User:Dusan Barok/Bitcoin bits, trivia and anecdotes

This document includes notes from the research on Bitcoin, the peer-to-peer currency (May-July 2011). The structure resembles Wikipedia article, but the content does not at all serve the purpose of presenting the coherent image of Bitcoin technology, nor community. I included things and anecdotes which are not widely known, or which i simply found interesting for my writing ([can read it here]). For futher reference see Resources section.

Numbers

50 mil USD & 6 mil BTC & 20k users (5/2011). [1]

100 top Btc addresses own 30% of economy (2 mil BTC, 36 mil USD); 5 addresses are USD millionaires (6/2011). [2]

210.000 = 50 coins * 10 minutes (6 per hour) * 4 years. The number comes from the combinations of the initial block reward (50 coins), the target blocks per hour (6) and the halving period (4 years). There will be 10.5 million created in the first four year period, and then the reward will be halved while all other metrics remain the same. As the reward continues to half again with each four year period, the total number of coins issued will trend toward the mathmatical limit (as in a logrithmic) of 21 million. The numbers that define the outcomes are the initial reward, the target block interval, and the halving term. All of these were design decisions that resulted in the outcome of 21 million, not the other way around. [3]

Terms

Fiat money: money legalised by state by linguistic act; since 1971 when Nixon ended the backing of USD by precious metal.
Ponzi scheme: pyramidal financial games, since early 1900s.

Technology

The main properties [4]:

Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending.

Nakamoto "Bitcoin's solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the first transaction to spend a coin. It takes advantage of the nature of information being easy to spread but hard to stifle. The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double-spending." [5]

http://twit.cachefly.net/video/sn/sn0287/sn0287_h264b_640x368_256.mp4 (from 41:00 till end)

Byzantine Generals Problem

Two Generals Problem

Important in epistemic logic; and to understand the importance of common knowledge. Tought in introductions of computer networking (mainly TCP), but can be applied to other type of communication too. Generals are camping on the hills facing over the city they plan to attack. They have to communicate through messengers passing through the city where they can be caught. They must communicate with each other to decide on a time to attack and to agree to attack at that time, and each general must know that the other general knows that they have agreed to the attack plan. Because acknowledgement of message receipt can be lost as easily as the original message, a potentially infinite series of messages is required to come to consensus. Solutions via number of accepted messages don't work. Engineering solution: we must not eliminate uncertainty, but lower the risk of failure, so let's send 100 messengers, at least one has to come back. With this approach the first general will attack no matter what and the second general will attack, if any message is received. [6]

Byzantine Generals Problem (Byzantine Fault Tolerance)

Szabo: "Exercise about liars in government [..] The basic idea of a Byzantine fault tolerant protocol is that it is a highly distributed peer-to-peer protocol robust from a certain fraction or less of its participants lying about information originally observed or created by one or a small subset of them. The fraction varies based on various assumptions of the model, but common figures are 1/3 and 1/2 for information originating from one node assuming that node is truthful. If the fraction required for successful collusive lying is not achieved (and such an attack requires either informed negotiations occurring before this protocol step or negotiating the collusion in a single step, the latter possible to avoid by assuming fraud if messaging is abnormally delayed), the liars are detected and can be excluded from future participation in the network." [7]

BGP is an agreement problem (first proposed by Marshall Pease, Robert Shostak, and Leslie Lamport in 1980) in which generals of the Byzantine Empire's army must decide unanimously whether to attack some enemy army. The problem is complicated by the geographic separation of the generals, who must communicate by sending messengers to each other, and by the presence of traitors amongst the generals. These traitors can act arbitrarily in order to achieve the following aims: trick some generals into attacking; force a decision that is not consistent with the generals' desires, e.g. forcing an attack when no general wished to attack; or confusing some generals to the point that they are unable to make up their minds. If the traitors succeed in any of these goals, any resulting attack is doomed, as only a concerted effort can result in victory. [..] In 1999, Miguel Castro and Barbara Liskov introduced the "Practical Byzantine Fault Tolerance" (PBFT) algorithm, which provides high-performance Byzantine state machine replication, processing thousands of requests per second with sub-millisecond increases in latency. PBFT triggered a renaissance in BFT replication research, with protocols working to lower costs, improve performance, and improve robustness. [8]

Nakamoto's BGP rephrased: [9]

System enables majority consensus without requiring anyone to trust anyone else.

Proof-of-work

Nakamoto: In Bitcoin, "everything is based on crypto proof instead of trust." [10]

Bitcoin network works in parallel to generate a chain of Hashcash style proof-of-work. The proof-of-work chain is the key to solving the Byzantine Generals' Problem of synchronising the global view and generating computational proof of the majority consensus without having to trust anyone.

"We have earlier seen two proposed cryptocurrencies, and proof-of-work was one of the most common proposals to deal with the rising tsunami of spam. (Although ironically, proof-of-work never seemed to go into widespread use because of general inertia and because to deter large amounts of spam, proof-of-work would deter legitimate users under some models; spam seems to have been kept in check by better filtering techniques (eg. Paul Graham's "A Plan for Spam" using Bayesian spam filtering) and legal action against botnets & spammers.)" [11]

Free software

Very first bitcoin client v0.1 was for Windows only (open source C++). Linux version launched only on 17.12.09 [12]

Non-trust-based system (No third-party; No central authority)

Nakamoto: "You know, I think there were a lot more people interested in the 90's, but after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction that this is the first time I know of that we're trying a non-trust-based system."

"These ideas were in contrast to credit cards, ACH, Chaum's e-cash, PayPal, etc. that try to copy the characteristics of various kinds of paper money or credit and in particular rely on monolithic trusted parties." [13]

Anonymity

"While bitcoin addresses are randomly generated cryptographic signatures, not obviously associated with any one person, the entire block chain is publicly readable, and you can readily see transactions between any bitcoin address: [14]. Thus, 'anonymity' must be in quotes. Even if one follows the recommended practice of using a new bitcoin address for each transaction, statistical analysis can be performed on the public transaction data." [15]. Andresen: [16]

Jeff Garzik wrote that all Bitcoin transactions are recorded in a public log, though the identities of all the parties are anonymous, concluding that "Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb". [17]

Matonis critises JGarzik: We should "resist digital money unless anonymous" and don't give up paper cash if the future is even more traceable and intrusive. Jgarzik wrongly stresses that Bitcoin is traceable and not anonymous, and that money can and should be used for identity tracking. [18]

Privacy

Matonis: "The way things are being positioned by the [Bitcoin] establishment --- 'give up the privacy and untracability elements of the $100 bill and we will give you the nirvana of a digital, cashless society.' This is such bullshit! Bitcoin needs to be positioned as a way to restore financial privacy to the individual: 1. Secrecy does not equal concealment, but rather secrecy equals privacy; 2. Large-scale private value transfer should not be impeded across national boundaries (money laundering is a pejorative term); 3. Individuals should have freedom from confiscation and immoral tax levies; 4. Individuals should have freedom from money being used to track identity; 5. Individuals should have protection from the depreciating nation-State political currencies." [19]

Vulnerability

Overpowering the network

Unk: "The attack is not expensive, nor does the fact that mining is profitable mean that a strategic attack on a valuable block chain won't be far more profitable. this neglect of the strategic value of an attack is the only well-known significant mistake in Satoshi's original paper, one that the analyst going by the name 'computerscientist' in various online forums has pointed out in detail." [20]

Nakamoto: "Even if a bad guy does overpower the network, it's not like he's instantly rich. All he can accomplish is to take back money he himself spent, like bouncing a check. To exploit it, he would have to buy something from a merchant, wait till it ships, then overpower the network and try to take his money back. I don't think he could make as much money trying to pull a carding scheme like that as he could by generating bitcoins. With a zombie farm that big, he could generate more bitcoins than everyone else combined. The Bitcoin network might actually reduce spam by diverting zombie farms to generating bitcoins instead." [21]

Nefario: "We suspect that within the next 6 months many if not most bitcoin exchangers will be shutdown by various authorities around the world." (6/2011) [22]

Mining

Bitcoin's feature: mining is not in feedback with supply. "Unlike gold, where the cost of mining effort is relatively stable and the market price fluctuates around it, in case of BitCoin, mining effort follows market price without any feedback. If gold becomes too expensive, more effort will be put into mining thereby increasing supply, while if gold price falls, people stop mining. With BitCoin, there is no such feedback: no matter how much effort is put into BitCoin mining, the rate at which BitCoins emerge is near constant." [23]

jgarzik's CPU miner: [24]. Making use of the new 'getwork' RPC command. Intended largely to demonstrate a 'getwork' miner. It is written in straight C, with minimal dependencies (libcurl, jansson). Getwork or Share Efficiency is defined as: (The # of getwork requested) / (The number of submitted shares) * 100.

License

Btc client is released under MIT license. The FSF acknowledges that the MIT license is compatible with the GPL. You can fork an MIT project into a GPL project if you like, after which your GPL fork is copyleft.

Ideology

Financial crisis

Nakamoto included information in the Genesis Block that pointed to The Times article “Chancellor Alistair Darling on brink of second bailout for banks” as a clue to his motivations for creating Bitcoin. [25]

All Bitcoin technology ingredients were in place 8-12 years before Nakamoto's publication. Financial crisis in 2008 occurred to be ideal opportunity to launch the system.

Freedom

Nakamoto: “[we will not find a solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years.”

Censorship-resistance

Nakamoto: "Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own." [26]

Incentive-to-market

Szabo: "There's nothing like Nakamoto's incentive-to-market scheme to change minds about these issues. :-) Thanks to RAMs full of coin with 'scheduled deflation', there are now no shortage of people willing to argue in its favor." [27]

Falkvinge: "The total money supply in the world is about 75 trillion US dollars. Estimates say that between 5% and 30% of this supply is in the black market with illicit work and services. Let’s be conservative and pick 5%; let’s assume cautiously that four trillion US dollars worldwide is in the black market. [..] That brings us to 15% out of 10% out of four trillion USD, coming to 60 billion USD that will enter the bitcoin system in cautious estimates. I expect those savings to get three more zeroes after them in three to four years." [28]

Gwern: "It may be that Bitcoin’s greatest virtue is not its deflation, nor its microtransactions, but its viral distributed nature; it can wait for its opportunity. 'If you sit by the bank of the river long enough, you can watch the bodies of your enemies float by.'" [29]

Long tail

Finney: "Bitcoin seems to be a very promising idea. I like the idea of basing security on the assumption that the CPU power of honest participants outweighs that of the attacker. It is a very modern notion that exploits the power of the long tail." [30]

Pure money

Andresen: "Bitcoin is really a pure money. It's a store of value and a means of exchange and that's all it is. It's almost a plutonic ideal of what money is, in that there is nothing backing it beyond the fact that it's useful as a money." [31]

Mutualism

Bitcoin-specific stock exchange

Bitcoin-speficic stock exchange: Conventional stock exchanges are available only to corporations big enough to go public, while small businesses must usually be bought out, either entirely by big businesses or partially by big angel investors and venture capitalists. This encourages aggregation of business ownership into centralized elites. On the GLBSE, in contrast, there is no regulation and thus no minimum size. Thus, the stock exchange replaces not only the function of exchanges like the NYSE and NASDAQ, but also venture capitalism; small businesses, just like large ones, would be able to take advantage of public investment, allowing innovative new businesses to far more easily attack entrenched monopolies with huge economies of scale keeping them in power. This creates quasi-mutualism rather than big-business-capitalism. Mutualism is a 150-year old economic philosophy which describes a type of society in which economic activity is done entirely bottom-up, with no big business or government interference, and where the means of production are controlled by individuals and, where necessary, cooperatively run factories. There are few regulatory differences between mutualism and big-business capitalism; they can both occur in a society without regulation. The difference between the two is divisibility. Proudhon (first person to call himself an "anarchist") @ Theory of Property, 1862: 'Imagine now that property and all the domains of the nobles could be divided and sold like chunks of beef, that they enter into an exchange and are paid for with products, since they are nothing but products: soon you would see inequality decrease, and property, by the same quality it had to monopolize, become an institution of equalization.' It is divisibility that is the difference between property ownership leading to accumulation in the hands of the few, and therefore oligarchy and despotism, and property ownership leading to equality, and a stock exchange embodies the very definition of divisibility." [32]

Anarcho-capitalism

Poll: Which of these most closely resembles your political position? [33]

Anarcho-Capitalist - 31 (40.8%)
Left-Wing Anarchist - 9 (11.8%)
Classical Liberal - 6 (7.9%)
Socialist - 11 (14.5%)
American Liberal - 4 (5.3%)
American Conservative - 1 (1.3%)
Other (please specify) - 10 (13.2%)
Apolitical/Non-Ideological - 4 (5.3%)

Total Voters: 76