One of the most fun parts about Bitcoin for me is that there are actually infinite public ledgers available. You and your counterparty have to agree in advance on which one you're using. Bitcoiners have solved this coordination problem by saying "We mutually agree to use the public ledger which a) adheres to all the rules in the Satoshi client and b) is longest of all ledgers satisfying that constraint."
From this follows several consequences, like there being an infinite supply of cryptocurrencies which share every advantage of Bitcoin, the Satoshi client being really freaking important relative to the "protocol" (whose only authoritative description is the Satoshi client, since in the case of disagreement with the Satoshi client the network will reject you no matter how "correct" your decisions are), and the fact that the ledger which is anointed as consensus at T1 is not necessarily the same ledger which will be consensus at some future T2 when looking back at history.
I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system.
I can maybe see where it'd be useful in minimizing electronic transaction costs. But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin. And, I guess I can see that it'd be useful to maintain anonymity, but I don't have that use case. Isn't it just easier to buy things with Dollars?
I also don't understand the dynamics of it. Doesn't it require increasingly more capital to mine coins and to maintain the ledger? What happens when the value of a coin is less than the mining costs or ledger maintenance? Or, does the coin just keep continuing to increase in value? And, if so, what's to stop people from just using another crypto-currency?
And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people).
> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system.
You don't have to be embarrassed. Surprisingly 99.9% of the people doesn't know how our monetary/banking system works (creating money out of thin air) but that doesn't prevent them from using $ or €...
Henry Ford once said: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning"
Bitcoin has just one advantage, and it's not minimizing transaction fees or anonymization. It's just that it's decentralized. The big breakthrough with Bitcoin over other distributed systems is that it prevents double-spending. That's what all the mining is for: a node verifies every transaction and then cryptographically signs the result. So you get all the benefits of a decentralized system - you don't have to trust any single source of truth, and transactions are publicly auditable - without the biggest downside they usually have.
> I am kind of embarrassed to admit that after all these years, I still don't understand Bitcoin. Not the underlying software and algorithms - but the concept, the system.
I don't either. Which brings me to a point, is it even intended for a mass audience and wide-spread adoption?
How could I explain Bitcoin to my mother for instance?
I'd end up down the rabbit hole just to explain the words and concepts used in the definition of Bitcoin...cryptography, private keys, wallets, addresses, miners, the block-chain, and on and on
The time I attempted to explain bitcoin to my parents I ended up starting with explaining how public key crypto works (to the best of my ability) and wound up dealing with so many tangential questions we barely managed to touch on bitcoin. I'm sure they took away almost nothing from an hour long conversation.
I think it is possible to understand bitcoin as a financial system if you have some background in financial concepts (my dad was able to pick up the open ledger concept pretty easily). But to understand the technical details you really need an implicit understanding of a lot of different technologies.
The average transaction cost is around $40 right now. You have to consider that each block mines coins, and the miners are getting those at the cost of everyone else. A decentralized system will be more expensive than a centralized one. An bitcoin transaction fee is going to be about 40 cents, plus $40 per transaction for the block reward. The value of bitcoin is that you can trade resources for trust. With traditional money you have to trust that visa or your bank will not just zero out your account.
You're bank just cant 0 out your account. and if your bank gets robbed or goes out of business, you still have your money. not the same for a bitcoin 'bank' as we have seen. they even resorted to telling clients to put their keys on paper, funny that
> But, most transaction costs (credit card fees) that I pay are already rolled into the price of things, so I don't benefit by purchasing them with Bitcoin.
It's not common yet, but I have in fact saved money by buying with bitcoins, because the merchant passed on some of the savings.
>Isn't it just easier to buy things with Dollars?
Sure, if you're allowed to, and you have that preference, why not? Bitcoin can facilitate the circumvention of censorship (a la Wikileaks). And once you have bitcoins, sending them is faster than paying with a credit card online.
>Doesn't it require increasingly more capital to mine coins and to maintain the ledger?
Yes, if you ignore hardware advances. It might even be true if you don't ignore that.
>What happens when the value of a coin is less than the mining costs or ledger maintenance?
There are transaction fees that go to the block miner.
>Or, does the coin just keep continuing to increase in value?
Hopefully not too quickly!
>what's to stop people from just using another crypto-currency?
Network effects. People do use other crypto-currencies. Just not as much. For now.
>And, what is the 'value' of a coin? The article implies that the value is created by the users' trust in the value. But, is that how currencies generally work? I had assumed that currencies either have tangible value, like precious metals, or that they are abstract derivatives of another's debt (government or people).
Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion.
There are historical examples of currency which was neither a debt derivative nor an intrinsically useful object being used as currency.
Ultimately, anything sellable is "worth" what other people will pay for it. Bitcoin provides a means of transferring information in a cryptographically signed manner. We happen to use that fact to transfer information about value. Other people are willing to buy bitcoins. The price is capped by the fact that there is a finite number of bitcoins and a finite number of people. Beyond that, it's pretty much new ground we're breaking here.
Bitcoin is not perfect. I don't know the future. But if you have other questions, I'm happy to answer them from the perspective of a bitcoin holder.
> Ah, yes. This is classic. The orthodox economists might tell you that Bitcoin shouldn't have any value at all. Yet, I can sell 1 BTC and pay for months of gas. I'd rather have a running car than an economist's opinion.
I still don't understand how economists can say that BTC has no "intrinsic value," so should be worthless, but the fiat currencies around the world are just dandy.
The whole concept of "intrinsic value" is nonsense. If you can make a Bitcoin transaction faster, cheaper, and with fewer people knowing about it (if you value anonymity), then BTC has value. You can send Bitcoin to someone overseas without anyone else knowing. How powerful is that?
> Ultimately, anything sellable is "worth" what other people will pay for it.
Precisely. I wish we could teach people this before they dismiss Bitcoin for unfounded reasons.
> I still don't understand how economists can say that BTC has no "intrinsic value,"
It really annoying to me that people keep putting up this straw man. What economist is saying that BTC has no intrinsic value and is thus worthless? Really? You learn in ECO101 that currency only has value because of what you can exchange it for. Money demand is not a fringe concept in economics--its a core concept that anyone in any branch of economics that deals with currency and money thinks about several times a day.
The fact that you can only do business with the vast majority of american society in USD is what gives the USD value. We got to that point because the US government said that US currency should be acceptable to pay off any debts in the US, including taxes. The fact that dollar exists and is the common currency in the US is tied to the law, but its exchange rate and purchasing power is (aka its 'value') is tied to other factors completely.
You can make the argument that the long term value of BTC is zero because there's nothing that guarantees it continued existence, like US law guarantees the existence of the dollar. But thats totally separate from the value and exchangability of BTC to US.
> You can make the argument that the long term value of BTC is zero because there's nothing that guarantees it continued existence, like US law guarantees the existence of the dollar.
The Internet guarantees the continued existence of BTC.
It's not just the taxation (which is true), it's the fact that they are backed by a particular entity. In the case of USD, it's the United States government. Dollars may not be "backed" by anything tangible, but they are accepted because the US is (largely) a trusted entity. That's what makes USD useful to people internationally.
Bitcoin doesn't have the advantages of having a government backing it, but some would probably argue that that is an advantage.
Considering how many trillion definitions people may mean when they say a currency is "backed by" something, I don't think your explanation is an improvement.
For that reason, I recommend listing the specific things that make the USD valued: in this case, the need to pay USD in taxes, and a very wealthy entity (US government) prefers to trade in that currency, or whatever specific thing you mean with "backed by" in that statement.
Intrinsic or not isn't really the question - it's not really a binary.
I'd rather have bitcoin than Zimbabwe's fiat currency.
Taxation definitely gives legitimacy, but so does the ability to pay for things anonymously. If enough people are willing to take a currency, than it gain value - period. The gov't wanting it in taxes is just a really big provider of liquidity providing those network effects.
It's not a question of legitimacy, isn't about demand. Currency is a token. You need tokens to play the game. The difference with taxes is that you don't choose to participate. You must play, so there is always demand for tokens.
Yea, but demand isn't all created equal right? I'm trying to capture more than raw demand - unless we're just defining terms differently (which I suspect)
>> What happens when the value of a coin is less than the mining costs or ledger maintenance?
> There are transaction fees that go to the block miner.
The issue here is that they go to the person who mined the block originally, but they aren't passed on to those who are simply running the client to maintain the ledger. With the increased difficulty in mining, it's very unlikely for anyone without a large investment in hardware, that you're ever going to make money on the fees. It provides no incentive to run the full client to help the network confirm transactions.
You are mostly correct, but I'd like to make some clarifications.
>they aren't passed on to those who are simply running the client to maintain the ledger.
The word "maintain" is ambiguous here. When I run bitcoin-qt on my computer, I have the whole blockchain locally, and I relay blocks created by others, but I do not "maintain" the blockchain in the sense of adding or subtracting from it beyond the transactions I create myself to spend my own money.
>With the increased difficulty in mining, it's very unlikely for anyone without a large investment in hardware, that you're ever going to make money on the fees.
Correct, so I don't mine.
>It provides no incentive to run the full client to help the network confirm transactions.
Again, "help" is a bit ambiguous. When I run bitcoin-qt, I relay transactions, but I do not contribute any processing power to confirmations. "Confirming" a transaction means including it in a block, an d only miners create blocks.
Now, it is a bit of a problem that there is little to no incentive to run a validating client, i.e. one that accepts transactions, verifies that they are cryptographically and monetarily valid, and passes them on to other people. We shall see if another cryptocoin solves this issue.
Thanks for that, I was struggling for the right words when I was writing the post.
I would really like to see another crypto currency come out that addressed the validating client issue. I think that could also get more people interested in it too, since they would be earning money just by running the client.
The miners are the ones who are maintaining the ledger. People just running the client and downloading the full blockchain are basically just duplicating the data (or using it to verify the full history for themselves), and maybe providing some bandwidth to others who want to do the same thing, they don't contribute to the transactions in any way.
I would argue that most of the perceived value right now is speculative. The actual benefits over using USD in transactions is marginal, for most use cases.
IMO, the speculation comes from the enormous potential of the idea. What is something you can do with an electronic currency, not tied to a single government, which has a great deal of value to the average person?
I don't know the answer to that question, but I see most altcoins as people trying to crack this nut. It seems likely to me that someone will find a use, partly just because the cost of attempting it is quite low.
You're not the only one. I've been following bitcoin for a while now, and still learning little nuances of the bitcoin protocol everyday.
For instance, I just learnt recently that there's transaction cost associated with each transaction, and if you set the transaction cost to zero, the transaction may take a while to get accepted (or never) into the blockchain because of the reduced incentive to miners.
This comes as a bit of surprise to me because one of the popular benefits of bitcoin touted by advocates is the reduced transaction fee over traditional means of monetary payments, but I guess that's a fault in my own understanding as 'reduced' does not mean 'none'.
The complexity of the concept is a barrier to the mass adoption of bitcoin. Wallet and payment merchants make it easy for people to use bitcoin without understanding the underlying technology, however I believe there's still a perception problem. People are hesitant to use things they can't wrap their minds around, especially when it's tied to money.
We need more articles like this that can ELI5 to lower that barrier.
According to the labor theory of value, the value of anything is derived from the amount of labor required to produce or obtain it. http://en.wikipedia.org/wiki/Labour_theory_of_value. Thus, the value of gold is derived from the amount of labor required to dig it from the ground. Analogously, the value of Bitcoin is derived from the amount of labor that's required to build, run, and sustain a crypto-mining apparatus (definitely not an easy task to do). There, Bitcoin has value! In fact, its source of value easier to comprehend than that of the dollar, which seems to appear out of nowhere.
Good article. It's clear, covers the important points, describes the basic technology reasonably well to a non-expert, debunks some common myths, and, thankfully, steers clear of "mining".
Mining is really a terrible term for the layperson that evokes thoughts of real mines that produce resources at a continuous rate. It should be called "Distributed transaction verification. And, oh yeah, by the way, verifiers have a chance to win a prize, lottery-style."
Useful description, but some not 100% accurate statements:
"A private key is nothing but a large pseudorandom number roughly between 1 and 2^256"
Not sure how the "pseudorandom" came in there - the private key might be random, or pseudo-random, or entirely deterministic - it's essential property is that it's just a 256 bit sequence that is unknown to others.
"It’s perfectly safe to give your Bitcoin addresses to other people, but extremely important to keep your private keys secret. "
The essential point trying to be made here is that the Bitcoin Address won't allow people to determine your private key. but there are a lot of reasons why you would not want to give your Bitcoin address to other people - the key reason being that it allows to track you. There is one philosophy that suggests you should change your Bitcoin address on every transaction.
Overall, though, a nice introductory article to Bitcoin - I'd recommend it to others.
> "A private key is nothing but a large pseudorandom number roughly between 1 and 2^256
Note: Nearly every 256-bit number is a valid private key. Specifically, any 256-bit number between 0x1 and 0xFFFF FFFF FFFF FFFF FFFF FFFF FFFF FFFE BAAE DCE6 AF48 A03B BFD2 5E8C D036 4141 is a valid private key.
The range of valid private keys is governed by the secp256k1 ECDSA standard used by Bitcoin.
Yeah, it should be something like:
"A private key is nothing but a number roughly between 1 and 2^256, that is only known by you. This number is usually pseudorandomly generated by your bitcoin client, but it could be generated in any way. The important thing is that it is an uncommon large number, that others will not be able to easily guess."
For me, this was the best intro to BitCoin - http://gendal.wordpress.com/2014/03/27/how-i-explain-bitcoin...
It doesn't focus on tech - it explains why BitCoin as a platform is so important and what are the killer apps that can be build with that platform.
A bitcoin is a commodity. A small piece of a complicated crypto system you can buy or decipher or even trade for goods (in very few and restricted cases) and has practically no use apart from storing it in the hope to get a benefit in the near future by selling it at a higher price. Have you got an old VCR? Well, a bitcoin is just like that, or it will be soon (Only you can't burn a bitcoin in the hope to get some heat when your bitcoin acquires absolutely no value whatsoever but, then again, you may not want to burn a VCR due to toxic fumes and such...)
Some talk about decentralized currency, anonymous payments, money laundry... Shenanigans. All shenanigans.
Besides ease of international transactions, consider that only 41% of adults in developing nations have bank accounts and only 7% of adults in developing nations have credit cards. With Bitcoin and perhaps technology built around it, they can now have access to banking-like features, but without the credit profile which they probably lack, and importantly they can join the digital age and conduct transactions online without the need for credit cards.
They forgot the other, key attribute of a dollar that makes it useful for 'distributing wealth': it has a relatively stable value. Economies rise and fall because of the struggle to control the price of their currencies. The notion that a medium of exchange with no such stability should replace the dollar is bonkers.
Yeah, I'll take a fairly predictable rate of inflation over an inherently deflationary currency with absolutely no controls on its motion. I guess we're supposed to be excited about currency being able to flit around like a panicking moth?
I became familiar with what Bitcoin actually was via an article posted here about 7 or 8 months ago. It was a very long article, but it started from zero assumptions and worked through designing a crypto currency, bringing up each problem and then explaining how Bitcoin solves that problem.
I wish I could supply a link to it - maybe someone else has the article?
From this follows several consequences, like there being an infinite supply of cryptocurrencies which share every advantage of Bitcoin, the Satoshi client being really freaking important relative to the "protocol" (whose only authoritative description is the Satoshi client, since in the case of disagreement with the Satoshi client the network will reject you no matter how "correct" your decisions are), and the fact that the ledger which is anointed as consensus at T1 is not necessarily the same ledger which will be consensus at some future T2 when looking back at history.