Bitcoin - A Primer [pdf]

http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf

by debugunit • 13 years ago

55 82 13 years ago

jdmitch• 13 years ago

What, in the end, is this new currency? It is a list of authorized transactions, beginning with the creation of the unit by a miner, and ending with the current owner.

Eloquent summary from a skeptic :)

schoen• 13 years ago

The description of proof of work is a little bit confused: the author says "The problem is difficult to solve, but the solution is easy to verify, as it is difficult to factorize a very large number but easy to verify that a proposed factorization is correct". If we read "as" as meaning "because" rather than "akin to the way that", this is wrong: this problem is based on hashes, not factorization.

jnbiche• 13 years ago

"...it is unlikely that [Bitcoin] will remain free of government intervention, if only because the governance of the bitcoin code and network is opaque and vulnerable."

And the traditional banking system is not opaque and vulnerable? Let us recall that -- despite its vaunted regulatory system -- the banking system nearly destroyed the global economy back in 2007, exactly because it was (and is) opaque and vulnerable.

Sometimes, I wonder if people stop and think about what they're writing.

res0nat0r6• 13 years ago

I'll keep my life savings at Chase bank any day of the week over a Bitcoin wallet thank you very much.

If my credit card is stolen or even used in a strange manner I get a phonecall and a hold put on my account. How many people have recovered money from their stolen Bitcoin wallets?

atom-morgan2• 13 years ago

We're in the early adoption phase so concerns like yours are understandable. However, give it some time and the infrastructure and services will be built to make Bitcoin a true competitor to Chase.

Just imagine back in the early days of the Internet when someone said, “I’ll shop at the brick and mortar store down the street any day of the week over an online store thank you very much.” It was a legitimate concern back then but we moved past it to the point that it sounds ridiculous today. Just wait :)

FellowTraveler19• 13 years ago

How many Cypriots have recovered money from their stolen bank accounts? Quis custodiet ipsos custodes?

csomar• 13 years ago

I don't think people have a problem with the banks. They have a problem with the currency. If the currency value drops to 0 (which is a possible thing), it doesn't matter if your bank was secure or not.

lectrick2• 13 years ago

Your life savings is losing 4% of value a year (on average) due to inflation.

In some countries, this is as high as 20%.

Are your savings earning more than 4% a year, wherever they're invested in? If not, it's losing money, and if it is, subtract 4% from it and that's your "real" interest.

What do you think is going to happen once a bunch of countries with really crappy currency systems get wind of Bitcoin in any meaningful way? Do you think the value might rise? :)

swswsw• 13 years ago

Hi, perhaps there is some misunderstanding of how bitcoin works.

People only need to know your credit card number, name, and expiration date to use your credit card to purchase something online. Since you give those information to many merchants, it is very easy for those info to leak out.

For someone to use your bitcoin to purchase something, they have to have your private key. When you make a purchase, you do not give out your private key to anyone. bitcoin and credit card are two very different things.

Credit card was not designed for internet, while bitcoin is.

Cowen2• 13 years ago

Ostensibly the goal of all government intervention in financial systems is to make them more transparent and secure.

Whether or not they accomplish those goals is obviously a matter of serious debate, but Velde's reasoning there is consistent with all other arguments for government intervention.

There's no point in trying to spin that statement into him giving the traditional banking system a pass.

camus2• 13 years ago

the goal of all government intervention in financial systems is to make them more transparent and secure.

with a whole lot of loopholes .

svantana• 13 years ago

I don't see any contradiction here? Both systems are opaque and vulnerable, and both may need government regulation. Some people would have it that the repeal of Glass-Steagall is what indirectly lead to the '07 crisis.

ArbitraryLimits• 13 years ago

Seriously. It bugs me when people take the '07 meltdown as proof that the banking system need to be left alone by the government. If the government's regulatory authority hadn't been curtailed, it wouldn't have had to rescue the banking system at all.

FellowTraveler19• 13 years ago

The banking and financial industry is the most heavily regulated (and thus corrupt) industry that we have, surpassing even the health industry. Basically it's just a cartel.

Saying that Bitcoin "may need government regulation" is like saying that Bittorrent "may need government regulation." The question is, how on earth can you regulate such things, when they are designed to be resistant to such threats?

Let's not forget also, that policy consists of political decisions regarding the use and threat of force. Therefore we can never actually regulate Bitcoin. At best, we can only regulate how we plan to use violence against people who use Bitcoin.

javert• 13 years ago

By "opaque and vulnerable," I thought he meant "we can see who is using/operating/mining/developing bitcoin." (Which lets them pass laws to coerce those people.)

chatmasta2• 13 years ago

This is one of the better "non-technical" explanations I've seen. I especially like his summary of the costs of Bitcoin: unique wallet identifiers impede anonymity, and blockchain verification delays transactions by ten minutes.

Has anyone thought of making a service to eliminate the ten minute delay? You would operate as a sort of Bitcoin credit agency, temporarily lending funds to credible buyers. You could market this on the merchant side (receive money instantly) or the purchaser side (send money instantly). Take a transaction fee to cover the risk.

jff• 13 years ago

Hmm, yes perhaps after verifying a buyer's credibility, you could issue him a card with a number on it and a magnetic strip. He could then use this card to draw upon his purchasing credit. I'm not sure what to call this system, though...

chatmasta2• 13 years ago

I'm not sure of the reason for this sarcasm. A credit card exists for regular currency, but making one for Bitcoin specifically to eliminate the 10 minute delay represents an entirely different undertaking than lending cash to buyers that currently do not have the cash.

pdog• 13 years ago

In reality, it takes more than a few seconds to charge a credit card.

Behind the scenes, the process of settling a credit card transaction after committing to it can take days. This is known as clearing.

Accepting a credit card after a few seconds is more like accepting a Bitcoin transaction as soon as you see it on the network (a 0-confirmation transaction), which is what some merchants do.

geoffschmidt• 13 years ago

Not exactly. Credit card authorization happens instantaneously, even though it takes the money a while longer to actually move between accounts. And this is separare from the chargeback mechanism, which can claw the money back after it's actually moved.

A 0-confirmation bitcoin transaction is more like writing down someone's credit card number and charging it later when you have access to your credit card terminal, which was common (in the form of those carbon copy credit card impressioning machines, which are why credit cards have raised digits) in the days before ubiquitous mobile Internet.

mahyarm• 13 years ago

You can issue a bitcoin scrip that doesn't have verification delays, but doesn't have the no-trust & public auditability property of bitcoin. To mitigate the no trust problem, you can take the scrip from a voting pool of server-providers so one guy cant run away with your bitcoin with his online wallet.

This is what open transactions & ripple aim to address partly:

http://opentransactions.org/ https://ripple.com/

jstalin• 13 years ago

If someone else is paying you to hold on to your money then you don't own that money.

en4bz• 13 years ago

"But once created, the bitcoin has no value other than in exchange, contrary to a gold coin."

How is this true. Gold has no use to the average person. The only real use for gold is in semi-conductors. Other than that gold derives its worth from the fact that is very scarce, like bitcoins.

davidkellis• 13 years ago

Jewelry.

ogreyonder• 13 years ago

Does that not prove his point? There is no functional requirement for gold in jewelry now that so many cheap stainless alloys exist. Why not make jewelry out of plastic?

The answer is: we, as a species, value gold far beyond its usefulness as a metal.

Do you remember the article posted earlier this year about how DeBeers literally invented the market for diamonds out of thin air? Before their campaign, diamonds were relatively cheap and not considered to be that special.

Like the dollar, or Euro, or gold, or even Bitcoin, the value of something is set by those who desire it.

pera2• 13 years ago

Well, some people appreciates jewelry because of the rare materials, some other people appreciates "difficult" numbers (like big prime numbers, a more accurate pi, or in this case hashes that starts with many 0's) :)

ChikkaChiChi3• 13 years ago

Few things in technology polarize my feelings like Bitcoin. I get it, I respect what some people think it stands for, but I can't take it seriously. Between the rampant speculation, wild fluctuations and the cult-like attitude of its community, I have a hard time seeing it as anything legitimate.

Not to mention that it's success assures that there is a weird shadowy cabal of people who end up insanely rich because they created it. Doesn't seem like currency should work that way...

FellowTraveler19• 13 years ago

"Not to mention that it's success assures that there is a weird shadowy cabal of people who end up insanely rich because they created it. Doesn't seem like currency should work that way..."

===> You are referring to the U.S. Dollar?

ChikkaChiChi3• 13 years ago

No, because last time I checked the US Dollar wasn't printed out of the back of some guy's house who came up with the idea.

aric7• 13 years ago

Bitcoin is a fiduciary currency
Fiduciary currencies—in contrast with commodity-based currencies (such as gold coins or bank notes redeemable in gold)—have no intrinsic value, and derive their value in exchange either from government fiat or from the belief that they may be accepted by someone else. They are inherently fragile; government orders can be ignored or doubted, and a currency that has value only because of the belief that it will have value may have no value at all (for instance, if I believe that no one will accept it, I will not accept it either).

--------------------------------

This article displays a lack of understanding of bitcoin, gold, and other market-driven assets. Quantifying bitcoin in terms of computing power and electricity is a clueless perspective. Conversely, the author doesn't attempt to quantify gold by the same standards of its minimum measurable cost to produce and mere industrial scope. Gold, in his mind, I suspect, is long established and therefore above the same logic.

Bitcoin and gold are each greater than the sum of their cost to produce, obviously. Demand drives this. Stability drives this. Intrinsic value is contained in bitcoin and gold for varying reasons. If the author doesn't appreciate (or understand) the intrinsic worth and applications of a peer-to-peer, cryptographically-secure, fungible transactional system that's becoming increasingly hard to defeat by any central authority and increasingly used in the real world -- then so be it. Many people won't value that. Hell, some people don't value the internet. Not valuing something doesn't mean it's not valued. To me, gold is a pretty element and good for electronics. I don't seek it out for fashion. Yet, I can fully appreciate why others do and why it's a stable way to store value.

Bitcoin has intrinsic value. It is not a "fiduciary currency." The "currency" of it is far removed from any guarantee of value and far separate from its functionality.

FellowTraveler19• 13 years ago

Regarding Bitcoins and gold, it’s important to keep in mind that neither has “intrinsic” value.

Rather, both are valued by men for their unique properties.

Gold is: Divisible. Fungible. Value dense. (Scarce.) Recognizable. Durable. Zero counter-party risk. Stable in supply, yet minable. Liquid. International. Non-manipulatable. (Non-centralized.)

By comparison: Diamonds, while valuable, are NOT divisible, nor are they fungible. Water, while valuable and divisible, is not value-dense enough to compete with gold as a form of money, on the free market. Food, while valuable, is not durable. Dollars, while liquid, do not represent zero-counter-party-risk (rather, they are debt-based.) Dollars, while recognizable, are not stable in supply (inflation is a worry). Dollars are also not minable. (Production is available only to a monopoly cartel, versus gold, which anyone can produce.) Food, which anyone can produce, is not liquid, especially in comparison to dollars or gold. Dollars, while you can hold them in your pocket, a board of bankers still has the power to reach into your pocket and manipulate its value. (This is not the case with gold.) Soon it becomes very clear that gold was never “declared” to be a form of money by any “authorities” but rather, became money due to natural market forces.

If gold became money strictly due to natural market forces (as a result of its unique properties) then clearly the only reason it has been supplanted by dollars is due to artificial restraints imposed on the market by government force. (Such as legal tender “laws”, tax “laws”, money laundering “laws”, etc.)

Such forces must be constantly active, otherwise, natural market forces would immediately resolve back to gold again as they have for thousands of years.

Now let’s consider Bitcoin’s unique properties:

Divisible. Fungible. Value dense. Recognizable. Durable. Zero counter-party risk. Stable in supply, yet minable. Liquid. International. Non-manipulatable. (Non-centralized.)

AS WELL AS: Non-confiscatable. Accounts cannot be frozen. Anonymity is possible. Electronically transferrable.

As you can see, Bitcoin’s unique properties are similar to those of gold, although it adds new properties due to its ethereal nature.

Those new properties (non-confiscatable, non-freezable, pseudonymous, transferrable electronically) all serve to route-around the artificial forces that are currently being used to supplant gold with the dollar. After all, the various immoral, legal-tender legislation in place today uses the force of a gun to impose fiat money onto an economy that would otherwise resolve to gold by natural forces. That artificial force depends on the government’s collusion with banks and their collective monopoly on the ability to issue, store, freeze, confiscate, track, and transfer dollars.

aric7• 13 years ago

FellowTraveler, I love your work throughout the years, btw.

Yeah, as I noted, bitcoin is no less rational or irrational than gold for what it is (or rather for what it's becoming). The whole "intrinsic value" debate is a moot, endless point because both sides are equally arguable. Anything clearly valued by others holds intrinsic value, I could argue. I could also conversely say that its value is not derived intrinsically. However, in an argument where gold is given the status of having intrinsic value, I'll gladly argue that so too should bitcoin be given that status.

simonebrunozzi3• 13 years ago

This is one of the most brilliant few lines that I've seen on bitcoin, and economy in general, in a while.

aric7• 13 years ago

Also, I have no idea why I'm being downvoted. We're both essentially stating the same things.

maxerickson• 13 years ago

There is quite some chance that in the future, the total value of the worlds gold will be less than it cost to dig it up (especially if you are willing to calculate the cost in terms of labor and material inputs).

aric7• 13 years ago

That's likely. Gold treads that line occasionally in certain parts of the world; and it depends on whether future technologies disrupt the high demand for it.

I mean 'greater' in the philosophical sense. Attributing worth by components alone is narrow. Animals, we are: greater than the sum of our parts. It's greatness not in terms of expense but in terms of people valuing the worth and utility of an idea and its embodiment. For instance, many people spent and spend money on bitcoin and mining, at a net loss, not out of a certainty of return. Rather, they love the idea. They want to support the cause.

impostervt• 13 years ago

If anyone is looking to learn more about Bitcoin, I wrote a short eBook about it.

http://www.bitcoinbeginner.com

If you'd like a copy, gratis, just send me an email - john@bitcoinbeginner.com

pera2• 13 years ago

At a minimum, one must wait ten minutes for the proposed transaction to be included in the block chain, and for large amounts it is customary to wait for six blocks, or one hour. These times are much slower than those to complete electronic retail transactions in most other currencies (e.g., a few seconds to charge a credit card either online or at a physical retail location)

the person who wrote this is a senior economist?

First of all, you don't must wait ten minutes or one hour, you wait iff you want confirmations from other peers saying that the transaction is actually included in the blockchain, more time you wait more confirmations you get. But in the practice you only do this when you can't trust the other party, and many times the other party is using an well-known online wallet that let you use a green address (https://en.bitcoin.it/wiki/Green_address). So, you can have almost instant transactions with Bitcoin.

Actually credit cards don't takes just "a few seconds to charge", that's what the final user thinks, but the reality is that it may take weeks to process and transfer the money to the seller bank account. And also the level of fraud with CC's is astounding; that's why we have to pay a lot of fees (I mean, CC's intrinsically needs insurance). Here is a interesting series of articles about CC: http://boss.blogs.nytimes.com/2013/03/25/what-you-need-to-kn...

By the way, with real cash the time for a transaction is equal to the time of one party giving one or more bills to the other party + the other party verifying if those bills aren't fake + (not always but usually) give the change. :)

Bitcoin - A Primer [pdf]

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