Wrapping your head around Bitcoin (a guide)

[hazek]

I decided to write up a guide to help people grasp what roughly Bitcoin is and why roughly it works and why it is valued and used in a layman friendly way.

Feel free to download, copy, edit, share, do what ever with it. The only request I have is that if you spot a typo or a grammar error to please let me know so I can correct it. Thanks!

https://docs.google.com/file/d/0B6bqlVfJOOWsRHphT3E1NmVXUjQ/edit?usp=sharing  (reading time ~10min)


EDIT: Here's a slightly updated black and white version if that is what you prefer: https://docs.google.com/file/d/0B6bqlVfJOOWsZUxtUGU2cUpHd0E/edit?usp=sharing

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[Akka]

Very nice work!

Again you proof that a colored ignore button only helps to identify the outsite of average guys (in both directions).

This guide is a very good step to a "Bitcoin for non-Geeks" Guide. (Which is really needed)

If you have any interest to get it translated into other languages, I offer to make a German translation over the weekend. (And keep it updated from time to time)

Feel free to download, copy, edit, share, do what ever with it. The only request I have is that if you spot a typo or a grammar error to please let me know so I can correct it. Thanks!

Well, I will just do so.

[jabetizo]

Nice writeup

I noticed this typo: Bitcoin simply ignores those who don't follow it's its rules

[hazek]

Nice writeup

I noticed this typo: Bitcoin simply ignores those who don't follow it's its rules

Gah.. I hate it when I miss mistakes like that

[Gestas]

Bitcoin has value because you can cash out to USD.

[DannyHamilton]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

[hazek]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

Bingo.

[IveBeenBit]

This sentence makes no sense:

One could say it's an entire money system behind your national currency that provides it and provides it in a form that people consider as useful for the role of money.

[Korbman]

Nicely written, and pretty concise.

Now if only someone would write up something like this that explains how Bitcoin works (turning technical details into something a third grader could understand)..essentially taking the Wiki version, adding more detail, and removing words longer than 6 characters . Or maybe that's been done already and I've just missed it? I'm getting tired of explaining cryptography to people

[hazek]

Use this video for getting people to understand cryptography: http://www.youtube.com/watch?v=G2_Q9FoD-oQ

[jerfelix]

I think you are technically mistaken when you say :

all confirmed Bitcoin transactions are with mathematical certainty irreversible, all
bitcoins are with mathematical certainty non-counterfeitable

Mathematical certainty is 100%.  Bitcoin is just very near to it.  It happens to be closer to it than our current banking system.

A 51% attack on the network could reverse transactions.
Likewise, a similar attack to the source code could introduce the ability to counterfeit.

You probably don't want to use the term "mathematical certainty".  Perhaps the term "impossible, practically speaking" or something like that.

It bothers me when Roger Ver tosses around the "impossible" and "mathematical certainty" terms, because he is flat out wrong.  You are introducing a binary situation here (yes/no, right/wrong) and in this case these terms are wrong.   "very near right" != "right".

[hazek]

A 51% attack on the network could reverse transactions.

As far as I understand how Bitcoin works this is false.

What could happen is they could get unconfirmed as blocks in which they were confirmed become orphaned but they'd still be valid and pending for confirmation. This of course exposes some of those transaction to a double spend attack but it doesn't reverse them.

[DannyHamilton]

A 51% attack on the network could reverse transactions.

As far as I understand how Bitcoin works this is false.

What could happen is they could get unconfirmed as blocks in which they were confirmed become orphaned but they'd still be valid and pending for confirmation. This of course exposes some of those transaction to a double spend attack but it doesn't reverse them.

I think that is the point jerfelix was making.  If someone had more hashing power than the entire combined honest network (51% of the total that includes their own hash power), then they could spend bitcoins and then re-mine the blocks and include a double spending on the previous transaction that now sends the bitcoins back to an address of their own.  In this way the earlier transaction would be "reversed".

[hazek]

A 51% attack on the network could reverse transactions.

As far as I understand how Bitcoin works this is false.

What could happen is they could get unconfirmed as blocks in which they were confirmed become orphaned but they'd still be valid and pending for confirmation. This of course exposes some of those transaction to a double spend attack but it doesn't reverse them.

I think that is the point jerfelix was making.  If someone had more hashing power than the entire combined honest network (51% of the total that includes their own hash power), then they could spend bitcoins and then re-mine the blocks and include a double spending on the previous transaction that now sends the bitcoins back to an address of their own.  In this way the earlier transaction would be "reversed".

But how many of the hundreds of thousands of transactions now unconfirmed was the attacker a counterparty to? Likely very few, which I'm not trying to downplay as a weakness but saying that he can reverse transactions is just as inaccurate as saying it being impossible with mathematical certainty to cheat Bitcoin.

Btw mathematical certainty in my guide primarily refers to the ability to fake obeying the rules. It's true it doesn't account for an attacker obeying the rules and still defrauding people, but it's a fact that rules in Bitcoin must be obeyed, even by an attacker and this is mathematically certain.

[Gestas]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

How does it have value? At least the USD is backed by the US Government, I guess bitcoin is backed by drugs since thats all you can buy with it??

[Gabi]

With a 51% attack you can reverse all the transaction up to the point where you decide to start forking the blockchain. I can for example start a 51% attack and start it from the block of a year ago: everything before will stay the same, everything after that block will be rewritten by me. So all coins mined in the last year would become mine, every transaction made in the last year would disappear (if i don't want to keep them and if they are not made with coins mined last year).
Yes, there is a checkpoint in the client (so i can just go back some weeks or so) but a 51% attack would still be a serious problem.

[marcus_of_augustus]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

How does it have value? At least the USD is backed by the US Government, I guess bitcoin is backed by drugs since thats all you can buy with it??

There's at least $275 million that says you are just plain wrong (hint it is very little backed by drugs) .... and yet here you are arguing the opposite of the reality staring you in the face,
reality check scoreboard 

[Gestas]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

How does it have value? At least the USD is backed by the US Government, I guess bitcoin is backed by drugs since thats all you can buy with it??

There's at least $275 million that says you are just plain wrong (hint it is very little backed by drugs) .... and yet here you are arguing the opposite of the reality staring you in the face,
reality check scoreboard 

That $275 million is based on the current market price and the total number of bitcoins, thats a pretty poor estimation by any means.

[SlickTheNick]

Bitcoin has value because you can cash out to USD.

I think you have that backwards.
You can cash bitcoin out to USD, because it has value.

How does it have value? At least the USD is backed by the US Government, I guess bitcoin is backed by drugs since thats all you can buy with it??

https://en.bitcoin.it/wiki/Trade

plenty more than drugs man.

[jerfelix]

A 51% attack on the network could reverse transactions.

As far as I understand how Bitcoin works this is false.

What could happen is they could get unconfirmed as blocks in which they were confirmed become orphaned but they'd still be valid and pending for confirmation. This of course exposes some of those transaction to a double spend attack but it doesn't reverse them.

I think that is the point jerfelix was making.  If someone had more hashing power than the entire combined honest network (51% of the total that includes their own hash power), then they could spend bitcoins and then re-mine the blocks and include a double spending on the previous transaction that now sends the bitcoins back to an address of their own.  In this way the earlier transaction would be "reversed".

But how many of the hundreds of thousands of transactions now unconfirmed was the attacker a counterparty to? Likely very few, which I'm not trying to downplay as a weakness but saying that he can reverse transactions is just as inaccurate as saying it being impossible with mathematical certainty to cheat Bitcoin.

Btw mathematical certainty in my guide primarily refers to the ability to fake obeying the rules. It's true it doesn't account for an attacker obeying the rules and still defrauding people, but it's a fact that rules in Bitcoin must be obeyed, even by an attacker and this is mathematically certain.

Correct me if this is wrong, but if I had an extreme amount of computing power, I could create an alternate blockchain dating back to the genesis block, all the way to present, with the only confirmed transactions being me solving the blocks, and then alter the mining software with my new checkpoints.  Also altering the mining software such that I ignore any information coming from the REAL miners with the CORRECT block chain.  Then I become a miner with 51% of the network.

This would effectively REVERSE every transaction that ever occurred.  Every existing transaction would appear to be an attempt to spend money that didn't belong to the owner, and so they would be reversed.

So although practically impossible, it is mathematically possible.

(I should also note that it would take just minutes to solve every block since the genesis block in an offline fashion, if I am creating this alternate blockchain, since I am not in competition with anyone, and the difficulty would be minimal.)