help! Bitcoin Article to be published, please review

[Anonymous]

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?

[1713943342]

1713943342

[FreeMoney]

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

Bitcoin accounts are private and not subject to outside inspection and therefore account monitoring or confiscation for any reason is not possible.

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.

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.

[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.

[caveden]

I wouldn't try to explain how cryptography works.

[FreeMoney]

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.

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.

[Anonymous]

I wouldn't try to explain how cryptography works.

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.

[Anonymous]

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.

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.

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....

[Insti]

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.

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.

[Insti]

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....

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

[Anonymous]

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.

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.

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"?

[Anonymous]

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....

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

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.

[Insti]

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"?

•   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.

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.

[FreeMoney]

•   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.
 

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.

[Anonymous]

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?

[kiba]

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.

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.

[Anonymous]

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 ....

[kiba]

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.

[Anonymous]

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.

[theymos]

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.

[kiba]

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).

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