Bitcoin : Where can it fail ?

[Bubbles McCoy]

You, as a regular guy, cannot afford to have all your savings tied up in 30 years mortgages. You need part of your savings around as liquid money, to buy stuff immediately if needed. But by pooling your savings witter those of others, a bank can offer you the liquidity of money, while still investing the majority of your savings in long term investments.

I'll be happy to have all my savings on a flat bitcoin account. And as most people think that deflation is looming to this system, it means that I don't need to make complicated maneuvers to get an interest rate.

The points we've made about deflation are a bit more subtle then that. It isn't so much that deflation will exist, so much as changes in the real value of a bitcoin will cause more changes of the same type - any amount of deflation can soon lead to greater deflation, and any amount of inflation can lead to greater inflation. Most importantly, an inflationary spiral can easily bring the currency to it's knees. Most assets do not work on a total trust based system, unless you think confidence that a government will arrest tax dodgers requires an identical amount of trust to a bitcoin.

When inflation increases in a traditional currency, a holder in the currency can have a fair bit of confidence that the central bank will take steps to restrain the inflation rate. Even if the central bank isn't particularly adept at it, there are still a number of reasonable expectations towards it - taxes will continue, and the currency will still be the medium of exchange of all goods in the country. In other words, a lot of people will still be placing their "trust" in the system, as the alternative is bartering. Economies have regressed to bartering before, but it is a very rare event that's always forced by incredibly stupid actions by the mint. Devaluation of a bitcoin on the other hand could cause some to doubt it's value, or just move money out of the bitcoin towards investment. A normal currency system has intrinsic properties that will keep the currency stable in these situations, but the bitcoin has nothing - if the bitcoin looses 10% of it's value in the course of a year, there's a good chance that a lot of people will start looking for alternatives, which causes a feedback cycle of people trying to get out of the currency. Absolutely nothing would indicate that the likely lower bound of this cycle would be the complete loss of value.

I think what this comes down to is that you're creating a false equivalency by saying both systems are based on "100% trust", ergo there is no demerit to the bitcoin on account of trust. There are very, very different amounts of trust that goes into a bank maintained by force of a centuries-old government with an established legal system opposed to a bunch of servers run by a few anonymous guys on the internet. The fact that a normal currency has a strong baseline expectation is hugely important. There is no reasonable scenario when you buy a dollar that the dollar might eventually be worth nothing. That the worst case scenario of holding a dollar might result in the loss of 20% of it's value, in terms of risk to an investor this is hugely different then an asset where you can lose everything. This difference means it is much, much easier for a run to occur on a bitcoin, whereas a dollar can move only so much.

[Zamfir]

Most people on the bitcoin forum seem to expect or at least hope that bitcoins become so popular that they can sell their stash with a profit. They clearly expect massive deflation.

The bitcoin economics subforum is filled with people explaining how deflation is actually good ( prices drop before your wages drop, so you make a profit), and how the bankers and the convenient are conspiring to keep this truth from us. There seems to be a lot of paranoia involved.

[creighto]

In other words, there is very little price stability with the bitcoin, unlike what we have right now.

That's an issue at present, because the Bitcoin economy is so small. There will come a point that the growth of the Bitcoin economy begins to level off, and the value of the currency will become roughly as stable as most fiat currencies on Forex trade against one another. That would probably take a decade or longer, in the best of conditions, but it will come.

Keeping prices stable by adapting the pool of money to the size of the economy is one of the most important roles of a modern central bank.

Not at all. The past century of fiat currencies, fractional reserve banking, and central bank planning should be proof enough that although a gold standard was less than ideal, it was certainly no worse than what we presently have. Yes, a gold standard often caused deflationary periods as a direct result of monetary limits, but they were both more regional, less lengthy and rarely as deep as what has been seen since 1913. Central planning is theoretically better than a rigid commodity standard; but in practice, Fed chairmen are neither as smart as they believe, nor as personally disintrested as they should be.

Why is price stability important? Because it lets you plan ahead, which is useful if you want to run an efficient economy.

True, but you can plan ahead with Bitcoin at least as well as one can with fiat currencies. Even if central planning worked, manipulation of the monetary base in the face of crisis is not likely to help you personally during any such crisis. The monetary base of Bitcoin is a known value at all times, as well as it's future base amount. That's not something that anyone can claim with regard to the same metrics within any fiat currency; and only somewhat true with regard to a gold standard.

I went into this discussion assuming that an efficient, and growing, economy is something that we'd like to keep.

A noble goal, but this is something that is beyond any human control, including that of central bankers.

In a deflationary economy, they will, of course, not invest anything.

This is a rediculous statement in the face of 6000+ years of a defacto gold standard. So you think that investors didn't invest before 1913? They would just horde their gold and giggle?

But even with a bit of inflation the amount of bitcoin is severely limited - thus there will not be many investments, and certainly not too many long-term ones, and they need to promise very good returns.

There are investment groups within Bitcoin already. No long term investments, yet, but again, the Bitcoin economy is damned small. $5million in total is peanuts.

So in a bitcoin economy, I cannot promise to pay you tomorrow? And I cannot get a loan from you? Because that's how you get into debt.

Bitcoin is a currency, and a ridgid one, coupled with a settlement process. There is nothing that would prevent a well funded individual, or even a bank, from offering deposit accounts or offering loans denominated in bitcoins. They could even be fractional reserve, if they were up front and honest about it, but those would be unlikely to survive their full reserve competitors' maneuvors. Truth be told, there are already more than one website that functions somewhat as a bank; but don't offer interest bearing accounts nor offer any loans from reserves held. However, they all offer demand deposit accounts.

[Iv]

Maybe I should take a look at their forums... But I suspect it has a lot of enthusiasm and I came here for more criticism. But actually many people argue about how bitcoins can naturally fail, but I was more wondering about how it could be attacked by a large hostile entity (like a big bank or a big goverment)

Most people on the bitcoin forum seem to expect or at least hope that bitcoins become so popular that they can sell their stash with a profit. They clearly expect massive deflation.

If one thing can make bitcoins fail, I think this is that belief. It will not be successful as a currency if people don't begin to exchange them.

The bitcoin economics subforum is filled with people explaining how deflation is actually good ( prices drop before your wages drop, so you make a profit), and how the bankers and the convenient are conspiring to keep this truth from us. There seems to be a lot of paranoia involved.

I find this idea intriguing. It is true that in a deflation scenario, one doesn't need a bank to have a positive interest rate on his savings. Making loans will be a bit harder but I guess it just means the lending rates will be higher. It makes for a slower economy but should prevent some crisis a la subprimes.

But it is also totally possible to create a fractional reserve banking system on top of BTCs. In such a system, you have regular banking operations : loans, savings, one can regulate the value of the IOUBTC currency through the usual means. Can we consider this hypothesis ? Which has the advantage of people being able to withdraw their BTCs directly and to make direct transactions without going through a banking system but also bears the advantages of a banking system as we currently know it.

I now give you the full control over the US banking system and the CIA with the mission to destroy bitcoins. How do you do that ?

[Silas]

There is nothing that would prevent a well funded individual, or even a bank, from offering deposit accounts or offering loans denominated in bitcoins. They could even be fractional reserve, if they were up front and honest about it, but those would be unlikely to survive their full reserve competitors' maneuvers. Truth be told, there are already more than one website that functions somewhat as a bank; but don't offer interest bearing accounts nor offer any loans from reserves held. However, they all offer demand deposit accounts.

That explains why normal fractional reserve banks are routinely crushed by their full-reserve rivals.

What are your thoughts ? What are its weaknesses ? How can it fail ? How would you attack it if you were a criminal organization, a banking institution or a government ?

If I ruled by ukase, I could destroy bitcoins as a serious currency in my country by ordering the courts not to enforce any contract calling for payment in them. If I were a banker, I'd be thinking less about how to attack bitcoins than about how to co-opt them, which wouldn't be difficult: people still need finance, and even if people expect their hundred bitcoins to be worth more a year from now than they are today, surely a hundred and two bitcoins will be worth more still. If I were a criminal, attacking the monetary system wouldn't even be in my vocabulary. I might look at cornering the market, if I had the resources, but for the most part, I'd be stealing shit. Phishing for people's private keys, ripping people off in craigslist scams, surreptitiously replacing a mark's transaction-authentication software with something that return bogus results to convince him he's been paid, that kind of thing.

The point is, you're asking the wrong question. It's not, "how could this system be sabotaged," or, "would a world where this system was in place be any good?" The question is, what circumstances could cause this system to be widely used? And the only answer is there being important goods and services that can only be bought with bitcoins. Those just don't exist, except for things like hiring-a-Russian-hacker-to-frame-your-romantic-rival-for-money-laundering.

[Bubbles McCoy]

The bitcoin economics subforum is filled with people explaining how deflation is actually good ( prices drop before your wages drop, so you make a profit), and how the bankers and the convenient are conspiring to keep this truth from us. There seems to be a lot of paranoia involved.

I find this idea intriguing. It is true that in a deflation scenario, one doesn't need a bank to have a positive interest rate on his savings. Making loans will be a bit harder but I guess it just means the lending rates will be higher. It makes for a slower economy but should prevent some crisis a la subprimes.

The problem is that money by itself means little. The reason that having to find an interest rate is necessary to not loose money on savings is because there is no inherent property to money that in any way suggests its value should climb with time. If you produce something today but don't wish to consume today, you have to find some way to guarantee that something will be produced in the future that you'd want to buy. For example, why not just stock up on cars instead of holding money? Quite obviously, cars lose value with time - as do most products made in the present. If you think you might want to buy a car in ten years time with money you make today, you have to find some way to guarantee that a carmaker ten years from now will exist, and want to exchange a car for whatever assets you hold. Goods without investment inherently lose value with time, that money does too is just a reflection of this. That money as a form of savings is meaningless is why serious currency deflation is considered quite bad economically, and the root cause for many of the problems associated with something like a bitcoin.

Not at all. The past century of fiat currencies, fractional reserve banking, and central bank planning should be proof enough that although a gold standard was less than ideal, it was certainly no worse than what we presently have. Yes, a gold standard often caused deflationary periods as a direct result of monetary limits, but they were both more regional, less lengthy and rarely as deep as what has been seen since 1913. Central planning is theoretically better than a rigid commodity standard; but in practice, Fed chairmen are neither as smart as they believe, nor as personally disintrested as they should be.

Have you read any monetary history? The reason the Fed was created in 1913 was because a gold-based depression was narrowly averted by banks a few years prior, and the bankers thought the bailout they arranged of the system was incapable of maintaining itself. This was after multiple depressions were made out of recessions in the nineteenth century on account of gold-based deflation swings.

[Zamfir]

The problem is that money by itself means little. The reason that having to find an interest rate is necessary to not loose money on savings is because there is no inherent property to money that in any way suggests its value should climb with time. If you produce something today but don't wish to consume today, you have to find some way to guarantee that something will be produced in the future that you'd want to buy. For example, why not just stock up on cars instead of holding money? Quite obviously, cars lose value with time - as do most products made in the present. If you think you might want to buy a car in ten years time with money you make today, you have to find some way to guarantee that a carmaker ten years from now will exist, and want to exchange a car for whatever assets you hold. Goods without investment inherently lose value with time, that money does too is just a reflection of this. That money as a form of savings is meaningless is why serious currency deflation is considered quite bad economically, and the root cause for many of the problems associated with something like a bitcoin.

That's a good piece, Bubbles. If I may try a slightly different formulation of a similar point:

Suppose someone has bitcoin. They generated it, or got it in return for something useful. Why should this person expect that in the future other unrelated persons produce useful things for them, in return for a useless piece of code? There is nothing obvious about that, but bitcoin people just say "because".

If you make an investment (or a loan in general), you make an explicit and legally backed deal with a particular person. This other person accepts the obligation to provide stuff for you in the future, if you give them the means to get stuff now. For example because they think they can create more stuff if they spend now. You know with whom you have a deal, so you can check if they are likely to keep the deal. And the other person knows when they have to deliver the goods, so they can plan around that.

A currency doesn't have that obligation, and it doesn't have that explicit coordination. At best, its a vague promise by "society" to provide you with future stuff, on the grounds that there will probably be other people in the future who are producing more then they need right then. It's clearly usefulto have a currency. You cannot make an explicit deal with someone everytime you produce something now and hope to get something else, yet unspecified, at some unknown point in the future. But if you can afford the effort of making an explicit deal, that's more efficient.

Amd just because something is useful doesn't mean it will exist, or that it will exist in enough amounts. A currency is a very implicit deal you make with many people you don't even know, to accept each other's services and obligations in a roughly standardized way. No one is bound by that deal, and people can leave the deal whenever they want. History suggets that people usually manage to coordinate on a currency to use, but it is a tricky process that can easily fail. For long stretches of history, currency use was mostly limited to a small set of elites. Monetization of an economy takes centuries, and there is usually some amount of government involvement.

Bitcoin essentially points at gold and says: People once coordinated on gold as currency. Bitcoin is like gold, so people will also coordinate on bitcoin. But that's like saying: people coordinated to form France, so if we draw a border around an area the size of France, it will become a single country too.

[creighto]

There is nothing that would prevent a well funded individual, or even a bank, from offering deposit accounts or offering loans denominated in bitcoins. They could even be fractional reserve, if they were up front and honest about it, but those would be unlikely to survive their full reserve competitors' maneuvers. Truth be told, there are already more than one website that functions somewhat as a bank; but don't offer interest bearing accounts nor offer any loans from reserves held. However, they all offer demand deposit accounts.

That explains why normal fractional reserve banks are routinely crushed by their full-reserve rivals.

Ha! A funny!

Of course, any Bitcoin banks wouldn't benefit from the nearly limitless backing of any central bank, so a concerted effort by any competitors to initiate a run on the bank could destroy it. This is a simple version of how independent banks would keep each other 'honest', preventing any bank from gaining an edge over the others by secretly issuing more banknotes than they had reserves.

What are your thoughts ? What are its weaknesses ? How can it fail ? How would you attack it if you were a criminal organization, a banking institution or a government ?

The point is, you're asking the wrong question. It's not, "how could this system be sabotaged," or, "would a world where this system was in place be any good?" The question is, what circumstances could cause this system to be widely used? And the only answer is there being important goods and services that can only be bought with bitcoins. Those just don't exist, except for things like hiring-a-Russian-hacker-to-frame-your-romantic-rival-for-money-laundering.

Well, there is no 'killer app' for Bitcoin as of yet, at least not in the places that Bitcoin is known and accessible, but that isn't the only reason that it could be adopted widely. Another that seems to be the cause of most growth at present, is simply that Bitcoin is a better cash-like Internet currency for many small transactions, and most transactions that traders wouldn't want to be traceable. Those two uses are small donations (wherein trust is not an issue) and online ordering of contraband. (much like buying dope from the corner dealer in cash, but the dealer is a website in some dark, hidden corner of the Internet. Recently such a site has popped up as a hidden service on Tor)

[creighto]

Not at all. The past century of fiat currencies, fractional reserve banking, and central bank planning should be proof enough that although a gold standard was less than ideal, it was certainly no worse than what we presently have. Yes, a gold standard often caused deflationary periods as a direct result of monetary limits, but they were both more regional, less lengthy and rarely as deep as what has been seen since 1913. Central planning is theoretically better than a rigid commodity standard; but in practice, Fed chairmen are neither as smart as they believe, nor as personally disintrested as they should be.

Have you read any monetary history? The reason the Fed was created in 1913 was because a gold-based depression was narrowly averted by banks a few years prior, and the bankers thought the bailout they arranged of the system was incapable of maintaining itself. This was after multiple depressions were made out of recessions in the nineteenth century on account of gold-based deflation swings.

Yes, I have. And if you believe that this was the reason that a bunch of very wealthy and powerful men secretly founded the Fed, out of concern for the little guy and how deflation might affect him, then I have a bridge you might be interested in.

[Antimony-120]

Not at all. The past century of fiat currencies, fractional reserve banking, and central bank planning should be proof enough that although a gold standard was less than ideal, it was certainly no worse than what we presently have. Yes, a gold standard often caused deflationary periods as a direct result of monetary limits, but they were both more regional, less lengthy and rarely as deep as what has been seen since 1913. Central planning is theoretically better than a rigid commodity standard; but in practice, Fed chairmen are neither as smart as they believe, nor as personally disintrested as they should be.

Have you read any monetary history? The reason the Fed was created in 1913 was because a gold-based depression was narrowly averted by banks a few years prior, and the bankers thought the bailout they arranged of the system was incapable of maintaining itself. This was after multiple depressions were made out of recessions in the nineteenth century on account of gold-based deflation swings.

Yes, I have. And if you believe that this was the reason that a bunch of very wealthy and powerful men secretly founded the Fed, out of concern for the little guy and how deflation might affect him, then I have a bridge you might be interested in.

There's no comment about sticking up for the little guy. It's that a bunch of wealthy men understood that it was rather for the best that millions of little guys, aka their customers, didn't suddenly start hording wealth. It was bad for buisness. That it happens to have ALSO been good for the little guy is yet one more reason to keep the system.

[creighto]

Not at all. The past century of fiat currencies, fractional reserve banking, and central bank planning should be proof enough that although a gold standard was less than ideal, it was certainly no worse than what we presently have. Yes, a gold standard often caused deflationary periods as a direct result of monetary limits, but they were both more regional, less lengthy and rarely as deep as what has been seen since 1913. Central planning is theoretically better than a rigid commodity standard; but in practice, Fed chairmen are neither as smart as they believe, nor as personally disintrested as they should be.

Have you read any monetary history? The reason the Fed was created in 1913 was because a gold-based depression was narrowly averted by banks a few years prior, and the bankers thought the bailout they arranged of the system was incapable of maintaining itself. This was after multiple depressions were made out of recessions in the nineteenth century on account of gold-based deflation swings.

Yes, I have. And if you believe that this was the reason that a bunch of very wealthy and powerful men secretly founded the Fed, out of concern for the little guy and how deflation might affect him, then I have a bridge you might be interested in.

There's no comment about sticking up for the little guy. It's that a bunch of wealthy men understood that it was rather for the best that millions of little guys, aka their customers, didn't suddenly start hording wealth. It was bad for buisness. That it happens to have ALSO been good for the little guy is yet one more reason to keep the system.

A valid perspective, I suppose. Not that either of us gets to choose. Either Bitcoin will succeed, or it will fail, entirely independently of our desires or that of the central bankers. If it does succeed, that may or may not affect fractional reserve central banking. Bitcoin may simply function as a decentralized online payment processing system, and never make the leap to meatspace. All of which is irrelevent to the question posed, which was closer to asking how the network could be attacked. The opinions expressed about Bitcoin's economic future, or lack thereof, probably belong in another thread.

[Zamfir]

Of course, any Bitcoin banks wouldn't benefit from the nearly limitless backing of any central bank, so a concerted effort by any competitors to initiate a run on the bank could destroy it. This is a simple version of how independent banks would keep each other 'honest', preventing any bank from gaining an edge over the others by secretly issuing more banknotes than they had reserves.

How would bitcoin prevent this? Suppose there are two banks, each claiming to have a reserve fraction of, say , 30%. So they keep 30% of the bitcoins you deposit with them, and they invest the other 70%. In return for being a fractional bank, they offer to pay interest. Or they offer extra service. For example they facilitate a way to use your bitcoin account to pay for dollar-denominated transactions, at the present exchange rate. Perhaps even in physical shops. Those are useful services, but they would not be free to implement. The 70% (or whatever) number allows them to offer those services for free, or for a small fee. You can still withdraw the entire sum, they just plan that not everyone will withdraw their enitre sum.

Presumably, some or even a lot of people will take up such an option. It's an attractive compromise between having bitcoins stuck under your digital mattress, and having bitcoins locked up in long term investments where you cannot touch them for years. In the real world, most people have bank accounts and very few have silver dollar stacks.

You can argue that such a system is better than fed-guaranteed deposits. Perhaps it is better if people monitor their own banks, and choose for themselves how safe or profitable they want their banks to be. But it would not in itself stop banks from secretly lowering their reserve, or to invest in more risky assets than they claim. Those things are not caused by having a central bank, or federal guarantees.

[creighto]

Of course, any Bitcoin banks wouldn't benefit from the nearly limitless backing of any central bank, so a concerted effort by any competitors to initiate a run on the bank could destroy it. This is a simple version of how independent banks would keep each other 'honest', preventing any bank from gaining an edge over the others by secretly issuing more banknotes than they had reserves.

How would bitcoin prevent this?

I'm not understanding what you are asking. If you are asking how would bitcoin prevent a group of banks from colluding to start a run on a fractional reserve bank in order to destroy it, it wouldn't. I'm not even saying that it's a better system, it's just different. People now have a choice, and when they learn of it and how it works, some of them will choose to use it. If you don't like it, don't use it; but this isn't a constructive debate.

[Bubbles McCoy]

Well, you originally said that the reason was that full-reserve banks don't exist was that fractional reserve banks are unfairly propped up by the government (or at least to this effect). If this was true, then bitcoin wouldn't actually change this system, and be inferior in the same fashion to fractional reserve banks that are government supported.

[Zamfir]

Of course, any Bitcoin banks wouldn't benefit from the nearly limitless backing of any central bank, so a concerted effort by any competitors to initiate a run on the bank could destroy it. This is a simple version of how independent banks would keep each other 'honest', preventing any bank from gaining an edge over the others by secretly issuing more banknotes than they had reserves.

How would bitcoin prevent this?

I'm not understanding what you are asking. If you are asking how would bitcoin prevent a group of banks from colluding to start a run on a fractional reserve bank in order to destroy it, it wouldn't. I'm not even saying that it's a better system, it's just different. People now have a choice, and when they learn of it and how it works, some of them will choose to use it. If you don't like it, don't use it; but this isn't a constructive debate.

You said that independent banks would keep each other honest, and assumed you meant independent banks using bitcoins. I don't understand how they would keep each other honest,or more honest than the current system.

Banks can always lie about their balance sheet, independent or bitcoins or not. It's third-party control that can to some extent keep them honest, not competition or the absence of a central bank.

[creighto]

Of course, any Bitcoin banks wouldn't benefit from the nearly limitless backing of any central bank, so a concerted effort by any competitors to initiate a run on the bank could destroy it. This is a simple version of how independent banks would keep each other 'honest', preventing any bank from gaining an edge over the others by secretly issuing more banknotes than they had reserves.

How would bitcoin prevent this?

I'm not understanding what you are asking. If you are asking how would bitcoin prevent a group of banks from colluding to start a run on a fractional reserve bank in order to destroy it, it wouldn't. I'm not even saying that it's a better system, it's just different. People now have a choice, and when they learn of it and how it works, some of them will choose to use it. If you don't like it, don't use it; but this isn't a constructive debate.

You said that independent banks would keep each other honest, and assumed you meant independent banks using bitcoins. I don't understand how they would keep each other honest,or more honest than the current system.

Banks can always lie about their balance sheet, independent or bitcoins or not. It's third-party control that can to some extent keep them honest, not competition or the absence of a central bank.

I see what you are asking.

During the free banking era (full gold reserves, no central bank) all paper currency was produced by independent banks. Most of the banks in a particular region would accept the banknotes of other banks at face value, and then occasionally 'settle up' by using porters to trade those banknotes in equal amounts. This didn't happen often due to the security issues, and the movement of actual gold was rarer. However, if a bank started to suspect that a rival bank had issued more banknotes than they had reserves, several of those banks could quietly over accumulate that bank's notes. Once they thought that they had enough, they would submit their notes for redemption at the same time, forcing the one bank in question to produce the reserves for themselves; while also starting the rumors that the bank was insolvent, starting a bank run. If they were issuing more banknotes than they had reserves, then they would run out of reserves for redemption, and would be destroyed. This happened about once a decade during the free banking era between the Civil War and 1913.

Likewise, a Bitcoin bank would be independent of central banking support. So a fractional reserve bank, in order to exist, would have to issue digital banknotes. I wouldn't consider it likely that they would be well received, but it could be done. Yet, if done, the full reserve bitcoin banks could do the same thing to the fractional reserve bank at any time, and likely succeed if the fractional reserve bank didn't have some deep pocketed support from somewhere. Full service bitcoin banks probably wouldn't make any sense, as many of the functions of a modern bank revolve around payment transfers and settlements. Something along the lines of a savings & loan, or a basic credit union, is bound to happen; but will never reach the levels of dominance that banks have in the real world today, because those deposit accounts could never be 'on demand' deposits, because they would be loaned out. Websites that function as 'on demand' deposits now are commonly called, "online wallet sites" in the bitcoin community, and there are a few, that offer the service of holding your bitcoins in a shared wallet format so that a user doesn't have to run the client himself, and for easy ecommerce website intergration (a la Paypal). These sites could probably get away with a 50% reserve setup, by issuing deposited bitcoins while also claiming a deposit balance available on demand. This would work as long as most people don't suspect, or don't care, that their bitcoins actually are not present, and that there is never a run. More than 50% would be impossible without issuing digital banknotes. The Federal Reserve System has a reserve ratio of 10% or so, but has the explicit backing of the Federal Reserve Bank itself, and the implicit backing of the printing press.

[Zamfir]

Creighto, thatch sounds to me like a long list of reasons to have a central bank. Organized bank runs on competitors are not exactly a boon to the people losing their money.

Is your point that you dislike banking, and would like to see less of it for some reason? With more people holding their liquid reserves in a not invested form?

Apart from the question whether bitcoin would achieve that, I don't understand why that is a particularly worthy goal. Banks make sense because a group of people needs less liquidity than the sum of their individual needs. Roughly similar to the way insurers exist because a group of people needs less savings for calamities than the sum of their individual needs.

Wh should we try to discourage the advantages to be had there, or to make the system more fragile and unpredictable for normal people?

[creighto]

Creighto, thatch sounds to me like a long list of reasons to have a central bank. Organized bank runs on competitors are not exactly a boon to the people losing their money.

Is your point that you dislike banking, and would like to see less of it for some reason? With more people holding their liquid reserves in a not invested form?

Apart from the question whether bitcoin would achieve that, I don't understand why that is a particularly worthy goal. Banks make sense because a group of people needs less liquidity than the sum of their individual needs. Roughly similar to the way insurers exist because a group of people needs less savings for calamities than the sum of their individual needs.

Wh should we try to discourage the advantages to be had there, or to make the system more fragile and unpredictable for normal people?

Central banking has it's own frailties. I'm largely indifferent to the central banking system, I just would like to have an alternative. Now I do. Others may choose to join me, for their own reasons, or they may not.

[Silas]

Creighto, you keep going on about how bitcoins represent a new financial landscape where fractional reserve banks (from here on, I'm just going to call them banks because no other kind really exists) don't make sense- with an undertone that that's a good thing.

You're wrong on both counts. First bitcoins aren't, in a meaningful way, different from gold or silver or any other generally-fixed-supply currency. Whatever could (and did) happen under the silver standard can (and, for the particular of banks, will) happen with bitcoins. Other than how they're generated and transferred- things which are maybe cryptologically, but not financially interesting- there is nothing new about these things.

And you're fixating on how there isn't a central authority like a national bank. That's not the game-changer you think. Yes, without a creditor of last resort, bank runs are a danger, and without deposit insurance, bank customers can lose their shirts. But those are solved- or at least managed- problems. It is almost trivially easy for a bank's management to calculate the reserve ratio required to satisfy customers- even with the threat of coordinated runs by other banks. We did this for a long time.

Last, the demise of banking isn't going to be an improvement. We have banks because being able to get a loan is really fucking useful, and because having people build up savings in cash is really inefficient. Money that isn't being spent right now is like a factory sitting idle. Banks save people from having to choose between renting out their money/factory and keeping it on hand/unoccupied in case they need it. A development that damages the ability of banks to provide that service is profoundly bad.

---
Of course, all this is assuming bitcoins catch on, which I still doubt. There's no problem that bitcoins solve, except for offering a new way to pay for illicit goods and services. But if people start doing that, it's only going to be a matter of weeks before the government starts to look very carefully at ways to track bitcoins spending, and then there won't be any advantage at all.

[creighto]

Creighto, you keep going on about how bitcoins represent a new financial landscape where fractional reserve banks (from here on, I'm just going to call them banks because no other kind really exists) don't make sense- with an undertone that that's a good thing.

You're wrong on both counts. First bitcoins aren't, in a meaningful way, different from gold or silver or any other generally-fixed-supply currency.

Of course they are, in a major fashion. They are digital by their nature. I know of no other currency that functions online as a matter of it's design.

[Silas]

So? That's the first example on the list of an irrelevant difference. What does it change? Nothing. There's not a single useful thing that you could do in a bitcoin-based economy that you couldn't do in a silver- or gold-based economy. That's what "meaningful difference" means.

[Iv]

So? That's the first example on the list of an irrelevant difference. What does it change? Nothing. There's not a single useful thing that you could do in a bitcoin-based economy that you couldn't do in a silver- or gold-based economy. That's what "meaningful difference" means.

Make micro-payements that are international, anonymous, without a central bank, and without a fee.
* If you have a business plan that require people from all around the world to give you ten cents, you currently have no tool to do that. Bitcoin can.
* If you are wikileaks and want to receive funds electronically from people all over the world without a single point of failure that the US can shut down, you can't.
* If you want to make an international non-profit that can receive donations, you can't. Non-profits need to be established in a given country.

BTW, I am a bit disappointed. I expected a discussion about how to attack bitcoin but instead it became an argument about why it would fail on a large scale. No one expects people to buy apartments in bitcoins anytime soon, but getting 10% of one's pay in bitcoin to buy internet access, hosting, freelance work, or other dematerialized things is an interesting proposition to say the least.

[Randomizer]

Bitcoins can't be any worse than investing in WOW gold. :p

A question about bitcoins: If my hard drive crashes, do I lose all the bitcoins that I own? If so, bitcoins would be useless to me, no matter how popular, as I certainly wouldn't trust my hard drive to safely store any significant wealth. I'd sooner trust my mattress. Which brings up the point that if some people stop using bitcoins, or lose them in hard drive crashes, the total number of bitcoins in the system is 100% guarunteed to slowly decline over time, even if the total number of people willing to use bitcoins stays stable. Unless there's a method in place that can identify when bitcoins are permanently "lost" and that can replace them in the system?

[Bubbles McCoy]

BTW, I am a bit disappointed. I expected a discussion about how to attack bitcoin but instead it became an argument about why it would fail on a large scale. No one expects people to buy apartments in bitcoins anytime soon, but getting 10% of one's pay in bitcoin to buy internet access, hosting, freelance work, or other dematerialized things is an interesting proposition to say the least.

Well, Silas I think wrote a fine post on how this could be destroyed if anyone had the inclination. All said and done, a donation to wikileaks still depends on countries being willing to rent land & servers to the company, so there's no real way that this could create a shadow currency. At some point some people need to be willing to trade them for actual goods, and it just seems implausible a system with any staying power could be made out of these, before you even get to how easily a government could shut this down. Illicit money transfers have been around forever, but they at least have the advantage that they could be disguised as legitimate; a means of payment with the stated purpose of subverting government doesn't quite have this protection.

[Silas]

Iv, that's kind of beyond the scope of what I was talking to Creighto about: how, if bitcoins catch on, it won't revolutionize or demolish the banking system.
---

But you want to talk about how to attack bitcoins? Fine, that's pretty straightforward. You make bitcoin contracts unenforceable, and (or) you sabotage the authentication nodes, whether by impersonating them or by attacking them directly. You don't have to do much, just make them appear slightly risky. Bitcoin's chief weakness, like any currency that doesn't have widespread, well, currency, is that it need users more than users need it.

The problem with using bitcoins to send money to WikiLeaks isn't transferring the funds, it's converting those funds into goods and services. Finding retailers and service providers who are willing to take payment in bitcoins is an enormously bigger problem than getting money to Julian Assange (after all, you can just mail him a check and he can get it cashed at the liquor store like everybody else). His hosting company's not going to take them- they'd just end up facing the same problem.

The point is, companies are going to be reluctant to take these things in the first place: if the government, or some other actor, is poisoning the well even a little bit, it'll be enough to confine bitcoin use to enthusiasts who use them in spite, not because, of their cost/benefit.

[Aaeriele]

A question about bitcoins: If my hard drive crashes, do I lose all the bitcoins that I own?

No.

(I think the rest of your post can be ignored, since it was based on a false premise.)

[Randomizer]

A question about bitcoins: If my hard drive crashes, do I lose all the bitcoins that I own?

No.

Then, presuming I had them stored on my hard drive, how would I get them back? Or am I not understanding how one keeps track of their supply of bitcoins? I know there are bitcoin wallet services out there, but let's assume I'd like to keep direct control of at least a portion of my supply and/or would be asking the wallet company how they'd be able to return my bitcoins should their equipment fail.
----
But still there's the question of what happens if people (either maliciously or not) take bitcoins permanently out of circulation by obtaining a supply and simply never using them again. While not as immediate a problem to an individual as accidentally losing their own supply, having the number of bitcoins in circulation slowly drop over time would threaten the currency's long-term stability. Heck, a company could seemingly legitimately operate as a bitcoin wallet service, and once they've collected enough simply turn off their servers so that no one could get their money back. And since bitcoins aren't legal currency, they'd have as much liability as imageshack would if they were to delete the lolcats you uploaded. And even if one thought, "Meh, doesn't affect me," becuase they weren't using that particular service, there'd still be a permanent decrease in available currency that could add up over time.

Now, if you paid real money for bitcoins or bitcoin services the company might be liable the same way Apple would if you bought iTunes songs and they refused to deliver them, or an MMO company would if you bought a purple costume for your character and the company wouldn't update your account so you could equip the outfit, but if they were offering services for free I believe one would be SOL.
----
* Edit to add: Well, here's something of an answer to my question: http://www.bitcoin.org/faq#Are_my_Bitcoins_safe

Are my Bitcoins safe?

As long as you make backups of your Bitcoin wallet, protect it with a strong password and keep keyloggers away from your computer. You need to make a backup of your wallet after each transaction, as the old wallet backup will be partially or completely invalid.

If you lose your wallet or if some unknown attacker gets it and manages to break your password, there’s no way to get your coins back. On the other hand, that is usually also the case if you lose your physical wallet.

Like I can be arsed to backup my wallet every time I make a transaction. :p I've already got enough stuff on my hard drive I'd be mad if I lost but still haven't backed up. Oh well, bitcoins sounded cool, anyway.

[Aaeriele]

* Edit to add: Well, here's something of an answer to my question: http://www.bitcoin.org/faq#Are_my_Bitcoins_safe

Are my Bitcoins safe?

As long as you make backups of your Bitcoin wallet, protect it with a strong password and keep keyloggers away from your computer. You need to make a backup of your wallet after each transaction, as the old wallet backup will be partially or completely invalid.

If you lose your wallet or if some unknown attacker gets it and manages to break your password, there’s no way to get your coins back. On the other hand, that is usually also the case if you lose your physical wallet.

Like I can be arsed to backup my wallet every time I make a transaction. :p I've already got enough stuff on my hard drive I'd be mad if I lost but still haven't backed up. Oh well, bitcoins sounded cool, anyway.

Apparently they have a rather poor implementation then... it seems like it would make much more sense to use something a la the Git distributed model so that the various objects can be stored universally and all you need is an identifying key.

[creighto]

* Edit to add: Well, here's something of an answer to my question: http://www.bitcoin.org/faq#Are_my_Bitcoins_safe

Are my Bitcoins safe?

As long as you make backups of your Bitcoin wallet, protect it with a strong password and keep keyloggers away from your computer. You need to make a backup of your wallet after each transaction, as the old wallet backup will be partially or completely invalid.

If you lose your wallet or if some unknown attacker gets it and manages to break your password, there’s no way to get your coins back. On the other hand, that is usually also the case if you lose your physical wallet.

Like I can be arsed to backup my wallet every time I make a transaction. :p I've already got enough stuff on my hard drive I'd be mad if I lost but still haven't backed up. Oh well, bitcoins sounded cool, anyway.

Apparently they have a rather poor implementation then... it seems like it would make much more sense to use something a la the Git distributed model so that the various objects can be stored universally and all you need is an identifying key.

His info is dated. The client now generates 100 advance keypairs by default, and generates a new keypair to add to the queue with each transaction, by default. So that the user is protected from loss as long as he backs up at least once every 100 transactions. And this advance queue can be set to any number.

[Randomizer]

On the subject of how to destroy bitcoin - I think the best way is to sabotage the software itself. They say there's "no central authority" controlling things, but that's plain false - someone had/has to make the software. So, if they don't already have auto-updates implemented, I'd wait for that to get in. Then I'd take a look at the code (it's open source), make whatever tweaks I needed to, then break into whomever's account(s) I needed to to force my changes into the system, send out an alert to the pleebs that a software update was available, then watch it get installed and destroy the whole system.

Wonder if anyone remembers that thing where the Skype network crashed because a bug slipped in that over-taxed the system? If something like that can happen on accident, it can happen deliberately, too.

Or maybe one could take down the IRC channel that the software automatically connects to to find the rest of the bitcoiners that are online? There's an "inbuilt node list" as a backup, but I'm not sure what the list comprises. The nodes that were online the last time you connected? An official server list that the creators try to make sure are always available like they do with the IRC channel? And how many nodes are on the list? Could taking them all down be done?

[Iv]

On the subject of how to destroy bitcoin - I think the best way is to sabotage the software itself. They say there's "no central authority" controlling things, but that's plain false - someone had/has to make the software. So, if they don't already have auto-updates implemented, I'd wait for that to get in.

They are crypto-geek. The identity of the other is probably a fake one, but even admitting you could hijack his identity and propose an update, it will of course be scrutinized. Some people are waiting a few versions behind to be cautious.

Then I'd take a look at the code (it's open source), make whatever tweaks I needed to, then break into whomever's account(s) I needed to to force my changes into the system, send out an alert to the pleebs that a software update was available, then watch it get installed and destroy the whole system.

Even if that was possible, every node of the system contains a backup, so restoring a system would be easy to do.

Or maybe one could take down the IRC channel that the software automatically connects to to find the rest of the bitcoiners that are online? There's an "inbuilt node list" as a backup, but I'm not sure what the list comprises. The nodes that were online the last time you connected? An official server list that the creators try to make sure are always available like they do with the IRC channel? And how many nodes are on the list? Could taking them all down be done?

All you could do with this approach is to force people to find a peer manually to begin the connection. It wouldn't take long to be restored, and the data will not have been compromised.

[creighto]

On the subject of how to destroy bitcoin - I think the best way is to sabotage the software itself. They say there's "no central authority" controlling things, but that's plain false - someone had/has to make the software. So, if they don't already have auto-updates implemented, I'd wait for that to get in. Then I'd take a look at the code (it's open source), make whatever tweaks I needed to, then break into whomever's account(s) I needed to to force my changes into the system, send out an alert to the pleebs that a software update was available, then watch it get installed and destroy the whole system.

This possible exploit was considered months ago, when a fairly serious exploit was discovered, and a patch quickly released. The main branch client may someday have signed alerts, but should never have auto updating for this exact reason. Alternative clients already exist, and those alternatives would not even have the signed alerts.

Truth be told, it is unlikely that anything that the membership on this list can think of, the Bitcoin forum members haven't already considered. Easy encryption and off-site backup of the wallet file, as an intergrated and perhaps automated function of the client, is already part of the future features list. There are a few additional security checks that the clients perform that are not even mentioned in the white paper, such as blockchain benchmarking; as well as planned future features, such as an optional parallel 'watchdog' process, that just quietly watches the network traffic for signs of double spend attempts, network splits, or node isolation and/or spoofing.

[creighto]

Or maybe one could take down the IRC channel that the software automatically connects to to find the rest of the bitcoiners that are online? There's an "inbuilt node list" as a backup, but I'm not sure what the list comprises. The nodes that were online the last time you connected? An official server list that the creators try to make sure are always available like they do with the IRC channel? And how many nodes are on the list? Could taking them all down be done?

This possible exploit has also been considered months ago. A modified client, that has been called the "shy" client, exists that not only does not announce itself on IRC, it doesn't even need to connect to it. The regular client has intergrated it's bootstrapping method, (the inbuilt node list, you mentioned) and even the regular client no longer needs to use the IRC list for bootstrapping. Even the older clients, some of which are still in use, do not need to use the IRC list for bootstrapping after the first successful connection after install. Nodes can announce peers across the network itself, and a previously installed client keeps a history list of it's prior connections. "Shy" nodes exist on Tor, IP2 and openly on cloud servers precisely for the purpose of bootstrapping other "shy" clients into the network, while being difficult to physically locate or attack. Recently, a non-generating and small footprint client, intended specificly to maintain the integrity of the blockchain in the event of a major disaster, has been discussed for a low-Earth orbit sat. A co-sponsorship of a ham radio sat being the most likely. This was probably prompted by the destruction in Japan.

[Randomizer]

Been looking over their forums/thinking about this a bit...

One thing that strikes me as odd, if GPUs are so much more powerful than CPUs, and thus bit coin miners are using them to mine, why isn't my computer using GPU-type architecture rather than a CPU? Wouldn't that give me more processing power for the buck? Or am I missing something here? :/
-----

How does the system keep track of who owns what? It says it does it by keeping track of transactions, but then individual transactions get pruned from the block tree or line or whatever after a while to save disk space, so eventually things like "Bob paid Sally on June 23rd 2012" would disappear from the chain. Does the system also keep a running tally of everyone's accounts? E.G. - Account aBcD owns X bitcoins, Account EFGh owns Y bitcoins, etc. and here's all the transactions that have happened since that info was last updated, check both to see if a given transaction is valid. Or how does it know? It has to have some way of keeping track, otherwise I could just say, "Yeah, I've got this (fake) bitcoin and it's totally worth 100 BTC, lemme sign that for you with my (valid) private key and you can give me the goods."

On the subject of tracking wealth - there's supposed to be a max of 21,000,000 bitcoins, divisible by 8 decimal points, so 2,100,000,000,000,000 units total (I'll call them "bits"). So, you have over 2 quadrillion bits to keep track of. If each bit was stored in an individual address/"account number", and only took one byte each to keep track of (obviously it'd take more), that would be over a petabyte of information. You would need a -lot- of hard drives to store that much info. It would not be possible to keep track of everyone's money as every working node has to individually hold all of this information, and even servers don't usually put a thousand hard drives in their computers.

So, if someone wanted to, they could break up their bitcoins into the smallest possible units for the purpose of requiring more resources to run the program. Sure, it's unlikely for people to deliberately/accidentally break down all money in the system that far, but such a "worst case scenario" should still be planned for.
----

I noticed in the forums, the question of attrition is said to "come up at least every other week." As such, perhaps it should be covered in the FAQ/a sticky thread made? But the solution proposed does not satisfy me - "Add extra zeros to the end of the bitcoin and you could run the whole economy on one coin!" For one thing, there is the memory issue I pointed out before - there's already potential for a couple petabytes of info to keep track of. Add another 0 and you multiply the potential requirements by 10. Another 0 and you multiply the potential by 10 again.

But the other problem is, people were saying, "Alright, so what if you added an extra 0, the price of milk stays the same!" but if this division is necessary, the price of milk would -not- stay the same, it would decline to reflect the fact that there are fewer bitcoins in circulation and people could only offer so many to buy milk. Maybe not immediately, but eventually.

The thing is, what if not all those bitcoins not in circulation were truly "lost"? What if someone had meticulously kept a number safe? Perhaps they'd been passed down a few generations for just such an occasion? A man using his 50 bitcoin inheritance could completely overwhelm the "we run on one bitcoin!" economy.

With a minimum value of exchange, sure, a baker could offer 6 loaves of bread for a penny, but if you only want one you won't get any change back. A minimum value of exchange is important, because then everyone knows the lowest that prices can go. For this, there needs to be a way to reclaim lost coins (and to distinguish between "oops, I set my hard drive on fire" and "hey, those are -MY- pennies in the piggybank! I'll turn 'em in when I'm good and ready!").
----

One question that came up was collisions and how that would be very (astronomically) unlikely. But what if someone deliberately wanted to crank out private keys until they got a/all public keys that matched another/all users'? "Start with private key 00000000, get the corresponding public key. Increment the private key to 00000001, get the corresponding public key, repeat. Oh, hey, this private key works with this public key which happens to have some money on it! Woot!" How much computational power would it take to brute force this? And another question, how much hard drive space would a full pre-computed table take up?

Are there plans to update the encryption when such an attack is deemed "computationally feasible"?
----

Another attack would be to make bitcoins illegal in whatever country. Sure, that wouldn't stop individuals from trading, but businesses that don't want to get on the wrong side of the law won't be adding "pay with bitcoins!" to their stores any time soon.

Although, I'm not sure how one would illegalize bitcoins without essentially illegalizing adding numbers together, or at the very least "numbers that represent a quantity of some virtual good which can be traded between individuals" like meat in KoL or gold in WoW or health potions in every gosh dang game there is. :p Though I'm sure the lawyers could find a way to make a law specifically apply to bitcoins and bitcoin-like "supplementary currencies". One counter-argument could be to say that bitcoins are no different than coupons that allow a customer to get a discount on goods, but anyway.
----

Another mode of attack - process blocks, but don't actually process any transactions in them. If there is a minimum number of transactions required for a generated block to be accepted, fill it with transactions to and from yourself. If you manage to compute the block first, congratulations! You've just backlogged everyone else by an extra ten minutes!
----

How well does the system scale? If bitcoin managed to get the whole world on its network, how many transactions per second would there be, and would the network be able to cope? For comparison, how many transactions are there per second with banks and the like? Could bitcoin's own success destroy it? Especially when it doesn't just have to deal with passing money around, but with people obfuscating transactions by passing coins to themselves. It doesn't cost the bank any processor power or bandwidth for me to move a twenty from my wallet to my coin purse and back. With bitcoin it does.

[Zamfir]

BTW, I am a bit disappointed. I expected a discussion about how to attack bitcoin but instead it became an argument about why it would fail on a large scale. No one expects people to buy apartments in bitcoins anytime soon, but getting 10% of one's pay in bitcoin to buy internet access, hosting, freelance work, or other dematerialized things is an interesting proposition to say the least.

Iv, I'll play your game . If I you understand you correctly, you’re supposing that at some point bitcoins are widely used for small private transactions at least, and that a powerful organization wants to destroy the system. I personally don’t see that happening, but who knows.

For all I know, the implementation and cryptography is sound, or could be made sound in some future similar concept. Perhaps not sound enough for the money amounts of business-to-business transactions (who require paranoid safety against transaction failures, not just sabotage), but enough for normal life.

So what could an organzation do to harm bitcoins, assuming the technical side is sound? I’d say the primary weakness to exploit are panics. If you hold a significant value of bitcoins and are only holding them for business reasons, then you have to watch out all the time that other people are still using bitcoins. A hostile organization could collect a large number of bitcoins, and rapidly sell them in a pattern that looks as if people are abandoning bitcoins. That can easily trigger real sell-offs from people who fear they might be too late in selling their bitcoins. Perhaps it is even enough to spread the rumour that you have a large stash of bitcoins in order to create a panic, so people become more twitchy every time bitcoins lose value.

Perhaps this does not work. We could imagine that bitcoins have for example some rich and benevolent godfathers who will quickly buy lots of bitcoins to stop the panic, even at the risk of losing lots of money themselves.

In that case, my next target would be volatility. Most currencies have a mostly stable user base. So swings in their exchange rate are determined mostly by the changes in the imports and exports (of goods and capital) of that stable user base. Also, most trade in a normal currency zone happens between users of the same currency, making exchange swings less important. Bitcoins on the other hand can easily have a growing and shrinking user base, perhaps even if the same people use bitcoins for more or less things. And presumably, there will be a lot of trade between the bitcoin-denominated economy and other economies, unless we assume that bitcoins completely replace a normal currency.

These things mean that bitcoins will normally already fluctuate more with respect to other currencies, compared to the usual fluctuations between national currencies with their more stable user base. It also means that such swings are more directly important to users. If your webshop buys stuff in RMB but sells in bitcoins, then you have to watch the exchange rate 24/7 and change your prices accordingly. If you earn income in bitcoins but pay rent in euros, you might not be sure whether you can pay the rent next month.

So a hostile organization with a good amount of money could aim to increase volatility. Buy lots of bitcoins when the price is going up, sell them when the price is falling. Open a range of shops that accept bitcoins (expanding the bitcoin economy and driving the price up), then close them again. For some periods, aim to stabilize the exchange rates. Then when people are getting used to a more stable rate you switch tactics again.

Even if you can’t create a panic, it would make bitcoins very hard to use for most people. Every change in the exchange rate forces them to change their prices, redo their calculations, renegotiate their contracts. So more volatility makes bitcoins less attractive. And even panics that do not destroy the currency will chase away risk-averse users, so you can combine this with the previous tactic.

[Aaeriele]

One thing that strikes me as odd, if GPUs are so much more powerful than CPUs, and thus bit coin miners are using them to mine, why isn't my computer using GPU-type architecture rather than a CPU? Wouldn't that give me more processing power for the buck? Or am I missing something here? :/

GPU-type architecture is only fit for certain tasks - generally, very intense calculation tasks. It's not as versatile, and thus doesn't serve a lot of the needs that modern CPUs do. Instead, it's specialized for certain types of calculations (generally by putting a lot of simpler processors in parallel with a shared or almost-shared data stream and very little cache).

Bitcoin mining happens to fit into the small subset of tasks that GPUs are very efficient at.

[MrConor]

One thing that strikes me as odd, if GPUs are so much more powerful than CPUs, and thus bit coin miners are using them to mine, why isn't my computer using GPU-type architecture rather than a CPU? Wouldn't that give me more processing power for the buck? Or am I missing something here? :/

GPU-type architecture is only fit for certain tasks - generally, very intense calculation tasks. It's not as versatile, and thus doesn't serve a lot of the needs that modern CPUs do. Instead, it's specialized for certain types of calculations (generally by putting a lot of simpler processors in parallel with a shared or almost-shared data stream and very little cache).

Bitcoin mining happens to fit into the small subset of tasks that GPUs are very efficient at.

As far as I can see from the Bitcoin forum, the simplest characterisation is that CPUs are very good at doing at quickly doing a lot of tasks, and GPUs are very good at quickly doing a single task a lot.

Bitcoin mining is a single process running over and over again; your CPUs multi-tasking abilities (for which is sacrifices some of its overall processing speed) are wasted.

[Arrian]

BTW, I am a bit disappointed. I expected a discussion about how to attack bitcoin but instead it became an argument about why it would fail on a large scale. No one expects people to buy apartments in bitcoins anytime soon, but getting 10% of one's pay in bitcoin to buy internet access, hosting, freelance work, or other dematerialized things is an interesting proposition to say the least.

Don't attack the technology directly, that's going to be an ongoing battle back and forth, just like anything else.

You attack it by making people unwilling to use the system: Charge users with felonies and label them terrorists, for starters.

Or, make people unwilling to use the currency through hassle and security concerns. If the list of necessary precautions for using the currency is the same as precautions for logging into WoW without getting your account hacked, well, look how effective those warnings have been for WoW. If people don't feel safe about using a currency, they won't use it. Credit cards and Blizzard indemnify you against the effects of stolen account info, I don't see Bitcoins doing the same.

[creighto]

Been looking over their forums/thinking about this a bit...

One thing that strikes me as odd, if GPUs are so much more powerful than CPUs, and thus bit coin miners are using them to mine, why isn't my computer using GPU-type architecture rather than a CPU? Wouldn't that give me more processing power for the buck? Or am I missing something here? :/

Not really, it's just that the process used to "mine" (sha256) is particularly well suited to GPU's.

How does the system keep track of who owns what? It says it does it by keeping track of transactions, but then individual transactions get pruned from the block tree or line or whatever after a while to save disk space, so eventually things like "Bob paid Sally on June 23rd 2012" would disappear from the chain.

No. A particular client may prune the blockchain that they use locally, under the protocol. This is not presently done as far as I am aware, certainly not by the standard client. And it's a feature that permits independent clients to operate on devices with limited storage, such as smartphones. Under certain (limited) conditions, it reduces the trust that the user should have with accepting coins, but the full blockchain is likely to always exist somewhere.

Does the system also keep a running tally of everyone's accounts?

That's also possible under the protocol, and the clients do this for any local users' accounts/keypairs, but this is not currently done on any macro level.

E.G. - Account aBcD owns X bitcoins, Account EFGh owns Y bitcoins, etc. and here's all the transactions that have happened since that info was last updated, check both to see if a given transaction is valid. Or how does it know? It has to have some way of keeping track, otherwise I could just say, "Yeah, I've got this (fake) bitcoin and it's totally worth 100 BTC, lemme sign that for you with my (valid) private key and you can give me the goods."

It does have a way of keeping track. The pruning is only done for compactness, and no transaction that has not already been "referenced" (i.e. spent) is ever pruned. Nor any transactions, spent or not, younger than a certain age. I don't believe the age is a set number, as different clients could have different levels of trust, but suggestions on the development forum wouldn't permit pruning of transactions younger than about 10K block deep, or roughly ten weeks old.

On the subject of tracking wealth - there's supposed to be a max of 21,000,000 bitcoins, divisible by 8 decimal points, so 2,100,000,000,000,000 units total (I'll call them "bits"). So, you have over 2 quadrillion bits to keep track of. If each bit was stored in an individual address/"account number", and only took one byte each to keep track of (obviously it'd take more), that would be over a petabyte of information. You would need a -lot- of hard drives to store that much info. It would not be possible to keep track of everyone's money as every working node has to individually hold all of this information, and even servers don't usually put a thousand hard drives in their computers.

This is part of the reason for the pruning, but the system also consistantly recombines transactions. For example, a person chooses to spend 50 bitcoins on something, but his coins were all sent to him in smaller transactions. The client, at present, will attempt to combine the oldest set of transactions that total to at least 50 bitcoins, potentially referencing dozens of transactions and then produce two transactions as it's output. One for the 50 bitcoin payment, and the other for the change left from the prior transactions. Once those referenced transactions are deep enough in the blockchain, they can then be pruned from the blockchain of any client that is setup to do so.

So, if someone wanted to, they could break up their bitcoins into the smallest possible units for the purpose of requiring more resources to run the program. Sure, it's unlikely for people to deliberately/accidentally break down all money in the system that far, but such a "worst case scenario" should still be planned for.
----

Not only has this attack been considered, it's been attempted. The current transaction fee table automaticly charges a tiny fee for any transaction smaller than .01 bitcoin, so this kind of attack remains possible for as long as the attacker still has bitcoins to burn and is still willing to continue to pay for the privilage of "spamming" the network. So in the end, it is a possible attack on the network, but no one seems to mind being spammed when their being paid for the aggravation. Of course, only the generators stand to gain from the transaction fees, and the regular users have trouble getting their transactions processed, but it all happens eventually.

I noticed in the forums, the question of attrition is said to "come up at least every other week." As such, perhaps it should be covered in the FAQ/a sticky thread made? But the solution proposed does not satisfy me - "Add extra zeros to the end of the bitcoin and you could run the whole economy on one coin!" For one thing, there is the memory issue I pointed out before - there's already potential for a couple petabytes of info to keep track of. Add another 0 and you multiply the potential requirements by 10. Another 0 and you multiply the potential by 10 again.

The question of attrition is one that is so small, and so far in the future, that if it really is a problem in 130 years when the system stops inflating, then I'm sure that it can be addressed. Keep in mind that the Federal Reserve Note, the oldest fiat reserve currency in continuous us on Earth, is not yet 130 years old.

But the other problem is, people were saying, "Alright, so what if you added an extra 0, the price of milk stays the same!" but if this division is necessary, the price of milk would -not- stay the same, it would decline to reflect the fact that there are fewer bitcoins in circulation and people could only offer so many to buy milk. Maybe not immediately, but eventually.

I would consider it a small issue, even if I live to see the day.

The thing is, what if not all those bitcoins not in circulation were truly "lost"? What if someone had meticulously kept a number safe? Perhaps they'd been passed down a few generations for just such an occasion? A man using his 50 bitcoin inheritance could completely overwhelm the "we run on one bitcoin!" economy.

With a minimum value of exchange, sure, a baker could offer 6 loaves of bread for a penny, but if you only want one you won't get any change back. A minimum value of exchange is important, because then everyone knows the lowest that prices can go. For this, there needs to be a way to reclaim lost coins (and to distinguish between "oops, I set my hard drive on fire" and "hey, those are -MY- pennies in the piggybank! I'll turn 'em in when I'm good and ready!").
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I don't even understand what you are asking here.

One question that came up was collisions and how that would be very (astronomically) unlikely. But what if someone deliberately wanted to crank out private keys until they got a/all public keys that matched another/all users'? "Start with private key 00000000, get the corresponding public key. Increment the private key to 00000001, get the corresponding public key, repeat. Oh, hey, this private key works with this public key which happens to have some money on it! Woot!" How much computational power would it take to brute force this? And another question, how much hard drive space would a full pre-computed table take up?

Go ahead and try it. I doubt you get very far.

Are there plans to update the encryption when such an attack is deemed "computationally feasible"?
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Yes, actually there is, but not just for this unlikely attack vector. The crypto used for each section of the system are modular, and can be swapped out for a more secure version of the same type of function in the event that the existing function is found to be faulty. This isn't easy to do, and would require a lot of people to agree to upgrade, but it can be done and is planned if neccessary.

Another attack would be to make bitcoins illegal in whatever country. Sure, that wouldn't stop individuals from trading, but businesses that don't want to get on the wrong side of the law won't be adding "pay with bitcoins!" to their stores any time soon.

Sadly, this is one issue that cannot be addressed at the codebase or network level.

Another mode of attack - process blocks, but don't actually process any transactions in them. If there is a minimum number of transactions required for a generated block to be accepted, fill it with transactions to and from yourself. If you manage to compute the block first, congratulations! You've just backlogged everyone else by an extra ten minutes!
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This can be done, and probably is, but the transaction fees, however rare they are, act as an incentive for generators to process those transactions at least. There is nearly zero overhead for the generators to add transactions to the block, so there isn't really an economic advantage to not doing so.

How well does the system scale? If bitcoin managed to get the whole world on its network, how many transactions per second would there be, and would the network be able to cope? For comparison, how many transactions are there per second with banks and the like? Could bitcoin's own success destroy it? Especially when it doesn't just have to deal with passing money around, but with people obfuscating transactions by passing coins to themselves. It doesn't cost the bank any processor power or bandwidth for me to move a twenty from my wallet to my coin purse and back. With bitcoin it does.

It scales fairly well, but there is a top end limit. The system is designed that, should it ever become popular for everyday transactions, the main network (blockchain included) would function more of a backbone; processing major transactions between banks and the like; while websites such as Mybitcoin.com function as the user level transaction processing a la Paypal. The difference being is that if you get mad a Paypal, all you can do is get your money back and stop using them; whereas with Bitcoin I could move my funds to another such website or to my own client at my will.

[creighto]

BTW, I am a bit disappointed. I expected a discussion about how to attack bitcoin but instead it became an argument about why it would fail on a large scale. No one expects people to buy apartments in bitcoins anytime soon, but getting 10% of one's pay in bitcoin to buy internet access, hosting, freelance work, or other dematerialized things is an interesting proposition to say the least.

Iv, I'll play your game . If I you understand you correctly, you’re supposing that at some point bitcoins are widely used for small private transactions at least, and that a powerful organization wants to destroy the system. I personally don’t see that happening, but who knows.

For all I know, the implementation and cryptography is sound, or could be made sound in some future similar concept. Perhaps not sound enough for the money amounts of business-to-business transactions (who require paranoid safety against transaction failures, not just sabotage), but enough for normal life.

So what could an organzation do to harm bitcoins, assuming the technical side is sound? I’d say the primary weakness to exploit are panics. If you hold a significant value of bitcoins and are only holding them for business reasons, then you have to watch out all the time that other people are still using bitcoins. A hostile organization could collect a large number of bitcoins, and rapidly sell them in a pattern that looks as if people are abandoning bitcoins. That can easily trigger real sell-offs from people who fear they might be too late in selling their bitcoins. Perhaps it is even enough to spread the rumour that you have a large stash of bitcoins in order to create a panic, so people become more twitchy every time bitcoins lose value.

This is probably the most realistic attack vector that I've yet seen, and not one that can be mitigated before Bitcoin reaches a critical mass of users. After a certain point, however, such an attack would become so expensive (literally) that no group is likely to attempt it.