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Author Topic: Some questions about the bitcoin system  (Read 1160 times)
lordscales91
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March 05, 2013, 06:54:09 PM
 #1

First of all, let me to say that I already read some FAQs about that here and there, and also saw some videos... I now understand mainly how the system works, but I still having some doubts about it.

Q1: I read somewhere that there is a maximum volume of Bitcoins allowed by the system, if this is true, Why? And how will this affect to the bitcoin economy once that maximum is reached?

Q2: I also read that if someone tries to fraudulently generate a huge amount of bitcoins, by using a modified client for example, it will be rejected from the system. How?

Q3: As I understood it is possible to a single user to have multiple wallets for bitcoins, and also there are a lot of sites offering bitcoins for free. So what happens if someone abuses of that and then transfers the money to a main wallet? There are some transaction fees?
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DataPlumber
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March 05, 2013, 07:06:32 PM
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First of all, let me to say that I already read some FAQs about that here and there, and also saw some videos... I now understand mainly how the system works, but I still having some doubts about it.

Q1: I read somewhere that there is a maximum volume of Bitcoins allowed by the system, if this is true, Why? And how will this affect to the bitcoin economy once that maximum is reached?

Once all of the Bitcoins are "mined" or "minted" (whichever way you want to look at it), then as the economy continues to expand, the value of individual Bitcoins will appreciate to match the ratio of Bitcoins to its represented economic value.  Put more simply, Bitcoins will continue to increase in real value over time.  While some predict that this effect will make people never want to spend their Bitcoin, last month I bought a new computer, even though I knew that this month there will be a better/faster model.  When you need things, you need things, and while Bitcoin does tend to bias people more toward saving, it won't prevent people from using them as money to exchange for goods or services when they need said goods and/or services.

Q2: I also read that if someone tries to fraudulently generate a huge amount of bitcoins, by using a modified client for example, it will be rejected from the system. How?

The Bitcoin protocol is very clear on what's allowed and what's not.  If you generate transactions or blocks that violate these protocols, they will simply be ignored.  If you cross out the "5" on your five-dollar bill and write "20", people will ignore your alteration.  Attempts to defraud the Bitcoin protocol would be just as transparent and equally ignored.

Q3: As I understood it is possible to a single user to have multiple wallets for bitcoins, and also there are a lot of sites offering bitcoins for free. So what happens if someone abuses of that and then transfers the money to a main wallet? There are some transaction fees?

Abuse of the free Bitcoin sites (eg Bitcoin Faucet) is a problem they struggle with on a daily basis; the last time I checked at the Faucet they required a Google login, which shifted the anti-abuse burden to Google.  They also only give a very small amount to get you started.  There is nothing to prevent you from trying to milk each of those sites for as much Bitcoin as you can get out of them, except, of course, your conscience.

lordscales91
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March 05, 2013, 07:37:22 PM
 #3

Thank you for the answers. Now I have a new question, I found a blog entry tagging the bitcoin system as SCAM http://www.good.is/posts/why-bitcoin-is-a-scam/

How will you defend the system from Tim Fernholz's arguments?
DannyHamilton
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March 05, 2013, 08:17:38 PM
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How will you defend the system from Tim Fernholz's arguments?

I'll simply point out that he has many of his facts wrong and needs to do a lot more research before trying to write about something he doesn't understand.

He is welcome to believe it is a scam if he likes, it doesn't affect me at all.

The quality of posts has dropped to such a low level that all users who are participating in a paid signature campaign are added to my ignore list. If you'd like a copy of the list to improve your browsing experience, you can find it here: https://bitcointalk.org/index.php?topic=973843.0 (Updated 2016-1-4)
lordscales91
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March 05, 2013, 08:35:07 PM
 #5


He is welcome to believe it is a scam if he likes, it doesn't affect me at all.

Yes, but it does to me, because I want to know if is really a scam or not, I want something to start trusting in bitcoins
DannyHamilton
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March 05, 2013, 08:43:55 PM
 #6

Fine.  I wasted a half hour to pick it apart for you.  After this though, you are going to have to start learning how bitcoin works so you can recognize when someone doesn't know what they're talking about.  I'm not going to come running to your rescue every time you stumble across some random blog and get yourself all scared over something that is quite obviously FUD:

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Each time bitcoins change hands, so does a transaction history encoded in a string of characters.
This is a very poor representation of what happens.

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This “hash value” or digest can be decoded by anyone with sufficient computer power and time to devote to the effort.
I don't even understand what he is trying to say here.

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When bitcoins are exchanged, a digest is broadcast to the network of users, a participant does the work of decoding the transaction history, and other users quickly confirm their history is accurate.
What?  When bitcoins are exchanged the transaction is broadcast to the network of users.  Many participants compete to include many transactions in the next block they solve.  A block of transactions is solved when a digest of that block meets the current network target.

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The decoders earn a 50-bitcoin bounty for their work.
Not anymore.  It has been a 25-bitcoin bounty (plus transaction fees) for a few months now and will continue to be for the next 4 years.

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This happens about once every 10 minutes
The amount of time this takes is essentially random.  The protocol adjusts the digest difficulty on a regular basis to attempt to keep the average time per block close to 10 minutes.

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A few weeks ago the value of the bitcoin briefly plunged to negative eight cents to the dollar as hackers crashed exchanges and digitally ransacked electronic wallets to the tune of $9 million
I'm pretty sure this never happened.  He should quote a source or double check his facts.

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There are nearly 7 million bitcoins sloshing around the Internet, worth over $100 million
There are currently 10.8 million bitcoins sloshing around the Internet, worth over $434 million

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major exchanges like MtGox have fallen to hackers
As far as I've seen, MtGox is still around.

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it accrues such a huge advantage to people who can bring the most computing power to bear on clearing transactions
Is there any transaction clearing system in the world where this isn't true?

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If any single person or group controlled a majority of computing power in the network, they could rewrite the transactions to take your money
What a person can do with a majority of the hashing power in the network is limited and well understood.  It is not true to say that they can "take your money".  It might be possible for them to take your money under a specific set of circumstances, but first they'd have to find a way to generate over 35 Thash/s (that's no small task).

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one mining collective, deepbit, currently clears more than a third of all transactions
Not true.  BCT Guild comes close to one third, but if it was found that they were attempting to engage in a 51% attack, many of their participants would quickly abandon them.

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Already, hackers have used botnets, online networks of computers, to increase their ability to process transactions and mine bitcoins
Almost useless once GPU mining caught on, and completely useless now that ASIC exist.

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And if those banks get together to regulate the supply of money, well, that’s where central banks come from
Except that the protocol rules are enforced by everyone.  You can't change the supply without 100% consensus.

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It’s hard to trust a monetary system concocted and managed by anonymous hackers who aren’t answerable to anyone
But easy to trust a monetary system that is strictly controlled by well understood mathematics and that can't be changed without 100% consensus.

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DannyHamilton
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March 05, 2013, 08:46:10 PM
 #7

Now.  Out of what's left of that blog, point out a single thing he says that demonstrates that bitcoin is a scam.

What's left is basically him saying:

Bitcoin is a scam!  Why? Because I don't like it, and I say so!

The quality of posts has dropped to such a low level that all users who are participating in a paid signature campaign are added to my ignore list. If you'd like a copy of the list to improve your browsing experience, you can find it here: https://bitcointalk.org/index.php?topic=973843.0 (Updated 2016-1-4)
boscorocks
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March 05, 2013, 08:48:21 PM
 #8

Read Forbes articles about Bitcoin, they are interesting. I my opinion, there are too many big players and business investments for it to be a scam. However I think there still needs to be a lot of settling of the valuation for it to become more accepted.
DannyHamilton
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March 05, 2013, 09:02:43 PM
 #9

However I think there still needs to be a lot of settling of the valuation for it to become more accepted.
Certainly.  It is still in a growth period and in it's infancy.  There will be a lot of volatility and as more and more mainstream uses show up, the exchange rate will skyrocket.  Eventually it will mature and the exchange rate will stabilize.

You can't gain mainstream use without creating volatility, but you can't reach maturity and stabilization without gaining mainstream use.  It is a cycle that every disruptive technology goes through.

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DataPlumber
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March 05, 2013, 09:24:18 PM
 #10

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Is Bitcoin a scam?

Sure... depending on your definition.

But if your definition includes Bitcoin then it almost certainly also includes $USD. Unless "the government is involved, sorta" necessarily excludes something from being a scam.  As a rule, though, the more you compare fiat currency to Bitcoin and *really do your homework*, the more you start to think of fiat currency as a scam and Bitcoin is closer to being "something real."

That being said, Bitcoin is "backed" by nothing except what emotional value people attach to it (but at this point in our history, the same is true of $USD), and the only innate utility of Bitcoin is its ability to conduct verifiable and non-cancelable transactions smoothly across any (or no) borders.  That being said, that utility is of immense value, and unmatched by any "traditional" payment system.

People talk about gold having innate value, but *most* of gold's value is, in fact, because of its use as an easily-identifiable, divisible, and (let's face it) pretty metal.  Bitcoin is also easily-identifiable and divisible, and to us cryptography nerds, f'n gorgeous.

Just sayin'

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March 05, 2013, 10:28:51 PM
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I dont feel like it's a scam, but I do feel like there is a major wall that keeps everyday joe-schmoe on the outside because the system is quite complicated and cannot be easily understood. Not to mention, a mere understanding of the concept isn't sufficient mastery alone. One must then mine/purchase coins to understand the way they work.

I unknowingly opened like 4 wallets because it took forever to cache with the original wallet program. After nearly a week of reading and exploring, I now have over 12 addresses for receiving bitcoins from free websites. And my knowledge of the currency and it's movement between patrons is more solidified.

DataPlumber
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March 05, 2013, 11:44:52 PM
 #12

I wrote something that might help bridge the gap:

http://dataplumber.blogspot.com/2011/07/how-bitcoin-works-technical-discussion.html

lordscales91
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March 06, 2013, 02:38:10 PM
 #13

Thanks to all of you for your answers, now I understand a lot better how the system works, special thanks to DataPlumber for his post that I (almost) understood perfectly because I am an IT Tech so I'm familiar with mostly all the things that you mentioned there.

I thought that once the 21 million BTC are generated the mining will stop, because there will not be a compensation to the miner, but that was because I didn't know about the transaction fees. So once the 21 million are generated that will mean just that a transaction fee will be mandatory and more expensive.
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March 06, 2013, 02:45:26 PM
 #14

- snip -
So once the 21 million are generated that will mean just that a transaction fee will be mandatory and more expensive.

Transaction fees will likely remain voluntary. However the maximum blocksize is limited (currently limited to 1 megabyte), and miners get to choose which transactions they include in the block they are working on.  Because currently there are frequently less transactions than a block can hold, miners generally include free (or extremely low fee) transactions in the otherwise unused space.  It doesn't really cost them anything extra to include the free transactions and it builds popularity of Bitcoin, so most miners are willing to do it. When there are more transactions than will fit in a block, miners will begin being more selective about the transactions that they include.  They will likely choose the transactions that pay them the highest fee per byte to increase their profits.  This will mean that if you want your transaction to be confirmed quickly you'll need to include a higher fee.  Those who don't pay a high enough fee will be delayed until transaction volume drops to a level where miners have already handled all the higher fee transactions.

The quality of posts has dropped to such a low level that all users who are participating in a paid signature campaign are added to my ignore list. If you'd like a copy of the list to improve your browsing experience, you can find it here: https://bitcointalk.org/index.php?topic=973843.0 (Updated 2016-1-4)
lordscales91
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March 06, 2013, 05:15:10 PM
 #15

Ok, one more question (or maybe two), the last one before starting to test it myself. I'm a little lost with the BTC addresses and their respective private keys. How this work, one is for receiving and the other for sending? So may I securely generate a wallet and then just use it for receiving (from free faucets, donations, etc...) until I have a good amount to spend it in something?
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March 06, 2013, 05:29:54 PM
 #16

Public keys are used for receiving funds.  You can then spend those funds by certifying your intent with a digital signature derived from your private key.

The way you send funds (simplifying) is that you tell the network you want to send some or all of the funds from one or more transactions, to another person's public key.  You certify that *you* can use the funds that were sent to your public key by signing your request, using the private key(s) corresponding to the public keys(s) of the transactions you're spending.  (Private keys are used for creating digital signatures.  Using your private key to create a digital signature does not expose your private key, but anyone who has your public key can verify your digital signature.  Note that in this context, just about every time I say "your private key" I really mean "the private key of a Bitcoin address that received funds in a transaction.")

Note that if you consume the funds sent you in a transaction, you must use all of the funds in that transaction; so you generally wind up sending the "change" to yourself at another address (keypair's public key) generated just for that transaction's change.

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March 06, 2013, 06:19:19 PM
 #17

Public keys are used for receiving funds.  You can then spend those funds by certifying your intent with a digital signature derived from your private key.

The way you send funds (simplifying) is that you tell the network you want to send some or all of the funds from one or more transactions, to another person's public key.  You certify that *you* can use the funds that were sent to your public key by signing your request, using the private key(s) corresponding to the public keys(s) of the transactions you're spending.  (Private keys are used for creating digital signatures.  Using your private key to create a digital signature does not expose your private key, but anyone who has your public key can verify your digital signature.  Note that in this context, just about every time I say "your private key" I really mean "the private key of a Bitcoin address that received funds in a transaction.")

Note that if you consume the funds sent you in a transaction, you must use all of the funds in that transaction; so you generally wind up sending the "change" to yourself at another address (keypair's public key) generated just for that transaction's change.
To avoid confusion, it is worth pointing out that an address is a hash of the corresponding public key.

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DataPlumber
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March 06, 2013, 06:27:33 PM
 #18

To avoid confusion, it is worth pointing out that an address is a hash of the corresponding public key.

Pretty sure an address is an actual public key, not a hash thereof:

http://en.wikipedia.org/wiki/Bitcoin#Addresses

But I stand to be corrected..?

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March 06, 2013, 06:30:45 PM
 #19

How will you defend the system from Tim Fernholz's arguments?

By continuing to use the system.

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March 06, 2013, 08:34:07 PM
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To avoid confusion, it is worth pointing out that an address is a hash of the corresponding public key.

Pretty sure an address is an actual public key, not a hash thereof:

http://en.wikipedia.org/wiki/Bitcoin#Addresses

But I stand to be corrected..?


The address is obtained from ripemd160(sha256(pubkey)). Your blogpost is more than great at all levels - this is just a detail that becomes important, for example, when discussing security of Bitcoin.You would need to break badly at the same time all three primitives (ecdsa, sha256, and ripemd160) to be able to reverse a known wealthy address into the corresponding private key, allowing you to spend (steal) the coins. This pretty much eliminates all the concerns of type "what if digital signature algorithm is broken in future?".

So:
Private key into public key (ecdsa)
Public key into address (sha256 and ripemd160)
Only public keys associated with addresses that were sent from are publicly known.

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

 

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