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HughPickens.com writes: Nobel Prizes are given for making important — preferably fundamental — breakthroughs in the realm of ideas. That's just what Satoshi Nakamoto has done, according to Bhagwan Chowdhry, a professor of finance at UCLA. Chowdhry has nominated Satoshi Nakamoto, the creator of Bitcoin, for a Nobel prize in economics. The Prize Committee for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, popularly known as the Nobel Prize in Economic Sciences, has invited Chowdhry to nominate someone for the 2016 Prize. He started thinking about whose ideas are likely to have a disruptive influence in the twenty first century: "The invention of bitcoin — a digital currency — is nothing short of revolutionary," says Chowdhry. "It offers many advantages over both physical and paper currencies. It is secure, relying on almost unbreakable cryptographic code, can be divided into millions of smaller sub-units, and can be transferred securely and nearly instantaneously from one person to any other person in the world with access to internet bypassing governments, central banks and financial intermediaries." Satoshi Nakamoto's Bitcoin Protocol has also spawned exciting innovations in the FinTech space by showing how financial contracts — not just currencies — can be digitized, securely verified and stored, and transferred instantaneously from one party to another.

There's only one problem. Who is Satoshi Nakamoto? Suppose the Nobel Committee is convinced that Satoshi Nakamoto deserves the Prize. Now the problem it will face is how to contact him to announce that he has won the Prize. According to Chowdhry, Nakamoto can be informed by contacting him online just the same way people have communicated with him in the past. He has anonymously communicated with the computer science and cryptography community. If he accepts the award, he can verifiably communicate his acceptance. Finally, there is the issue of the Prize money. Nakamoto is already in possession of several hundred million U.S. dollars worth of bitcoins so the additional prize money may not mean much to him. "Only if he wants, the committee could also transfer the prize money to my bitcoin address, 165sAHBpLHujHbHx2zSjC898oXEz25Awtj," concludes Chowdhry. "Mr Nakamoto and I will settle later."

An anonymous reader writes: A notice at bitcoin.org warns users of the cryptocurrency that many miners are currently generating invalid blocks. The cause seems to be out-of-date software, and software that assumed blocks were valid instead of checking them. They explain further "For several months, an increasing amount of mining hash rate has been signaling its intent to begin enforcing BIP66 strict DER signatures. As part of the BIP66 rules, once 950 of the last 1,000 blocks were version 3 (v3) blocks, all upgraded miners would reject version 2 (v2) blocks. Early morning UTC on 4 July 2015, the 950/1000 (95%) threshold was reached. Shortly thereafter, a small miner (part of the non-upgraded 5%) mined an invalid block--as was an expected occurrence. Unfortunately, it turned out that roughly half the network hash rate was mining without fully validating blocks (called SPV mining), and built new blocks on top of that invalid block. Note that the roughly 50% of the network that was SPV mining had explicitly indicated that they would enforce the BIP66 rules. By not doing so, several large miners have lost over $50,000 dollars worth of mining income so far."

ASDFnz writes: Satoshi Nakamoto, the respected (and currently missing) inventor of Bitcoin, seems to have had his email address compromised by an unknown agent. Satoshi exclusively used one email address when he was active in the Bitcoin community: satoshin@gmx.com. If you have a look at the original Bitcoin whitepaper (PDF), you will find it there at the top just under the title. He also usually signed his correspondence with his PGP signature. Earlier today, the head administrator of Bitcointalk, Theymos, received an email from Satoshi's email address that appeared to originate from GMX's servers. Theymos made a post on the Bitcointalk forums saying he had received an email from the address without Satoshi's PGP signature. Later, the unknown agent posted to other Satoshi accounts.

Contributor Tom Geller writes: "I recently wrote an article about Bitcoin and the law for Communications of the Association for Computing Machinery. In researching it I ran into plenty of wishful thinkers, ridiculous greedheads, and out-and-out nutbags promising a rosy future. I also found the expected blowback from vehement naysayers who think the best way to combat crazy is with more crazy. But despite that, I walked away believing that Bitcoin — or a decentralized cryptocurrency like it (let's call it "Coin") — is here to stay. As an interested outsider to the Coin economy, and a long-time technology commentator, here's what I think its future holds." Read on for Tom's predictions. Coin's primary use will continue to be in international transactions.

While people wonder "When will I be able to pay for groceries and utilities with Bitcoin?", that use might never come. But Coin already shines in international transactions, where it provides a clear advantage over current systems, which are expensive and complicated hassles. That's why PayPal has become the go-to solution: it just works, albeit with typical fees around 3-5%.

Coin reduces that fee to a small fraction of 1% (when sent directly), and is available in places where PayPal fears to tread (Zimbabwe, Pakistan, etc.). Coin transactions occur instantly, with no intermediary, and — for better or worse — without recourse.

That leads to Coin's second primary use: to store liquid value in places where other stores (such as national currency) are unreliable. For all the cries that Bitcoin is "unstable", it seems to have settled quite nicely after its April spike. Certainly it looks appealing to anyone in an unstable country, and it's even tempting for those in places where the currency's been on a long, slow slide, like Argentina.

Coin's big vulnerability is its interface with national currencies ("real money").

None of this matters if you can't get your money out again. And that's where governments are taking a close look at Coin — with good reason. First, Coin exchanges have a terrible track record; second, such points of exchange are bottlenecks through which financial crimes often flow.

In the U.S., the government's Financial Crimes Enforcement Network (FinCEN) issued guidance asserting its right to regulate "Money Services Businesses", and defining exchanges dealing in virtual currencies (including Bitcoin) as such. That's a problem for many existing Coin exchanges, as the costs for complying with regulations are high. But if there's not a stable and reliable way to get national currency in and out of Coin, its value will plummet.

Conversely, Coin's value is likely to shoot up if this interface gets easier. Right now, it's surprisingly hard to buy Bitcoin (et al.) directly with U.S. dollars. Most methods require bank wires, tricky multi-step workarounds, and high fees. (I found Coinbase to be the most accessible, albeit with long delays and a bank verification procedure similar to PayPal's.) If Coin becomes as easy to buy as a gift card and redeemable at every bank, its practical utility will soar for everyday people.

No government will make Coin illegal.

Despite bloviation by a few politicians and baseless statements in the press, Coin is not per se illegal, and there have been no serious attempts to make it so. The FinCEN guidance mentioned earlier explicitly says that ordinary users — those who buy and sell using Coin — are "not subject to FinCEN's... regulations for MSBs". It's possible that other government agencies will continue to claim authority, but there doesn't seem to be much support for it.

A lot of noise has been made about Coin's use in illegal business, for example on Silk Road (where it's the only currency). But law enforcement is realizing that the currency isn't to blame, much as they've started to say that Craigslist isn't responsible for crimes organized through its ads. I predict that that distraction will continue to surface from time to time, but will essentially die soon.

Even if governments attempt to illegalize Coin, there's only so much they could do to criminalize ordinary users. Again, Coin's real vulnerabilities are higher up the chain. However....

If Coin succeeds, governments will get involved — for the better.

"Noooo!!!" scream the cryptoanarchists who are Coin's pioneers. "Keep the government out of this! Coin can't be controlled! Nobody can take away our freedoms!" What they don't realize is that this attitude doesn't reflect the values of Coin's future users. The benefits of "freedom" matter to the innovators; convenience and safety matter to those who follow.

"Government" in this case could also be a government-size corporation, syndicate, or other entity. The important thing is that it's big enough to administer, back, and enforce initiatives to protect the Coin economy. Whatever that "bully entity" is, Coin adopters will welcome it because of two major flaws currently in (Bit)Coin's design.

First, Coin is ridiculously easy to destroy by accident. If you lose the private cryptographic key that identifies your coin, it's gone. Not just stolen, but removed entirely from the economy, so nobody will ever own it again. Consider these stories on Bitcointalk.org, where within a few messages the cumulative total tops 10,000 BTC — currently valued around a million dollars. A central authority could address this in several ways such as tracking, restitution, etc.. People don't care that their cash is anonymous when the rent money disappears.

Second, the entire system is vulnerable to a brute-force attack. Without getting into the specifics, Coin (well, Bitcoin) works because it assumes that at least 50% of the computer power on the network is held by honest players. But a recent 51% attack on Feathercoin (a Coin with much lower capitalization) showed that it's possible for a single party (or syndicate) to trump that.

Let's do the math for Bitcoin, the Coin with by far the highest capitalization, at just north of USD$1 billion (1 x 10^9). To reliably overwhelm the network, you'd need computing power delivering about 100,000 gigahashes per second. Computers optimized for Bitcoin processing are currently available for about $1,000/gigahash, so sufficient computing power can be bought for $100 million. Electricity cost for the deed would be about $200,000/day.

O.K., it's not something a basement hacker could whip up. But there are over 400 people, and thousands of syndicates with a billion dollars in the U.S. alone. Perhaps at least one of them is crazy enough to drop 1% of the wealth to partially control (or completely destroy) a billion-dollar system. (Hell, one of them recently spent 1/10th of that price tag on his wedding.)

Those are only the two biggest technical concerns. Then there's the galaxy of financial services (such as insurance) that's available for fiat money, but which would be hard or impossible to provision for Coin without a central authority. Time could overcome these barriers; a bully entity would overcome them faster, and with greater public buy-in.

Bitcoin is not the end game.

Along those lines, I don't believe that Bitcoin will be the ultimate winner in this game. It's the 1.0, and a brilliant first effort at that. But it's not perfect, and several pretenders to the throne already claim to fix some of its bugs. In fact, shifting conditions may require periodic issuance of new Coin as a matter of course. (As I said before, I believe such issuances will involve a central authority.)

These predictions all assume that Coin will grow, and there are many reasons it might not. However, I'm bullish on it for the long-term. It's already proven its value in use; the public is used to handling Coin-like money (viz. Square Wallet); and its first major hurdles are in the past. Now it's ready to enter a fascinating future.



- - - - -
Tom Geller (tomgeller.com) writes about technology and business. He's best known for Drupal-related work that includes eight video courses for lynda.com, a book for Peachpit Press, and corporate work for Acquia, Commerce Guys, and others. He first became involved in computers as a grade-school student in 1976, playing "Hunt the Wumpus" on a 100-pound monster that spewed tractor-feed paper onto the floor. He lives in Oberlin, Ohio.

Frequent contributor Bennett Haselton is still thinking about prediction markets, and giving away money. He writes: "In an article last December I described a problem with prediction markets, where even markets with cap on betting limits could be manipulated by a single trader willing to spend a lot of money to distort the marketplace odds. So I offered a $100 cash prize to be split between readers who collectively came up with the best solution to the problem. Here's an idea that I think would work." Read on for the rest.

In November I wrote an article arguing that prediction markets like Intrade -- where users can bet on the odds of, say, Obama or Romney becoming president -- were a useful tool for aggregating the wisdom of crowds, but could be manipulated by someone placing a large bet in order to create the illusion that "the markets" were favoring their candidate. If the fake "market odds" were reported in the news, it could have the effect of causing more supporters to switch to that candidate, thus increasing the true odds of their victory and creating a self-fulfilling prophecy before the markets had the chance to correct themselves. The solution, I thought at first, was to have a cap on the amount that individual users could bet (which is one of the rules at the Iowa Electronic Markets), and make it illegal for a single mastermind to pay large numbers of third parties to make bets in order to circumvent the single-bettor limit.

As I admitted in a follow-up article, it turns out this regulation would not work after all. The problem is that as long as long as overseas betting markets like Intrade have no limit on wagers, a market manipulator could place a huge bet on Intrade to cause the odds to shift on that market -- for example, changing the odds of Obama-to-win from 4:1 to 6:1. Meanwhile, the odds in a domestic prediction market with a betting limit -- call it CappedEx -- would initially stay at their non-manipulated value of 4:1. But then "arbitrage players" could spot the difference in the odds being offered, and make opposing bets in the two markets in a way that would be guaranteed to make a net profit. (The details are spelled out in my last article, but basically, any time two markets are offering different odds of an event happening, you can pick appropriate amounts to bet in the two markets so that you're guaranteed a profit whether the event occurs or not.) These arbitrage players would continue making opposing bets in the two markets until the odds being offered in the two markets converged onto the same value -- at which point, the market manipulator has successfully manipulated the odds in the capped market, even without ever placing a bet there. Essentially, the market manipulator has hired all of those arbitrage players and paid them to make bets on his behalf, but done so indirectly to avoid violating laws against hiring an army of bet-placers.

I should be clear about the two different time frames being discussed here. If a manipulator places a large bet on Intrade, causing the odds on Intrade to diverse significantly from the odds on CappedEx, then the arbitrage players should cause the odds on the two markets to converge to the same value very rapidly -- plausibly in less than one minute. (Whoever spots the difference first, gets guaranteed free money. It would be easy to write a bot that could watch for any divergence in the odds in the two markets, and place guaranteed-profit bets as soon as a gap appeared.) Then, as political observers noticed that the odds have shifted (without any real-world event in the news that could plausibly explain the shift), another wave of bettors would take advantage of the distorted odds, to bet on the side of the event whose odds had been artificially lowered by the market manipulation. (The odds favor making such a bet, although it's not as good as a guaranteed profit.) As enough people made these opportunistic bets, the market odds would correct themselves to their original values. However, this second wave of betting would probably take a few hours, because it requires humans to think critically about the events. (One likely case of manipulation managed to shift the odds for a few minutes for just $20,000, so it's not unreasonable to think that a million dollars or two -- still small change by the standards of presidential candidates, especially when it's not subject to spending limits -- could distort the market for several hours.) The danger is that the market manipulation could cause the odds to shift in the capped market almost instantly, but the market correction would not take place until several hours later, and in that time the damage (in altering people's perceptions, and possibly creating a self-fulfilling prophecy) would already be done.

It didn't seem like there was any obvious solution to this problem. The U.S. government could ban its citizens from betting on foreign uncapped markets, but it would be too easy for a U.S. citizen to coordinate with an overseas partner to place the arbitrage bets together and split the profits. Or the U.S. could try to ban prediction markets entirely (capped or uncapped), but many economists argue that they're a useful tool for assessing the wisdom of crowds to assess the odds of an event. You could ban media reporting on the odds given by prediction markets (to try and avoid the self-fulfilling-prophecy problem), but that would probably be unconstitutional in the U.S., and unenforceable anyway if people could get their news from overseas.

So in my last article I offered up to $100 to be split between readers who came up with the best arguments for how to stop prediction markets, even markets with individual betting limits, from being shifted by manipulators who place large bets on foreign markets and then count on arbitrage players to pass on the effects to the capped markets. (I've offered cash prizes to readers who submit winning ideas before, and it usually doesn't take this long to get to the follow-up and pay out the prizes. Some follow-up articles that I submitted got lost in the editors' spam filters, sigh, and then there were some other articles in the pipeline that had to go out first. If I offer prize money for ideas and you submit a winning idea, normally you'll get your money much faster.)

Before reading any further, you might want to stop and try to think of what you would consider to be the best solution to this problem (even if the prize money has already been allocated), and then compare it to what we came up with.

... And, welcome back. Here's what I think is the best answer so far: For each event that the capped markets allow users to bet on, the capped market should also be required to monitor the odds that any overseas uncapped markets are offering on the same event. Then if there has been any recent time period where the odds on the overseas markets differed significantly from the odds on the domestic market (significantly enough to indicate manipulation -- and, similarly, significantly enough that the difference probably motivated arbitrage players to place bets to close the gap), then the reported odds should appear with a disclaimer saying, "There was a recent divergence in the odds on capped vs. uncapped markets, so the odds displayed here may have been manipulated, and should be regarded skeptically." This would help to avoid the self-fulfilling prophecy problem, if people are less likely to regard the manipulated odds as a reflection of reality.

The key assumption here is that if a real-world event happens that changes the probability of, say, an Obama victory, then the market odds in both the capped and uncapped markets should shift at about the same time to reflect that new probability. On the other hand, if the odds have shifted significantly in only one of those markets, that could be taken as a sign that that market was being manipulated. Arbitrage players would still be free to make opposing bets in the two markets to narrow the gap, so the odds in both the capped and uncapped marketplaces would still change in the short term, but in the regulated capped market, the odds would be reported with a disclaimer that they're not reliable. After a few more hours, opportunistic bettors would make bets taking advantage of the distorted odds, and the market would correct itself.

This idea did not come from any particular reader but came up as the result of the back-and-forth I had with several people.

A few readers also had interesting ideas for regulations that could fix the problem if they could be applied to all markets. For example, Nathan Dykman suggested that in order to wager larger amounts, you would have to wager that your candidate would win by a larger margin (e.g. if you can bet $1,000 that Romney would win by 1 million votes or more, or you could bet $10,000 that Romney would win by 10 million votes or more -- so that large "manipulative" bets would stand out more obviously). Andy Jobe suggested "staggering" bets so that high rollers could only bet large amounts by placing lots of small bets in sequence, paced slowly enough that the market would probably detect the manipulation attempt and start correcting for it, before all of your bets went through. Jonathan Pearson suggested mandating that markets report the number of people making particular bets as well as the market odds, so that single large manipulative bets could be easily spotted. Ben Griffin suggested simply requiring disclosure of large bets by certain people (as he put it, the headline "Saudi Prince believes that Romney will win the election. What does he know that we don't?!" contains more useful information than "Romney's odds of victory looking better at Intrade").

I think these points are all correct, but the problem with all of these ideas is that they only work if all of the relevant markets are regulated. And if you allow that assumption, then the problem becomes trivial -- because you can just require an individual betting cap in all of the markets. On the other hand, if there's at least one market anywhere in the world that is beyond the reach of your regulations, then they don't have to disclose any statistics about their bettors or follow any other rules that you make. Then when a manipulator places a large bet in that unregulated market, when the arbitrage players place their many small corresponding bets in your domestic regulated market, the detection mechanisms described above, won't do anything to stop that -- those bets in your regulated market look like real bets because they are real bets.

By contrast, if you require domestic capped markets to monitor the overseas uncapped markets, and disclose if the uncapped odds have diverged recently from the capped odds, this still works even if the regulations only apply to your domestic capped market. People can still place manipulative bets on foreign markets, but if the media reports the current "market odds" by looking at the capped market, those odds will be harder to manipulate without getting caught, because they'll run a disclaimer if manipulation has been detected recently. (Of course if the media gets their "odds" from the overseas uncapped market, and reports those odds as literal truth even when the domestic capped markets are running a disclaimer saying that those same odds have recently been manipulated, we can't do anything about that. The hope is that news agencies, no matter how lazy they may be, will at least choose to report accurate information if it takes the same effort as reporting inaccurate information, and thus would prefer getting their information from the domestic capped market, where they can easily check if there's a disclaimer saying the odds have been manipulated recently.)

Some interesting points made by other readers:

• Carl Pearson mentioned that if campaigns had to start diverting attention to prediction market manipulation in addition to all of their other business, this might hurt small third-party candidates more than big campaigns -- because smaller campaigns have fewer available resources to put towards handling new kinds of problems. (True, I think, but only if the markets can be manipulated. If they can't be manipulated, and they're just a barometer of what people are thinking will happen, then you don't need to waste campaign time fighting on that front.)

• Michael Mendenhall pointed out that even in a capped market, the cap should be high enough to create a high "signal-to-noise" ratio. If the cap is too low, the market odds will reflect the betting of more uninformed people who use the betting as a low-cost opportunity to cheer for what they think should happen instead of what they think will happen. (On the other hand, if the cap is too high, then the market is too easily to manipulate.)

• Marc Beaupré argued that prediction markets can probably never be stamped out anyway, because anonymous payment protocols like Bitcoin make it possible for crypto-anarchists to place best on unregulated darknets where they can ignore caps and disclosure requirements all they want. I'm not sure that's true (how do you place a bet in an anonymous peer-to-peer market -- who enforces the payment from the loser to the winner, depending on the outcome?) but it actually doesn't change the main thrust of my argument -- you can still have a regulated, capped domestic market, which is where the media could go for accurate information about the current market odds. So a manipulator could throw their Bitcoin money away on an unregulated peer-to-peer betting network, but it wouldn't do them any good.

Splitting the $100 in prize money, all 7 of the readers credited here get $15. There may be a simpler idea that we missed, or a different reason why this proposed idea would not work. Either way, I'm always grateful for the high quality of the comments that get emailed to me as part of these contests. Eventually I'd like to run some article contests for people to email ideas for a follow-up article, but without offering prize money, to see if that affects the quality of the submissions. It would be impossible to run a precisely controlled experiment (because you can't write a single article where half of your readers are eligible to submit ideas for prize money, and the other half are expected to submit ideas for free), but if we run contests for a large number of articles, and about half of those contests involve cash prizes while the other half offer only acknowledgement, it should eventually become clear if there's a difference in the quality of submissions. It may be that, unlike prediction markets, idea-improvement contests work just as well when there's no money involved.

Last week, you asked questions (many rather pointed!) of Amir Taaki, co-founder of Bitcoin Consultancy, which develops Bitcoin related services, exchanges and Bitcoin itself. (They also own Britcoin.co.uk.) Says Taaki: "When creating video games I spent much time imagining tools to make artists lives easier, and how we could keep funding developers to write free software. One contribution of mine to the community was a site where developers could get funded for developing features and I'd love nothing more than to pay people to write free software." With regard to Bitcoin, similarly, "We need fulltime developers thinking about the problems and solutions needed to keep this system running. We aim to get all the creative thinkers from the community and provide a mechanism for enabling their work." Below find his answers to the questions readers raised.

Is the gold rush over?
by curunir

With BitCoin limited to a pre-determined amount and the difficulty of mining new BitCoins, it seems that this gives a huge advantage to people who got into BitCoin early and have already amassed a considerable amount of BitCoins. Is this true and, if so, do you think this disincentive will undermine BitCoin's ability to become more popular since the majority of the population will have to work so much harder to obtain the currency?

Amir Taaki: It is certainly true that early adopters have been rewarded. I do not think these inequities will be more shocking than those in the real world. Any guesses as to how this will play out is pontification. However, I don't think anyone has proposed a working model for a decentralized secure digital currency where such a thing would not happen. Overall, I believe the properties of this currency will significantly add to the wealth of all peoples, especially those less well off.

Crypto-Anarchism?
by conner_bw

I argue that bitcoin is interesting because it's a locked currency, with a known maximum, and a timeline for that maximum based on contemporary crypto math and radical ideas. There is clearly well thought out timeline for adoption and disruption. It's not just "Cool, new money!" Are you a crypto anarchist, or similar?

A.T.: Yes, I myself am a crypto anarchist. However, not everyone on my team has the same political ideologies and we do not try to push our ideologies on each other. In fact, we have all seen our ideologies change over time with the awareness of new knowledge and information. Ideologies should not be a point of contention, especially when we all see the immense prolific value of a more efficient means of commerce.

If not, then is this another Tulip craze [wikipedia.org] and all these news stories and bitcoin currency exchange services being hyped heavily the last month machinations for profiteering?

A.T.: I do not advocate that people speculate on bitcoins. In fact I actively advocate against that because those who are new to bitcoin might see it as just that, a 'craze.' I do however think that the properties of bitcoin are clearly advantageous over the current means of commerce. Although bitcoin is still underdeveloped, everything visible in the modern world can be adapted using bitcoins as a backbone. This will result in all the services of today's world (clearing houses, security, fraud protection, interest bearing accounts...) continuing to be offered, but with far less overhead.

Austrian Acceptance
by MyFirstNameIsPaul

I have found that the Austrians have a hard time accepting the idea of a digital currency. The core of their argument seems to be that digital currencies are not made up of something that had value before being a medium of exchange, such as gold and silver. When I counter to them that BitCoin is made up of code and people pay money for things like video games, they argue that the video game would have to be the thing valued, not the computer code. How do you deal with these kinds of objections?

A.T.: Gold is not a currency in my mind. It is a store of value. I would not want to go to buy bread from my local store and shave off some gold from a bullion and take out a scale and wait for an acid test to be performed. Gold is backed by real world properties.

Bitcoin is backed by the fact that is has unique properties as well:

• Decentralized
• No bank holidays
• International
• No concept of borders
• Divisible
• True micro-transactions possible (new markets feasible)
• New privacy model
• Private identity yet transparent
• Secure
• You do not have to trust merchant sites (Sony - Playstation) to protect your data
• Fast Transactions
• No Charge backs

Useful Calculations?
by Bodhammer

Is there any way to make the calculations more useful (i.e. Boinc) and still maintain the same level of difficulty in the computations? It just seems so wasteful to run Bitcoin at this time.

A.T.: Our world's current infrastructure depends on paying employees, building large buildings, paying for heat, electricity, transportation, lawyers, courts, judges, policemen, government bureaucracies, armies and much more. Doesn't it seem wasteful to rely on tedious and sometimes ambiguous real world laws with a lot of overhead instead of mathematical laws?

When merchants started accepting bitcoins, verifiers (because miners is a misnomer) started to see that their generated coins were worth something. They became competitive and found ways to do the same calculations cheaper which provided security for the network and verified the transactions. Verifiers found out that running these hashing algorithms on one's GPU was far more energy efficient than running them on one's CPU. Specialized software was later constructed for these purposes. Some keep their machines under dry ice. In the not so distant future, hardware FPGAs will be specially designed for this verification process.

The advantages of bitcoin exist because it is an inherently more efficient and less wasteful system. The reward for minting a block, provides a healthy competition that causes the energy cost to be driven down.

Additional privacy layers and smartphones?
by DriedClexler

Is there any serious development underway to make the privacy more robust? There has been talk of "Bitcoin laundry," where large pools swap their coins around between each other to make it harder to connect a coin/address with an owner. But for this to seriously work, it needs a lot more people to be involved in it, and it has to be integrated in a way that's secure (against someone just keeping coins in the middle of a shuffle) and transparent to the user (so they don't have to think about the new addresses they generate, or which coins are optimal to send where for the maximum shuffle). How soon can we expect something like this? Also, how soon will smartphones be able to handle this with the same ease as desktops and notebooks?

A.T.: A bitcoin laundry already exists. The volume on it is very low, but if demand increases in the future then such a service is trivial to setup. A mixing service (as they're called) requires a large volume and therefore a persistent demand.

Smartphones can already use bitcoin :) An Android version of the command line Bitcoin was compiled. Additionally one can use an online wallet service (or a bitcoin exchange) to store their bitcoins.

Lost/forgotten bitcoins?
by algorimancer

One thing that concerns me is the fixed maximum number of bitcoins. Lets say people acquire bitcoins, but the amount isn't enough to worry about, so they never use them, or perhaps their computer crashes and they don't have a backup. My understanding is that these bitcoins are permanently lost from the economy of bitcoins. Over time, the total supply would begin to dwindle, presumably pushing up the value of those that remain, until people become frustrated at the small supply and are motivated to move to a new system, then bitcoin is abandoned. In the real world this happens with dollar bills, but the government can compensate for this by creating more. Is this issue addressed in some fashion?

A.T.: The supply of bitcoins is 21 million. The supply of money is infinite. A bitcoin can currently be divided to 8 decimal places. The loss of bitcoins in the future may lead to some deflation however I expect it to be insignificant. In the very long term, even if there was only 1 bitcoin theoretically in circulation, running the world economy would not be a problem. There exists only 6 MBTC in circulation at this moment.

Extreme instability of Bitcoin vs. USD
by Limerent Oil

Why would any merchant IN THEIR RIGHT MIND want to deal with Bitcoin? With the insane USD-to-Bitcoin exchange-rate gyrations happening lately, why would any serious retailer even bother, when the value of Bitcoin vs. USD could change by 50% or more in just a few hours?

A.T.: As liquidity increases transaction costs decrease. If there was already an appropriate clearing house in place, a merchant would be able to automatically accept bitcoins and liquidate them to dollars. In the same way that people who use the internet are not all cognizant of the communication protocols they are using, I foresee the possibility of merchants offering their products in USD, EUR, GBP, and customers purchasing those products in their local currency. And the underlying mechanism which facilitates this transfer is the bitcoin. Bitcoin would provide these same services that payment services, credit cards or banks do but with much less cost to the merchant and customer.

What about the lack of inflation?
by Cyberax

It's long known that economic growth is severely stunted without some measure of inflation. Adopting bitcoins for the global economy would mean that policymakers lose control on money supply, and while there are advantages in this, disadvantages far outweigh them. Additionally, adopting a global currency standard will deny governments ability to influence currency rates robbing them of yet another way to control the economy. Is there any plan to solve this? Maybe a system of independent bitcoin 'roots' operated by governments would help?

A.T.: Ben Friedman has released a lot of work on E money and how it will affect the future and how governments will adapt. The truth is that the government will still have monopolies on much of the operations of the economy such as fractional reserve banking and the issuing of licenses which allow banks to lend money.

Aspirations
by slim

What are your aspirations for the currency? Do you hope for it to be near-ubiquitous — used by corner shops and mainstream merchants like Amazon? Or are you happy to see a parallel economy grow, as a niche thing? Or something else?

A.T.: I have lofty dreams of a world where people can send money abroad without having to pay 20+% in many cases to rip offs like western union. Where people can raise funds through services like paypal but not have their accounts arbitrarily frozen. Where citizens in developing nations who already oppose their government do not have to pay for wars of genocide out of their own pockets as was the case in ex-Yugoslavia where authoritarian control over the money supply helped finance a terrible war and bring about the worst hyper-inflation in Europe since WWII.

Bitcoin in some form is going to be adopted whether it is used as a unique currency, a payment system or as a clearing house. Our aspiration for bitcoin is to provide competition to the current system making everything cheaper for all. It's about cutting the middleman, democratising money and handing back power to people.

Will governments let it survive?
by merdaccia

We live in a world where the supply and movement of money are controlled by governments, central banks, money laundering laws, and financial institutions. How can BitCoin survive in this world? Middle men like banks stand to lose a fortune in fees and exchange rates, governments stand to lose a fortune in taxes if they can't track money movement, and the black market stands to gain a silent way to move value. For BitCoin to gain adoption, some major retailers need to start supporting it, but given the above risks, what stops a government from telling companies in its jurisdiction that they can't accept it?

A.T.: The US is not the world. If their government forces everyone to continue to use typewriters in lieu of computers and pay through the nose, they can. New and better technology, especially when it is revolutionary, does threaten archaic models and practices. Hopefully there will not be contention. My team is already in contact with SWIFT which has operated for 30 years and is the backbone of international money transfer for over 9000 banks. Many forward thinkers see the advantages of bitcoins but it is easy to understand how those perhaps well-intentioned but not well-versed in what bitcoin is can promote FUD.

Regulatory compliance?
by molo

For those of us interested in developing financial services using bitcoin, how have you dealt with regulatory issues? It seems like the SEC and FINRA in the US would not be keen on unregistered broker-dealers and agents and owners not having the legally required Series 7 and Series 24 certifications. Have you sought the UK equivalent certifications? The requirements of lawyers, accountants, certifications etc. seem to put a very high capital cost on starting a legitimate business offering services in this space.

A.T.: As well as being a developer, I own and operate www.Britcoin.co.uk (the UK exchange site). My team has been in negotiations for a long time now with lawyers and regulators. There is no regulatory process or restrictions now on the running of such services. Non-regulated sectors rarely seek out regulation. However, when it comes to bitcoins, I believe the sooner they are regulated the better. If their regulation is pushed by those who understand what bitcoins are then we may be able to regulate them in the best way possible and show the world they were not created for illegal practices. The sooner they are regulated, the sooner users can have legal assurances that merchants are liable for their operations. The negligence seen at MTGox would never have happened in a regulated market.

Although the FSA have not made any official statement about bitcoins. We at www.britcoin.co.uk are hoping that we can show to the proper authorities that indeed we have recorded our history of transactions. That all the money in our users accounts is accounted for. This process would dispel the FUD surrounding bitcoins and allow the people of the world to enjoy the freedoms and wealth of bitcoins that much sooner.

Tax avoidance and illicit trading
by slim

Some "benefits" of Bitcoin, from one perspective, appear to be that its cash-like properties lend themselves to tax avoidance (making transactions without declaring them), illicit trading (e.g. drugs or prostitution) and money laundering. Do you view this as a positive, a negative, or neutral? If you view it as a problem, how can the problem be mitigated?

A.T.: Most new technologies can be used for good and bad. Of course I do not condone or agree with the use of Bitcoins for illegal purposes.

However, I really want people to understand one thing. The criminalization of Bitcoin would not stop the illegal activity that surrounds it. In fact, it would help those who use it as a means of engaging in illegal activity by not regulating the purchasing and selling of bitcoins. Criminalization would only stop people from enjoying the tremendous and fruitful benefits of such a system, it would hinder the social good. Regulation would allow the proper authorities to find and charge those who use bitcoins for illegal activities.

Britcoin.co.uk has kept a clear record of the exchanges which have gone on. Every single transaction is recorded and we are happy to open our books to the proper authorities. We are aggressively advocating and promoting the legalization and regulation of the exchanges.

Bitcoins offer massive potential for positive social change. It would be a sad thing to see Bitcoins outlawed due to ignorance or reactionary feelings. If you outlaw Bitcoin then the illicit trades will still continue, perhaps even proliferate, but the good would disappear.

Kings used to raise capital in order to wage wars. They required popular support before they were able to fund their wars. A common tool in modern day authoritarian regimes is currency manipulation in order to fund their wars of genocide (e.g Milosevic in the 90s). Bitcoin democratises governments.

Quantum Computing?
by SanityInAnarchy

Are there plans to deal with quantum computing, or with any of the algorithms used being compromised?

A.T.: If SHA256 or ECDSA was ever cracked, we'd have far bigger problems to worry about than bitcoin being destroyed. I suspect that there won't be any overnight switch, giving everybody enough time in order to adjust the current system to any changes.

The internet wasn't built perfect. But years of reshaping/patching/incremental design have shaped it into a workable network. Bitcoin will too undergo this transformation with time as it ages.

(More from the call for questions:)

is there ever going to be a bitcoin bank? ... The idea that if you lose or destroy or whatever your computer and lose all your money isn't going to make the general public accept this.

A.T.: Bitcoin now stands at its early stages. It's the kernel of the software stack that will eventually exist for this financial system. Other services and software utilising Bitcoin will exist. A common view is where Bitcoin acts as an automated clearing house between all these user facing services in the future.

Bitcoin's protocol itself will need to be extended in order for it to grow. As the network expands, block sizes could become impossible large once it rivals the transaction volume of a comparable service like VISA or Paypal. To have lightweight clients that don't need to process these large GB sized blocks new protocol commands like a txmatch regex would need to be introduced in order that clients don't need to process the entire block data.

The point to Bitcoin is that you can choose your own level of trust in an external service. One of our group's members, Patrick Strateman, came up with a scheme whereby a wallet could be recovered algorithmically using an email and a password. In the future I expect savings accounts where retrieving the money is an arduous proccess. Then we can go further to where a person has all their funds in a trusted service like with email today- how many people run their own mail servers?

What markets do you think will be the first to most aggressively adopt bitcoins as their currency?

What insights can you offer as to why the US government is having a hostile reaction to bitcoins?"

What kinds of competing P2P currencies are in development, and how will their deployment affect the valuation of bitcoins?

A.T.: Immediately as liquidity improves in exchanges, the best use for Bitcoins will be individuals transferring funds between countries without fees. Our group has a lot of interest from mobile sectors because of the potential as a micropayment system. Currently now in Africa, people use mobile credit as a form of currency to transfer funds across borders, but that's usually less than ideal.

The US government isn't a homogenous entity, and one senator (possibly funded by bankers) made a false claim on Bitcoin- calling it a scheme for drug trafficking networks. It may simply be due to reactionary misunderstanding like the people in Yahoo Finance calling Bitcoin a Ponzi scheme invented by bankers. That's why our group is aggressively pursuing press in order to dispel these myths.

Terminology

If we eventually use Bitcoin in everyday life, say, in the supermarket, how will we deal with prices in fractions of a Bitcoin? What terminology might we use for something priced at 0.00000005 Bitcoins?

A.T.: The accepted 'standard' is to use SI prefixes. 0.005 BC would be 5 mBC.

Here come the regulators ...

How will your business change when countries regulate exchanges? How do you ensure your exchange isn't being used for illicit purposes (to avoid being shut down by government authorities)?

A.T.: It is our goal (and has been for months) to get legal legitimisation. Our organisation has been aggressively seeking FSA regulation here in the UK for Britcoin. Our hope is that when governments do come to look at Bitcoin, they will see a long running, honest, legal exchange with open books. By having something in the law books about Bitcoin, it sets a positive legal precedent in the future and puts us as the policy makers rather than a bunch of old 60 year banker types.

Our exchange complies with the UK Know Your Customer laws which ensures it's not being used for illicit activity. We keep detailed transaction records and run regular audit logs to look for missing funds.

But eventually, one would want to use BitCoins to pay for legal services. My question is; how do you get to that point? Why would a legitimate business accept a currency that is used almost exclusively for illegal means? What is the strategy to convince mainstream businesses that BitCoins have a purpose in the main web, as well?

A.T.: The illicit markets are a very small part of Bitcoin yet the most sensationalist. I can see how one would think Bitcoin is purely for illegal trade if I didn't know better.

Check out the list of merchants.

Full and open disclosure: how many bitcoins do you currently own?

A.T.: 32 BC. At one point I had 6000, but I'm a bad hoarder. Everytime Bitcoins would double (and I'd have $2k), I'd donate half my wealth to other free software developers. Then recently I was going to wait until I had $4k, but the price went down and I'm very bad at holding onto cash :)

But that doesn't bother me at all. We have our group of free software developers developing Bitcoin itself and other related projects. Funds are coming in and we're growing. The goal is to this as a sustainable operation paying developers working on Bitcoin fulltime.

What are the advantages of bitcoin?

One problem I see with bitcoin is it offers very little over what we currently have. If I want to perform an online transaction using my computer, unless I am buying something illegal, then there are already companies which offer products for me to use. If I want to make an anonymous purchase in person, I would easily use cash.

Bitcoin seems to suffer from a lack of portability, which makes me wonder, what "need" is bitcoin catering to? What do I do in my day-to-day life that bitcoin will help me do such that as some point, bitcoin becomes irreplaceable and achieves de facto permanency?

A.T.: Sending funds abroad is time consuming, expensive and difficult. Recently I tried sending funds to a Polish bank from the UK- the bank was closed and I waited until Monday. Requiring me to be in person at the bank, the woman was unable to enter the Polish L looking character into her terminal. I had to aquire an internet banking code to do it online. Waited 3 days, logged in and the internet banking form didn't work. In the end, I ended using a friend to aquire Bitcoins and use the Polish exchange bitomat (we never use Britcoin ourself).

I wanted to donate funds to the excellent Symphony of Science musician. I went to fill in the Paypal form, spent 10 mins signing up to an account, entering all my very personal details and my card was rejected. In the end I got him to accept Bitcoins and donated directly without paying fees to Paypal.

Sony recently was hacked. Millions of accounts were leaked. If they were using Bitcoins then the addresses people donated to would be known to the attacker. Not my private keys which enable said attacker to spend my cash.

With commerce, everything becomes cheaper. Bitcoin vastly reduces the overhead needed for fees. We no longer require staff sitting inside banks pressing numbers on a keyboard since the system is automatically backed by mathematics and cryptography, not laws and people.

Gendou writes "The EFF issued a statement that it will no longer accept Bitcoin donations, has not used any of the donations, and will transfer all past donations to The Bitcoin Faucet. See also additional and forum threads."

Gendou writes "The EFF issued a statement that it will no longer accept Bitcoin donations, has not used any of the donations, and will transfer all past donations to The Bitcoin Faucet. See also additional and forum threads."

olsmeister writes "A Bitcoin user allegedly has had $500,000 worth of Bitcoins stolen from him. A hacker supposedly gained access to the user's home computer and managed to get the user's wallet.dat file, which contained the cryptographic keys that allowed him to drain the user's balance."

"Bitcoin," says the project's website, "is a peer-to-peer currency. Peer-to-peer means that no central authority issues new money or tracks transactions." Wikipedia offers a readable explanation of the underlying technology. In (very) short, Bitcoin uses a distributed database and public key encryption to allow users to reassign ownership of units of Bitcoin currency (BTC), and does so in a way that can keep the user's identity private. Bitcoin isn't yet accepted the way credit cards are, but it's more than theoretical. You can buy (some) things with Bitcoin, and trade the currency itself. Now, you can ask question about Bitcoin of Amir Taaki, a developer of client interfaces and stock trading software for Bitcoin, and owner and operator of trading exchange Britcoin.co.uk. Amir requests that questions focus not "so much on the mining (too many people get focused on that when it's a minor aspect of Bitcoin) nor simple technical questions (people can go find that info themselves on Wikipedia/the forums/sourcecode)," but rather on the harder-to-answer questions. Reading some of the related stories listed below may give you ideas on what those are. Standard Slashdot Interview rules apply: ask as many questions as you want, but please keep them to one per comment. Amir will get back with his answers.

An anonymous reader writes "There's a popular discussion happening at the Bitcoin forums about a new browser-based bitcoin miner released today. This lets people mine for bitcoin straight from the browser. There's talk of making an embeddable version. How long until websites start using CPU power from their users to create Bitcoin for their owners?" As Bitcoin gets more attention, I foresee malware with payloads promising to do the same thing.

angry tapir writes "A Google engineer has released an open source Java client for the Bitcoin peer-to-peer currency system, simply called BitcoinJ. Bitcoin is an Internet currency that uses a P2P architecture for processing transactions, avoiding the need for a central bank or payment system. Cio.com.au also has an interview with Gavin Andresen, the technical lead of the Bitcoin virtual currency system." Update: 03/23 16:22 GMT by T : Confused? BitcoinJ author Mike Hearn points out this video explanation of how Bitcoin works.

IamTheRealMike writes "The BitCoin peer to peer currency briefly reached exchange parity with the US dollar today after a spike in demand for the coins pushed prices slightly above 1 USD:1 BTC. BitCoin was launched in early 2009, so in only two years this open source currency has gone from having no value at all to one with not only an open market of competing exchanges, but the ability to buy real goods and services like web hosting, gadgets, organic beauty products and even alpaca socks."

Teppy writes "How's this for a disruptive technology? Bitcoin is a peer-to-peer, network-based digital currency with no central bank, and no transaction fees. Using a proof-of-work concept, nodes burn CPU cycles searching for bundles of coins, broadcasting their findings to the network. Analysis of energy usage indicates that the market value of Bitcoins is already above the value of the energy needed to generate them, indicating healthy demand. The community is hopeful the currency will remain outside the reach of any government." Here are the FAQ, a paper describing Bitcoin in more technical detail (PDF), and the Wikipedia article. Note: a commercial service called BitCoin Ltd., in pre-alpha at bitcoin.com, bears no relation to the open source digital currency.

Teppy writes "How's this for a disruptive technology? Bitcoin is a peer-to-peer, network-based digital currency with no central bank, and no transaction fees. Using a proof-of-work concept, nodes burn CPU cycles searching for bundles of coins, broadcasting their findings to the network. Analysis of energy usage indicates that the market value of Bitcoins is already above the value of the energy needed to generate them, indicating healthy demand. The community is hopeful the currency will remain outside the reach of any government." Here are the FAQ, a paper describing Bitcoin in more technical detail (PDF), and the Wikipedia article. Note: a commercial service called BitCoin Ltd., in pre-alpha at bitcoin.com, bears no relation to the open source digital currency.

Teppy writes "How's this for a disruptive technology? Bitcoin is a peer-to-peer, network-based digital currency with no central bank, and no transaction fees. Using a proof-of-work concept, nodes burn CPU cycles searching for bundles of coins, broadcasting their findings to the network. Analysis of energy usage indicates that the market value of Bitcoins is already above the value of the energy needed to generate them, indicating healthy demand. The community is hopeful the currency will remain outside the reach of any government." Here are the FAQ, a paper describing Bitcoin in more technical detail (PDF), and the Wikipedia article. Note: a commercial service called BitCoin Ltd., in pre-alpha at bitcoin.com, bears no relation to the open source digital currency.