Bitcoin : Where can it fail ?

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Naurgul
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Re: Bitcoin : Where can it fail ?

Postby Naurgul » Thu Apr 11, 2013 6:33 pm UTC

If it went up and down by 50-100% every day, I would hardly call it a stock. :mrgreen:
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Re: Bitcoin : Where can it fail ?

Postby HungryHobo » Fri Apr 12, 2013 8:44 am UTC

Yakk wrote:If the price of a stock exchanged dropped 61% in a day, would you call it a crash?

If the value of a stock was 1000% of what it was 3 months before but with significant daily fluctiations would you say that it had crashed?

I'm sure the bubble will burst but I'm just curious what suddenly drove it so sky high.
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Re: Bitcoin : Where can it fail ?

Postby Ixtellor » Fri Apr 12, 2013 1:45 pm UTC

It seems to me that bicoin acts more like a commodity or future than currency.
So in summary, I think it is vulnerable to the same kinds of things that affect the commodity market as opposed to currency problems. (inflation, devaluation)
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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Fri Apr 12, 2013 2:38 pm UTC

HungryHobo wrote:
Yakk wrote:If the price of a stock exchanged dropped 61% in a day, would you call it a crash?

If the value of a stock was 1000% of what it was 3 months before but with significant daily fluctiations would you say that it had crashed?

I'm sure the bubble will burst but I'm just curious what suddenly drove it so sky high.


Pretty simple really. http://www.google.com/trends/explore#q=bitcoin

It was a cycle. Bitcoin's price kept rising, so people talked about it. People talked about it, so people bought Bitcoins. This loop led to a bubble.
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Re: Bitcoin : Where can it fail ?

Postby Naurgul » Fri Apr 12, 2013 5:45 pm UTC

Ixtellor wrote:It seems to me that bicoin acts more like a commodity or future than currency.
So in summary, I think it is vulnerable to the same kinds of things that affect the commodity market as opposed to currency problems. (inflation, devaluation)


Agreed. I said something to that effect on the previous page: "Bitcoin is more like a finite resource than a currency".

KnightExemplar wrote:Pretty simple really. http://www.google.com/trends/explore#q=bitcoin

It was a cycle. Bitcoin's price kept rising, so people talked about it. People talked about it, so people bought Bitcoins. This loop led to a bubble.


Agreed again. The recent explosion of the price was almost solely due to increased exposure in the media.
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Re: Bitcoin : Where can it fail ?

Postby ucim » Sat Apr 13, 2013 1:32 pm UTC

What, fundamentally, is a bitcoin anyway? After you do calculations of "sufficient difficulty", you get "rewarded" with a bitcoin... by whom? Best answer I could find is that a bitcoin is a number with specified properties, but only if you have to "work hard" to find it.

The guy who invented it is a genius, not for inventing the system, but for convincing people that the things the system uses have value.

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Re: Bitcoin : Where can it fail ?

Postby Naurgul » Sat Apr 13, 2013 1:51 pm UTC

ucim wrote:What, fundamentally, is a bitcoin anyway? After you do calculations of "sufficient difficulty", you get "rewarded" with a bitcoin... by whom?


By consensus of a network that is following the bitcoin protocol.
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Re: Bitcoin : Where can it fail ?

Postby PeteP » Sat Apr 13, 2013 2:29 pm UTC

ucim wrote:What, fundamentally, is a bitcoin anyway? After you do calculations of "sufficient difficulty", you get "rewarded" with a bitcoin... by whom? Best answer I could find is that a bitcoin is a number with specified properties, but only if you have to "work hard" to find it.

The guy who invented it is a genius, not for inventing the system, but for convincing people that the things the system uses have value.

Jose

All transactions are saved in blocks. A new block is generated on average every 10 minutes. Bit coin miners calculate a hash of the block and a nonce (basically a random string) which is accepted if it fulfills the difficulty. You can represent the hash as a number, the higher the difficulty is, the smaller the number has to be.
Each block begins with a transaction to the miner who first presented a solution. So in a way the Miner grants themselves the bitcoins, since they put the transaction there or you can say the network grants it, since the rest of the network has to accept that there is a transaction without a source. *shrugs* Anyway there is no central organisation which hands out the rewards, they are a part of the design.

A bit coin is about the same as the rest of our money a number in someones account. Here, a peer to peer network determines who owns how many bitcoins. In our normal system banks determine it with some oversight from the government.

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Re: Bitcoin : Where can it fail ?

Postby ucim » Sun Apr 14, 2013 3:56 am UTC

I eschew obfuscation. I have read the above explanation (and others like it) in various places, and while it describes the process, it doesn't answer the fundamental question of what a bitcoin is.

Our regular money, while having the appearance of being simply being an arbitrary medium of exchange, actually is something. It started out being a precious commodity like gold or salt (precious because people wanted it for what it was, not for what it could be exchanaged for). Government regularized it by standardizing the sizes and putting its seal of approval on it, so it no longer needed to be assayed at every exchange. Coins were put into circulation by government paying people with them. It was still something people wanted for what it was, but it was no longer used for what it was (since the standardized size and seal of guarantee was a value-added feature that would otherwise be lost). Later, pieces of paper which could be exchanged for coins were introduced - the paper itself wasn't valuable, but it represented a promise by government to supply coins (or whatever), and by law was made legal tender (sufficient to pay debt such as due to private contracts which are upheld by law).

While some governments don't back their promises with commodities any more, they still back them with the "full faith and credit" of their respective countries, inasmuch as they represent a debt owed by the government to the note holder, and the government originally got the value (that it would be giving back) by receiving goods and services in the past.
Spoiler:
Yes, government can make more promises (by printing more money without having gold to back it). This is where the "full faith and credit" business applies. A government that is growing is likely to be able to pay this debt back, so the currency retains its value. One that isn't, isn't, and inflation results. Currency can be considered (loosely) to be shares in government, and it gets its value from what government is capable of providing in exchange for redeeming those notes.
The government will accept these pieces of paper in exchange for services, or in payment of debt owed to the government. In short, present day money represents debt owed by the government to the holder. It is something. It matters not whether it is paper or bits; it is the debt that is real.

In contrast, as far I can tell, bitcoin isn't anything.

I suppose it is meaningful to say "the network grants the transaction, and thus imbues the bitcoin with value", but "the network" has no intrinsic value to grant, and no intrinsic ability to return value for a bitcoin. You could consider a bitcoin to be a certificate of accomplishment for pointless calculations done on a computer. But that isn't anything, and doesn't represnt any debt owed to anybody by anything.

The genius is getting people to want this.

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Re: Bitcoin : Where can it fail ?

Postby Sizik » Sun Apr 14, 2013 4:51 am UTC

The value comes from other people valuing it, and thus accepting it as payment.
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Re: Bitcoin : Where can it fail ?

Postby ucim » Sun Apr 14, 2013 5:02 am UTC

Sizik wrote:The value comes from other people valuing it, and thus accepting it as payment.
Exactly.

Nothing intrinsic.

Somebody pulled a nothing out of thin air and is getting people to want this nothing... badly!

Unlike real money, nobody has to value it. With real money, at least the government has to value it, and backs it up by providing actual goods and services in exchange.

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Re: Bitcoin : Where can it fail ?

Postby sardia » Sun Apr 14, 2013 6:48 am UTC

ucim wrote:
Sizik wrote:The value comes from other people valuing it, and thus accepting it as payment.
Exactly.

Nothing intrinsic.

Somebody pulled a nothing out of thin air and is getting people to want this nothing... badly!

Unlike real money, nobody has to value it. With real money, at least the government has to value it, and backs it up by providing actual goods and services in exchange.

Jose

There are many complaints about bitcoin, the fact that it is entirely digital is not one of them. I could send you 20$ on paypal, which you would spend on some shoes from amazon. That was entirely digital. I could send you 20 bitcoins on mt vox and you could spend on some shoes from...w/e accepts bitcoins.

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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Sun Apr 14, 2013 8:27 am UTC

Overall though, most currencies in this world are fiat today. And like failed currencies (ie: Zimbabwe Dollar), if everyone suddenly feels like another currency is better, then everyone switches off of it and then the old currency becomes worthless. The USD is one of the strongest and most well respected currencies in the world, so its a bit unfair to compare BTC to it. BTC is somewhere between Zimbabwe Dollars and USD. I'd definitely would rather hold onto BTC over Zimbabwe dollars... even if that currency is backed by the full faith and credit of Zimbabwe.

-----------

Anyway... more worrying to me is this blog post: http://streetwiseprofessor.com/?p=7183

The "pump and dump" strategy could have very easily been executed by say... the Winkelvoss twins (who in fact, have cashed out on some millions of USD due to BTC's rise and fall these past weeks, and would have easily had millions to invest into a scheme like this). As I stated before, there was a well-coordinated selling and buying effort on Mt. Gox during the crash. But what if the market was getting manipulated even more than just then?

http://rt.com/news/bitcoin-currency-market-drop-671/
Just before the crash, the anonymous Reddit user ‘Bitcoinbillionaire’ gave away almost $14,000 in Bitcoins to random Reddit users over the day, Business Insider reported. Bitcoinbillionaire made the donations through a Reddit feature that allows users to ‘tip’ each other with Bitcoins online.


I know it is a bit of a conspiracy theory right now... but I'm almost willing to bet that all this crap happened because of some guy planned it all to happen. Pulling off a bubble with the explicit purpose to pump-and-dump the market is illegal... but what will the unregulated Mt. Gox do about it? What would the strongly anti-government anti-regulation libertarian community behind BTC right now do about it?

Nothing. Its like the perfect group to dupe with a classic market manipulation scheme.
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Re: Bitcoin : Where can it fail ?

Postby ucim » Sun Apr 14, 2013 12:41 pm UTC

sardia wrote:There are many complaints about bitcoin, the fact that it is entirely digital is not one of them. I could send you 20$ on paypal
... and it is not my "complaint" either. Paypal is not new digital currency - it is a digital representation of existing currency. You get paypal euros by buying them from PayPal with real euros. PayPal is obligated to me for the value of those euros, and if I buy shoes, the obligation is transferred to the shoe store.

With bitcoin, there is no obligation at all. It's not like Zimbabwe currency, it's more like Gringott currency. Bitcoin looks to me like a sophisticated way to convince people you are giving them something when in fact you have given them nothing.

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Re: Bitcoin : Where can it fail ?

Postby elasto » Sun Apr 14, 2013 12:45 pm UTC

ucim wrote:
Sizik wrote:The value comes from other people valuing it, and thus accepting it as payment.
Exactly.

Nothing intrinsic.

Somebody pulled a nothing out of thin air and is getting people to want this nothing... badly!

Unlike real money, nobody has to value it. With real money, at least the government has to value it, and backs it up by providing actual goods and services in exchange.

Well, a government doesn't have to either. It could overnight declare it null and void and circulate a new currency. And that's what is sometimes done to exit a country out of hyperinflation, more or less.

Also, commodities like gold have a lot in common as already stated. Gold has a small intrinsic value because (a) it looks nice and (b) it has certain industrial uses, but the current price of gold is way way out of proportion to that. It's valuable mainly because people think it valuable. Obviously Bitcoins don't have any industrial uses, but they do have an intrinsic value similar to gold's 'it looks nice', which is 'it's anonymous'. But otherwise, it's likewise mostly only valuable because people think it valuable.

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Re: Bitcoin : Where can it fail ?

Postby ucim » Sun Apr 14, 2013 2:57 pm UTC

elasto wrote:Well, a government doesn't have to either. It could overnight declare it null and void and circulate a new currency.
It promises to, and has the capability to. Such currency is therefore valued based on the strength of that promise. With bitcoin, there isn't even a promise.

elasto wrote:Also, commodities like gold have a lot in common as already stated. Gold has a small intrinsic value because (a) it looks nice and (b) it has certain industrial uses, but the current price of gold is way way out of proportion to that...
Gold, at least, is something that actually exists.

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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Sun Apr 14, 2013 3:12 pm UTC

BTC does exist. As a concept, it is the bits and bytes that prove that you are the rightful owner of a certain BTC block. Alice traded 5 BTC to Bob, who then traded it to Sally, who then traded you those 5 BTC. The blockchain is a public record in BTC, proof that every single transaction in BTC existed... each step has been verified through hashes and public key encryption to prove that each transaction did in fact take place.

The promise of Bitcoin is that we can trace your BTC that you hold, all the way back to when it was minted. Every single transaction is stored in the transaction log and publicly announced to the world. Everyone running the original BTC client participates in verifying and storing that public record. One website that makes it easy to browse recent transactions is here: http://blockchain.info/ . There is no promise of value, but we can use it to store value because it has some properties. Just don't "invest" in it, its dumb to invest in currencies anyway. The only promise of BTC is the proof that the BTC you hold was created and verified by the BTC network. Furthermore, it is exceptionally easy to run your own software to verify the proof yourself.

That is IMO, the true value of Bitcoin. The concept of proving ownership of your currency through public announcements of transactions, and public verifications of those transactions. In fact, the definition of "confirming the transfer" of bitcoins right now is when you notice 10 major databases officially recognizing your latest transaction.

--------------

Litecoins change the algorithm to make the "confirmation" process faster btw, since bitcoins take a long time to verify (minutes to hours, depending on a few things).
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Re: Bitcoin : Where can it fail ?

Postby ucim » Sun Apr 14, 2013 3:47 pm UTC

KnightExemplar wrote:BTC does exist. As a concept, it is the bits and bytes that prove that you are the rightful owner of a certain BTC block.
Ok, we're getting closer. What, exactly, is a "block" (when newly "minted"), and where does it come from?

similarly,
PeteP wrote:A new block is generated on average every 10 minutes. Bit coin miners calculate a hash of the block and a nonce...
Who is generating these "blocks" for the "bitcoin miner" to hash?

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Re: Bitcoin : Where can it fail ?

Postby Sizik » Sun Apr 14, 2013 4:18 pm UTC

The original paper might answer some of your questions.
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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Sun Apr 14, 2013 9:39 pm UTC

Sizik wrote:The original paper might answer some of your questions.


Maybe if you're a Comp Sci major, it'd be useful. :wink: :wink: Fortunately, I've studied enough cryptography that I understand it. (Its mostly built on top of digital signatures and hashing). But still, its one of those things that I'd expect is outside the reach of most people to understand. Without knowing exactly what a digital signature or hash is... it becomes difficult to get a full understanding of BTC.

Here's my explanation, without using the words "digital signature" or "hash". (I'm not a BTC expert though: so people double-check me on this. I'm just trying to simplify it down a bit without going into the math)

Long story short: the Bitcoin network has a series of difficult math problems... Math problems that have been proven to be very very hard to calculate. Whoever solves the math problem gets the next block of bitcoin. (Currently, "one block" is worth 25 BTC) Basically, "Bitcoin Mining" is the process of running this program on your computer so that you have a chance to be the first one to find the next bitcoin. When you find the answer, you announce it publicly to the world, to everyone at the same time. At that point, you are the rightful owner of the next block of Bitcoins. Then, the next math problem is posted up, and all the computers search for the answer again.

Here's the funny thing about math problems: Once you have the answer to a math problem, it is very very easy to prove it's the right answer. The hard part is coming up with the answer first. So when you announce yourself as the first person to find the answer, everyone else can verify that fact easily, without having to redo the work on that math problem.

Currently, every block is worth 25 BTC. In a few years... BTC blocks will drop down to only 12.5 BTC per block. And then continue to half until BTC reach the hard-limit of 21 million. After 21 million BTCs are minted, no more will ever be found. Furthermore, the network automatically adjusts the difficulty of the math problem based on how fast computers are solving it today. The goal is for the network to find a block every 10 minutes or so. If the network is finding more blocks than that, then the difficulty goes up. Otherwise, difficulty goes down.

In essence: the minting program is a giant computer race. Every computer in the world running the minting program has a chance at winning it. They just gotta be the first one to find the answer. This race automatically adjusts itself based on the time of the previous races. All of which is public knowledge (since whoever finds the next BTC block can only claim it as theirs if they announce it to the world first).

Eventually, BTCs will reach the 21 million limit and stop. But there will still be transaction fees. You see, publicly re-verifying that bitcoins were transferred between two people uses up CPU time and electricity. So in every BTC transaction, a little bit of BTC is reserved as "prize money" on the re-verification process. (It can be set to zero... but then there's a chance that no one out there will verify that your transaction took place). Whoever verifies the transaction first gets the prize. The re-verification process is exactly the same as minting new coins, except instead of creating new coins, you're just proving a transaction occurred.

https://en.bitcoin.it/wiki/Transaction_fees

------------

BTW: I'm intrigued by BTC technicals. But I am not an enthusiast. I don't own any. I'm just surprised that Satoshi found an answer to the Byzantine Generals Problem. Currently, Mt. Gox has proven itself... unreliable... and the BTC market is extremely immature. There is no guarantee that the whole thing will even continue standing. But I do think it contains a lot of good ideas.
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Re: Bitcoin : Where can it fail ?

Postby paigeannecarter » Wed Jul 31, 2013 2:49 am UTC

Has anyone of you ever tried mining bitcoins or simply buying/exchanging it for an earnings?
It seems to me that a lot of you have in depth knowledge about it.
And does any of you know, why quite a handful of people are hiring writers to write about bitcoins? (Is there something to be earned her perhaps?)
Thanks in advance for your help.

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Re: Bitcoin : Where can it fail ?

Postby Meneth » Sun Aug 04, 2013 6:10 am UTC

Responding to the original post, here are a few ways I know of that Bitcoin could fail:
  • Early miners cashing in.
    Analysis of the blockchain has showed that nearly 50% of all bitcoins are owned by a very small number of people.
    This can be mitigated by identifying the coins in question, and rendering them useless, by blacklisting them in a client update. See w w w . l o p e r - o s . o r g /?p=1009
  • Breaking the encryption.
    A quantum computer could do this, and it seems likely that the US government has, or will have, the first working one.
    Can be mitigated by switching to encryption that is not quantum vulnerable.
  • Hostile network takeover.
    An attacker with more computing power (not necessarily more nodes) than the rest of the network can impose his will at any time. Can be mitigated by blacklisting known attacker IP ranges.
IMHO, the first two mitigations should be implemented as soon as possible.
The third one can unfortunately not be done before the attack starts.

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Re: Bitcoin : Where can it fail ?

Postby EdgarJPublius » Mon Aug 05, 2013 6:43 am UTC

Ed Felten at Freedom to Tinker Has written a couple of interesting posts on the roles of consensus and governance in the value of bitcoins.
One
Two

Well worth checking out.
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Re: Bitcoin : Where can it fail ?

Postby dii » Sat Sep 07, 2013 7:45 pm UTC

ucim wrote:What, fundamentally, is a bitcoin anyway?


KnightExemplar wrote:it becomes difficult to get a full understanding of BTC.


This might help:

http://www.zerohedge.com/sites/default/ ... 12_BTC.jpg
Image

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Re: Bitcoin : Where can it fail ?

Postby ucim » Mon Sep 09, 2013 2:10 am UTC

Thanks dii, that does help.

So, mining a bitcoin is equivalent to validating bitcoin transactions (finding a hash that fits the rules), and the bitcoin is payment for that service. But it still seems a little arbitrary - the thing that makes it hard is the rule that the result must start with a certain number of zeros. But I don't see how that makes the system any more secure.

So, we're back to "we made it hard so that it would be hard to do." It (validating a bitcoin transaction) is otherwise trivial. You are actually getting the bitcoin for doing hard work for its own sake, not for doing anything useful.

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Re: Bitcoin : Where can it fail ?

Postby Thesh » Mon Sep 09, 2013 2:39 am UTC

It doesn't have to be doing anything useful, it just has to take long enough to compute so that the supply doesn't grow too quickly. Currency does not have to be backed by anything of inherent value.
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Re: Bitcoin : Where can it fail ?

Postby snowyowl » Mon Sep 09, 2013 9:01 am UTC

Mining is not the reason why bitcoins have value. I'm sure if Satoshi could have found a way to prevent double-spending without having powerful computers checking every transaction, he would have. One of the driving visions behind Bitcoin was that it would be decentralised, and mining smacks of centralisation because it depends on a small number of contributors. Mining is a patch over a potential cryptographic flaw, not an economic incentive to use the currency.

Most BTC users don't earn bitcoins by mining. They earn them by trading goods and services for them, the way most people earn most currencies.
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Re: Bitcoin : Where can it fail ?

Postby ucim » Mon Sep 09, 2013 2:02 pm UTC

Thesh wrote:It doesn't have to be doing anything useful, it just has to take long enough to compute so that the supply doesn't grow too quickly. Currency does not have to be backed by anything of inherent value.
No, but currency that is has higher stability, and is less vulnerable to everyone waking up and realizing that "it's just a tulip, for chirp's sake". And the inherent value of being backed by a promise depends highly on the likelyhood that that promise will actually be kept.

The value of a currency is limited (on the low end) by the difficulty of creating new currency. It's (one way to look at) the reason why inflation weakens currency, and why paper money (the evidence of a promise) is hard to counterfiet. But a distinction needs to be made between the currency itself (be it salt, gold, or promises) and the evidence of this promise (clad coinage, paper money, a bank account datafile). It is tempting to view the artificial rule about having the hash begin with zeros as the equivalent of the special paper and ink used in dollar bills, but with dollar bills, the paper isn't the currency, it is the evidence. The promise (by the US government) is the actual currency.

That's the piece I don't see in bitcoin. Who, exactly, is promising what?

I suppose that's inherent in a decentralized system... "The system" is promising "transactional integrity". But it's self-referential enough to make me wary.

Jose
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Re: Bitcoin : Where can it fail ?

Postby Sizik » Mon Sep 09, 2013 2:25 pm UTC

The promise is made by merchants who accept bitcoin as payment.
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Re: Bitcoin : Where can it fail ?

Postby dii » Tue Sep 10, 2013 3:19 am UTC

ucim wrote:
Thesh wrote:It doesn't have to be doing anything useful, it just has to take long enough to compute so that the supply doesn't grow too quickly. Currency does not have to be backed by anything of inherent value.
No, but currency that is has higher stability, and is less vulnerable to everyone waking up and realizing that "it's just a tulip, for chirp's sake". And the inherent value of being backed by a promise depends highly on the likelyhood that that promise will actually be kept.


On the other hand, the government that backs up your fiat currency is under no obligation to keep any promises to you. They can devaluate your currency at any time, they can print as much more money as they want, and the entire financial system is being controlled by central banks which are practically immune to any kind of oversight (too big to fail, anyone?)

Just go ask the small business owners of Cypros how trustworthy the euros and banks look to them now. When the bank just up and takes up the majority of your money despite no wrongdoing on your part, in order to pay up for some bigwig financial players mistakes, you might not have such a rosy view on government-backed currency.

The value of a currency is limited (on the low end) by the difficulty of creating new currency. It's (one way to look at) the reason why inflation weakens currency, and why paper money (the evidence of a promise) is hard to counterfiet. But a distinction needs to be made between the currency itself (be it salt, gold, or promises) and the evidence of this promise (clad coinage, paper money, a bank account datafile). It is tempting to view the artificial rule about having the hash begin with zeros as the equivalent of the special paper and ink used in dollar bills, but with dollar bills, the paper isn't the currency, it is the evidence. The promise (by the US government) is the actual currency.


That's just it, on government-sanctioned currency, it's a one-way relationship - the government or the central bank has the authority to decide when and if to print more money and how and where to distribute that new money, but you don't. With Bitcoin, anyone can become a miner and mine for new bitcoins (up until about 2040, when it's estimated the last bitcoin will be mined).

That's the piece I don't see in bitcoin. Who, exactly, is promising what?

I suppose that's inherent in a decentralized system... "The system" is promising "transactional integrity". But it's self-referential enough to make me wary.


No one is promising anything. The protocol is designed to prevent double spending or other kinds of cheats, it's amazingly robust and resistant to attack (see chart). It provides a very reliable means to make transactions. But there's no inherent promise on any amount of value for your coins: Bitcoin works on market principles, supply and demand, it only has the value we give it. It's like if you have a really rare stamp, that only 10 exists in the world, and people are willing to pay a million euros a piece of them, but then someone finds from some deserted island a crate of the same stamps and suddenly the value plummets to a fraction. That's supply and demand.

Bitcoin is more of a commodity, being that most transactional currencies in the world are currently inflationary fiat currencies, bitcoin has more in common with gold than other currencies. You could think of it as "virtual gold": like gold, there's limited amount of bitcoins, both in existence now, and there's a limit how many bitcoins will ever be mined. The difficulty in mining is necessary to keep the coins from all being mined at once, I suppose you could think of it as "wasted computing" but on the other hand, the existence of a tool like bitcoin can be immensely useful, and the mining is necessary for the functioning of bitcoin, so whether it's going to waste is a matter of perspective.

So in bitcoin's case, the scarcity, which creates valuation, is derived from the fact that it's hard to mine, and it takes time and high-end equipment to do. The algorithms are also set to grow progressively harder to anticipate growing processing power and special ASIC circuits.

The service that bitcoin provides is a way to make transactions online with anonymity. To many people, that offers a valuable service, to which end they are willing to value bitcoins as a commodity. This in turn makes it possible to use as a currency, which again makes it valuable. So this should sort of like create a positive feedback loop, which should eventually plateau out somewhere - where, depends on how big a piece of the transactional currency market bitcoin manages to get. As of now, the value is still very flexible, but the more people are using bitcoin, the more stable it gets.

There are so many new possibilities with bitcoin that aren't possible with current money transaction systems, so many problems solved (it seems like not a day goes by that I don't hear of someone having problems with paypal, like accounts getting randomly freezed, paypal suddenly deciding you're a scammer etc). There are entire new business models, entire new economies that are made possible by bitcoin.

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Re: Bitcoin : Where can it fail ?

Postby ucim » Tue Sep 10, 2013 5:06 am UTC

Sizik wrote:The promise is made by merchants who accept bitcoin as payment.
And what is that promise? It is an act of faith (on the bitcoin holder's part) that they will continue to accept bitcoins as payment. They have not promised to continue to do so.

dii wrote:On the other hand, the government that backs up your fiat currency is under no obligation to keep any promises to you.
Yes, they are. They can of course reneg, just like any other promise-maker, and they can also engage in practices that render their promise impossible to keep. That is why it is important which government is backing a currency.

dii wrote:That's just it, on government-sanctioned currency, it's a one-way relationship - the government or the central bank has the authority to decide when and if to print more money and how and where to distribute that new money, but you don't.
I can also promise you an hour a day of my time; I still have the authority to promise other people an hour a day of my time, and if I make too many of these promises, I won't be able to keep them very well. The value of my promise will go down. That doesn't make it a one-way relationship. Owning currency means the government (that backs it) promises you something.

dii wrote:Bitcoin is more of a commodity, being that most transactional currencies in the world are currently inflationary fiat currencies, bitcoin has more in common with gold than other currencies.
You keep bringing up inflation; it's a red herring. How much has bitcoin inflated? You also bring up your contention that most currencies are fiat currencies - I don't think that's quite right...

Currencies that are not "backed" by a government are fiat currencies, but the act of backing a currency (promising to exchange it for something of value) makes it not fiat... it makes it a representation of whatever it is "of value" that the government promises to exchange it for, be it salt, gold, or food. The fundamental question then becomes "what is of value?" and "what makes it valuable?" (wait, that's two questions)

Gold is said to have intrinsic value; gold-backed currency is said to be non-fiat. However, gold only has value because people want it. (ooh, shiny). Food on the other hand is valuable because people die if they are deprived of it. So, gold really has no "intrinsic" value, but food does.

For the bitcoin system, the intrinsic value is the hash, and the hash is only valuable within the bitcoin system. Like food, the hash is perishable; worthless once ninja'd. Its only value is to support the game it was created for. Bitcoins represent your score in the game.

The game is valuable because it facilitates transactions. But there is no external intrinsic value to a bitcoin that I can see.

The rest of your analysis is enlightening, and I think similar to what I'm saying above, though it reaches the opposite conclusion.

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Re: Bitcoin : Where can it fail ?

Postby Zamfir » Tue Sep 10, 2013 6:59 am UTC

Currencies that are not "backed" by a government are fiat currencies, but the act of backing a currency (promising to exchange it for something of value) makes it not fiat... it makes it a representation of whatever it is "of value" that the government promises to exchange it for, be it salt, gold, or food. The fundamental question then becomes "what is of value?" and "what makes it valuable?" (wait, that's two questions)


Governments nowadays do not promise to exchange currency for something else, like they used to do with gold. They main mechanism by which they back a currency is by legislating that its citizens must accept it as currency. That's what the fiat part means in practice, a legal obligation on the citizens to accept the currency (in particular when the government is paying its bills).

On top of that, they accept the currency for taxes and transactions withe the government itself. That's not the same as a promise to exchange it. For one, it will only take your currency up to the amount that you owe, if you want to get rid of more currency they will not exchange it for something else. That is very different from the gold standard, where governments promised that would give you gold no matter how much currency you wanted to exchange. Famously ending when De Gaulle sent a navy cruiser to New York and asked to fill it up with gold in return for all of France's dollars :) Second, modern governments do not promise an exchange rate. Not for the tax demands, not for gold, salt or whatever. They target a basket of goods through inflation policy, but it's just that: a target, not a promise.

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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Tue Sep 10, 2013 1:02 pm UTC

On the other hand, the government that backs up your fiat currency is under no obligation to keep any promises to you. They can devaluate your currency at any time, they can print as much more money as they want, and the entire financial system is being controlled by central banks which are practically immune to any kind of oversight (too big to fail, anyone?)


How is this any different from Bitcoin? BTC rules are enforced by the miners. The 0.8 / 0.7 split that rocked the BTC community a few months ago is proof that ultimately... humans are also running the operation here. The rules that were introduced with version 0.8 of BTC were unfavorable to the community, and miners voted it down by simply continuing to run version 0.7. The main difference is that your "voting power" under the BTC system is determined by how powerful your computer is, anyone who obtains 51% of the hashrate of BTCs will be able to take over the network... even maliciously. So I ask you: what do you do when the largest BTC miners disagree with you? They hold the validity of BTC in their hands, with the thousands... maybe millions of dollars in BTC mining equipment. Don't fool yourself. The BTC system of government is technology == power. Those with the most powerful mining rigs run the show.

On the other hand, government entities tend to be one person - one vote. BTC favors those who invest significant amounts of money into mining equipment. Arguably, the ultimate form of BTC is a plutocracy. (Once mining equipment standardizes, those with the most money will have the most votes in the BTC network)

For example, if some future version of BTC allows blacklisting wallets, BTC miners would be able to deny transactions that originated from certain wallets. And as long as a large enough subset of miners agreed with you, it can happen. Why not? The BTC 0.7 vs BTC 0.8 split proves that every version creates a "new blockchain" entirely. The rules of every blockchain can be as arbitrary as you want. You are simply limited by code...
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Re: Bitcoin : Where can it fail ?

Postby dii » Tue Sep 10, 2013 2:53 pm UTC

ucim wrote:
dii wrote:On the other hand, the government that backs up your fiat currency is under no obligation to keep any promises to you.
Yes, they are. They can of course reneg, just like any other promise-maker, and they can also engage in practices that render their promise impossible to keep. That is why it is important which government is backing a currency.


No, they don't, sorry. The government has the unilateral power to devaluate your currency or print more money to create inflation. They can say "this bill is worth X" but then the next day, they decide "this bill is only worth X/10" and you can't do anything about it.

dii wrote:That's just it, on government-sanctioned currency, it's a one-way relationship - the government or the central bank has the authority to decide when and if to print more money and how and where to distribute that new money, but you don't.
I can also promise you an hour a day of my time; I still have the authority to promise other people an hour a day of my time, and if I make too many of these promises, I won't be able to keep them very well. The value of my promise will go down. That doesn't make it a one-way relationship. Owning currency means the government (that backs it) promises you something.


The worth of any currency is based only on trust. If the people trust the currency, they value it. This trust can be derived from a promise made by a government, but it doesn't have to be, and can be derived from other things.

dii wrote:Bitcoin is more of a commodity, being that most transactional currencies in the world are currently inflationary fiat currencies, bitcoin has more in common with gold than other currencies.
You keep bringing up inflation; it's a red herring. How much has bitcoin inflated? You also bring up your contention that most currencies are fiat currencies - I don't think that's quite right...


None, Bitcoin is not an inflationary currency, that's why I said it has more in common with commodities than current fiat currencies. And yes, most currencies of the world are in fact fiat currencies. Their value is not tied to commodities, but is a matter of legislation.

Currencies that are not "backed" by a government are fiat currencies, but the act of backing a currency (promising to exchange it for something of value) makes it not fiat... it makes it a representation of whatever it is "of value" that the government promises to exchange it for, be it salt, gold, or food. The fundamental question then becomes "what is of value?" and "what makes it valuable?" (wait, that's two questions)


The value of fiat currencies is not derived from nor tied to commodities such as salt or gold. It is entirely controlled by governments and central banks.

Gold is said to have intrinsic value; gold-backed currency is said to be non-fiat. However, gold only has value because people want it. (ooh, shiny). Food on the other hand is valuable because people die if they are deprived of it. So, gold really has no "intrinsic" value, but food does.


Nothing has intrinsic value. Anything only has the value we assign to it. Just because we need something to survive does not mean it has an intrinsic value, we might in some circumstances decide that it's better to starve to death (for example, some kind of worldwide catastrophy that makes life unbearably painful).

A more down-to-earth example: someone living in a country where food is abundant values food much less than someone living in a country where food is scarce. The valuation of food is entirely different between USA and Ethiopia.

For the bitcoin system, the intrinsic value is the hash, and the hash is only valuable within the bitcoin system. Like food, the hash is perishable; worthless once ninja'd. Its only value is to support the game it was created for. Bitcoins represent your score in the game.


Nope, that's not quite correct. Firstly, the hash by itself doesn't guarantee any value. The "value" (ie. the coins) in the Bitcoin system is in amounts of currency being stored in addresses, and you need the entire blockchain in order to move these currencies from one address to another. The hashes are only a part of the system, used in part to authenticate transactions - ie. additions to the blockchain.

Secondly, there is no intrinsic value to anything. Any thing has only the value we assign to it. Gold is valuable not only because it is a scarce resource, but also because people want it for various reasons (utility in making jewelry, utility in electronics, etc.) Money is valuable because it can be used to buy things, the value (to us) is derived entirely from utility.

The game is valuable because it facilitates transactions. But there is no external intrinsic value to a bitcoin that I can see.


It's the same thing as any other currency. There's no real intrinsic value to fiat currency either, we value it because we collectively accept the system where we use money as an instrument of transactions, and this gives money buying power. I see Bitcoin as the next step in the natural evolution of currencies: first we had trade economy, then gold coins, then currency whose value was based on gold, then fiat currency, then decentralized cryptocurrency. It's the next big thing in currency, a paradigm shift, if you will.

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Re: Bitcoin : Where can it fail ?

Postby dii » Tue Sep 10, 2013 3:29 pm UTC

KnightExemplar wrote:
On the other hand, the government that backs up your fiat currency is under no obligation to keep any promises to you. They can devaluate your currency at any time, they can print as much more money as they want, and the entire financial system is being controlled by central banks which are practically immune to any kind of oversight (too big to fail, anyone?)


How is this any different from Bitcoin? BTC rules are enforced by the miners. The 0.8 / 0.7 split that rocked the BTC community a few months ago is proof that ultimately... humans are also running the operation here. The rules that were introduced with version 0.8 of BTC were unfavorable to the community, and miners voted it down by simply continuing to run version 0.7. The main difference is that your "voting power" under the BTC system is determined by how powerful your computer is, anyone who obtains 51% of the hashrate of BTCs will be able to take over the network... even maliciously. So I ask you: what do you do when the largest BTC miners disagree with you? They hold the validity of BTC in their hands, with the thousands... maybe millions of dollars in BTC mining equipment. Don't fool yourself. The BTC system of government is technology == power. Those with the most powerful mining rigs run the show.

On the other hand, government entities tend to be one person - one vote. BTC favors those who invest significant amounts of money into mining equipment. Arguably, the ultimate form of BTC is a plutocracy. (Once mining equipment standardizes, those with the most money will have the most votes in the BTC network)


This would be correct if we were living in an ideal direct democracy, where I could really be certain that if I am of the opinion X, and 51% agree with me, then X is what will be done. This is not the case anywhere in the world (well, maybe Iceland, to an extent). All of the democracies in the world are representational democracies, with varying non-negative amounts of corruption, political games, lobbying and corporacrate cronyism. We might as well call it corporacracy. The one with the most lobbying money gets to influence the decisions of politicians the most.

On the other hand, anyone is free to become a miner, you can get a mining rig on as little as $300, and it's an investment that pays itself back. Also, you might have misunderstood the system somewhat - 51% of miners deciding on something is not enough to change protocol - the entire network, including the non-mining users, would have to accept these changes, as well. The miners can't just force the users to use a new version of the client, that supports their new version of the protocol.

Furthermore, the network and the protocol is set in a way that it incentivizes the miners to maintain the integrity of the network. The miners will not want to "shit in their own nest", so to speak, because their business model depends on the valuation of Bitcoin.

https://en.bitcoin.it/wiki/FAQ#Could_mi ... Bitcoin.3F

It is also extremely unlikely for any one entity to gain enough computing power to beat all of the rest of the miners. The hashrates that are produced by the network at the moment are enormous. Maybe some governments might get into the bitcoin game and start their own mining rigs. Then other governments would likely also join in, and this would create a power balance. This would also legitimize Bitcoin, and make the network extremely robust, so it wouldn't be a bad thing at all.

For example, if some future version of BTC allows blacklisting wallets, BTC miners would be able to deny transactions that originated from certain wallets. And as long as a large enough subset of miners agreed with you, it can happen. Why not? The BTC 0.7 vs BTC 0.8 split proves that every version creates a "new blockchain" entirely. The rules of every blockchain can be as arbitrary as you want. You are simply limited by code...


And if that were to somehow happen, no one would use Bitcoin anymore and its value would plummet. There's a huge incentive for miners to maintain the integrity of the Bitcoin network. Besides, anyone is already free to start their own *coin, seeing as Bitcoin is entirely open source, and start their own blockchain. There's nothing stopping the miners, if they decide they'd rather use their own protocol, from starting a new *coin with their own protocol and their own blockchain. If people found it more useful and better than Bitcoin, people would start using it more. If not, it would fail. Simple free market rules, supply and demand - if people value the utility of your cryptocurrency, they will want to use and own them, and this increases the value of your currency.

There already exists a number of alternate currencies, like litecoin and p2pcoin, and some specialized currencies with added functionality, such as namecoin, which doubles as an alternate DNS-tree. Bitcoin is the most well-known, the highest in value and the first to market, but it's not like if Bitcoin were to fail (or be sabotaged somehow) that the entire concept of a cryptocurrency would tank with it.

But again, it's not going to happen without the users' acceptance. To change the protocol, the change must be implemented not only by the miners, but all of the client software as well.

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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Tue Sep 10, 2013 4:01 pm UTC

On the other hand, anyone is free to become a miner, you can get a mining rig on as little as $300, and it's an investment that pays itself back. Also, you might have misunderstood the system somewhat - 51% of miners deciding on something is not enough to change protocol - the entire network, including the non-mining users, would have to accept these changes, as well. The miners can't just force the users to use a new version of the client, that supports their new version of the protocol.


BTC Clients automatically select the blockchain with the largest depth. The integrity of the blockchain is kept by the BTC Miners. The blockchain with the largest depth is considered the most accurate one. Therefore, anyone who gains 51% of the hashing-power of the BTC network can nearly arbitrarily modify the Blockchain to do whatever the entity wants.

https://en.bitcoin.it/wiki/Weaknesses#A ... ting_power


An attacker that controls more than 50% of the network's computing power can, for the time that he is in control, exclude and modify the ordering of transactions. This allows him to:

Reverse transactions that he sends while he's in control. This has the potential to double-spend transactions that previously had already been seen in the block chain.
Prevent some or all transactions from gaining any confirmations
Prevent some or all other miners from mining any valid blocks

The attacker can't:

Reverse other people's transactions
Prevent transactions from being sent at all (they'll show as 0/unconfirmed)
Change the number of coins generated per block
Create coins out of thin air
Send coins that never belonged to him


Yes, that is right, anyone with 51% power (or a group of people with 51% power) can blacklist transactions, prevent other miners from mining, and double-spend coins that he owns. Its a known "weakness of BTC".

This ultimately implies that the BTC system is a technocratic government, where the more powerful computer gives the biggest votes. As stated before, this has already happened. Read up on the history of the 0.7 and 0.8 blockchain fork. http://bitcoinmagazine.com/3668/bitcoin ... hain-fork/

The fact that disaster was averted is not because BTC was itself resilient, but because the BTC community took matters into their own hands and reverted to 0.7. Miners "voted" with their computers to keep the 0.7 blockchain, and invalidate all transactions from the 0.8. They then moved transactions over from 0.8 to 0.7. During this rebuilding time, there were some reported double-spends, but everyone was nice enough to return the money to their "rightful" owners.

When people work together to watch over a system... that group of people is usually called a Government. BTC Miners constitute the BTC Government. Those who control the BTC blockchain control the "proof of transactions" in the BTC system, which grants you a hell of a lot of power.

Furthermore, the network and the protocol is set in a way that it incentivizes the miners to maintain the integrity of the network. The miners will not want to "shit in their own nest", so to speak, because their business model depends on the valuation of Bitcoin.


The Eurozone doesn't want to screw up the Euro, and the US doesn't want to screw up the dollar. And yet... mistakes happen.

Similarly, BTC miners don't want to screw up BTC, and yet the 0.7 / 0.8 fork allowed double-spends and nearly caused a schism in the community. I don't think that BTC is nearly as resilient as you think it is.
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Re: Bitcoin : Where can it fail ?

Postby dii » Wed Sep 11, 2013 12:13 am UTC

KnightExemplar wrote:BTC Clients automatically select the blockchain with the largest depth. The integrity of the blockchain is kept by the BTC Miners. The blockchain with the largest depth is considered the most accurate one.


Yes.

KnightExemplar wrote:Therefore, anyone who gains 51% of the hashing-power of the BTC network can nearly arbitrarily modify the Blockchain to do whatever the entity wants.


Nnnnnope. Read your own quotes!

An attacker that controls more than 50% of the network's computing power can, for the time that he is in control, exclude and modify the ordering of transactions. This allows him to:

Reverse transactions that he sends while he's in control. This has the potential to double-spend transactions that previously had already been seen in the block chain.
Prevent some or all transactions from gaining any confirmations
Prevent some or all other miners from mining any valid blocks

The attacker can't:

Reverse other people's transactions
Prevent transactions from being sent at all (they'll show as 0/unconfirmed)
Change the number of coins generated per block
Create coins out of thin air
Send coins that never belonged to him


The attacker that has 51% of the processing power of the miner network can double-spend and pretty much prevent the normal functioning of the network from thereon. They can NOT "arbitrarily modify the blockchain", or in any way affect the blockchain that already exists, because to modify the already existing blockchain would require re-hashing all of the transactions from the modifying point onwards.

Besides which, the whole idea of someone gaining 51% of the miner network is already getting to be quite implausible. If you look at the ridiculous hashrates that are churned out. The more distributed the network is, the more robust it is, and the distribution of the BTC mining network is pretty far and wide already.

GPUs can no longer hash efficiently enough to pose any sort of threat to the mining network. It's all in ASICs these days, and the most efficient ASICs used by common miners are orders of magnitude more efficient than even the latest GPUs. An attacker would seriously need to build a computer center consisting of several warehouses full of ASIC circuits, which would cost tons of money and become obsolete the moment they are used to destroy the BTC network. Not to mention if the attack simply fails because the rest of the network just decides to blacklist the source of the attack, it's a whole lot of wasted money for no gain whatsoever.

KnightExemplar wrote:This ultimately implies that the BTC system is a technocratic government, where the more powerful computer gives the biggest votes. As stated before, this has already happened. Read up on the history of the 0.7 and 0.8 blockchain fork. http://bitcoinmagazine.com/3668/bitcoin ... hain-fork/


No, it does not "ultimately imply" that anywhere except in your head full of hyperbole and slippery-slope arguments.

The fork was a mistake, an unexpected bug in the early protocol, occured only once and has never happened since. It was not some kind of hostile takeover attempt or technocratic oppression or attack of the communists or whatever.

You constantly seem to be forgetting that in order to do something malicious (blacklist transactions, etc) by this method, one would have to control over 51% of the mining network. This is simply unplausible even now, and it will get even less plausible as the network grows. To fundamentally change the protocol would be even more difficult, as it would require not only gaining the majority of the network, but to also convince all of the clients to update to this new version of the protocol as well.

These types of hypotheticals are not really useful, as there's really no actual scenario in which 51% of miners would suddenly go crazy and decide they no longer like money.

KnightExemplar wrote:The Eurozone doesn't want to screw up the Euro, and the US doesn't want to screw up the dollar. And yet... mistakes happen.


Yes, mistakes happen. In case of BTC, it's good to get these types of mistakes out of the way now, when the network is still young, and adaption still relatively low - that way, the network can learn from them and we now know how to avoid repeating them in the future.

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Re: Bitcoin : Where can it fail ?

Postby KnightExemplar » Wed Sep 11, 2013 12:30 am UTC

Besides which, the whole idea of someone gaining 51% of the miner network is already getting to be quite implausible. If you look at the ridiculous hashrates that are churned out. The more distributed the network is, the more robust it is, and the distribution of the BTC mining network is pretty far and wide already.


http://mineforeman.com/2013/04/06/btc-g ... hash-rate/

Of course it is. :roll: If BTC Guild didn't limit themselves, they'd be way above 50% by now, and basically be in charge of the BTC Blockchain. BTC Guild has self-limited themselves to insure the integrity of the BTC network, because they are almost exactly the 51% entity that can own the network.

The fork was a mistake, an unexpected bug in the early protocol, occured only once and has never happened since. It was not some kind of hostile takeover attempt or technocratic oppression or attack of the communists or whatever.


That was not what I was implying. I'm implying that the BTC Miners together constitute the BTC Government. In April of this year, the BTC Miners decided that the mining rules for version 0.8 were insufficient, and moved back to version 0.7. Once more than 51% of the mining moved back to the 0.7 version, the blockchain was solid again. Overall, everything worked just fine, but only because of human cooperating. There were double-spends that occurred during that time period. The fact that everything turned out okay is a result of good human nature, if anything else. (The double-spends were self-negated).

GPUs can no longer hash efficiently enough to pose any sort of threat to the mining network. It's all in ASICs these days, and the most efficient ASICs used by common miners are orders of magnitude more efficient than even the latest GPUs. An attacker would seriously need to build a computer center consisting of several warehouses full of ASIC circuits, which would cost tons of money and become obsolete the moment they are used to destroy the BTC network. Not to mention if the attack simply fails because the rest of the network just decides to blacklist the source of the attack, it's a whole lot of wasted money for no gain whatsoever.


I thought you were against blacklists. Are you going to make up your mind about the subject?
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dii
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Re: Bitcoin : Where can it fail ?

Postby dii » Thu Sep 12, 2013 10:24 am UTC

KnightExemplar wrote:
I thought you were against blacklists. Are you going to make up your mind about the subject?


Blargh. If you want to be disingenuous and intellectually dishonest, we're done here. I don't have time for your games.

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Ixtellor
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Re: Bitcoin : Where can it fail ?

Postby Ixtellor » Wed Oct 09, 2013 12:19 am UTC

The United States has a vested interest in maintaining the value and integrity in its currency. There is NO situation where a citizen can crash the market for dollars while enriching themselves.

The same can not be said for Bitcoins, which like commodities are subject to market manipulations particularly when its unregulated. Some major stake holder sells all his bitcoins, etc.
The Revolution will not be Twitterized.


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