The Big Book of Bitcoin - An introduction

http://alvarofeito.com/articles/the-big-book-of-bitcoin/#.UUxY7MrTvGw.hackernews

by alphydan • 13 years ago

118 52 13 years ago

jstalin3• 13 years ago

Does anyone know of an explanation of the bitcoin protocol in plain English? I'm a non-math guy who's trying to write a legal treatise on the use of bitcoin, and I'd like to give some background on how it works to my readers. Can anyone help?

adventureloop• 13 years ago

The Security Now episode on bitcoin was quite good. Steve Gibson also provides transcriptions of all of this episodes.

http://twit.tv/sn287

dmiladinov• 13 years ago

You can find the transcripts on his site here: http://www.grc.com/sn/past/2011.htm , scroll down to find episode #287.

Direct links to them for your convenience:

Html transcript here: http://www.grc.com/sn/sn-287.htm

Text transcript here: http://www.grc.com/sn/sn-287.txt

Pdf transcript here: http://www.grc.com/sn/sn-287.pdf [pdf]

eof2• 13 years ago

Have you tried just the original white paper? You can understand without understanding the underlying algos. bitcoin.org/bitcoin.pdf

jstalin3• 13 years ago

I have, but it doesn't seem to discuss how mining works, for instance.

drcross• 13 years ago

There's a small bit of irony when a legal student is asking for an explanation of maths in plain language. Sorry if I sound a little jaded.

jstalin3• 13 years ago

Thanks. I'm not a legal student, I'm an attorney doing some research on the issue. I was just looking for some help understanding the more difficult math concepts. Sorry that I don't live up to your standards.

erikpukinskis• 13 years ago

I wrote a explanation in lay terms on my blog a while ago:

http://snowedin.net/blog/2011/04/05/bitcoin/

tocomment2• 13 years ago

I just got to wondering, how would charging for a monthly service work in bitcoin? A user can't just give you an account number and say bill me $X every month, right?

Any thoughts on how to design such a system?

Nursie2• 13 years ago

The user would have to set up a cron-job effectively. All payments have to be initiated by the holder of the wallet.

tocomment2• 13 years ago

I guess a future bitcoin client could build in that feature (or an online wallet).

Anyone can build a bitcoin wallet right?

hcal• 13 years ago

The simplest solution is to send a monthly invoice like a mailed utility bill.

It might be neat to create or extend a bitcoin client that accepts invoices/requests that you can approve like many bank's bill pay services, but without the middle man. You would need to figure out how to prevent getting spammed with requests.

It probably isn't worth the effort though, because I'd bet that one day someone will just make create a credit card based on bitcoin just as they have for most other currencies (I don't think one exists yet).

waterlesscloud4• 13 years ago

I suspect in the long run most of the bitcoin economy, if there continues to be such a thing, will work through payment processing services.

These will resemble the banks of today, in that you'll have an account with the service and they'll manage moving your money around for you. Some of this may end up just decreasing one account and increasing another within the same provider.

A lot of people assume these payment services will be just like banks, but that's not necessarily the case. There's certainly room for innovation, and so far there's nothing whatsoever that would require them to be subject to any particular nation's regulations. We'll see how it shakes out.

gwern• 13 years ago

Plenty:

A wallet service which you've entrusted your coins to can obviously do recurring payments (bonus: can't hurt you any worse than your total deposit).

Your local wallet software could do this (in a more user-friendly fashion than programming a crontab to invoke bitcoind).

A credit card would work, regardless of whether you settle your account with the credit card company in bitcoin or dollars.

The Bitcoin protocol supports future-dated transactions, but which can be canceled by a user at any point before the future date; so for a 'subscription', a user sends a few transactions worth $X future-dated to each month for the next, say, 5 months. The service holds onto them, and tries to commit them when they mature; if the transaction works, the user gets access for the next month. (See https://bitcointalk.org/index.php?topic=22772.msg287925#msg2... https://en.bitcoin.it/wiki/Contracts https://en.bitcoin.it/wiki/Script )

melvinmt• 13 years ago

Technical details aside, I don't want to be tied into paying for a service in a currency that fluctuates 30-50% a month. I think that's by far the biggest problem bitcoin currently has.

mhartl• 13 years ago

The price will eventually stabilize (possibly at 0).

willholloway• 13 years ago

This is a great intro to bitcoin. It made me feel more optimistic about the prospects of the currency.

It highlights many of the risks and benefits but misses out on what I think is the Achilles' heel of bitcoin, the ability for sovereigns to shut down the exchanges.

Without the ability to convert bitcoin to fiat easily, the currency loses its usefulness as a proxy for fiat currency. Does anyone have a convincing argument for how the exchanges are not vulnerable?

alphydan7• 13 years ago

Good point. I agree that major exchanges are vulnerable to regulation and shut down. I think localbitcoins.com (cash in hand or private transactions for bitcoins all over the world) is probably part of the answer (but not a very liquid or effective answer yet).

baddox• 13 years ago

Aren't the exchanges only necessary initially, for some definition of "initially"? Surely the goal is that, eventually, enough people are mining (or even receiving bitcoins as payment for labor) and trading among themselves for goods/services without any other currency in the picture.

aneth42• 13 years ago

There will always be other currencies, and currencies that are not exchangeable are less desirable and therefore less valuable.

Do you care if you are paid in Chinese Yuan or USD? The currencies are interchangeable, but Yuan is very hard to convert it USD and you'll lose a lot when you do.

Regardless of how big bitcoin gets, everything will not be transacted in bitcoin. People try to accumulate capital to buy big things, like cars and houses. If you can't buy a beach house in Costa Rica - and any beach house, not just from a few sellers - then the currency is less valuable and people will prefer fiat currencies.

Bitcoin must be easily exchangeable to be widely adopted.

meta-coder• 13 years ago

The situation is like the chicken-and-egg dilemma.

Definition 1: 'Good producer' is a producer that accepts bitcoins.

Definition 2: If all the good producers together produce all that you need, then the number of producers is 'enough'.

Definition 3: 'Ideal state' is when enough good producers exist.

Theorem 1: A producer will accept bitcoins if either of the following is true: i. Ideal state has been attained. ii. There exists exchanges that trade you physical currency against bitcoins.

Observation: Once we are in the ideal state, we no longer need to have bitcoins converted to physical currency. So we don't need the exchanges to exist forever. We need exchanges only till enough producers have started accepting bitcoins.

aneth42• 13 years ago

Except the only ideal state is when you can buy anything in the world, not just "enough."

The great thing about good currencies is they can be exchanged for almost any currency and therefor can be used to purchase almost any good or service that is for sale.

lukifer• 13 years ago

Even if BitCoin can't be exchanged for some fiat currencies, there is always the prospect of exchange through some middle step: either less restrictive foreign currencies, or commodities such as gold.

At this point, a full-scale governmental assault on BitCoin could slow it down or scare some people away, but it's highly doubtful that the growth could be stopped altogether. The bigger danger is that they'll embrace it wholesale and start taxing BTC exorbitantly instead. :P

RoboTeddy• 13 years ago

Decentralized peer to peer currency exchanges might be possible:

http://www.youtube.com/watch?v=mD4L7xDNCmA&t=24m57s

https://en.bitcoin.it/wiki/Ripple_currency_exchange

disclosure• 13 years ago

  < The bitcon economy is growing fast.
  > The bitcoin economy is growing fast.

xhrpost2• 13 years ago

Is the part about it costing $25,000 Million to "trick the network" true any more, given the advent of ASICs into the mining arena? User 67117 on BTC Guild is currently processing 6,348.98 GH/s, or roughly 10% of the entire mining network. While not cheap, it appears it could be relatively affordable to hit the 50% mark.

alphydan7• 13 years ago

As of today, you can't buy the ASICs because they don't exist, so I guess it's true (plus minus a lot of millions as it is a rough estimate). But it will be a lot cheaper very soon for a brief period of time before miners up the arms race [-- see reply below for clarification --]

xhrpost2• 13 years ago

So how is this one user mining 10% of the network? http://mineforeman.com/2013/02/15/67117-identity-reviled-its...

eric_bullington• 13 years ago

This is incorrect. Avalon has shipped a number of Asic units over the past 2-3 weeks, as confirmed by several trusted members of the Bitcoin community, including by one of the core developers of the Bitcon client.

DavidSJ3• 13 years ago

The difficulty auto-adjusts to keep supply constant, so market forces will drive the cost of mining a bitcoin to just below the value of a bitcoin. Hence, ASICs should have no major long-term effect on the difficulty of taking over the network.

Arguably they'll even make it a bit harder since you'd need specialized hardware, and couldn't just buy up a bunch of GPU EC2 instances on a whim and take over the bitcoin network.

mikemoka• 13 years ago

"Bitcoin is obviously not the solution to these issues, nor will it be a key enabler to crime. It is just a currency with some interesting features on top: peer-to-peer, security, public transactions and potential anonymity."

Not a key enabler, but I think criminals would definitely appreciate a hardly traceable and potentially anonymous currency, don't you think?

It's not an opinion unfortunately, there is already evidence floating around that they are using it or that they are very interested about it.

Because of this I don't think bitcoin should replace a national currency anytime soon, can you convince me otherwise?

waterlesscloud4• 13 years ago

Not doubting you at all, but can you link to the evidence that criminals are using it? Other than Silk Road, which I'm already aware of.

Curious to read about the evidence, is all.

alphydan7• 13 years ago

I can't. I think criminals will find their way with Bitcoin or without it. It's easy to fall for the easy argument: "the standard banking/monetary system is even worse, so bitcoin is ok". As a small example HSBC was considered too big to jail (they laundered last year about twice the size of the Bitcoin Economy, helping criminals, drug lords, etc), and only got a slap on the hand (a $1.8bn fine). The powerful can launder their money, do tax evasion, use tax havens ... now it's available to all technicaly skilled ones (good or bad?). Drugs sold on silk road were evaluated (http://arxiv.org/abs/1207.7139) last year to about $14m/year ... a good 20% - 30% of the bitcoin Economy, so yes it's looking pretty tainted so far. I would however highlight one innovative point: If you slip (leave any trace, don't use TOR, use a physical address, leave your IP), the community can track you down! And I think it will happen. Because ledgers are public, you can make algorithmic criminal enforcement :)(for those criminals or corrupt politicians who are not careful enough)

gregpilling• 13 years ago

Well said.

I also think criminals will avoid it like the plague. Bitcoin could conceivably tell law enforcement everywhere you received money from and everywhere you spent it. I realize it is one long number transacting with another long number, but law enforcement have computers too, and they have time on their side. Using bitcoins could be like leaving DNA on the scene of the crime - probably not a good idea if you want to get away with whatever you are doing.

arpp2• 13 years ago

Looks like you are describing conventional cash! ;) Any kind of currency allows criminal actions...

check for example this: http://www.nbcnews.com/business/report-hsbc-allowed-money-la...

and this: http://www.guardian.co.uk/world/2009/aug/17/cocaine-dollar-b...

DavidSJ3• 13 years ago

A few minor issues: a b is a bit, a B is a byte.

A satoshi (not satochi) is 0.00000001 BTC, not 0.000000001 BTC.

Not sure where the $6,000/BTC comes from for $80b in annual transactions per 10m BTC, but consider velocity of money. A BTC can be spent multiple times in one year. Also consider that monetary base (raw currency) is not the same as a credit account, but you can spend either.

So in practice, you might only need 0.1 BTC per 1 BTC in annual transactions.

alphydan7• 13 years ago

Good points about velocity and monetary base. "satochi" spelling and decimals corrected. Thanks. The $6000 is just an order of magnitude >>>(80/12)*1000. Too many unknowns for anything beyond guesstimates: What percentage of the currency is hoarded by then (1/2? 1/3? 3/4?). How many bitcoins are lost forever? As you point out velocity, or even limits on transaction speed from block-size ...

DavidSJ3• 13 years ago

Even for a wild guess I think you're off by at least an order of magnitude if you don't take into account velocity (typical dollar is spent four times per year; edit: and bitcoin, as a digital currency, is likely to have higher velocity) and the different types of money (monetary base is maybe one fifth of total money supply).

Note also that your math involves 12m BTC but your page says 10m.

erichocean• 13 years ago

> A satoshi (not satochi) is 0.00000001 BTC, not 0.000000001 BTC.

I have no idea, visually, what the difference is between those two numbers, and I so suspect no one else reading does either, without manually counting the zeros one-by-one.[0]

Here's an idea: we sometimes use commas to the left of the decimal point to make the numbers easier to read, perhaps using apostrophes to the right would also make things easier to read? E.g.:

A satoshi (not satochi) is 0.000'000'01 BTC, not 0.000'000'001 BTC.

I can easily tell the difference now. (The idea behind using apostrophes and not commas is that you won't inadvertently confuse the right-hand side of the decimal point with the left.)

Anyway, carry on. :)

[0] There's also scientific notation, but that only works in cases like this with lots of zeros between the decimal point and the number in question. With a number like Pi, scientific notation is useless.

tmflannery• 13 years ago

The article talks about crowd processing eliminating falsified balances, but it doesn't go into some exchanges getting hacked. Hasn't that been a security concern? Haven't people lost money that way? I know my credit card numbers can get stolen, is that the right comparison? Do exchanges just make you whole?

RustyRussell• 13 years ago

"The bitcon economy is growing fast."

Perhaps it is, but don't think it's what you meant :)

alphydan7• 13 years ago

thanks for the typo notice. I really hope that's not what it becomes ... but who knows? :)

The Big Book of Bitcoin - An introduction

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