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Traktion

Bitcoins Word Spreading?

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Hat tip to Alan B'stad for linking the Bitcoin site the other week.

Now it looks like word is spreading through the economics blogosphere: http://www.lewrockwell.com/orig6/luongo7.1.1.html

...

This is a warning to the hard money crowd that a return to commodity money will happen organically or not at all; an outgrowth of a loss of confidence in the dollar and the institutions that circumscribe our daily reality. Without any kind of fundamental shift in mass perspective, I see no future for a commodity exchange standard that bears any resemblance to the International Gold Standard.

People are more trusting of digits than physical gold.

To that end, I came across something the other day that piqued my curiosity. It was called Bitcoin. Compared to the systems mentioned previously, to call this idea a currency would do violence to the idea of a currency. It is, as of right now (vers. 0.3.2 beta), an exercise in what a digital currency could look like that is not dependent on third-party trust or centrally issued by a monopolistic agent of force.

Quoting from the FAQ Bitcoin is:

…a peer-to-peer network based anonymous digital currency. ''… there is no central authority to issue new money or to keep track of the transactions. Instead, those tasks are managed collectively by the nodes of the network.

Yes, but what is it? In deference to Dr. North again, the answer is simply, "Digits."

But, they are digits with a twist. New bitcoins are generated via lottery within its proof-of-work system where the records of previous time-stamped transactions are hashed into a chain, which is verified by all the members of the P2P system. There is planned inflation of a known and slowing rate up to a point. After that, deflation is built into its structure. It is currently in this early phase of development. The longer the chain the more secure the system is by nature of the algorithms at work. For details, see the white paper. They are currently divisible to 8 decimal places. Transactions can be completely anonymous.

...

I find all this very interesting. I'm not convinced that Bitcoins have the best formula increasing the distribution along with the size of the economy (ie. Bitcoin users), but the technology and the ideology both have compelling cases.

EDIT: Fixed formatting

Edited by Traktion

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I am not clever enough to understand the nuances.

Would this be complimentary to or competitive with Scepticus's Ripplepay thread? Could it be just one of many currencies offered within a Ripplepay framework?

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I read about this before. I don't really understand how a currency that is neither backed by something physical or by means of force will ever catch on. It is reliant purely on goodwill.

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I read about this before. I don't really understand how a currency that is neither backed by something physical or by means of force will ever catch on. It is reliant purely on goodwill.

With the "means of force" being the ability to enforce a taxation regime in most cases.

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I am not clever enough to understand the nuances.

Would this be complimentary to or competitive with Scepticus's Ripplepay thread? Could it be just one of many currencies offered within a Ripplepay framework?

Yup, pretty much. In it's current form, it's more akin to a virtual commodity than anything else. I'm not sure if that will help it be the best money, but it's a very interesting starting point.

The key point is that it's fully distributed. There is no central authority or clearing mechanism. Coins are minted by Bitcoin users, within the limits of the software framework. The network itself clears the transactions. It's all rather clever, really. Whether it will catch on is up for debate, but if people like it, they will use it and the Bitcoin economy will grow.

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I read about this before. I don't really understand how a currency that is neither backed by something physical or by means of force will ever catch on. It is reliant purely on goodwill.

With the "means of force" being the ability to enforce a taxation regime in most cases.

I think that may be what gives it its value - the desire for people to get away from centralisation and force. The value of the currency is in the very mechanism of its workings. Whether that is enough, I don't know, but it's a clever concept.

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I read about this before. I don't really understand how a currency that is neither backed by something physical or by means of force will ever catch on. It is reliant purely on goodwill.

It makes about as much sense to back a currency with the energy needed to compute it, as it does use a metal that has a small amount of intrinsic value. Admittedly, gold is traditionally accepted as valuable, but I don't see a fundamental difference here. It is true you cannot recover the energy, but then the only thing you could sensibly do with the recovered gold would be to mint new coins :-) </devils advocate>

It would be easily possible to give a virtual currency a value: offer to sell intangible goods that people want to buy anonymously for virtual coins. Then offer to sell virtual coins in exchange for cash. Also offer to sell things that people are not embarrassed to buy, so they have a legitimate reason for wanting the coins. You only require the sort of trust customarily placed in a porn-vendor, i.e. very little.

Anyone can give value to a piece of paper by writing down a few paragraphs and signing it. There is no fundamental reason why the text has to be on paper and the "signature" has to be physical and not cryptographic.

The fundamental flaw in the plan is that it is possible to counterfeit virtual coins given enough computational power and/or advances in mathematics. It would not matter if we were certain the likelihood is tiny, perhaps similarly unlikely as someone discovering a huge gold deposit that could be mined and refined for pennies. But we are not. It is certainly not that it is not possible to give a virtual currency some value even without own police force.

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It makes about as much sense to back a currency with the energy needed to compute it, as it does use a metal that has a small amount of intrinsic value. Admittedly, gold is traditionally accepted as valuable, but I don't see a fundamental difference here. It is true you cannot recover the energy, but then the only thing you could sensibly do with the recovered gold would be to mint new coins :-) </devils advocate>

It would be easily possible to give a virtual currency a value: offer to sell intangible goods that people want to buy anonymously for virtual coins. Then offer to sell virtual coins in exchange for cash. Also offer to sell things that people are not embarrassed to buy, so they have a legitimate reason for wanting the coins. You only require the sort of trust customarily placed in a porn-vendor, i.e. very little.

Anyone can give value to a piece of paper by writing down a few paragraphs and signing it. There is no fundamental reason why the text has to be on paper and the "signature" has to be physical and not cryptographic.

The fundamental flaw in the plan is that it is possible to counterfeit virtual coins given enough computational power and/or advances in mathematics. It would not matter if we were certain the likelihood is tiny, perhaps similarly unlikely as someone discovering a huge gold deposit that could be mined and refined for pennies. But we are not. It is certainly not that it is not possible to give a virtual currency some value even without own police force.

Actually, it seems impossible to do this, or at least sustain the illusion without expending vast amounts of wealth on the energy to power the computers doing it.

Reading through the docs and having asked some questions on the forum, the attackers would have to keep running with a majority of CPU power for as long as it took the transaction to stick (ie. the goods had been delivered). As any honest node (you can run one yourself) can detect that something is wrong, why would you take the risk on any large transaction? So while a majority of attack nodes can fool the network for a while, it would:

1. Only be possible to fake small transactions, which limits the scope of the damage which can be done.

2. The honest nodes will know that there is disagreement on the network and could flag warnings should there be close to a 50/50 split.

Like I said above, it's actually very clever in the way it works. If someone discovered a way to crack encryption, we would have more to worry about than rogue Bitcoins (such as the collapse of all online payments). As pointed out on their forum, it is probably more likely that someone figures out a way to extract gold from sea water or some such. Anything is possible, but it doesn't seem probable. I wouldn't suggest storing your life savings in Bitcoins for a good while though.

Edited by Traktion

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Actually, it seems impossible to do this, or at least sustain the illusion without expending vast amounts of wealth on the energy to power the computers doing it.

It is definitely not known to be impossible. A proof that it is would be a major mathematical breakthrough, because it would imply P<>NP. More to the point, there is a trivially cheap way of taking over the network. Anyone with a zombie botnet can do so. I doubt it would cost even £10000 starting from scratch.

Like I said above, it's actually very clever in the way it works. If someone discovered a way to crack encryption, we would have more to worry about than rogue Bitcoins (such as the collapse of all online payments). As pointed out on their forum, it is probably more likely that someone figures out a way to extract gold from sea water or some such. Anything is possible, but it doesn't seem probable. I wouldn't suggest storing your life savings in Bitcoins for a good while though.

Lots of protocols have been though to be clever and work, only for someone to later discover they did not actually. The encryption used in a protocol is rarely the weakest link, so it can often be broken without ending the world as we know it.

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I think that may be what gives it its value - the desire for people to get away from centralisation and force. The value of the currency is in the very mechanism of its workings. Whether that is enough, I don't know, but it's a clever concept.

Achieving that is one thing for virtual goods, another for physical ones. The acid test for such a system becoming general "money" will be along the lines of, can you buy a barrel of oil or a bushel of wheat with it?

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It is definitely not known to be impossible. A proof that it is would be a major mathematical breakthrough, because it would imply P<>NP. More to the point, there is a trivially cheap way of taking over the network. Anyone with a zombie botnet can do so. I doubt it would cost even £10000 starting from scratch.

Sure, but then what will you do? You're hardly going to spend £10,000 to fake a few £10 transactions from headless clients. If you took over the network and sent someone £10k in fake coins, who would be daft enough not to check it from either a trusted node or their own node?

Yes, you could perform DoS on a budget, but the cost to do such an attack will get higher, the more honest nodes there are. I suppose someone could perform a DoS attack to stop people selling out if a panic occurred (much like the FTSE 'crashes' when it approaches free fall <_<)... I could imagine a big holder of Bitcoins could try that to attempt to preserve their position. Actually stealing others' coins or faking large transactions would be impossible (AFAIK), unless the receiver made no effort to confirm the transaction.

Lots of protocols have been though to be clever and work, only for someone to later discover they did not actually. The encryption used in a protocol is rarely the weakest link, so it can often be broken without ending the world as we know it.

Sure - I'm certain that many will try to break the system too. Like I said, I wouldn't have my life savings in it, but that doesn't stop it being a highly liquid, useful way to transact, without having to rely on centralised agencies/states.

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Achieving that is one thing for virtual goods, another for physical ones. The acid test for such a system becoming general "money" will be along the lines of, can you buy a barrel of oil or a bushel of wheat with it?

Or whether you can exchange it for popular money, such as USD: https://www.bitcoinmarket.com/

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Achieving that is one thing for virtual goods, another for physical ones. The acid test for such a system becoming general "money" will be along the lines of, can you buy a barrel of oil or a bushel of wheat with it?

I suspect that'll be the point where the tax man steps in and puts a dampener on things.

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I am not clever enough to understand the nuances.

Would this be complimentary to or competitive with Scepticus's Ripplepay thread? Could it be just one of many currencies offered within a Ripplepay framework?

yes, complementary. In fact the ripplepay framework and the peer to peer trust relationships it relies on eases quite a number of issues that decentralised digital currency suffers from.

Given that, I'm not sure that the problem that bitcoin solves - that of creating a truly decentralised clearing house is going to have much relevance in a future in which peer to peer credit is common. What ripplepay allows is a choice of many clearing houses, which is pretty much as good as a decentralised process, in fact it may be preferable if the software process is not fully trusted or subject to attack.

Also I agree with traktion that bitcoin as currently conceived has issues : in fact it is more or less a ponzi scheme and/or an experiment in austrian ideology than a serious contender for digital money.

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yes, complementary. In fact the ripplepay framework and the peer to peer trust relationships it relies on eases quite a number of issues that decentralised digital currency suffers from.

Given that, I'm not sure that the problem that bitcoin solves - that of creating a truly decentralised clearing house is going to have much relevance in a future in which peer to peer credit is common. What ripplepay allows is a choice of many clearing houses, which is pretty much as good as a decentralised process, in fact it may be preferable if the software process is not fully trusted or subject to attack.

Also I agree with traktion that bitcoin as currently conceived has issues : in fact it is more or less a ponzi scheme and/or an experiment in austrian ideology than a serious contender for digital money.

Where do i sign? :)

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Sure, but then what will you do? You're hardly going to spend £10,000 to fake a few £10 transactions from headless clients.

A monetary system that would not make it possible to buy £10000 worth of some good is just pointless.

If you took over the network and sent someone £10k in fake coins, who would be daft enough not to check it from either a trusted node or their own node?

Your own node will not know what the truth is, and more to the point no-one is going to trust it even if it did. Once the attacker has more processing power than is available to the legitimate nodes, the game is over. There is no need to DoS anything.

unless the receiver made no effort to confirm the transaction.

The check will go thorough just fine as long the attacker controls a large proportion of the network (easy and cheap for the foreseeable future).

but that doesn't stop it being a highly liquid, useful way to transact, without having to rely on centralised agencies/states.

It is certainly not useful for any practical purpose right now, and would be taken over the moment anything of value can be bought with Bitcoins.

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Or whether you can exchange it for popular money, such as USD: https://www.bitcoinmarket.com/

It's possible that a robust and liquid bitcoin-currency exchange would make bitcoins more acceptable to people supplying real goods, but those people still have to deal with the physical world of warehousing, delivery, invoices etc. -- the physical world in which centralisation and force are at their most potent. That's why I say it's the acid test: there's a step-change when you go from a transaction where both payment and goods are "invisible" to the authorities, to a transaction where one or both of them exist in the physical world and/or on a centrally-controlled system.

Edited by huw

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I assume you haven't read and digested the software spec, as I thought of similar problems until I had understood the concept in detail.

A monetary system that would not make it possible to buy £10000 worth of some good is just pointless.

Of course, but you wouldn't use a thin client ('simplified payment verification') for that - you would use your own node to check the block validity or use a trusted node (could be a bank, even). BTW, the thin client hasn't even been written yet - all current clients are transaction processing nodes too.

I'm not sure if you've read the technical PDF in depth, but it is only the thin client which is susceptible to attack in this way. You wouldn't accept a £10,000 cheque and let someone drive away with your car, any more than you would accept £10,000 via the thin client - it's for smaller, less risky payments. Even then, the thin client could confirm block validity with a trusted node (your own or someone elses).

Your own node will not know what the truth is, and more to the point no-one is going to trust it even if it did. Once the attacker has more processing power than is available to the legitimate nodes, the game is over. There is no need to DoS anything.

It will - each block has to have a valid proof of work. An honest node will flag up a fake block, even if it is in the minority. That's why your own honest node can always verify a payment.

The thin clients are the ones which can be fooled, as they don't self validate all the blocks in the chain (which is CPU intensive) - they rely on the swarm to validate them, which is susceptible to the sort of attack we are discussing.

Take a read here, if you need convincing (like I did): http://www.bitcoin.org/smf/index.php?topic=435.0

The check will go thorough just fine as long the attacker controls a large proportion of the network (easy and cheap for the foreseeable future).

See above

It is certainly not useful for any practical purpose right now, and would be taken over the moment anything of value can be bought with Bitcoins.

See above. I disagree, although I agree with Scepticus that it is more akin to a pyramid scheme at the moment, as the number of Bitcoins doesn't grow proportionally with the Bitcoin economy. As there are very few coins and users, the coins will either not be used or will become worth more with each new user. As Bitcoins aren't universally accepted as valuable, I fear the former. I hope they will consider changing this though.

The technology is on sound footing, IMO. There are issues over scaling and how the thin clients (when they are written) can be sure their transactions are valid, but these are already being discussed. They seem to have done the hard part well, so I don't see why they can't meet the remaining challenges.

Edited by Traktion

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It's possible that a robust and liquid bitcoin-currency exchange would make bitcoins more acceptable to people supplying real goods, but those people still have to deal with the physical world of warehousing, delivery, invoices etc. -- the physical world in which centralisation and force are at their most potent. That's why I say it's the acid test: there's a step-change when you go from a transaction where both payment and goods are "invisible" to the authorities, to a transaction where one or both of them exist in the physical world and/or on a centrally-controlled system.

Sure, I hear what you're saying - as soon as the virtual world hits the real world, anonymity gets diluted.

That said, I think much of the advantage of such a distributed system is in the way the coins are generated and distributed. Fiat by hard coded software rules, different from fiat as decided by a few good men at the BoE. Software rules aren't subject to the whims of experts, politicians or VIs - they are just set and then they remain. I'm not convinced that Bitcoins have the best rule set, but it wouldn't be a huge leap (especially at this embryonic stage) to improve them.

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I assume you haven't read and digested the software spec, as I thought of similar problems until I had understood the concept in detail.

I don't claim to understand how it works in detail, however it seems fairly clear that you can spend the same coin multiple times as long as you can generate a longer proof of work than the network? And if someone comes up with a way of quickly inverting SHA256 hashes, the game will be up there and then?

It will - each block has to have a valid proof of work. An honest node will flag up a fake block, even if it is in the minority. That's why your own honest node can always verify a payment.

Your node would need to handle an awful lot of traffic to always know. In any case, all that achieves is that you won't take a coin that has been double-spent already. As soon as someone else does, your coin will become worthless because no-one will know whether to trust your node or the attacker's?

Take a read here, if you need convincing (like I did): http://www.bitcoin.o...php?topic=435.0

There seems to be a consensus that an attacker with enough processing power can double-spend coins?

See above. I disagree, although I agree with Scepticus that it is more akin to a pyramid scheme at the moment, as the number of Bitcoins doesn't grow proportionally with the Bitcoin economy. As there are very few coins and users, the coins will either not be used or will become worth more with each new user. As Bitcoins aren't universally accepted as valuable, I fear the former. I hope they will consider changing this though.

I think that is not a serious problem. It will be possible to increase the velocity if there is not enough money, and the coins can be split if it does not help. The people getting in early might well end up "winning the lottery", but you can protect against paying for it yourself by only holding bitcoins for short amounts of time.

The technology is on sound footing, IMO. (...) They seem to have done the hard part well, so I don't see why they can't meet the remaining challenges.

It is way too early to claim that. There have been cryptographic protocols thought to be correct for decades until someone noticed an attack. The starting point here is that a double-spending attack is already known?

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It is way too early to claim that. There have been cryptographic protocols thought to be correct for decades until someone noticed an attack. The starting point here is that a double-spending attack is already known?

True but a new hash method will come along (based on hindsight and use of current technology to prove effectiveness).

There is no reason why a system can't repeat the same data using multiple hashing algorithms. It is easy to check all repeated copies concur. This is like sticking another lock on your front door but using a different kind. The attacker might be able to circumvent one lock but but that would not be good enough to open the door. Poor analogy but in lay mans terms.

Now you have to compromise multiple hashes at once for the same data (this really is in the order of the probability of someone finding a way to turn sea water into gold within our lifetime).

This also allows a smooth migration to new hashing algorithms over time (there is no sudden switch over date, you phase the usage of a new one in and over time the old one out over time) since you run 2 or more on the same data to cross-check each other.

The receiving party can insist on a minimum algorithms to accept the transaction, this rule may include that at least 2 different algorithms are in use. Stricters rules for verification maybe applied for larger transaction amounts.

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looks like a good place to stash cash : price increasing at about 2.4% a day at the moment, people starting to buy a few hundred dollars worth at once.

bitcoinpricecrash anyone ?

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It only takes a single idea to spread and before you know it, centralised banking and currency is a thing of the past. If mobile devices and slow connections can use this, there's no reason why people shouldn't transact using a purely digital currency.

As to what it's backed by, well, it's backed by what people value their skills/products/services in bitcoins.

I don't believe currency needs to be backed by anything except real things/people's time.

If it's trusted and can be guaranteed to be safe, why shouldn't people start trading in it? It only takes a critical mass of people to accept it and bang, the world would be free of the tyrannical grip of centralised banking forever.

Edited by Pindar

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  • 260 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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