Trust/backing...

[Gavin Andresen]

In another thread venom said:

Give people some kind of assurance that there isn't a way that the operator of the currency can just start minting bitcoins at will.  It's probably irrelevant at the moment - but imagine if BC$ was as popular as e-gold in its heyday - the owner, if he were less than honest, could essentially be an Internet millionaire spending his own currency at will around the interwebs.   In theory it's possible with any digital currency - but at least, the theory behind the digital gold currencies is that if all else fails, you can call them up and redeem physical gold (I'm referring to c-gold, e-gold, Pecunix, GoldMoney, and probably many others) so you have something 'tangible' as backup.  What is BC backed by?  Just saying, these might be things that a skeptic will ask himself before wanting to use this currency.

So the short answer is that BC is backed by mathematics/cryptography and the "wisdom of crowds"; assuming there's no flaw in the algorithms, and assuming that there is no grand conspiracy of more than half of the BC nodes, it is impossible to inflate the currency or make fraudulent payments.

I don't believe in grand conspiracies, so that doesn't worry me.  And I can't see any flaw in the algorithms... but that's where I'm skeptical (there might be bugs in the BC code, but those can and will be easily fixed).

Are there any professional cryptographers looking at Bitcoin?
Or will they only get interested if/when Bitcoin gets popular?

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[sirius]

Economically speaking, Bitcoin is backed by the people who exchange it for other things of value (goods, services, other currencies). The same goes for every currency. The more stuff people offer in exchange, the more the currency is worth.

[The Madhatter]

Oil is what really backs the USD. (See: "Reserve Currency").

Maybe someday you'll be able to buy/trade crude with Bitcoins.

[laszlo]

If you give me some bitcoins I'll give you a bucket and a spoon and you can go scoop up your own oil in the Gulf!  As much as you can carry!

[dwdollar]

I think the exchange rate is the best indicator for Bitcoin's trustworthiness.

Many will come.  From everyday users to crypto experts.  The real test is if they transfer from their physical wallet to their digital wallet and how much they choose to transfer.  Or if they offer goods and services for Bitcoins and at what prices relative to traditional currencies.  This test is better than any opinion or analysis.

[hugolp]

Oil is what really backs the USD. (See: "Reserve Currency").

Maybe someday you'll be able to buy/trade crude with Bitcoins.

I disagree.

The biggest army in the world is what backs the USD.

It just happens to happen that oil is one of the most important trades in the economy and thus the reserve currency is used. But if it wasnt for the USA army the world would not be using the dollar, not for oil, not for any other thing.

[Gavin Andresen]

Oil is what really backs the USD. (See: "Reserve Currency").

The biggest army in the world is what backs the USD.

If it was oil, then it seems to me the country with the largest oil reserves would be the world's reserve currency.

It might be the biggest army, but I think the dollar is the world's reserve currency because the US has the largest productive economy in the world backing it.

Unfortunately, we might be subject to a natural experiment in the next couple of decades that will show us the right answer; I can imagine that in 20 years the US still has the world's biggest army but some other nation has the world's largest economy.

It would be really cool if Bitcoin Nation were the world's largest economy by then...

[lachesis]

The US doesn't have the world's largest army. That distinction goes to China, I believe. They also have the largest air force and I think the largest navy.

El Estados Unidos de América has the most effective army, though. And we have a lot of very big bombs.

[ksd5]

It's in China's better interests that their currency doesn't become more valuable than the US's. If it did, then US-based manufacturing taking place in China would move out.

[db]

The US doesn't have the world's largest army. That distinction goes to China, I believe. They also have the largest air force and I think the largest navy.

That's just silly. The US military budget is as big as the rest of the world's combined and about ten times bigger than China's.

[db]

It's in China's better interests that their currency doesn't become more valuable than the US's. If it did, then US-based manufacturing taking place in China would move out.

That would be great for the Chinese. They could consume more and manufacture less of it themselves. That is, they would be richer. (That what is means for the currency they hold to be more valuable.)

[Gavin Andresen]

Yep, Americans have been getting a really sweet deal from the Chinese for a while now-- we send them pieces of paper with dead presidents on them (well, the electronic equivalent) and they send us all sorts of useful stuff.

[db]

Some day the Chinese government will wise up and stop preventing people from spending all those dollars. It might be a good idea not to hold a lot of dollars by then.

[smoothie]

In another thread venom said:

Give people some kind of assurance that there isn't a way that the operator of the currency can just start minting bitcoins at will.  It's probably irrelevant at the moment - but imagine if BC$ was as popular as e-gold in its heyday - the owner, if he were less than honest, could essentially be an Internet millionaire spending his own currency at will around the interwebs.   In theory it's possible with any digital currency - but at least, the theory behind the digital gold currencies is that if all else fails, you can call them up and redeem physical gold (I'm referring to c-gold, e-gold, Pecunix, GoldMoney, and probably many others) so you have something 'tangible' as backup.  What is BC backed by?  Just saying, these might be things that a skeptic will ask himself before wanting to use this currency.

So the short answer is that BC is backed by mathematics/cryptography and the "wisdom of crowds"; assuming there's no flaw in the algorithms, and assuming that there is no grand conspiracy of more than half of the BC nodes, it is impossible to inflate the currency or make fraudulent payments.

I don't believe in grand conspiracies, so that doesn't worry me.  And I can't see any flaw in the algorithms... but that's where I'm skeptical (there might be bugs in the BC code, but those can and will be easily fixed).

Are there any professional cryptographers looking at Bitcoin?
Or will they only get interested if/when Bitcoin gets popular?

Gavin had the right attitude from the first few weeks in getting involved with bitcoin.

It's not all about mining and not all about profit, but perhaps USABILITY!

[FreeMoney]

It's in China's better interests that their currency doesn't become more valuable than the US's. If it did, then US-based manufacturing taking place in China would move out.

That would be great for the Chinese. They could consume more and manufacture less of it themselves. That is, they would be richer. (That what is means for the currency they hold to be more valuable.)

Such a pervasive and silly idea. It's like Tom Sawyer getting his friends to paint fences, but for decades.

[Serith]

Thank you for bumping the thread, I really enjoyed reading this bit about how it was in the beginning, such an innocent time that was 

[molecular]

So the short answer is that BC is backed by mathematics/cryptography and the "wisdom of crowds"; assuming there's no flaw in the algorithms, and assuming that there is no grand conspiracy of more than half of the BC nodes, it is impossible to inflate the currency or make fraudulent payments.

Sorry to chip in here slightly offtopic... I interpret the meaning of "backing" a little differently: backing implies a promise to be able to redeem the unit of currency for something else, usually at the issuer. This is the case for example for eGold, which you can redeem for gold. This is not the case for gold itself or bitcoin, the concept of backing just doesn't apply. You cannot redeem a bitcoin for some math or "wisdom of crowds" anywhere. You cannot redeem your gold for a piece of that 5000-year-long tradition.

Cryptography/mathematics and the "wisdom of crowds" is what ensures bitcoins scarcity / limited supply.

From this scarcity and other factors (mainly tradition and hope) stems bitcoins value, which is a purely external feature attributed to it by the people that use bitcoin.

Just like gold, bitcoin is a monetary commodity: divisible, fungible, quantifiable, recognizable, durable, storable and mobile -- backed by nothing, valued by many.

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As for reacting to people "not trusting" bitcoin (a very understandable first reaction), I usually explain to them that I'm confident that the crypto/network and incentive structures guarantee its scarcity and a reliable transfer of ownership. As for the value, I point them to the free market and explain the concept of supply and demand if necessary. If that doesn't suffice or the recipient is bored, I show them the offerings on silkroad.

[Gavin Andresen]

backing implies a promise to be able to redeem the unit of currency for something else

In a wisdom-of-crowds system, the promise comes from faith that somebody in the future will still find bitcoins valuable, and be willing to give you something in return.

True, it isn't a promise from one particular institution or person to redeem for one particular something else, so it doesn't fit your definition of 'backing.'  But I trust The Crowd more than I trust any one particular institution (especially institutions like governments, who have a long history of breaking promises).

See my recent "Is store of value enough?" blog post for more thoughts along these lines.

[molecular]

backing implies a promise to be able to redeem the unit of currency for something else

In a wisdom-of-crowds system, the promise comes from faith that somebody in the future will still find bitcoins valuable, and be willing to give you something in return.

True, it isn't a promise from one particular institution or person to redeem for one particular something else, so it doesn't fit your definition of 'backing.'  But I trust The Crowd more than I trust any one particular institution (especially institutions like governments, who have a long history of breaking promises).

See my recent "Is store of value enough?" blog post for more thoughts along these lines.

Not surprisingly, I agree with you on the trust angle. I trust bitcoin and gold a lot more (to retain their value) than any fiat or eGold currencies that involve having to trust small groups of people that can easily be influenced (or controlled) by other small groups of people.

I don't want to start splitting hairs on definitions of 'backing' but will read your blog post instead, thanks for the link.

[cbeast]

...Bitcoin Nation...

This should be the name of the revolution. T-Shirts... Magazine... podcasts...