Bitcoin Releases Version 0.3

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.

Comments

Obvious flaw:

[tomhudson]

from wiki

Whenever a Bitcoin user makes a transaction, their node broadcasts the transaction to the network of nodes. When transaction data is received through a node, the node begins a proof-of-work calculation in an attempt to create a block containing the transaction. All nodes essentially race to create a block, as the first one to create a block gets Bitcoins as a reward. Once a node successfully creates a block, it broadcasts the block to the network. Other nodes receive the block, perform a proof-of-work check, and add it to their chain if it is valid. As more transactions occur, blocks are created and added ad infinitum. The longest proof-of-work block chain is acknowledged to be the oldest and most reliable account of the online transactions.

This mechanism is claimed to be virtually tamper-proof. For an attacker to manipulate the record, he must outpace all of the other nodes on the network to produce the longest proof-of-work.

The assumption that the longest one is the oldest and most reliable is invalid, Since anyone can peer, there's no reason that a peer can't fake itself as 20, 30, 100 peers, and, working on a very fast machine, produce a longer chain quickly than an older peer.

Re:Ummmmmmm

[Anonymous Coward]

New currency can be generated by solving difficult math functions (cryptographic functions)

Since these functions take a certain amount of energy (electricity) to complete, the value of the currency is driven towards the price of electricity.

It's similar to mineral mining: on average you have to spend a certain amount of time and effort to mine a certain amount of gold, and this tends to set bounds on the value of the gold.

Re:How secure

[hitmark]

i would say that any currency is backed by the goods and services one can buy with it.

the one way to make sure a currency is usable in daily trade is for it to be accepted as tax payment by local government.

Re:uhhh.... exactly

[blackest_k]

couldn't find anything on the 60's but this page from 2009 was interesting.

http://www.brianrwright.com/Coffee_Coaster/01_Columns/2009/090609_Liberty_Dollar_Game_On.htm

with the currency being made of precious metal and not being legal tender the worst that happens is you go for scrap value.

Re:Ummmmmmm

[xaxa]

I've installed the software (from Sourceforge) and I still don't really understand it.

I have an address to receive payments (1D3ojVLNgD7D5WEKdq37m291N3Cai5CHTU) but it seems I'll have to wait a while to generate a "coin" myself. When that's done I don't know what I'll do with it -- how could I spend it? Why would you accept it?

Re:How secure

[Anonymous Coward]

All money is virtual. Direct barter is the only thing that isn't, and even then only after the transaction has been completed. Precious metals are no different. The price of gold has gone up to 4x what it was a decade ago and it can drop again just as quickly. Clearly it isn't a reasonable, stable store of value. Also, traditionally the value of gold and other precious metals has generally been explicitly set by nations laws. For example the one sixteenth rule for the value of silver to the value of gold. So, although precious metals may have intrinsic value (the corrosion resistance of gold, its malleability and decent conductivity make it useful in many applications in small amounts, and silver is the most conductive metal and is vital in a number of chemical processes such as traditional photography) that has little relation to their traditional value, which has always been artificial. Sure, it's rare, but there are plenty of rare things in the world and some of them are considered valuable and others no-one cares about.

Re:kdawson strikes again!

[amirulbahr]

Any idea how to do this for the Slashdot RSS feed?

Re:Inflation at the speed of Moore's Law

[HungryHobo]

I'm curious- from the sound of this it would be a great way for botnet herders to turn their victims electricity bills into cash(assuming I can swap my bitcoins for regular pay-my-taxes cash somehow). What measures are in place to prevent this?

Re:Inflation at the speed of Moore's Law

[Teancum]

I'm trying to get this picture straight: The whole purpose of the blocks and CPU time metric is to get involved with the distribution of the initial set of money, not necessarily that the currency itself necessarily requires massive quantities of computing power.

BTW, it seems like this coin generation issue is something that can be used as an attack vector, and is a different issue than the problems associated with double spending the money. What kinds of safety protocols or protection protocols are in place to keep somebody from simply "minting" money at will?

"He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than
everyone else combined, than to undermine the system and the validity of his own wealth."

I don't buy this argument, as found in the PDF file about Bitcoin. Mind you, I'm just skeptical here and not trying to say it is impossible to resolve, but I don't see the protocols or transactional security which is dealing with this issue.

"Although it would be possible to handle coins individually, it would be unwieldy to make a
separate transaction for every cent in a transfer. To allow value to be split and combined,
transactions contain multiple inputs and outputs. Normally there will be either a single input
from a larger previous transaction or multiple inputs combining smaller amounts, and at most two
outputs: one for the payment, and one returning the change, if any, back to the sender.

"It should be noted that fan-out, where a transaction depends on several transactions, and those
transactions depend on many more, is not a problem here. There is never the need to extract a
complete standalone copy of a transaction's history."

I'm really curious about this particular issue and how a complete copy of the transaction's history doesn't need to be maintained. Again, it gets to the coining of the money issue, where it would seem as if the transaction trace would have to go back to when the money was coined in the first place. Some sort of planned decay of the history certainly could be used in terms of suggesting that after a certain amount of time it can be presumed that a certain bit of transaction history if valid (using a variety of metrics to make that happen that could even go beyond a pure timestamp measurement). Still, the option to view the full transaction history for what fan outs and inputs were associated with that transaction seems like a critical feature.

Re:How secure

[MyFirstNameIsPaul]

What is the problem with deflation? In the U.S. we had deflation for over a century and it worked out quite well. (Spiral deflation is only theoretical - it has never happened.) Hard currency has been used for thousands of years and there are no indications that any economy has resorted to mass saving or hoarding. People generally enjoy spending money and growing their wealth; it's human nature.

Inflation, on the other hand, is the root of much evil. It has utterly crushed economies and created conditions ripe for mass-murdering, genocidal tyrants to come to power. Deflation has never done such a thing.

Money makes trade between two parties much easier because without some form of currency we would have to rely on a Coincidence of Wants. It also acts as a method of informing producers what consumers are desiring, generally in a way that is much more efficient than centralized control.

There is nothing wrong with interest, per se. It allows those with capital an opportunity to increase wealth and those without capital an opportunity to create wealth. Both parties win.

Increasing taxes generally has the effect of reducing economic activity (Laffer Curve). Using taxes to control the money supply would have the effect of destroying production.

The concern of the solvency of the lender should only be for the interested parties. However, in your example of fractional-reserve lending this can really only be practiced with paper currency. In order to make a loan, the currency must be provided. If a bank has $10 of deposits and wishes to make $15 in loans, it must find the extra $5 from some place. In the case of a hard currency, it must find another party to provide the $5, but in the case of a paper currency, it simply gets the money from the central bank at some interest rate that is probably at a rate below what the market would demand for that money.

Inflation, even a 'small' amount, has the effect of encouraging malinvestment. When people know that come time to retire, that $10,000 they added to their savings this year is only going to be worth $5000 when they retire, they know that they must put this money some place to protect it from inflation. But people are generally poor at choosing places to invest their money, and they are downright awful when they feel pressured to do so. They invest in stocks that don't give dividend yields; they invest in real estate and have no idea why. In short, they invest in things that are beyond their understanding because they feel pressured to do so. OTOH, if there were instead a small amount of deflation, convincing people to part with their money would be considerably more difficult. Since the average person could be confident in knowing that a penny saved is truly a penny earned, not some fraction thereof, they would stick with what they know, and the economy would grow more efficiently.

It is the paper currency that is the root of evil. Many try to speak of it as if is some new concept; the next evolutionary step after gold, but fiat currency systems have been around for thousands of years, and every society that ever engaged this policy has gone bankrupt, including Ancient Rome.

Re:How secure

[Myopic]

For fifty years, the only valid currency has been crude oil. All national currencies trade against the cost of a barrel of oil. What makes you like gold? It's just soft yellow metal. You can't fill your gas tank with gold. Military might (which is the backing for most national currencies) is certainly more useful than your silly gold.

Re:How secure

[MrNaz]

I wrote about the problems in the Eurozone that arise from having conflicting monetary and fiscal policies in a blog entry linked to below. Basically put, the Eurozone forces member states to have materially identical monetary policies due to the unified currency and centralized state banking. Under such circumstances, nations are unable to compensate for national situations using fiscal policy alone, and their attempt to do so is a large part of what has landed Europe in the fiscal mess they're currently in.

http://www.mrnaz.com/?s=publish-blog&entryid=208