Very interesting. I'll make sure to link this to the developer I'm hiring.

Yes, and it's also one of the most important issues for me. The question is, is it solvable?

One partial solution I have thought about, is to actally withdraw some of the online funds to an offline bitcoin adress, and then manually deposit/withdraw funds to the online host as neccessary. This would limit my risk since any potential thieving host would only be able to run away with a fraction of the entire project balance. But this still puts me at a risk I'm not entirely comfortable with, so I would really like if this is possible to secure some other way. Is it at all possible to solve this with encryption somehow?

Of course, the optimal would be to actually find a host I can trust 100%, but this is quite hard to do since even the most trustworthy may surprice you when money is involved.

I'm thinking of developing a site (paying for the development since I'm not that code-savvy) that will need the use of a bitcoin-daemon and a system for deposits/withdrawals and someway to send money between different customer accounts to work, and I need some input on the best way to solve some of the issues I have about this.

Basically, I need a way to let customers be able to deposit and withdraw bitcoins on demand, and also send funds between them. The way I have thought of this is to use a web-frontend to the bitcoind, and give every customer a single adress that will be used to deposit funds. All funds that are sent to a specific adress will automatically be credited to that customer and kept track of in a database. If money is sent to another account, the database will keep track of the difference without actually making any transaction in the bitcoin network. This means that funds could be instantly transfered between accounts without actually relying on confirmations and such. However, once someone wants to withdraw their funds, the balance of their "bitcoin deposit adress" most likely won't be the same as the balance in the internal database. So with this solution, it becomes neccessary to let them withdraw from other bitcoin adresses as well, and the server need to do some internal control to make sure that they don't withdraw more than my database says they can.

This the easiest way I thought of to get the result I need. But I would really like to have some input on the pros and cons of this method from some more experienced users. Is this the way you would implement this or would you go about it some other way? Any input on things I may not have thought about is also appreciated.



Also, I do not have the resources to host this site myself, so I will need to pay someone else to do this. My goal is to try to find someone willing to host both the web site and a corresponding bitcoind. The web-site will probably be in the grey-area of the market (as a lot of bitcoin activity seem to be) so this brings up two potential issues. First, I want to make sure that I will be able to find someone to host this site + a bitcoind for me. I don't think this will be that hard but I just want to make sure before paying for the development of the site. Second, and this is probably my most important question, if someone else is hosting everything for me, I want to make sure that the person who has physical access to the server doesn't have access to the wallet containing all my customers funds. I really don't know how to solve this problem. I assume that it can be solved by cryptography somehow, but I really need to check with you more knowledgable guys before going further with this.

Thanks in advance.

It will work fine. The transaction is stored in the block chain on the internet. As soon as you turn on the computer it will start to catch up and download all the blocks since last time.

This seems like clever marketing from Mt gox. By being extra slow to add your dollar funds you will learn to appreciate bitcoin more.

Jokes aside, I feel you. I missed an opportunity to buy in just before a rally as well. This was one of the first rallies though so I'm feeling pretty good about bitcoin at ~$14 now regardless. I hope you will feel like me and not care in a couple of months.

What about the bandwith optimization that is mentioned at the bottom of the wiki page? That seem to reduce the bandwith needed drastically. Any problem with this not mentioned in the wiki?

Edit: I think I can answer my own question. While this does reduce the bandwith for block broadcasts, we still have a problem because the transactions themselves need to be propagated to the entire network first. Correct?

You try to do that with several thousands of dollars and see how easy it really is. I really don't think any newcomer is going to find someone willing to lend them several hundreds of BTC.

I'm with OP here, for shorting to take off, a large trusted third party would have to set it up. It's the only way to resolve the trust issue.

I'm not sure how much work this is to implement, but it would be great if you could log the data and show a history of past market depth as well.

Miners do not have a direct incentive to preserve the value of the currency. Thier incentive is to keep earning money, inflation or not. And more importantly, they are not economists. If they can be persuaded that increasing the block reward is a safer solution than decreasing the difficulty, they may settle for that solution. The majority of miners may be libertarian-leaning right now but I don't think it's safe to assume this will always be the case.

Amendments are fine. "Panic amendments" or not imo.

It's clear for you and me, but I don't think it is for everyone or even the majority of miners (especially not in the future when this community represents even less of the total amount of miners and users). In a potential situation where the stability of the bitcoin-network is very uncertain, I don't think it's safe to just assume that our solution is the one that will gain traction. I really think such issues needs to be adressed before that ever becomes a reality.

I couldn't agree with you more here. Any change need very thourough thoughts and investigation put into it. And that is kind of my point. We won't have that time right after a sudden drop in the value and sudden transaction hold-ups.

Also, I just want to make clear that I'm not as certain of my position as I probably sound. I arguee mor for the sake that I really think this needs to be adressed long before it ever becomes real.

This is a fallacy. Bitcoin is the most traceble currency ever. You can trace every single unit of bitcoins from the present to the point of creation. However, you can only trace it from one bitcoin adress to another. If you take the right steps to make sure that your adress can't be traced back to your person, then it's untraceable in the way that mathers.

Unfortunately, I believe that the general  public would say the same of a deflationary currency. The libertarians and austrian economists are the ones who are looked upon as kooks. But sure, if the scenario I layed out were to happen right now, I do believe this community still has enough influence to make sure that the right adjustments are made. The point I tried to make to you was that in the future, the influence over bitcoin of this community may be next to nil. If that is the case, we can't be sure that the majority of miners won't settle for some other solution that sounds plausible/has better marketing.

But the cost of this would surely be a massive loss of confidence in the very concept of cryptocurrencies. I don't see how that would benefit any of us. Preventing emergencies is always better than dealing with them. If the scenario I have layed out is plausible, then I am of the belief that measures should be taken to prevent it, not to deal with it.

Sure, a few die-hards would mine at an unprofitable rate. But most miners probably wouldn't. And the intention with bitcoin as I understand it, is to not have to rely on altruism and the goodness of people's heart to get the system working.

I don't think it's safe to rely on a quick protocol change at the time of a potential panic with unprofitable mining and transaction hold-ups. We can't even be sure that the current community has that much influence when this happens. What if someone proposes to increase mining reward instead? That could solve the same problem and would certainly sound good to a lot of miners. But then we have set the precedent to turn bitcoin into an inflationary currency with increasing block rewards. Bitcoin relies on trust, and if this ever becomes real that trust will be severely damaged.

Also, I don't think it's enough to just say that this is unlikely. If bitcoin truly is the Napster of banking I believe the road ahead will be far bumpier than it has been so far. The network really needs to be prepared for these bumps, not just figure them out as they come.

I'm not in to the details of difficulty changes. Surely the network has to have some way of agreeing of the time it takes to solve an entire difficulty right now? How does the network come to an agreement?

It is certainly a choice, just not a free one. The voting booth is simply a suggestion box for slaves.

Doesn't anyone else think that this is worth some more discussion? It seems to me that the possibility of multiple weeks of a weak network and unprofitable mining is a pretty bad combination. And what if someone that really wanted bitcoin to fail would take an opportunity like this and time an attack on the network. It seems really bad.

Someone please disprove me.

I think it just assumes that miners have no reason to believe the value will go up. It doesn't matter if they sell in the future if what they recieve in the future is worth less than what the spend in the present (it actually gets worse if they sell in the future because of time preferences). Anyone who believes the value of bitcoins should go up could and should mine at an unprofitable rate even today. Any nonspeculative miner would lose their incentive to mine though. Sure, the miners still have a strong incentive to keep the network going, but this still creates the prisoners dilemma scenario where everyone gains by simply letting everyone else do the work.

And I don't think the economy needs to get that big for this scenario. Lets say the economy is backed by internet gambling and drugs and we get a government crackdown on one part of the economy like gambling.

Well, that should dampen the effect at least. But I don't think there is any doubt that a lower exchange rate means lower profit for miners. So if the fall in value is big enough, the scenario in OP is still feasible I think.

Also, there is no guarantee that such transactions would exist in every block and there's no point wasting energy on unprofitable blocks. So the miners incentives would actually be to wait for the fees to pile up until it gets profitable enough to mine, but then the next block would be unprofitable again.

Yeah I'm with you. +EV is +EV after all. Even if some people are irrational, other people would just take advantage of the opportunity. I'm getting a bit worried about the possibility of a negative expected return for miners as I expressed in this thread though: http://forum.bitcoin.org/index.php?topic=10708.0

Mathematically, it's even better than a regular lottery. The point I tried to make was that the physical activity of a regular lottery is probably part of the fun for the participants. But this should be irrelevant.

So I just thought of something. Assume that we have reached some sort of equilibrium in the economy. Miners earn just slightly more than their cost of electricity. Then assume that we have a sudden decrease in value for whatever plausible and unforseen reason. As I have understood bitcoin, the difficulty will only change every 2016 blocks. Isn't it possible that we get a situation where mining could actually be unprofitable for everyone except those with free energy until the next difficulty change? This would create a prisoners dilemma situation where basically no one has an incentive to mine, but everyone gains from other people mining (since the new difficulty would come sooner).

Thoughts?

How sure can we be of this? It's basically like a lottery but with a positive expected return. The problem is that very many doesn't care about their expected return when they play lotteries. They usually care about the joy and excitement more. How can we actually know that most miners will find their way back if the chance of getting payed is ridicilously low?

I wasn't really suggesting a change of the protocol, just a discussion of the pros and cons of the current way. And it wasn't to help pool operators, but to make sure that the incentives to provide a strong network are as strong as possible at all times, even during attacks. I don't really think a discussion about optimization and strengths/weaknesses is the equivalent of a nanny state.

Lets say someone does a huge coordinated attack like this right after a difficulty increase. I think it could be somewhat of a problem that this doesn't increase in any higher profitability for the rest. Obviously some miners would still find their way back mining solo. But some others would maybe not think it's worth it without the pooling feature. Assuming the attacker has the capacity to do this for a prolonged period of time, this could potentially lead to several weaks of a slower network.

I don't really know if this is actually an issue or not. But irregardless if it is, the questions i had was, would faster difficulty adjustments make the network stronger against attacks like this? And would there be any severe drawbacks to this?

I'm thinking a bit of the difficulty adjustments. Why is it that we only change difficulty every ~2 weeks. Since luck plays a part in block generation, difficulty probably needs to be somewhat stable. But if the difficulty would adjust faster than it currently does, we would probably improve the defense against a similar attack, since a lowered difficulty would provide even stronger incentives for miners.