Bitcoin Forum

I'm writing a Bitcoin article that I hope to be published. The problem is, the intended audience is composed of non-programmers (financial/investment people mostly, and a lot of monetary freedom-oriented people), but they absolutely want to understand how it works -- otherwise they will not trust it. So I've had to simplify, simplify to get something that a smart non-programmer could understand (even if it's not 100% accurate -- the point is to "get the idea", and then I'll provide a link to the technical paper).

And please, if your feedback is "please make the explaination more complex in the following way" then that's not helpful, because I need to SIMPLIFY the explaination furthur, not make it more complex. I would like to condense and simplify the "how does bitcoin work" section to be about half its current length, so please help.

Thanks,

Bitcoin Cryptocurrency: The Future of Money

What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has just been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a libertarian computer programmer and cryptography expert. Bitcoins are digital tokens of value that can be exchanged anonymously between users across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.

Although Bitcoin is not a “hard” currency in the sense that it is not directly backed by a commodity, it differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. There will never be more than 21 million Bitcoins in circulation, unlike fiat currency which has no limit.
•   Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
•   Bitcoin accounts are private and not subject to outside inspection and therefore account monitoring or confiscation for any reason is not possible.

It is also worth pointing out that gold-backed digital currency – such as what GoldMoney offers – also differs from Bitcoin in important ways. Gold has the obvious advantage of thousands of years of historical precedent as money, as well as having a physical form that can be used in trade. However, the major disadvantage of a gold-backed currency is that it requires a central repository, which implies (1) storage fees (2) vulnerability to raids and inspections and ultimately (3) complete monitoring and control by regulators. The unfortunate fate of E-Gold is tantamount to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have any of these risks.

How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no paperwork, no identification, and no payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com, which allows exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.

How does Bitcoin work?
Part 1: Digital Signatures
The foundation of Bitcoin lies with digital signatures, which are related to cryptography. Consider two people, Dick and Roberto. Dick wants to send Roberto messages over the internet, and Dick wants to be certain that nobody impersonates him. To accomplish this, Dick uses a pair of what are called asymmetric cryptographic keys. Asymmetric keys have the special property that a message encrypted using one key can only be decrypted using the other matching key.

Dick can publish one of his keys for everyone to see (his “public” key), and keep the other secret (his “private” key). Before sending a message to Roberto, he first encrypts the message using his private key. Although anyone can decrypt and read the message (because everyone can access his public key), everyone knows that Dick truly wrote the message because only he could have encrypted it using his private key. This is the basis for a digital signature.

Finally, it should be noted that real world digital signatures can also verify that the signed document has not been tampered with or modified since it was signed.

Part 2: Neighborly Agreement
In the world of Bitcoin, every user has a wallet which contains (1) their personal public/private key pair and (2) all transactions between all Bitcoin users. A transaction is just a record of money changing hands from one Bitcoin wallet to another: it contains the public key to identify the spender, the public key of the receiver, and the amount. Additionally, the transaction is digitally signed by the spender, proving that they agreed to the transaction.

To check your current balance, you take a look at all the transactions, and add up all the ones that have been signed over to you. You can verify this balance with all of your neighbors, since everyone knows about all transactions.

To give someone money, you simply sign a new transaction and broadcast it publicly to everyone. Everyone else will audit your transaction before they accept it to be sure you have a sufficient balance. The receiver will get confirmations from auditors as they accept the transaction. In this manner, you cannot spend money that you don’t have.

Part 3: Dealing with Dishonesty
When someone publishes a transaction to be audited by everyone else, not everyone can send confirmations to the receiver. If this were true, then it would be too easy to fool receivers if a large number of auditors were dishonest. To solve this problem, everyone who agrees with a transaction must also work together to perform a very difficult computational operation on that transaction, that when complete seals the transaction as valid.

The computational operation that must be performed on each new transaction also relates to previous old transactions, much like a stack of blocks. The tallest stack of valid, sealed transactions is regarded as “the truth”, and receivers will therefore only trust auditors with the tallest valid stack. Since it takes enormous computing power to build a valid stack, any group of dishonest users would need more computational power than all of the honest users to continue to grow and propagate a false stack of transactions.

Finally, even if a group of dishonest users managed to accumulate more processing power than all of the honest users, they would have to decide between using that power to defraud the system (thus invalidating their claim to wealth) or using it to collect legitimate transaction fees (which are earned by helping to seal transactions onto the stack). Someone who worked hard to accumulate such immense computational resources would find it more profitable to use it to earn legitimate wealth rather than destroy the currency.

Part 4: Anonymity
Previously it was mentioned that each wallet has a pair of cryptographic keys. Actually, however, each wallet can contain an indefinite amount of key pairs. Ideally one could use a new key pair for every single transaction. In this way, even though everyone has a record of all transactions, there is no way for them to (1) discover or track individual account balances and (2) discover the common source or destination of multiple transactions. To audit, the wallet owner merely needs to prove that they own enough Bitcoins for a particular new transaction, which they can do without revealing their total balance.

Conclusion
Despite the fact that Bitcoins do not exist in the physical sense, even a cursory glance can show that they do serve the primary functions that make money useful. Bitcoins provide medium of exchange (anonymous and across great distance), unit of account (completely private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (can be transferred as a file), and store of value (current exchange rates put 1 Bitcoin, or BTC, equal to 0.065 USD).

Of course, it’s impossible to know if Bitcoin will continue to meet the store of value requirement. Bitcoin could lose favor new and better digital currencies are invented, it could be hacked, exchange rates could change dramatically, and so on. I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace.

Even if Bitcoins turn out as a failed experiment, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continue to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity.

Finally, for those who claim that Bitcoin is “too virtual” – well, what about the US dollar?

These two parts might appear to many to be a contradiction.



I don't know if it fits in your article (or is even any good at all), but I was thinking of a telephone analogy.

Imagine everyone can listen to all conversations, hardly private, right? But if they can only associate the call to two numbers and not to any person, you can still have privacy. However if someone is able to link you to your number (maybe you gave it to them previously) you lose your privacy. Privacy is restored by making a new number for each call.

This would be a bad system for phone calls, but it works great for money.

Someone else can confirm, but I think this is why they call it pseudonymous instead of anonymous.

Thanks for the feedback thus far! I'm going to wait a few days for feedback to accumulate and then integrate it all and post an updated version for additional review.

I wouldn't try to explain how cryptography works.

The computational operation is not preformed on each transaction. Usually there are hundreds of transactions involved in one block, and afaik, there don't need to be any.

I'm not saying you should elaborate much, but you don't want to be inaccurate. Maybe say that new transactions go in the blocks.

Yup, I've gotten this feedback several times. I will try to remove the explaination and see if I can re-write everything without the concept of public/private keys. Maybe just give an idea of what a digital signature is used for rather than how it works.

True. However, I think the fact that transactions are grouped into blocks is just extra detail that's not neccessary to "get the idea" of Bitcoin. Even as it reads now I think it's still far too complex for a non-programmer to readily understand, so I need to furthur simplify rather than complexify....

You seem to be also explaining a lot of financial concepts, this would seem to be unnecessary?
There also seems to be a lot of redundant text throughout.

I think you undermine any trust you may have built up with your final paragraphs that talk about how bitcoin is likely to get hacked and lose all its value any minute now.

What do they need to know to trust it?

What are the basic points you think they need to know?

The article is getting better.

Simplifying in a way that is not misleading about how the system works is preferable.

Good points, I will re-write the final paragraphs. I personally have faith in Bitcoin and you're right, it reads as if I don't. The intended audence is likely to be very skeptical of Bitcoin already b/c they're hard money gold bugs.

As for the monetary concepts (like gold vs fiat money and how bitcoins serves the properties of money), that's actually targeted specifically at my audience, because a lot of them are gold bugs that are obsessed with high quality money and would be interested in this. Am I understanding this right, or is there something else you mean by "financial concepts that are unnecessary"?

I agree 100%. Any ideas on how to do this would be helpful... again, it's already too complex IMO, that's the problem. I've run the "how does bitcoin work" section by a few non-programmers and they're basically just confused about it, so I'm not happy with that section. Seems a lamens explaination is more difficult to write than anticipated...

Also, I think I will cut part #4 and merge that content into part #1. A few people have noted that without addressing anonimity right off the bat causes confusion.

Stuff like this.
I'm guessing your audience already understands the disadvantages of fiat currency.
•   Bitcoins have no central issuer
should be enough.

On a separate point.
If you talk about how there will never be more than 21 million you also need to talk more about the divisibility. (you currently only mention it briefly right at the end.) I'd mention that 8 decimal places is however many gazillion  and how that compares with the number of USD currently in existence.

Well then where do they come from? If anyone can make them, then who polices the limit?

That's what I think when I read that part.

OK, I didn't integrate all the feedback, but I did a major revision of the "How does bitcoin work" section. Let me know if this version is more intuitive for non-programmers. thanks

Bitcoin Electronic Currency: The Future of Money

What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has just been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a libertarian computer programmer and cryptography expert. Bitcoins are digital tokens of value that can be exchanged anonymously between users across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.

Although Bitcoin is not a “hard” currency in the sense that it is not directly backed by a commodity, it differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. There will never be more than 21 million Bitcoins in circulation, unlike fiat currency which has no limit.
•   Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
•   Bitcoin ownership is private and not subject to outside inspection and therefore asset monitoring or confiscation for any reason is not possible.

It is also worth pointing out that gold-backed digital currency – such as what GoldMoney offers – also differs from Bitcoin in important ways. Gold has the obvious advantage of thousands of years of historical precedent as money, as well as having a physical form that can be used in trade. However, the major disadvantage of a gold-backed currency is that it requires a central repository, which implies (1) storage fees (2) vulnerability to raids and inspections and ultimately (3) complete monitoring and control by regulators. The unfortunate fate of E-Gold is tantamount to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have any of these risks.

How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no registration or payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com, which allows exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.

How does Bitcoin work?
Everyone that uses Bitcoin has a balance stored in their account. This balance can be changed by sending and receiving money in transactions. A transaction is money changing ownership from one account to another: it specifies the giver account, the amount, and the receiver account. When you want to make a transaction, you announce the details of it publicly to everyone.

Each user has the ability to perform a digital signature with their account, which operates just like a normal hand-written signature. Before announcing a transaction, the giver signs the transaction first. In this way, everyone can take a look at any publicly announced transaction and know that the giver account owner truly agreed to that transaction.

When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows how much money is in each account. (Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an indefinite number of accounts – ideally, you should create a new account to receive the balance of each new transaction.)

Dealing with Dishonesty
Not everyone is allowed to publicly confirm the validity of new transactions – if this were true, the system would be too easy to fool if a large number of users were dishonest. Instead, after successfully auditing the transaction, users must place the new transaction on top of a virtual stack of the previous transactions. To seal the transaction on the top of the stack, they must perform very difficult computational work – this is akin to the physical work required to cement blocks on top of one another. As a reward, those who complete this work first get a small transaction fee, and then they share the new transaction stack with other honest users who audit and verify that it is correct. Honest users accept the tallest stack of transactions as the correct and most up-to-date consensus.

Dishonest users cannot possibly build a stack of false transactions continuously faster and taller than honest users, because it is likely that the combined computational resources of honest users will be greater than that of any single cooperating group of dishonest users. Over time, it becomes harder and harder to fake older transactions as the stack gets taller – therefore, the more time that passes, the more certain one can become of the legitimacy of their Bitcoins. Even if a group of dishonest users managed to get more computational resources than honest users, they would have to decide between using it to earn legitimate transaction fees, or to destroy trust in the currency and thus the legitimacy of their own wealth.

Other Details
There are many additional details – such as initial Bitcoin issuance, the 21 million limit, and Bitcoin divisibility – that were purposefully left out of the above description for simplicity. Also, some of the above is not 100% accurate, but it’s very close to how the system actually works without getting overly technical. I recommend going to bitcoin.org and reading Nakamoto’s technical paper if you wish to have a complete understanding.

Conclusion
Despite the fact that Bitcoins do not exist in the physical sense, a cursory glance shows that they do serve the primary functions that make money useful. Bitcoins provide medium of exchange (anonymous and across great distance), unit of account (private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (transferred electronically), and store of value (current exchange rates put 1 Bitcoin, or BTC, equal to 0.065 USD).

I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace. Even if Bitcoins do not catch on in the mainstream, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continues to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity. Finally, for those who claim that Bitcoin is too virtual: what about the US dollar?

Are you sure that Satoshi Nakamoto is a libertarian? We don't know much about other than he wrote a technical paper and invented bitcoins.

Good point, I thought I read this in another article online. In any event, I'll either remove it or check with the source himself :)....

An interview with Satoshi would be interesting.

Whoa! Genius idea, though would be fascinating. I think I'll try to get a general article published first, and then depending on the reaction to it by subscribers I could do an interview and publish that as a follow-up.

I wouldn't be surprised if "Satoshi Nakamoto" is an alias, since he speaks perfect English and I haven't seen anything else from him (though I haven't really looked).

Here's my attempt at "how Bitcoin works". It might be better just to skip the complex block chain system.

Bitcoin transfers are very simple: the software announces that you are transferring coins from your "account" to someone else. To prove that you actually own that account, you create a "digital signature" using a special mathematical algorithm. The signing algorithm used in Bitcoin is a US government standard that is considered completely secure.

Digital signing alone might allow someone to send the same coins twice, so Bitcoin uses a unique "block chain" mechanism to securely record the order of transactions. A subset of Bitcoin users have their software configured to constantly compete against all other such users to solve a very difficult computational problem. Whoever solves the problem first publishes a "block" of data containing all recent transactions. Blocks also include (what amounts to) a copy of the last block, which makes a "chain" of all blocks ever created.

Changing anything in a block invalidates the computational problem that allowed the block to be created: an attacker would have to re-do the problem of that block to make any changes. Plus, since the next block has a copy of the block (and that block appears in the next block, etc.) and only the longest chain of blocks is considered valid, an attacker would also have to re-do all future blocks in the block chain, as well. And they'd have to do all of this faster than the rest of the network, since legitimate clients only add new blocks onto the longest chain.

I saw a profile on p2p social networking thingy that say he's from Japan.

I'd drop the 'of value' wording, that will distract some people who get stuck on "only gold and silver have value"



The second sentence is a bit distracting too, it makes you have to explain why there are only going to be 21 mill coins, then you have to explain that it is just a rule coded in the client and if everyone decided to change it then we could.  More important at this point is that the rate at which they are created is fixed and, for the time period this article will be relevant, the rate won't change.  How about:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank.  New bitcoins are created at a slow and predictable rate, unlike fiat currency which can be created at the whim of the central bank.

Unless the confiscate the computer with your wallet file on it.  I'd drop the confiscation part since it clearly isn't true.  Remember, there was gold confiscation in the 1930's and gold ownership was also "private and not subject to outside inspection".

Getting bitcoins to play around with is a vital part of getting started, put it right after the downloading the client part.

My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no registration or payment required to start – just download the software. After installation, go to freebitcoins.appspot.com for some initial bitcoins and you’re ready to exchange Bitcoins with your friends across the world.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com, which allows exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an like e-bay with Bitcoins

I like your revised article, although you may have gone too far in simplifying and leaving out details. Under the section "How Bitcoin Works" you might mention that it is based on public key cryptography, which is the same technology used for virtually all secure websites on the internet.

Thanks for all the feedback so far, keep it coming! I'm very busy this week so it may take me a while to integrate and post a 3rd draft, but rest assured I'm reading your feedback in the meantime. Thanks

Okay, I integrated most of the feedback here. Please review and send more feedback! Thanks.

Bitcoin Electronic Currency: The Future of Money

What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a cryptography expert. Bitcoins are digital tokens that can be exchanged anonymously between users across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.

Although Bitcoin is not a “hard” currency in the sense that it is not directly backed by a commodity, it differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. Currently, Bitcoins are slowly being issued in a decentralized manner, but new issuance will forever halt at exactly 21 million coins.
•   Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
•   Bitcoin ownership is private and not subject to outside inspection and therefore asset monitoring or confiscation for any reason is nearly impossible.

It is also worth pointing out that gold-backed digital currency – such as what GoldMoney offers – also differs from Bitcoin in important ways. Gold has the obvious advantage of thousands of years of historical precedent as money, as well as having a physical form that can be used in trade. However, the major disadvantage of a gold-backed currency is that it requires a central repository, which implies (1) storage fees (2) vulnerability to raids and inspections and ultimately (3) complete monitoring and control by regulators. The unfortunate fate of both E-Gold and the Liberty Dollar is tantamount to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have any of these risks.

How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no registration or payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com and mtgox.com, which allow exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. You can visit bitcoin.org/trade to see a list of services that accept Bitcoin.

How does Bitcoin work?
Everyone that uses Bitcoin has a balance stored in their account. This balance can be changed by sending and receiving money in transactions. A transaction is money changing ownership from one account to another: it specifies the giver account, the amount, and the receiver account. When you want to make a transaction, you announce the details of it publicly to everyone.

Each user has the ability to perform a digital signature with their account, which operates just like a normal hand-written signature. Before announcing a transaction, the giver signs the transaction first. In this way, everyone can take a look at any publicly announced transaction and know that the giver account owner truly agreed to that transaction.

When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows the balance of each account. (Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an unlimited number of accounts – ideally, you should create a new account to receive the balance of each new transaction.)

Dealing with Dishonesty
Not everyone is allowed to publicly confirm the validity of new transactions – if this were true, the system would be too easy to fool if a large number of users were dishonest. Instead, after successfully auditing the transaction, users must place the new transaction on top of a virtual stack of the previous transactions. To seal the transaction on the top of the stack, they must perform very difficult computational work – this is akin to the physical work required to cement blocks on top of one another. As a reward, those who complete this work first get a small transaction fee, and then they share the new stack with other honest users who audit and verify that it is correct. Honest users accept the tallest stack as the correct and most up-to-date consensus.

Dishonest users cannot possibly build a stack of false transactions continuously faster and taller than honest users, because it is likely that the combined computational resources of honest users will be greater than that of any single cooperating group of dishonest users. Even if a group of dishonest users managed to get more resources than honest users, they would have to decide between using it to earn legitimate transaction fees, or to destroy trust in the currency and thus the legitimacy of their own wealth.

Other Details
Finally, it’s worth noting that many details were left out of the above description for simplicity. You may want to visit bitcoin.org and read the FAQ or technical paper for more information.

Conclusion
Despite the fact that Bitcoins do not exist in the physical sense, a cursory glance shows that they do serve the primary functions that make money useful. Bitcoins provide medium of exchange (anonymous and across great distance), unit of account (private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (transferred electronically), and store of value (current exchange rates – as of August 2010 – put 1 Bitcoin, or BTC, equal to 0.065 USD).

I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace. Even if Bitcoins do not catch on in the mainstream, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continues to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity. Finally, for those who claim that Bitcoin is too virtual: what about the US dollar?

References
Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, www.bitcoin.org, 2009

Hey! Why you're leaving out mtgox?

Alrighty sir, I added you in (I just edited the above post to include mtgox)

I don't think "indefinite" is the word you're looking for here.  Maybe "limitless", "unbounded", or "unlimited".  Probably not "infinite".

But indefinite implies that the precise number of accounts is uncertain, vague, lacking precision.  Not so, right?

Thanks, I made the change in the above post.

This article is really improving.

1) If I'm reading this article and I get to the "but new issuance will forever halt at exactly 21 million coins." line. I'm thinking "21 million is never going to be enough." and stop reading there.

Maybe:

Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. Currently, Bitcoins are slowly being issued in a decentralized manner, but in ever decreasing amounts, which will eventually stop.

If you're going to talk about there 'only' being 21 million, you need to talk more about the divisibility (I think I said this before..). And you need to make sure that the divisibility talk is in the next sentence!
But for a general overview piece I don't think mentioning the 21million number is relevant at all.

2) Dealing with dishonesty.
This section is better than it was but it is still waaaaay too confusing.
(Here I quote it and put the readers questions after each section.)


"Not everyone is allowed to publicly confirm the validity of new transactions – if this were true, the system would be too easy to fool if a large number of users were dishonest" - What? Why? So it is a centralized system?

"Instead, after successfully auditing the transaction, users must place the new transaction on top of a virtual stack of the previous transactions." - Ok (skeptical about where this is going)

"To seal the transaction on the top of the stack, they must perform very difficult computational work – this is akin to the physical work required to cement blocks on top of one another." - Why do they need to do something difficult? Isn't that thermodynamically perverse?

"As a reward, those who complete this work first get a small transaction fee," - So I'm still paying a fee, this is no different from credit cards.

"and then they share the new stack with other honest users who audit and verify that it is correct." - They don't share it with the dishonest users?

"Honest users accept the tallest stack as the correct and most up-to-date consensus." - If a stack is taller it has more transactions? What do dishonest users do with it?

"Dishonest users cannot possibly build a stack of false transactions continuously faster and taller than honest users," - Why?
"because it is likely that the combined computational resources of honest users will be greater than that of any single cooperating group of dishonest users." - The bad guys can just make lots of transactions to themselves, this will make their stack taller.

"Even if a group of dishonest users managed to get more resources than honest users, they would have to decide between using it to earn legitimate transaction fees, or to destroy trust in the currency and thus the legitimacy of their own wealth." - What if the government wanted to destroy the system and was not concerned about creating wealth with it?

I think, that you may as well just note, that without introducing further details, since that is the goal of the blockchain and the p2p storage system.
You may also add, that And maybe that
Forgive me my English.

Yet again another major re-write.... this time just the 'how does bitcoin work' section. Please review:

How does Bitcoin work?
Everyone that uses Bitcoin has a balance stored in their account. This balance can be changed by sending and receiving money in transactions. A transaction is money changing ownership from one account to another: it specifies the giver account, the amount, and the receiver account. When you want to make a transaction, you announce the details of it publicly to everyone.

Each user has the ability to perform a digital signature with their account, which operates just like a normal hand-written signature. Before announcing a transaction, the giver signs the transaction first. In this way, everyone can take a look at any publicly announced transaction and know that the giver account owner truly agreed to that transaction.

When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows the balance of each account. (Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an unlimited number of accounts – ideally, you should create a new account to receive each new transaction.)

Establishing Consensus
Obviously, there needs to be a consensus over the order and validity of transactions – if not, then one could easily see how confusing things could become if many auditors were dishonest.

Transactions are placed inside blocks, and these blocks are strung together in what is called the block chain. Due to the nature of the chain, it takes a lot of computational resources to properly add a block to the chain. However, once a chain is constructed, it’s easy to share it publicly and widely, and it’s easy to verify that it was constructed properly and that the transactions inside are valid.

In theory, there could be several different chains available – potentially because some dishonest people have been building a chain containing false transactions – but only the longest chain is regarded as the consensus. This consensus mechanism should always work provided that the combined computational power of all honest users exceeds that of any single cooperating group of dishonest ones.

Incentive
Finally, it’s worth mentioning that small transactions fees are earned by those who help build the chain. Therefore, even if a group of dishonest users managed to get more resources than honest users, they would have to decide between using it to earn legitimate transaction fees, or to destroy trust in the currency and thus the legitimacy of their own wealth.

It's getting very good. It's a lot of work.


Regarding the bold: Is that really possible? They won't be correctly signed. The main forking attack is to remove transactions that you already made in order to double spend.

Great point, this paragraph needs to be totally re-written... any ideas? I think I got the idea about the "false chain" from reading the thread on network splitting. In theory, an isolated supercomputer could build up a block chain, and when reconnected to the bitcoin network could wipe out everyone's coins. But I don't want to go down that road anyway in this article...

(btw, I went ahead and edited the prior post w/ your other changes, thanks)

Right, but even that wouldn't be acomplished by putting in "false transactions" it would just not include all the 'legit' generate transactions and have all the generate transactions for itself. Okay, I guess those would be "false generate transactions".

How about this?

In theory, there could be several different chains available – potentially because some dishonest users have been building a modified chain to "rewrite history" – but only the longest chain is regarded as the consensus. This consensus mechanism should always work provided that the combined computational power of all honest users exceeds that of any single cooperating group of dishonest ones.

I just realized you should be using address in most places that you used account.


How about working on this to replace the last two paragraphs:

By choosing to accept the longest chain as valid users do not have to trust any particular individual or organization. They need only trust that the total honest computing power is greater than any villain. However; a powerful, self interested villain is more likely to prefer to collect the large number of block generation rewards than to destroy the system.

Wow, great, that really shortens it a lot! I cut the last section "incentive" completely. Now it reads:

Establishing Consensus
Obviously, there needs to be a consensus over the order and validity of transactions – if not, then one could easily see how confusing things could become if many auditors were dishonest.

Transactions are placed inside blocks, and these blocks are strung together in what is called the block chain. Due to the nature of the chain, it takes a lot of computational resources to properly add a block to the chain. However, once a chain is constructed, it’s easy to share it publicly and widely, and it’s easy to verify that it was constructed properly and that the transactions inside are valid. By helping build the chain, users earn small transaction fees.

By choosing only to accept the longest known chain as the consensus, users do not have to trust any particular individual or organization. They need only trust that the total honest computing power is greater than any villain. However; a powerful, self interested villain is more likely to prefer to collect a large number of transaction fees than to destroy the system.

By the way, I will add a final small "thank you" section to the end and add you to it for your help (as well as others from this thread that provided feedback)

I don't know if you want to mention that the only possible evil thing you can do with 'bad' transactions is try to double spend money you already have.
You cannot make money up from thin air and you cannot steal money from anybody else's account, which very much limits the scope of any possible attack.
Fraud is still a problem, but that's a problem in any system.

If a single villian has a super-supercomputer, then they could do worse than just double-spending, right? They could sustain a longer block chain that ignores all honest transactions, rendering Bitcoin useless for honest folk..... correct?

Is that worse? It just seems pointless.
The minute the villain gets bored all the real transactions start getting included again.

Everybody still has their money.

Looking good.

How about changing to "if many auditors disagreed" since that would in fact be confusing and includes dishonesty implicitly.

I'd kill the "Obviously" too. It's offensive to anyone who doesn't find it obvious and begs the question of why you bother saying it if it's so obvious.

I'm not sure, but order and validity might be redundant. If you try to spend before receiving it's invalid anyway. And I don't see any other context in which order matters.

 

If villain replaces the whole chain with a new longer one all the normal folks generates will be gone, this means they'll all be gone and villain will have all the generates. This isn't rally possible now because like 65000 blocks are "locked in"

None of this should go in the article.

Thanks, updated. Also, changed "destroy the system" to "destroy trust in the system", since there are limits to what a true villian would be able to accomplish... but I don't want to go into those details, unless you think it is neccessary.

Establishing Consensus
There needs to be a consensus over the validity of transactions – if not, then one could easily see how confusing things could become if many auditors disagreed.

Transactions are placed inside blocks, and these blocks are strung together in what is called the block chain. Due to the nature of the chain, it takes a lot of computational resources to properly add a block to the chain. However, once a chain is constructed, it’s easy to share it publicly and widely, and it’s easy to verify that it was constructed properly and that the transactions inside are valid. By helping build the chain, users earn small transaction fees.

By choosing only to accept the longest known chain as the consensus, users do not have to trust any particular individual or organization. They need only trust that the total honest computing power is greater than any villain. However; a powerful, self interested villain is more likely to prefer to collect a large number of transaction fees than to destroy trust in the system.

Heh, I meant keep validity because it covers order in any case that order would be necessary.

Doh, okay I updated the above post.

Okay, posting the entire revised article again for review.

Bitcoin Electronic Currency: The Future of Money

What is Bitcoin?
The first completely decentralized, anonymous, electronic currency has been created, and its name is Bitcoin. Its creator is Satoshi Nakamoto, a cryptography expert. Bitcoins are digital tokens that can be exchanged anonymously across the internet or stored on disk. Bitcoin serves the purpose of not just a currency, but also of an online virtual banking system.

Bitcoin differs greatly from traditional government issued fiat currency and regulated banking in several important aspects:

•   Bitcoins have no central issuer whereas fiat currency is issued at will by a central bank. Currently, Bitcoins are slowly being issued in a decentralized manner, but eventually new issuance will forever halt.
•   Bitcoin transactions are anonymous whereas a wire transaction in a government run banking system requires a federally licensed financial institution to act as a middleman. This third party must report on transactions to the regulators, and so in effect all financial transactions are monitored by the government. With Bitcoin, no third party can spy on, prevent, control, or tax transactions.
•   Bitcoin ownership is private and not subject to outside inspection and therefore asset monitoring or confiscation for any reason is nearly impossible.

Bitcoin also differs from gold in important ways. Gold has the advantage of thousands of years of historical precedent as money, as well as having a physical form. However, the major disadvantage of gold is that ownership cannot be transferred electronically (or with paper certificates) without requiring a central repository. The unfortunate fate of both E-Gold and the Liberty Dollar is evidence to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have these risks, and thus provides an excellent compliment to physical gold.

How do I use Bitcoin?
My own experience using Bitcoin has been a blast, especially when compared to the slow and cumbersome nature of traditional financial institutions. To use Bitcoin, the place to start is bitcoin.org. There’s no registration or payment required to start – just download the software. After installation, you’re ready to exchange Bitcoins with your friends across the world. If you want a few coins to start with, go to freebitcoins.appspot.com for some initial bit-capital.

The quantity of services that use Bitcoin is small but steadily growing. Notable websites thus far are bitcoinmarket.com and mtgox.com, which allow exchange between various fiat currencies and Bitcoins, and biddingpond.com, which is an implementation of e-bay with Bitcoins. You can visit bitcoin.org/trade to see a list of services that accept Bitcoin.

How does Bitcoin work?
Everyone that uses Bitcoin has a balance stored in their account. This balance can be changed by sending and receiving money in transactions. A transaction is money changing ownership from one account to another: it specifies the giver account, the amount, and the receiver account. When you want to make a transaction, you announce the details of it publicly to everyone.

Each user has the ability to perform a digital signature with their account, which operates just like a normal hand-written signature. Before announcing a transaction, the giver signs the transaction first. In this way, everyone can take a look at any publicly announced transaction and know that the giver account owner truly agreed to that transaction.

When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows the balance of each account. Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an unlimited number of accounts – ideally, you should specify a new account to receive each new transaction. For convenience, when using Bitcoin your own accounts appear integrated even though others see many separate accounts.

Establishing Consensus
There needs to be a consensus over the validity of transactions – if not, then one could easily see how confusing things could become if many auditors disagreed.

Transactions are placed inside blocks, and these blocks are strung together in what is called the block chain. Due to the nature of the chain, it takes a lot of computational resources to properly add a block to the chain. However, once a chain is constructed, it’s easy to share it publicly and widely, and it’s easy to verify that it was constructed properly and that the transactions inside are valid. By helping build the chain, users earn small transaction fees.

By choosing only to accept the longest known chain as the consensus, users do not have to trust any particular individual or organization. They need only trust that the total honest computing power is greater than any villain. However; a powerful, self interested villain is more likely to prefer to collect a large number of transaction fees than to destroy trust in the system.

Conclusion
Bitcoins have the necessary features of money: medium of exchange (anonymous and across great distance), unit of account (private), divisibility (up to eight decimal places), scarcity (21 million limit), portability (transferred electronically), and store of value (current exchange rates – as of August 2010 – put 1 Bitcoin, or BTC, equal to 0.065 USD). For more information on how it achieves these features, please read the FAQ at bitcoin.org.

I believe that Bitcoin has enormous potential, but it will have to stand the test of time and the marketplace. Even if Bitcoins do not catch on in the mainstream, it still provides a glimpse into a decentralized monetary future. As distrust in central banks continues to increase as the financial crisis drags on, my expectation is that private currencies will continue to grow in popularity. Finally, for those who claim that Bitcoin is too virtual: what about the US dollar?

References
Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, www.bitcoin.org, 2009

Special Thanks
Thank you to all the members of the bitcoin.org forums for your valuable input for this article. A special thanks to users FreeMoney and Insti who went above and beyond with their feedback.

I know someone was saying this in another thread and I decided not to fight with them, but it's wrong imo.

Bitcoin is a commodity. There is demand for it, it is qualitatively uniform, and it is fungible.

So yeah, it isn't backed by a commodity, but it is a commodity. Gold isn't even backed by a commodity. That doesn't make any sense, it is the commodity. I'm not saying bitcoin = gold. Just that neither are backed by commodities, but both are commodities.

<still reading the rest>

So I would replace that paragraph with something like:

"Bitcoin differs from other types of money."

and then put that list you've got there already.

How about "have the features" or "have the necessary features of money" instead?

Since you put the 21 million number here I would remove it from the top. Leave the finite limit part up top, just take out the number. You don't want people to think the particular number is important and puzzle over it while they read. The curious will be satisfied down lower.

Oh, "tantamount" struck me as being wrong word usage. I don't have a better phrasing yet.

What you are calling accounts we call addresses. I don't know if it matters much, do you think accounts is clearer? I think it implies they might have to keep track of a bunch of accounts is they want privacy.

Maybe the ease of creating and using many address should be mentioned. I mean it's beyond easy, so mentioning that it's easy makes it seems harder than it is.

Thanks for the additional feedback -- I updated the above post to integrate most of it.

I didn't change "account" to "address" however ... I tried it, but after reading it with "address" it seemed confusing. Maybe I'm just not re-wording it correctly.

I changed the "create a new account" to "specify a new account", because it's clearer than way that there's really no work to be done if you want a new account. Maybe that slight change of wording is enough...?

Maybe add this at the end:

Specifying a new account is a one click process, and the new account will be integrated with your old accounts. You see one balance that includes all of your accounts, but others see many separate accounts.

I overuse parens like crazy, but I don't think they're needed here ;-)

Better? (Btw i also added this change to the above post...)

When a transaction is announced, everyone audits the transaction to ensure that it is valid. This is possible because everyone knows the balance of each account. Despite this, nearly complete privacy is achieved because account ownership is not known, and each user can own an unlimited number of accounts – ideally, you should specify a new account to receive each new transaction. For convenience, when using Bitcoin your own accounts appear integrated even though others see many separate accounts.

Yes, I like it.

If your crowd might be defensive about their gold you could add, "Bitcoin makes a great compliment to physical gold."

How about this instead? (changes integrated in the above post as well)

Bitcoin also differs from gold in important ways. Gold has the advantage of thousands of years of historical precedent as money, as well as having a physical form. However, the major disadvantage of gold is that ownership cannot be transferred electronically (or with paper certificates) without requiring a central repository. The unfortunate fate of both E-Gold and the Liberty Dollar is evidence to the fact that any centralization of a currency system is vulnerable to outside monitoring, tampering or outright confiscation. Bitcoin does not have these risks, and thus provides an excellent compliment to physical gold.

Have you worked with the publisher before? They won't be happy with your public collaboration if they expect first right of publication.

I don't think this is a problem, but I'll ask.

Thanks, I confirmed that public collaboration like this is no problem.

I added two new sections to "how does bitcoin work"-- please review!

Protection from Vandalism
We’ve talked a lot about what information in Bitcoin is public knowledge, but what exactly needs to be kept private? Each user must keep secret the information that allows them to render digital signatures for their accounts – otherwise a thief could announce a transaction to remove money from their accounts. This information is kept inside of each user’s “wallet”, which is stored as a file on their computer. It is highly recommended that you encrypt your wallet and make periodic backups.

If someone stole your computer, it is essentially impossible to decrypt the wallet and spend your money – but even if the thief had a super-computer that managed to crack the encryption, it is likely that you would be able to use your backup to quickly transfer your money to new accounts before the thief was able to decrypt your wallet. (Note – in the current version the wallet is not encrypted, but this feature will be added soon.)

Initial Issuance
In the world of Bitcoin, there are actually no “coins” at all – there are only transactions. The balances of your accounts are simply the sum of transactions to those accounts. However, this brings up an interesting question – since all transactions have a spender account associated with them, what is the original spender account that started circulation of Bitcoins?

The answer has to do with construction of the block chain. Earlier it was mentioned that users earn transaction fees for helping build the chain – however, what is really going on is that each user individually attempts repeatedly to add a block, but it only works with a certain low probability. The first user that successfully adds the block includes a special transaction inside that block which credits them with the transaction fee. The fee is subtracted from the other transactions inside the block.

To bring “coins” into circulation, for the first certain number of blocks, instead of a transaction fee, the user receives newly issued Bitcoins. This mechanism is policed in the same manner as everything in Bitcoin: via the consensus mechanism. Even though individual Bitcoin users may wish to counterfeit, no user would desire others to counterfeit, and so they reject a block chain that includes new Bitcoins past a certain limit, which is agreed to be 21 million Bitcoins. The fear of non-recognition by other auditors means that no individual would ever accept as payment a coin that is known to be counterfeit.

s/instead of/in addition to/

In general:

You're getting complicated again..

True... but I need to answer the vandalism question and the issuance / 21 million limit question. But you're right, I can probably make it simpler than it is presented here, I will try to re-word.

Alrighty, I cut it down to size, it now reads:

Protection from Vandalism
We’ve talked a lot about what information in Bitcoin is public knowledge, but what exactly needs to be kept private? Each user must keep secret the information that allows them to render digital signatures for their accounts – otherwise a thief could announce transactions to remove money from their accounts. This information is kept inside of each user’s “wallet”, which is stored as a file on their computer. It is highly recommended that you encrypt your wallet and make periodic backups.

Initial Issuance
To bring “coins” into circulation, the first certain number of blocks in the block chain represent newly issued Bitcoins, which are used to pay those who help build the chain (rather than transaction fees). This mechanism is policed in the same manner as everything in Bitcoin: via the consensus mechanism. Even though individual Bitcoin users may wish to counterfeit, no user would desire others to counterfeit, and so they reject a block chain that includes new Bitcoins past a certain limit, which is agreed to be 21 million Bitcoins. The fear of non-recognition by other auditors means that no individual would ever accept as payment a coin that is known to be counterfeit.

Are you aware of this?

http://bitcointalk.org/index.php?topic=782.0 (http://bitcointalk.org/index.php?topic=782.0)

Backups need to be continual (after every transaction) or they will not have all the required keys to get your coins. Imo, keeping your savings in a secure wallet used infrequently is best. Use a different wallet for everyday spending.

I don't know if any of this should go into the article.

Maybe just "The file wallet.dat holds the keys that allow you to spend your coins. If that file is compromised so is your balance."

It isn't a paragraph, so I guess you should find somewhere else to stick it.

Let me think about the second part for a bit.

This is better.

This is worse.


Initial Issuance
To bring “coins” into circulation, those who generate a new block are rewarded with newly issued Bitcoins in addition to any transaction fees. The amount of new coins awarded will decrease over time eventually reaching zero when there are 21 million total Bitcoins.

Good points... mentioning backups is probably not a good idea since the rules around backups are actually complex. Also, my expectation is that backup capability will improve in future versions of Bitcoin.

Thanks, here is the current version:

Protection from Vandalism
Each user must keep secret the information that allows them to render digital signatures for their accounts – otherwise a thief could announce transactions to remove money from their accounts. This information is kept inside of each user’s “wallet” file. Please refer to the FAQ at bitcoin.org for information on how to encrypt and backup your wallet.

Initial Issuance
To bring “coins” into circulation, those who construct the block chain are rewarded with newly issued Bitcoins in addition to any transaction fees. The amount of new coins awarded will decrease over time eventually reaching zero when there are 21 million total Bitcoins.

Good.

Slightly off topic since it should not go in the article.

Insti, how does the halving of the reward work exactly? Is it rounded down if there isn't enough precision? In about 10*4 years there will be a reward of 0.048828125 BTC will it be rounded down to .04882812 BTC? Will this result in a limit strictly less than 21 million?

It's done as a right bitwise shift (of a 64-bit integer). The reward will go from 0.00000001 to 0. Then no more coins will be created. The maximum number of coins is 20,999,999.9769.

Cool. I also want to confirm that the 4 years is just an estimate, it is actually tied to block generation, correct? Block 210001 will be worth 25BTC regardless of when it is found.

Correct.

So is this article going to get published? Can you reveal to us who's publishing it?

Sorry I'm coming in a little late with this, but do we want to expose Bitcoin to the liability of being a "currency"? In another thread, I've posited that we should be careful not to claim that Bitcoin is useful for any particular purpose, especially as a currency or money. That could leave us open for charges of fraud.

Sorry, but bitcoins are a currency by definition and design.  You can avoid the term as much as you like, but a currency is what they were intended to be, and there will always be people to will refer to them as such, no matter what we few here choose to do.

I prefer that the government believe in their own legal fiction and regard us as "toy money".

Let me ask them first before I get back to you.

I can and will post this information the moment it is published. I don't know yet when that will be. I'm hoping within approximately one month from now.

This is presuming that no kind of extended precision value for Bitcoins is established, although with the current behavior that is certainly the case.

It should be noted that the roughly estimated time before the "final" bitcoin block will be generated even with the current software is about 120 years into the future (roughly the year 2130).  I have no doubt that the specification of Bitcoins will change drastically over the next century and there is no real certainty as to what the behavior will be, but with the current reference client/servers the eventual exhaustion of Bitcoins will happen.

If Bitcoins makes it to the 100th anniversary of the first block being created, it will certainly be an interesting experience to say the least, and new blocks will still be created at that time.

thanks ;)

lots of help from the forums though

Now how the hell did the author know about OWS over a year ago?

Sorry, can only comment on a little piece since it's almost 3am.


This opinion is widespread, but I believe it sounds too negative for Bitcoin. The design is actually quite extensible and probably close to the optimum; if Bitcoin fails for non-technical reasons, the future of private currencies would look quite dim.

That said, there is no serious competition and no reason to believe anything BUT Bitcoin should become the dominant non-fiat global currency.

This is a very strong statement. Bitcoin is a special case, a disruptive technology just emerging. Just like html, there could have been others, but this one came first and is likely to take its market position with great force. This stance is not only logical, but also in everyone's best interest -- there is no reason to split into marginally better backing systems when we can just extend Bitcoin and unite on a measure of value.

An article should emphasize that Bitcoin is in a special position, and this first appearance of distributed finance is a once-in-history event. No reason to "tone it down" at this point. :)

Good.  I'm a subscriber.

I think its time you wrote another article.  Its been over a year.  Bitcoin has withstood the worst of the crash and is working its way back up.   

You have a huge audience that needs to know about this.

i agree completely.