Bitcoin Forum

http://paulbohm.com/bitcoin-decentralization/ (http://paulbohm.com/bitcoin-decentralization/)

Recently I've read a lot of claims that Bitcoins don't have intrinsic value. I've come to a different conclusion. Bitcoins have intrinsic value if they enable desirable interactions that are not possible without them. Bitcoin is a theoretical and practical breakthrough that makes it possible to decentralize services we couldn't previously decentralize.

To elaborate: Bitcoin isn't just a currency but an elegant universal solution to the Byzantine Generals' Problem[1], one of the core problems of reaching consensus in Distributed Systems. Until recently it was thought to not be practically solvable at all, much less on a global scale. Irrespective of its currency aspects, many experts believe Bitcoin is brilliant in that it technically made possible what was previously thought impossible.

The Byzantine Generals' Problem roughly goes as follows: N Generals have their armies camped outside a city they want to invade. They know their numbers are strong enough that if at least 1/2 of them attack at the same time they'll be victorious. But if they don't coordinate the time of attack, they'll be spread too thin and all die. They also suspect that some of the Generals might be disloyal and send fake messages. Since they can only communicate by messenger, they have no means to verify the authenticity of a message. How can such a large group reach consensus on the time of attack without trust or a central authority, especially when faced with adversaries intent on confusing them?

Bitcoin's solution is this: All of the Generals start working on a mathematical problem that statistically should take 10 minutes to solve if all of them worked on it. Once one of them finds the solution, she broadcasts that solution to all the other Generals. Everyone then proceeds to extending that solution - which again should take another ten minutes. Every General always starts working on extending the longest solution he's seen. After a solution has been extended 12 times, every General can be certain that no attacker controlling less than half the computational resources could have created another chain of similar length. The existence of the 12-block chain is proof that a majority of them has participated in its creation. We call this a proof-of-work scheme.

If that sounds confusing, don't worry. What it means is just that consensus is reached, because computational resources are scarce. You vote with work. To rig the vote an attacker would need to control more computational power than the honest nodes. To ensure it's more expensive for an attacker to purchase the computational power needed to attack the system, Bitcoin adds an incentive scheme. Users who contribute computational power get rewarded for their work. If the value of a Bitcoin rises and thus attacking the system becomes more profitable, it also becomes more profitable for honest users to add computational resources. At any given point, one would expect miners to invest as much resources into mining as is profitable for them. Bitcoin is a currency, because it needs incentives to protect the consensus process from attackers. This computational process ("mining") is not wasteful at all, but an incredibly efficient way to make attacks economically unprofitable. Bitcoin never uses more computational resources than neccessary to protect the integrity of its interactions.

Now let's go back to discussing the value provided by Bitcoin. Essentially it's a means to make consensus in highly distributed large-scale systems, which would otherwise never be able to reach consensus. The value of this is, that it's now possible to build applications in a decentralized fashion, that we previously thought could not be built without a central authority. The most obvious value of Bitcoin is as a medium of exchange for goods and services that can't be easily bought or sold using cash issued by a central authority. But there's more. Bitcoin also makes it possible to fully decentralize the DNS (Domain Name System). In that case, every Bitcoin Domain Name already comes with a cryptographic key pair. That means it also allows us to solve the PKI (Public Key Infrastructure) problem - every name you connect to has an encryption key associated with it that can be verified without trusting a central authority. In case network traffic monitoring prevents people from accessing information either at all or anonymously, Bitcoin makes it feasible to pay for internet relays that anonymize or reroute traffic - that is, it makes it easier to remove central control and fight censorship. The list goes on, I've been hard-pressed to find any decentralization schemes that would not benefit from Bitcoin integration

The pattern here is: Pretty much all of these applications can already be built in centralized form. But often the centralized solution comes with a whole bunch of weaknesses. In the PKI case you'll have to trust over 300 Certificate Authorities every time you make an https:// connection, many of which are located in countries with repressive governments. If any of those 300 entities get compromised or malevolent attackers will be able to read your email, access your bank account, and violate your privacy. DNS is getting censored by governments because they can. And every time you store value in currency, you're trusting a central authority that it isn't mismanaged and thus depreciates in value.

Is there value in Bitcoin? Let me ask a counter question: Is decentralization valuable? If you think that we'll increasingly lose trust in the central authorities that manage the infrastructure we rely on, you might expect Bitcoins to rise a lot in value. If not, that is you believe that authorities will be able to tackle the challenges of the future better in centralized form, then from your perspective Bitcoins don't add value. We'll see.

This is one of the most insightful commentaries I've read about bitcoin. Wonder why it's falling off the first page.

I think it should be stickied,
Any time somebody argues with me about bitcoin I just make them read this and that works. ;D

Thanks for the great post. Regarding whether Bitcoin has true value, let's also remember that it is both a money AND a software. The software allows the sending of ledger information between any two parties, and as the OP mentioned this is done with no central authority. It is this software component that gives Bitcoin significant "inherent" (pardon the term) value, and the currency which is built into that software is then traded freely on open markets, and valued by supply and demand.

If we remember that Bitcoin is both a digital commodity, and a software, then it's easier to understand why it's so valuable.

This editorial reminds me of an article I read many moons ago on a defunct website called "Laissez Fairy City Times" wherein a future was described where software would live "on the network" and not be anchored to one server or servers.  This was still in the 90s so it sounded fantastic at the time.

Flash forward to present where such a future now exists. The author makes it clear that bitcoin is a prototye, a building block, an enabler of a whole new class of software solutions. (And I had read--from outsiders--that the enormous activity mining blocks was wasted effort.  Nay, it is an essential enabler of the decentralization.)

The time has come for decentralization of software and of society. The trend is toward privacy and freedom. The nation state is obsolete and the world is starting to realize it.

It is fascinating to watch these freedom trends happen when the Establishment is pushing so hard for the opposite. These are exciting times, indeed.

I like that text a lot!

bumping for good in this thread  :'(

This was a very insightful post, and I agree that it should be stickied. It not only answers one of the most often asked counter-questions to Bitcoin, it provides a modestly down to earth explanation for how Bitcoin's proof of work system functions.

I think the majority of new people and people introducing others to Bitcoin could benefit greatly from this post.

Well done, sir.

Just to clarify I didn't write this, the second I found it I posted it.

Well then, good job to YOU!

agree

As a disclaimer I would like to mention that I believe bitcoins would be more valuable as a currency if they were backed by something of physical value like gold, silver, rice, oil, gasoline, or perhaps even the kilowatt-hour. However, the article does a very good job showing the value of Bitcoin.

I agree that the Bitcoin concept has a lot of value. The Bitcoin software has a lot of value. The Bitcoin community of programmers, miners, merchants, and users has a lot of value. I am not in denial of the value of Bitcoin. However, the source of where I tend to disagree with the “bitcoins have intrinsic value” crowd is with regard to the extent to which the valuable Bitcoin concept, software, and community impact the value of an actual bitcoin.

The Bitcoin concept has been published. The Bitcoin software is open source. The community of Bitcoin users, miners, developers, etc. are probably not going to remain exclusive to bitcoins once a decent Bitcoin-like competitor comes around, especially when one of the new currencies is backed by something of physical value.

Take paypal as an example. Paypal is a very valuable company. It's concept is valuable. It's software is valuable. Its community of users and merchants is valuable. However, would paypal have been successful if it only executed transactions using 21 million units of monopoly money? If you have created a brilliant system to transact then why not leverage this brilliant system by transacting with units that have physical value. Would the monopoly money version of paypal be able to compete with the real money version of paypal?

Anyway, I am in full agreement that “Bitcoin” has value, but if bitcoins don't become backed by something then I am not sure if the actual bitcoins in people's wallet files are going inherit that value.

Paypal would become the dominant payment system in the world if it stayed with the vision of the founders: anonymous transactions.  But the founders got paid by ebay and it was made to play by the rules that The Big Boys laid down. 

Bitcoin is doing an end run around the Big Boys' rules.  It can't be inflated and it can be anonymous.  It can be moved effortless across borders.

I don't really see your point about something "of value" backing a currency. Gold has backed currencies, indeed gold has been USED as currency, but even gold is valuable only because there is sufficient consensus for it to have such status. Bitcoin has a lot in common with gold: it is rare, it is divisible into large and small units, it is durable, it is mobile.  If there is sufficient consensus giving something valuable status, isn't that enough to make it tradable for other things and as such, a currency?

Bitcoins are valuable because they are decentralized.  Backing would require trusting a central party's promise to trade something for Bitcoins.  If Bitcoins were backed by something, they wouldn't be decentralized.  Therefore, Bitcoins are valuable because they are not backed at all.

Those things are themselves "backed" by the conjecture that they exist in limited quantities and require a lot of work to produce.
Bitcoin solves the currency issue by generalizing this into pure math. Those who grok it see them as the best currency backing you can achieve.

Good insight. Not being a liability or responsibility of any party is where Bitcoin derives some (but not all) of its value.

Money was backed by gold, what is gold backed by?

Gold is back by our ability to modify each others behaviour.

I have something that you want, what will you give me or change for it?

Bitcoins can do that more efficiently for many reasons. The main one is that its authenticity can be verified by the largest super computer in the world every time you transact even the smallest amount. Are you really going to verify the authenticity of a gold flake every time?

The consensus of gold being valuable has lasted over 5,000 years. The consensus of a bitcoin being worth more than a hamburger has only been with us for a few months. A week or so ago the consensus said 20 hamburgers and now today the consensus say 10 hamburgers. The consensus can do strange things when trying to assign value to bits on a computer.

Bitcoins can be backed and still be decentralized. If the backing worked your better off with it than without it. If the backing failed it would be the same as if you didn't have it.

Would you rather have a coin that promised “Someone was given this coin as proof they mowed a yard” or a coin that promised “I'll mow your yard when you give me this coin”. A currency should promise something meaningful to the holder of the currency so it is important to look at what that promise is.

Damn I enjoyed reading that!  ;D

You mean paper dollars were backed by gold, because gold is real money. And gold is "real money" because it's been chosen by the marketplace to act as such, due to its properties that make it effective as money.

Patently false. Backing requires a promise of exchange - a promise to exchange one thing for another. When dollars were backed, the US Gov promised to exchange gold for those dollars. When private banks distributed paper notes that were backed by silver, they promised to exchange silver for those notes.

The concept of "backing" requires a specific party to be the "backer," and with Bitcoin would thus remove one of its primary advantages - that it is not the liability of any specific party. 

Please tell me how this is possible? The properties of bitcoin back itself so it is not necessary but I would still love to see how it is possible.
If you could manage this feat it could be applied to problem domains other than the one bitcoin targets.

You are correct that the backing would need to be centralized, but the point I was trying to make was that backing could be put on top of the completely decentralized Bitcoin system. The Bitcoin system would be decentralized regardless of whether or not the centralized backing succeed, failed, or was even attempted. Bitcoin users would only need to interact if the backing system if it benefited them.



I have made some posts about backing a Bitcoin-like system with classic backing http://forum.bitcoin.org/index.php?topic=16900.0 and I also tried a "backing approach with the current Bitcoin system http://forum.bitcoin.org/index.php?topic=19208.0

Let's not get into the habit of post-jacking (STEALING) other peoples write ups on bitcoin guys...

Especially the smaller websites.

If this guy spends the time to do a huge writeup on bitcoin and only gets 5-10 page views... what are the chances he will write about it again?

In the future please go the the site and read the article there.

That's idiotic. It's common practice on forums to quote the entire article.

bump.

Your kwhcoin is just a rephrased version of Enron's energy trading business plan.

+1 for using the word "grok" correctly. ;)