out, and who may even then be able to share data with affiliates and joint marketers. Bitcoin is particularly interesting in the wake of recent events that demonstrated how financial institutions can make political decisions in whom they service, showcased by the decisions of PayPal, Visa, Mastercard and Bank of America to cut off services to Wikileaks. Bitcoin, if it were to live up to the dreams of its creators, might offer the kind of anonymity and freedom in the digital environment we associate with cash used in the offline world.

But Bitcoin's current implementation won't resolve all of the issues surrounding autonomy and privacy. Notably, the anonymity on Bitcoin is not entirely secure at this time, which makes its merits as a more private form of currency tenuous at best. There are also other weaknesses to the system, some significant, which should be understood before using Bitcoin. And as of this writing, Bitcoin can't be used to donate to Wikileaks. But even more important than these concerns is the fact that governments around the world may raise legal issues with any digital cash scheme — ranging from money laundering to tax evasion to a range of other regulatory concerns. Nonetheless, Bitcoin is an intriguing project and worth watching to see how it develops in the coming years." (https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant)

Interview

Excerpted from a more detailed interview:

"Klint Finley: Could you give us a brief overview of what Bitcoin is for the unfamiliar?

Gavin Andresen: Sure. Bitcoin is the first peer-to-peer currency - it is money created by people instead of by a central bank or government.


And how does it work?

Everybody trying to create bitcoins and everybody trading bitcoins is connected by a peer-to-peer network. And the code everybody is running makes sure nobody else is cheating - nobody else is creating more bitcoins than are allowed, nobody is trying to spend their bitcoins more than once, and that bitcoins are only being spent by their rightful owners.

The really novel idea is a mechanism for preventing bitcoins from being spent more than once WITHOUT relying on a central authority.

The other mostly new idea is limiting the supply of bitcoins without relying on a central authority.


How do you accomplish these things without a central authority? And how do Bitcoin clients and servers find each other?


Let me tackle the easy one first - how do Bitcoin clients find each other:

All p2p networks have "the bootstrapping problem" - without central servers, nodes (machines) on the network need to be able to find each other. Bitcoin solves it using three mechanisms:

1. By default, Bitcoin clients join an IRC chat channel and watch for the IP addresses and ports of other clients joining that channel. The name of that channel (and the name of the IRC chat server) is hardcoded into the Bitcoin software.

2. There is a list of "well known" Bitcoin nodes compiled into the software in case the IRC chat server is unreachable for some reason.

3. You can manually add (via configuration file or command-line option) IP addresses of other machines running Bitcoin to connect.


Once you're connected to the Bitcoin p2p network, other machines send you messages containing IP addresses (and ports) of other machines they know about, so after bootstrapping you find other Bitcoin nodes via the Bitcoin network itself.

There is a lot of discussion about alternative bootstrapping mechanisms, so I wouldn't be surprised if alternative Bitcoin implementations that use something else pop up in the next year or so.


I'm guessing you can also change the IRC server and channel manually as well?

No, actually, you can't - you'd have to recompile Bitcoin to do that." (http://www.readwriteweb.com/hack/2010/12/interview-bitcoin.php)



Aspects of Bitcoin

Bitcoin Business and Economics

Bitcoin Research

Via [2]

  • Jerry Brito (@JerryBrito), senior research fellow at the Mercatus Center at George Mason University. [3]
  • Russell Roberts (@EconTalker) of the Library of Economics and Liberty. He hosted an EconTalk episode on Bitcoin: [4]
  • economist Jon Matonis (@JonMatonis) who recently presented on using Bitcoins as a currency to monetize game play: [5]

Critics:

  • Timothy B. Lee (@BinaryBits) sees problems with Bitcoin (bubbles, vulnerable to cartel, etc.): [6]


Discussion

See: Bitcoin - Discussion


More Information

Explanatory paper at http://www.bitcoin.org/sites/default/files/bitcoin.pdf


  • Bitcoin for beginners
  1. http://mybitcoin.com ; website version, no download required, start making or receiving donations.

@the best available info for beginners is http://bitcoinme.com.


Critiques of Bitcoin

  1. http://www.pds.ewi.tudelft.nl/~victor/bitcoin.html


Video documentation

  1. TWIST Bitcoin episode, Full show: http://thisweekin.com/thisweekin-startups/bitcoin-discussion-with-gavin-andresen-and-amir-taaki-on-this-week-in-startups-140/
  2. Gavin explains the fundamentals of Bitcoin, http://www.youtube.com/watch?v=Ta73DofiT7o
  3. Who is Satoshi, the mysterious bitcoin founder? http://www.youtube.com/watch?v=RDRwgbWkxFw
  4. The million-dollar bitcoin question: Can the system be hacked? http://www.youtube.com/watch?v=G2837h-85O4
  5. Jason sets his software to generate bitcoins and Gavin explains why that's a bad idea, http://www.youtube.com/watch?v=jix4MG5V0-E

Other Digital Currencies

"While Bitcoin is relatively young, digital currencies have been around a long time. Digicash, released in 1994, is considered a pioneer of electronic cash using cryptography to maintain anonymity. The Ripple currency project relies on interpersonal relationships to allow communities to create their own money systems (which is similar to the Local Exchange Trading System). There is also the anonymous digital cash system eCache, which can only be accessed via the anonymous onion routing network Tor. There are also numerous other digital money projects that have been proposed over the years; Bitcoin is just the newest chapter in the ongoing effort to create wholly digital currency." (https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant)



  1. eCache: an anonymous bank operating over the Tor network.
  2. Pecunix: an (optionally?) anonymous digital gold currency.

Miscellaneous