Bitcoin

Bitcoin-225 Bitcoin purports to be a peer-to-peer virtual currency without a central monetary authority. You download and install the client. The client lets you send and receive Bitcoins. It also lets you try to create new Bitcoins. Bitcoin has a list of hard computer problems and if your computer is the first to solve it, you get a new block of Bitcoins. Designers say that they've set up the problems and the blocks so that new Bitcoins will be created at a slower and slower rate. By 2030 or so, there will be 21m Bitcoins, and that's it. 

Experience with game currencies makes me skeptical about Bitcoin. 

Despite the claims, Bitcoin does have a central monetary authority: The bot that releases new coins and stops at 21m. As central monetary authorities go, it's not very good. A fixed currency guarantees that the price level will continuously decline as the economy grows. Price instability in either direction is bad, because it shrouds the future value of assets in darkness. Human psychology hates deflation, because it guarantees that each son will earn less than his father and that salaries will fall over time. And what does the bot do about hacks, which are sure to come? Nothing. 

How do I know these things are bad? I know because I play games. Game designers could have made currencies on the Bitcoin model many years ago. They didn't. One thing we know about game currencies: People like them. We know this because the objective of the game designer is to make people happy. Game currencies are good currencies. What are the features of those currencies?

Bitcoins don't have these features. That makes me skeptical. 

Games have become an extensive laboratory of economic and social policy. Game designers are the great researchers of our age. If there's something to be discovered, they will discover it first. Anyone with a crazy new idea should look for it in games before getting too excited. 


Comments on Bitcoin:

bc says:

Skepticism is healthy and important. Unfortunately, it's not typically applied to common thinking on the USD, the Federal Reserve, inflation, or Keynesian economics.

The "puzzles" are actually an important innovation for securing the network.

While bitcoin is an infant in the scheme of things, it employs very strong cryptography, and solves problems (inherent in currencies) that most people will never understand - nor should they.

Posted Jul 6, 2011 10:05:44 AM | link

Anthony Thomas says:

There isn't a central 'bot' that hands out coins for people doing the mining(solving the "puzzles") The people mining are also recieving and broadcasting transactions to the rest of the network. successfully solving a hash simply allows them to add a transaction to a block of transactions where they recieve 50(amount to be lowered over time) coins. My point being there is not one system that would needed to be hacked to change or exploit this, but the whole network.

I'm not saying there aren't other reasons to be skeptical about bitcoins, just that this particular bit of information is not entirely accurate.

Posted Jul 6, 2011 10:45:48 AM | link

Edward Castronova says:

bc: The Federal Reserve only exists because of strong skepticism about wildcat currencies. Having a zillion currencies floating around with no central control leads to financial panics.

As long as I can remember there have been claims that we could reduce economic problems with a policy of "sound money" - usually expressed as going back to the gold standard. Advocates like the idea of gold because they think it more real and solid, somehow not subject to manipulation. Is that what's driving Bitcoin, the belief that there's a benefit to a fixed amount of currency?

But there has never in history been such a thing as sound money. It does not exist. Bitcoin will not be sound money either. It will be hacked. OK, the algorithm may be sound, sure. But what about claims to Bitcoin possession? How has BitTorrent done in terms of making sure everything torrented is also a good file? Having bad Torrents in the system doesn't hurt BitTorrent, but it will hurt Bitcoin. Well, not *hurt* it, but just make it like any other form of money.

Under the gold standard, people would take gold coins and clip off the edges, melting down the clippings and selling them. The clipped coins stayed in circulation. Over time, that one ounce gold coin became a 0.8 ounce coin. It lost value. Bitcoin is no different, except, there's nobody able to restore its value when something seriously crazy happens.

Posted Jul 6, 2011 11:08:30 AM | link

Edward Castronova says:

AT: Point taken. By "bot" I mean the program that does everything. I think of it as a bot that lives in every client. It's a common bot, not a central one, in that its programming is the same no matter where instances of it happen to live.

Posted Jul 6, 2011 11:10:04 AM | link

Technollama says:

I keep reading that Bitcoins are secure. This may be true of the actual keys which represent the currency, but as with everything else, the security breaks down at the user level. The client is insecure, the wallet is unencrypted, and the anonymity favours scamming.

Even a cursory trawl through the BTC forums will show you that the currency is rife with malware, scams and problems with the exchanges. This makes Bitcoin less secure, not more, than fiat currencies.

Posted Jul 6, 2011 11:12:12 AM | link

Eliott Marsden says:

Oh dear:

'Bitcoin purports to be a peer-to-peer virtual currency without a central monetary authority"

Bitcoin doesn't purport to be that, it is that.

I have a question for you; have you downloaded the Bitcoin client and run it? Unless you have done this, you should not even begin talking about it.

You get money only by doing things that can be interpreted as "productive work." No freebies or handouts, and nothing abstract. You don't solve puzzles to get coin, you run FedEx quests.

You dont understand how Bitcoin works. Solving hashes IS productive work. It creates the coins and helps run the system by processing transactions. There are no 'freebies'. You have not done your homework.

Mild inflation. As in the real world, mild inflation makes people happiest. Small enough to be unnoticeable in the short run, yet gives people a sense over time that their wealth and power is rising (even if it isn't).

Inflation does not make people happy. You do not know what inflation is, where it comes from and what its real effects are in the real world. Inflation is an increase in the supply of money. It harms savers, reduces the value of your paycheck, makes food and living more expensive... you could not be more wrong about this. If you think that its OK to steal money from people through central banking and inflation, because it 'makes them feel good' by tricking them into thinking that their wealth is increasing, even if it isn't, you perhaps, need to rethink your morals.

It assumed that the currency will be hacked and exploited. A strong central authority is in place to seize illicit funds and roll back damage.

This is nonsense, statism and a straw man. You obviously do not understand cryptography, or anything about Bitcoin, liberty or economics.

Your skepticism is unfounded, by definition, because you are not in possession of the facts.

Its a great pity that there are not more people out there who have the sense to actually try something before trying to tear it down, especially as it costs nothing to try, and nothing to read about how it actually works.

If Bitcoin were a new online game, you would not dare review it without trying it first; apply that rigorous standard to everything you write about, and your posts will be more valuable.

My 2¢ (Bitcoin Cents that is, and if you liked this comment, tip me: 1CvREbwrFWmDSbXAjrisJBfWL7trGKVMmW)

Posted Jul 6, 2011 11:25:17 AM | link

Edward Castronova says:


Another thing I remember, through the years, is that people who want
to return to the gold standard are really passionate about it. I
mean, every policy has people who want it to happen. But the gold
standard people have been quite intense, probably more intense about
their issue than any others I've encountered. There's something
about sound money, psychologically, that brings out intense
feelings.

So, Elliot, I'm sorry not to have analyzed this issue to your
satisfaction. You're right - I got a lot of stuff backwards.
Everyone should just download the Bitcoin client and see for
themselves.

Posted Jul 6, 2011 11:38:38 AM | link

Isaac Knowles says:

Inflation is an increase in the supply of money.

This is not the correct definition of inflation. Inflation is the rate of price increase that results when the money supply is constantly increasing relative to the quantities of all goods & services produced in the economy. If, alternatively, the money supply ceases to grow (bitcoin's future) and the number of goods and services traded rises unabated, then the currency, by definition, will experience deflation.

It harms savers, reduces the value of your paycheck, makes food and living more expensive...
This tends only to be true of unexpected increases in, or very high rates of, inflation. Very low rates of inflation, the likes of which we have in the developed world, afford savers and borrowers the security that whatever the terms they agree upon, the rate of interest will be exactly or near what they expected it to be for the duration of the transaction.

If bitcoin experiences exponential growth in usage over time, then as its supply ceases to grow, so shall it experience a very high level of DEflation, which is equally "bad" for people, especially borrowers. Central monetary authorities generally exist to avoid the extremes on either side, and usually prefer a moderate level of inflation, because that gives them a margin of error that deflation does not.

Posted Jul 6, 2011 12:10:49 PM | link

greglas says:

Seems like a lot of hassle to me if you're paying for something online. So what's the appeal of paying for things with bitcoins over old fashioned currency / paypal / credit cards?
Technology > government?
It's curious, though -- will be interesting to watch how governments respond.

Posted Jul 6, 2011 1:01:04 PM | link

Edward Castronova says:


I think one response to wildcat currency is for dollars, euros, and yen to go virtual.


Wait. They're already virtual. I mean, achieve the degree of internet efficiency provided now by Paypal, but without the intervening institutions of Paypal. 

Mobile

Posted Jul 6, 2011 2:09:52 PM | link

Technollama says:

Tried it, mining is becoming unprofitable, the exchanges are a joke, so there is little incentive to the general public to buy BTCs (unless you want to speculate).

Moreover, all of the speculative swings make it very unattractive as a currency, with 25% swings in value in a few hours a merchant would be crazy to accept it as a means of payment right now.

The idea is interesting, but it is not the silver bullet to the USD that libertarians dream it is.

Posted Jul 6, 2011 2:10:06 PM | link

Technollama says:

They are a bit hit with libertarians, Ayn Rand supporters and Tea Party members. It has to do with Ron Paul's love of all things gold.

Posted Jul 6, 2011 2:11:49 PM | link

greglas says:

Ted -- yeah, I suppose that would be good, though I'm not sure where the impetus for that sort of change would come from.

TLam -- Hmm, well, if it's the crypto-libertarian front, they're welcome to their bitcoins and all the interesting consequences. (E.g., have fun at tax time!)

Posted Jul 6, 2011 2:53:32 PM | link

Eliott Marsden says:

Deflation is a good thing, not a bad thig:
http://www.youtube.com/watch?v=R8STuvRHPfI

Inflation is an increase in the supply of money:
http://mises.org/daily/2914
http://mises.org/money.asp

dont take my word for it, read it for yourself!

Posted Jul 6, 2011 3:27:29 PM | link

It's not 1970 any more says:

Greg: the impetus comes from Bitcoin. And Facebook credits.

I feel for Bernanke and friends. Their heads are already messed up by the failure of Keynesian economics - which has less to do with economics than with the failure to measure the growth of the virtual economy - and now they have to deal with currency evolution on the scale of the Zollverein.

Posted Jul 6, 2011 3:43:19 PM | link

Isaac Knowles says:

Elliot, the link you directed me to affirms my original definition:

"Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods." http://mises.org/daily/2914
It is measured by the rate of change in prices that results when the volume of money and credit change in relation to the volume of goods.

Deflation and inflation are neither good nor bad, but extreme amounts of either, or volatility in the rates of change, can be very problematic. Deflation is just "negative" inflation. The difference from a central monetary authority's point of view is that low inflation can be controlled and maintained, while any amount of deflation, once it presents, is much more difficult to stop. This is because interest rates can always be increased (thus reducing inflation), but they can never be made to go below zero (thus reducing deflation). Lacking a central monetary authority, bitcoin might run into an issue of accelerating deflation if the goods traded in it rise. That means that if I want to buy something on credit in bitcoins, the effective interest rate I pay will become greater and greater over the term of the loan. I will thus not be interested in getting any credit in bitcoins. This severely limits the usefulness of bitcoins. Whereas, if I could trust that the rate of change in prices in bitcoins stayed relatively constant, I could negotiate an interest rate that takes this into account and would be very happy to borrow in bitcoins.

The ideal, of course, is a constant price level. If bitcoin could guarantee that, I'd have no argument. But it can't, so I do.

Posted Jul 6, 2011 4:14:01 PM | link

Outlook says:

i think the main problem with this system is the controll issues, whose to say waht

Posted Jul 6, 2011 4:22:59 PM | link

Eliott Marsden says:

This is why inflation is bad:

http://mises.org/daily/3010

And by 'bad inflation', I do not mean of the sort that is built into Bitcoin, or that results in the discovery and mining of new gold reserves.

I'm glad that we agree on the definition of inflation, at least. I suggest that you download Bitcoin, and start using it. You have nothing to lose.

The rate of change in Bitcoin at the moment is what could be classed as 'volatile'. This will settle down eventually. In the meantime, it is incumbent upon you to start using it, the very act of which will help stabilise the exchange rate.

Thank you for your insightful and thoughtful replies!

Posted Jul 6, 2011 4:57:09 PM | link

pjz says:

Wow, Ed, I expect better from you. You clearly haven't done your homework. Hopefully you'll take another look and see how mining coins really works, what would really be involved in trying to spend the same bitcoin twice, as well as trying to come up with some actual reasons to prefer inflationary currency.

Posted Jul 6, 2011 6:02:20 PM | link

knife says:

just a thought... why do we need interest rates with bitcoins?

Posted Jul 6, 2011 8:29:23 PM | link

Edward Castronova says:

I hated econ. But now, as a curmudgeon, I think everyone should take
as much econ as possible.

Interest rates measure the change in value of currency across time.
In an economy with general deflation, interest rates should be
negative. If you give me $100 now, I should only have to give you
$95 a year from now to pay it back.

Posted Jul 6, 2011 8:37:20 PM | link

Alex says:

You Sir, Are an ignorant. Thank you for sharing your ignorance.

Posted Jul 6, 2011 8:38:17 PM | link

Isaac Knowles says:

Because usury is alive and well? I am assuming that people will want to extend one another credit in bitcoins. The price of credit is summarized in an interest rate.

Posted Jul 6, 2011 8:40:53 PM | link

Alex says:

There is NO BOT, no central computer that does anything. Do you know how your browser and each secure website communicate? How they exchange keys? They are solving puzzles and playing games and represent a common bot... what ever that means to you, if it works for you, go with it. But your metaphor is confusing your and many of less technical readers.

Posted Jul 6, 2011 8:44:19 PM | link

Alex says:

As you say the keys (and transactional network) is secure. The insecurity of the user is a social and user interface concern. It's a new project. Be patient. Don't write it off just because it's not ready for Gramma yet.

Posted Jul 6, 2011 8:46:33 PM | link

Alex says:

We should stop using this baby explanation 'solving puzzles'. It's solving ONE puzzle. Since that puzzle is very difficult to explain in a sentence, why don't we just say the PURPOSE if we are avoiding the WHAT, let's just say WHY.

The miners are VALIDATING the transaction history. And it requires enormous computational power. Like months and months of power to validate 10 minutes of transactions. The lucky miner who VALIDATES is awarded some coins.

Posted Jul 6, 2011 8:51:55 PM | link

Alex says:

> Interest rates measure the change
> in value of currency across time.

No it is more sinister than that. Interest is the cause (not the result) of inflation. Interest rates encourage borrowing. Borrowing CREATES money. Yes, really. When you BORROW money, the bank creates money and if you request the fiat paper money and the bank happens not to have enough in the back, they just ask for more from the Federal Reserve/Central Bank. The Fed 'buys' bills (out of thin air) from the Treasury. If this sounds fantastically unbelievable, you're not allow. Dollars and Euros are not backed by anything. Nothing at all except the debt on more dollars and euros. And now there is more debt than money, so the US (and Greek and Zimbabwe and Venezuela and just about all of the worlds) governments are printing money.

Interest is nothing. It costs the central bank nothing. In fact your savings gives the central bank the legal right to loan out 10x more! I'm not kidding.

Posted Jul 6, 2011 8:59:50 PM | link

knife says:

yeah I get that. I know nothing about econ but interest seems to be the key "evil" in anything to do with loans... be it loan sharks, the corner bank, uncle joe or uncle sam for that matter. Interest is the one thing that enslaves us all and turns every dollar bill in your pocket into debt.

Since BTC is peer to peer, wouldn't loans be private transactions between peers? There are no banksters applying IR to bitcoins so how would that work? Who's to say there has to be interest on good faith loans between "friends" or trusted peers?

The thing I find most interesting about BTC is that all the usual "laws" and economic rules don't really apply anymore...

In a sense, IMHO, with the concept of bitcoins (or whatever accepted form eventually comes out of it) we have the inkling of an emergent evolution happening with how we perceive the use currency... http://en.wikipedia.org/wiki/Emergent_evolution

let's all open our minds a bit.

Posted Jul 6, 2011 9:01:41 PM | link

knife says:

you are correct Sir... it's all outlined here: http://en.wikisource.org/wiki/Modern_Money_Mechanics

Posted Jul 6, 2011 9:07:18 PM | link

knife says:

sorry for the html goof, my bad.

Posted Jul 6, 2011 9:08:01 PM | link

Isaac Knowles says:


> All the usual "laws" and economic rules don't really apply anymore

I think you're conflating rules of economics with real-life economic institutions. The rules of economics will always apply: as the price of a good goes up, less will be demanded and more will be supplied.

>There are no banksters applying IR to bitcoins so how would that work?

Just because there is no bank doesn't mean a line of credit can't be negotiated. The first lenders weren't bankers, after all. It's certainly the case that I can get a loan from a friend in an emergency at no interest. But if I want a loan from a stranger, that lender is taking on a risk, i.e. that I will actually pay back what I borrowed. Interest rates are compensation for that risk, as well as for the loss of money while the principal is being repaid.

I'm generally skeptical of the notion of emergence, but that is not the source of my skepticism of BTC. Rather, my mistrust of BTC as a viable currency rests on the fact that no one can give me any assurances of its sustained value as an asset. Absent those assurances, why would I not default to a currency that has a history of stability and usefulness as a medium of exchange, unit of account, and store of value?

Anyway, I'm not saying anyone HAS to lend. I'm just saying that people will probably WANT to lend. If they do, they establish an interest rate for that loan. In that case, interest rates will fluctuate, probably wildly, in the absence of a central monetary authority.

Posted Jul 6, 2011 9:28:14 PM | link

Isaac Knowles says:

> No it is more sinister than that
Actually, its not sinister at all. Its a fact.

> Interest is the cause (not the result) of inflation.
No, its not. This was addressed above.

>Interest rates encourage borrowing.
They do if they are low.

>Borrowing CREATES money.
Well, fractional reserve banking 'creates' money. Borrowing is just one part of that process.

>When you BORROW money, the bank creates money and if you request the fiat paper money and the bank happens not to have enough in the back, they just ask for more from the Federal Reserve/Central Bank.

Not really, no. This is more of an FDIC/NCUA thing. And the reason people don't go to withdraw all their money all at once is because there exist institutions that protect savers from unscrupulous bankers.

> The Fed 'buys' bills (out of thin air) from the Treasury.

Categorically false. And illegal in the United States.

> Dollars and Euros are not backed by anything.

Neither was gold, before it found industrial use, except insofar as people thought it had value. This, of course, is the point: Currency has value insofar as people think it has value.

> Interest is nothing.

Then how can it be sinister?

>In fact your savings gives the central bank the legal right to loan out 10x more!

The central bank adjusts the money supply by buying and selling treasuries using intermediate dealers. My savings have nothing to do with it, only the incentives that the Fed creates for other banks to increase or decrease their lending.


Posted Jul 6, 2011 10:38:20 PM | link

Isaac Knowles says:

>> The Fed 'buys' bills (out of thin air) from the Treasury.

>Categorically false. And illegal in the United States.

I think you meant Treasury Bills, but perhaps you meant dollar bills. This is also not entirely accurate, but the Fed does have an account at the Treasury as part of its balance sheet.

Posted Jul 6, 2011 11:09:50 PM | link

Julz says:

"It's a common bot, not a central one, in that its programming is the same no matter where instances of it happen to live."
You're still misrepresenting the situation somewhat.
Anyone is free to write another bitcoin program and join the network - it's effectively the shared blockchain (think of it as a shared accounting ledger) and the size of the existing network which won't let you change the core rules. If you do violate what the majority of the network considers is the right way to make entries in the ledger - your modified version is simply useless.
..also, there's no reason to suggest game designers 'could have' done it years ago, any more than forex software writers 'could have'. It took a combination of highly available computer power, high speed peer to peer systems, a solid understanding of cryptography and a stroke of brilliance. Even if you 'could have' envisioned it 10 years ago - it's doubtful you could have built a practical version of it.

Posted Jul 7, 2011 7:22:05 AM | link

Edward Castronova says:

What happens when 51% of the network thinks my Bitcoins are genuine?
Do we then have TedBitCoins in competition with NotTedBitCoins?

Game designers *could* have made a system like this 10 years ago.
Such as: "Every account in the game has a 1% probability of getting
new money every login. This continues until 21m gold are created,
when it stops."

The issues I have are not with the technical details. It's about how
the world reacts to anything that wanders up with the name "Money"
on its head.

Posted Jul 7, 2011 8:54:45 AM | link

knife says:

only time will tell... for now we'll discuss it in circles ;)

Posted Jul 7, 2011 11:00:53 AM | link

Easy says:

Wow, I can't believe my search for Bitcoin news brought me here. This article is so technically inaccurate, it makes me want to vomit. I'm sure others have told you the same, but I'll repeat it anyway, just to drill it into your tiny brain. There is no central bot that produces or hands out bitcoins--it's a P2P currency (peer-to-peer). You do actual work to create a block of bitcoins (SHA-256 hashing). The whole network of machines running the Bitcoin client then verifies that the work you did is correct, giving legitimacy to your claim that you now own that money. Lack of a central authority is a good thing. People who own bitcoins are the only ones who determine how much they're worth against fiat currencies when they exchange them for those monies. That is also a good thing.

I wish there were a way to down-vote results in Google's search rankings.

Posted Jul 7, 2011 11:41:10 AM | link

Edward Castronova says:

My tiny brain also wishes that Google wouldn't have directed you
here. And I hope your vomiting doesn't hurt too bad. Anyways, to the
issues:

"There is no bot." That's correct (as I've said - please read the
thread before yelling). There is a protocol dictating when and where
Bitcoins will be created. That protocol involves getting your
machine to solve a problem. The reward for the first machine to
solve the  is a block of Bitcoins. I hope I'm understanding it, but
I'm sure I'm not.

Here's my point: Whatever the actual process, it's not "meaningful
work" in the sense of the real world or video games. Technically,
yes: It is an operation that consumes resources and results in a
proof of work. But it doesn't contribute anything in a human sense
to the universe. It's not "Take this antidote to the plague-stricken
village." Meaningful work is work that an ordinary human being could
view as part of some quest or achievement or contribution. My point
was that game designers give currency to people as a reward for
something that has relevance in the context of the fantasy world.
They could have just handed it out, but they didn't. They made it so
you earn money by contributing something to somebody.

Now, as for the whole network verifying one machine's claim to have
some Bitcoins - so Bitcoin has completely solved the peer to peer
trust issue. That's great news. C'mon.

As for people themselves determining the value of Bitcoins vis a vis
dollars: Yes! Moreover, I alone determine the value of my apples. If
I insist that my apples are worth $10m, they magically are worth
$10m, and it makes no difference how many other people out there are
selling apples for $1 that they foolishly claim are just as good as
mine. C'mon.

"Lack of a central authority is a good thing" Look, humans lived for
millenia with unregulated money. There were known problems that got
worse as the financial economy grew. The move to regulated fiat
currencies was not an accident or a conspiracy - it was a
much-discussed policy performed by several openly democratic
societies at about the same time.

Bitcoin claims to be a good form of money that does not need
regulation. May it be so; we'll save a lot of money and hassle that
we now spend on central banking. But I am concerned for its future
because that nobody in the real world or in a big game has made a
currency with these features. It makes me think that human beings
don't like that kind of money. That's all. It may well be
technically perfect, but I'm not making a technical point. I'm
making a social-economic point: So far, the world has not shown any
desire for a fixed money supply that appears randomly, and so far,
the world has not created a form of money that could not be hacked.
Bitcoin is trying to swim up a stream that looks pretty rough.

Posted Jul 7, 2011 12:30:21 PM | link

True Religion Jeans says:

yes

Posted Jul 8, 2011 3:20:09 AM | link

ConnyT says:

" If I insist that my apples are worth $10m, they magically are worth $10m"

C'mon yourself. Surely you must understand the basics of trade? Your apples are only worth what someone else it willing to pay for it.

Posted Jul 8, 2011 6:51:43 AM | link

Edward Castronova says:

Please note: It was a sarcasm.  My point was, no individual person
can dictate the value of the Bitcoin. Its value will rise and fall
with market forces. If bad Bitcoins enter the system, and they will,
the value of Bitcoins will fall.

Posted Jul 8, 2011 9:28:44 AM | link

Alice Bevan-McGregor says:

"Whatever the actual process, it's not "meaningful work" in the sense of the real world or video games."

Wrong. The work (which is technically a hard signature problem) signs others' transactions to ensure the security of the network. It works like this:

(This uses crypto names; Eve is untrusted, Alice and Bob are trust-worthy.)

* Eve gives Bob 1 BTC via pseudo-anonymous account numbers.
* Everyone in the world gets a copy of that transaction.
* Bob sees the transaction, but no-one has signed it yet.
* Eve can, in theory, cancel the transaction at this point.
* Alice signs the transaction by performing a difficult proof-of-work problem, potentially earning a transaction fee for doing so.
* If Alice's transaction signature matches certain criteria, she gets 50 BTC. (This is rare, and hard.)
* For each signature on a transaction, it becomes geometrically more difficult for Eve to cancel.
* After roughly 10 signatures, Bob can be confident that he actually has the BTC, and can then perform further transactions using it.

The above process should make it obvious that the abstract proof-of-work problems aren't a waste of electricity. In a human sense, it provides the security and validity of the system, while simultaneously generating an income. (Usually tiny, per-transaction fees, but sometimes "eureka"-style discoveries of new 50 BTC transaction blocks, and that frequency is algorithmically determined.) It's like taking a receipt around town and getting everyone to sign the back of it.

Also note that in the above, Alice is often a group, not an individual. This helps spread the cost of the work across many, as well as speed up the act of signing by having the work done in parallel.

Posted Jul 8, 2011 11:40:47 AM | link

Alice Bevan-McGregor says:

"If bad Bitcoins enter the system, and they will…"

They can't unless an attacker can out-pace legitimate signatures or can replace the majority of the software running across all peers so as to utilize alternate rules. That's as close to impossible as you can get, at the moment, unless the majority of the world's top 10 super-computers all get in on the fraudulent action simultaneously based on the current hash rate estimate of 11.85 tera-hashes/second. (That's 11,850,000,000,000 hashes/second.) An average (non-pimped-out) computer can generate, maybe, 5-10 mega-hashes/second. (And a pimped out one can generate up to 1.6 or so giga-hashes.)

Posted Jul 8, 2011 12:00:10 PM | link

Alex says:

In the article you state: "Bitcoin does have a central monetary authority: The bot that releases new coins and stops at 21m."

Is it not then a little disingenuous to then claim that "By 'bot' I mean the program that does everything. I think of it as a bot that lives in every client. It's a common bot, not a central one, in that its programming is the same no matter where instances of it happen to live."

Consensus is not centralization. Perhaps you could just admit the mistake and edit the article before it misleads readers?

Posted Jul 8, 2011 1:22:11 PM | link

TrueAmericanHero says:

you are a rock. Well maybe it's just your intelligence that reminds me of this rock I saw the other day.

Posted Jul 9, 2011 5:32:33 PM | link

CherryBombSim says:

The main source of desire for an alternative currency comes from people who don't feel like they have as much of the real thing as they rightfully deserve. If they don't have enough, it must be due to a banking conspiracy that is cheating them out of what they are actually worth. "Fiat currency" has become sort of a code phrase for these people that roughly translates to "money that other people have more of than I do." "Fiat currency" is worthless because it is not backed by anything tangible, whereas BitCoins are rock solid because they are backed by....., er, what was that they were backed by again?

Posted Jul 9, 2011 9:39:37 PM | link

ConnyT says:

OK *confused*
Strange sarkasm. Has anybody ever claimed that individuals may dictate the value of their own bitcoins?! Must have missed that...!?

The point is, on the contrary, that ONLY the market dictates the value, no goverment or fed.reserv.

Posted Jul 10, 2011 4:22:59 PM | link

Alice Bevan-McGregor says:

I can choose to issue a sell order for $16 CAD/BTC… that doesn't mean anyone in their right mind (at current market valuation) would take me up on that offer unless they were extremely desirous of getting bitcoin now.

If I were to issue a sell order of USD for CAD at 2:1, nobody would take me up on it. How does this differ? At all?

CherryBombSim: congratulations on failing to troll. You need to pick something where the dictionary isn't against you.

Posted Jul 10, 2011 8:41:25 PM | link

Alice Bevan-McGregor says:

Rather, 1:2. or CAD for USD at 2:1. Y'know what I mean. ;)

Posted Jul 10, 2011 8:42:32 PM | link

Justin bieber supra says:

The main source of desire for an alternative currency comes from people who don't feel like they have as much of the real thing as they rightfully deserve. If they don't have enough, it must be due to a banking conspiracy that is cheating them out of what they are actually worth. "Fiat currency" has become sort of a code phrase for these people that roughly translates to "money that other people have more of than I do." "Fiat currency" is worthless because it is not backed by anything tangible, whereas BitCoins are rock solid because they are backed by....., er, what was that they were backed by again?

Posted Jul 12, 2011 5:56:38 AM | link

ConnyT says:

Yes naturally, that must be it.
What can be desirable with a global, quick, fee-free way to send money online without state/bank control.

Must be something else that is driving this... ;)

Posted Jul 12, 2011 9:36:06 AM | link

wefose says:

Mild inflation is not good. Not any kind of inflation is good. It bring us financial crisis at every end of the illusions. The author is an economic idiot.

Posted Jul 13, 2011 8:45:23 PM | link

wefose says:

Central bank system is not as amazing as when it was created. Central bank was created to build confidence and stability, but now it bring us most of the time inflation and instability by money which is cheaper and cheaper. it manipulate the market by the currency illusion. yes, we are human beings and have illusions for a short time, but we're not idiot and we will start our own currency system!

Posted Jul 13, 2011 8:48:24 PM | link

Rassah . says:

You're right. Trying to convince people that the work your computer does when "mining" is important, and is on par with paying to print and secure US dollars, will be difficult. Hopefully the task of mining will eventually become so computationally difficult that it will only be relegated to dedicated financial datacenters, run by business people who understand Bitcoin, leaving users with just a "it's just another currency" in their head.

Somewhat agree with you on the inflation v.s. deflation part, especially in regards to psychological effects. Maybe the deflation in bitcoin will be stable enough eventually not to be much of a problem. Either way, it should be interesting to see the effects while it continues to grow.

There is no one strong central authority to prevent it from being hacked and exploited, but the "central authority" that keeps bitcoin secure is the same one that keeps Linux more secure than either Windows or Mac. It's an open-source project with a very dedicated open source community, writing and improving code around the project. Except unlike with Linux, these nerds have their actual "real" money in the system, and so likely have WAY more incentive to make sure this thing stays secure, and any problems get resolved quickly.

Personally, I don't except Bitcoin to replace other currencies. But bitcoin is a tool with very unique convenient properties, such as low transaction fees, and easy transfer of wealth over long distances. So, even if it's not used as a replacement currency, and is plagued by severe price fluctuation, it can still work as a replacement for PayPal, where you buy it with USD, use it to pay someone online, and they immediately transfer it back into USD. Or work as an international payment system, where you could buy a few million of it on an exchange, send it to China, and have them exchange it for their currency within an hour, fast, cheap, and without a middleman taking huge fees for international transfers.

Posted Jul 20, 2011 9:12:25 AM | link

MountainMan says:

BitCoin works because the miners aren't just getting free coin... they're verifying and validating blocks of transactions. Each transaction adds a unique and computationally difficult variable to the algorithm. A solution is a permanent record of all solved transactions. If there were no incentive to verify and validate transactions, then there wouldn't ever be enough "mining" to make the network function properly.

The other important aspect of mining is currency distribution. The founding concept is decentralization. This means that no one entity or group controls the distribution of new currency. There are many variations of even distribution, but by tying it to the mining concept, the developers ensured that you have to earn your coins. It takes money and time and power to produce new currency. It's not free by any means.

Miners only profit on the disparity between the work put in, the cost of their rigs and power, and the current exchange rates. Most mining rigs, at this point in time, would take 4 or 5 months to pay off before they start producing profit. It's a better bet to buy $1000 USD in BitCoins right now and watch them grow in value as the system matures.

@Castranova: I think you should put in some more facetime with BitCoin, as you're definitely one of the few thinkers whose opinion I value in this respect. The concept isn't necessarily a paradigm shift, but it's certainly a new frontier.

Posted Jul 20, 2011 3:21:33 PM | link

Jpierre says:

Oh dude, I'm surprised at how wrong you got it.

First, there's no list of hard problems for the computers to solve, and there's no bot handing problems to them. A computer needs to take a group of transactions that were performed recently, and combine them with a random number, then take it through a one-way algorithm that will result in a number that is unpredictable. This number should be smaller than certain value, and a computer must try many different random numbers in order to get the right result. All nodes of the network know what the upper-limit of this number should be, since it depends on the speed at which the network was able to perform previous calculations. No bot, and no central authority of any kind, it's truly distributed and decentralized.

On the other hand, inflation does not make anyone happy. It's the prices that inflate. Your money is worth less. It's the amount of money available in the system that increases by inflation, it's "inflation" of the money supply, or prices.

What makes people happy is deflation. It means that the amount of money out there is fixed, so as the economy gets bigger, prices decrease, because money gains value.

Some people, particularly those in the elites that control the money supply want to make you believe that deflation is bad for everyone. Your common sense probably tells you otherwise, as well as the economists that follow the Austrian school of economics, as opposed to the mainstream Keynesian school.

Posted Jul 21, 2011 3:40:49 PM | link

Keith Ellis says:

It's nice to know that when the folk-Austrian cranks appear on a virtual world website they prove themselves to be at least as unwittingly ignorant and full-on crankish as they regularly do at their more usual haunts.

What continually both fascinates me and weirdly pushes my buttons is this distinctive cluster of personality traits displayed by Objectivists, Randroids, folk-Austrians, and goldbugs. It's a completely unearned intellectual hubris.

For example, the only thing that many Objectivists have ever read about epistemology is Rand, who was laughably incompetent as a philosopher, and yet they confidently assert that they've comprehended the most important truths of the cosmos, not knowing that half their arguments are demolished by throw-away comments by Socrates in a dialogue, not to mention every major philosopher who followed.

Similarly, the folk-Austrians entire economic "competency", such as it were, arises from half-understood readings of mises.org and results in assertions such as those above that actual Austrian-school economists, already far in the fringe themselves, would laugh at. But these pronouncements are loudly and hotly proclaimed, along with asserting that any and all counter-arguments or disagreements are ignorant.

Just to take one tiny example: Castronova writes as in the real world, mild inflation makes people happiest. This is an empirically falsifiable assertion about real people in the real world. It's not, to be sure, an assertion about the economic utility of inflation, or whether inflation is objectively "good" or "bad". It's merely a statement about how people report their sense of economic well-being under mildly inflationary conditions versus the alternatives. And, as it happens, there is a tremendous amount of actual research on this issue. And, as it happens, people are, collectively, indeed happiest about their economic situation under mild inflation. Does that mean that they're materially better off? No. Does it mean that mild inflation is in the long-run economically most productive relative to the alternatives? Again, no. It doesn't say one way or the other anything about these things.

But the perpetual sophomores above can't differentiate between a mere assertion about people's self-reported happiness and their absolutist theories about how the world "really" works.

They know that inflation is always and everywhere "bad" and thus although there's absolutely no reason to believe that people couldn't be mistaken about what's best for them, the assertion that people like (gasp!) mild inflation is so prima facie theoretically offensive that it's denied purely on the basis of a misapplication of theory and not on the basis of any relevant empiricism (which, if they had bothered, they'd find supports Castronova and not themselves).

This sort of thinking and behavior is emblematic of the frothing nutcase. They have theories of which the theories are their own; theories which they have. Dinosaurs are skinny at one end, fat in the middle, and skinny at the other end. Oh, so impressive!

In the wider sense, these cranks are of a piece with the global warming deniers, the creationists, the people who can't stand relativity, the people who can't stand the uncountability of the real numbers, and the people who think Cantor's Diagonal Method is all wrong. Seriously...take a random sampling of the comments made by each of these groups and just tell me they don't have some striking similarities.

One thing they have in common is a disdain for consensus expert opinion and favoring instead the theories of a hard-pressed, heroic group of rugged intellectuals who struggle valiantly for Truth with a capital T in opposition the mediocrities who mass against them, spreading falsehoods as part of a nefarious coherent plan to Ruin the World, especially for those who are heroically minded. Yes, there's a reason you can scratch one of these cranks at random and it's relatively likely you'll find someone who thinks of themselves as Howard Roark.

In any case, for those who are merely interested in an academic view of virtual worlds and social gaming in general, and who don't know about and don't care about macroeconomics and central banking, all you really need to do is look for someone using the words "fiat currency" the same way a cop would use the words "heroin supply" and you know you can safely ignore everything else such a person writes as almost entirely full of crap.

Posted Jul 22, 2011 6:13:56 AM | link

Iron Pillar Candle Holders says:

Bitcoin payments are normally displayed to the receiver near-instantly, but they are initially displayed as unconfirmed, because the bitcoin system cannot yet assure that the transaction will be permanent.

Posted Aug 4, 2011 5:30:47 AM | link

crowdSPRING says:

What makes people happy is deflation. It means that the amount of money out there is fixed, so as the economy gets bigger, prices decrease, because money gains value Everything have a value with time so post on time for more benefits..

Posted Aug 10, 2011 5:41:41 AM | link

David Schwartz says:

I hope you don't take this the wrong way, but it's clear that you don't understand the currency well enough to comment on it with any accuracy.

The most egregious example is the one that others have pointed out to you -- you have been informed that Bitcoin has no central authority, yet you have made up some sort of "bot" that exists nowhere but in your imagination. Why would you substitute accurate information from people familiar with a technology with something you simply made up?

Other examples are more subtle. For example, you have the misunderstanding that Bitcoins are paid for solving problems that are not related to Bitcoin itself. In fact, Bitcoins are paid to miners in exchange for performing the computations that secure the Bitcoin network.

Also, the network has been severely hacked at least once in the past. You know what happened? Even without any central authority, everyone with an interest in keeping Bitcoins working reliably worked together to solved the problem.

Bitcoins have a lot of weaknesses, but none of them are even remotely related to the non-issues you mention. You really do have to learn about something before you can analyze it.

Posted Sep 14, 2011 2:32:41 AM | link

Edward Castronova says:


The currency is regulated by its code. 

Mobile

Posted Sep 14, 2011 8:25:55 AM | link

mac leasing says:

Bitcoins can be compared to cash, but cash is limited to physical exchange, where as bitcoins can be sent throughout the Internet. Today there are more than 6.3 million bitcoins in existence and this number continues to grow.

Posted Sep 17, 2011 10:16:49 AM | link

BitcoinTravel says:

Bitcoin directory of hotels, restaurants, nightclubs, stores and other businesses in tourism industry, accepting Bitcoins around the world. Bitcoin community is growing.
www.bitcoin.travel

Posted Sep 22, 2011 6:36:00 PM | link