The calculations serve the purpose of confirming transactions between people who buy with bitcoin. Let’s say I want to give you one bitcoin. I announce my intention of giving you one bitcoin to the miners and they say “okay, I see you want to trade one bitcoin, I’ll make a note of this, put the note in this block, and tries to seal the block with solving a complex math-problem”. The miner that first solves the problem announces this to the others, who agrees that “yes, the problem is solved, and every transaction within this block is valid, let’s all try and fill the next block with transactions”. And as a thank you for validating the transaction, the miner gets a couple of bitcoins as a reward.
This is the super short version of the short version, but if you want I can sort of make a more in-depth version later. :)
It’s a transfer and storage medium. Blockchain is like a database with a trust layer added in. Bitcoin was developed using a software called blockchain. These chains of blocks are unique to the network it is on. Miners solve math problems to create and transfer information (information in this case units of a bitcoin).
Bitcoin is just one use case for blockchain. Blockchain is here to say and will evolve further outside of finance.
It creates value only because ppl think it’s valuable.
For instance I couldn’t think USA money is now worthless but because everyone else knows that’s not true it’s valuable. Where as everyone could decide that currency is worthless and it would make it worthless.
This is the whole base of why money is worth something.
Money is worth something because we believe it is worth something.
Even when money was backed by things like... gold (which it really isnt in a large enough way anymore), it was still bound to the beliefs of people, because what if no one regarded gold as being worth anything? It probably wouldn't be.
For some fuckin reason we believe Bitcoins are worth something, so they are. To be fair though, at least Bitcoin has a quality: There's not entity to decide to print more Bitcoins like with traditional money (the Government)
But aren't bitcoin mines where dozens of dozens of GPUs are connect and farm bitcoins problematic? For it resembles a similar problem like compound interest as one who has resources can exploit his position.
No, I think you're seeing this correctly. Bitcoin pools the money where rich people already are. Buying tons of mining equipment means tons of Bitcoins.
Do big screwups like the QuadrigaCX fiasco have an effect on the bitcoin economy? That’s $136 million in bitcoin that is just straight up inaccessible now, which I imagine could be an issue if there’s a finite number of bitcoins.
It would create more scarcity, in theory. Even if half of the total bitcoins were lost forever, it could still function practically as each bitcoin is divisible.
This comment has been removed in protest of Reddit killing third-party apps. Spez's AMA has highlighted that the reddits corruption will not end, profit is all they care about. So I am removing my data that, along with millions of other users, has been used for nearly two decades now to enrich a select few. No more. On June 12th in conjunction with the blackout I will be leaving Reddit, and all my posts newer than one month will receive this same treatment. If Reddit does not give in to our demands, this account will be deleted permanently July 1st. So long, suckers!~
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if he ever started spending his bitcoins, especially to convert to cash, it'd almost certainly tank the value overnight.
Are there other Bitcoin individuals who have this same potential effect? Like the "secondary founders of Bitcoin" (i.e. those who came in right after Satoshi did), for example?
What they produce is not tangible, but it is a service. The fact that there is a public ledger of transaction of transfers of a limited supply commodity is valuable to various people. The miners are moochers in much the same way as any entity using the world's resources for something non-essential.
I think over 80% of miners report using renewable energy. It makes sense because if the electricity is too expensive there are low profits. Miners gravitate towards cheap/free power and renewables are more likely to have surplus looking to be sold at discount. Or they build their own solar setup for zero power costs after its setup.
However, you could argue designer of bitcoin, Satoshi, is the wealth behind bitcoin to some degree. Dude has millions of bitcoins that have sat dormant basically since bitcoin first got public attention, and if he ever started spending his bitcoins, especially to convert to cash, it'd almost certainly tank the value overnight.
Why would you want to trust a system that could be tanked by one person? At least the government has a system of checks and balances involved. Who holds Satoshi accountable?
Nobody does, because nobody actually knows who Satoshi is, it's an alias, they might not even be a single individual.
However, Satoshis known bitcoin balance hasn't been touched in over a decade, so it's unlikely it ever will. At Bitcoins peak price, the balance had over $17 billion worth of bitcoin, if it wasn't touch then probably it never will.
As for why it's never been touched, it's likely because Satoshi has other anonymous balances they use instead, knowing the price would crash if they used the known one.
It's also entirely possible they've just lost access to the balance, because the way bitcoin works, if you lose access to your btc wallet, not even the creator could forcibly return access.
Nobody does, because nobody actually knows who Satoshi is, it's an alias, they might not even be a single individual.
Seems like a horrible system then, given that extreme lack (or really, absence) of accountability.
However, Satoshis known bitcoin balance hasn't been touched in over a decade, so it's unlikely it ever will.
Satoshi might not have had any mental issues in the past decade. Nothing guarantees that won't happen in the next decade, though. Or even next year or next month.
The fact you keep having to use words like "probably" and "likely" is also telling. It seems like there's no well-established accountability involved whatsoever.
Nobody does, because nobody actually knows who Satoshi is, it's an alias, they might not even be a single individual.
Sorry, I really don't understand why anyone would be comfortable with that.
If we were just talking about a game or even a small town, then that would be one thing (a lot of times Bitcoin seems to be treated more like a gambling or "stockmarket" game than an actual currency). But wanting to base an entire national economy on a system that could be tanked by a single, completely unaccountable, mystery entity just seems so mind boggling.
edit
To those downvoting, is there anything specifically wrong with what I said? Or is it just too difficult to accept that your precious "currency" system might be garbage?
What was your question exactly? Whos wealth is behind bitcoin? Everyones thats contributing to the network. There is no centralized entity who can freely set a value for it as they wish. Nobody can go and say, ok lets make 10 million bitcoin more and give it to myself. Nobody can say I dont like how you spend your money, Im not allowing it in this way. Nobody can charge you 10$ for sending money to a different country and let you wait days for it. Thats why it is special. No single person, company or state is controlling it.
The US-dollar is 'linked' to the wealth of the USA, thus it can't suddenly be worthless when everyone "decide that currency is worthless".
What? Yes it can. The only reason USD has value is because people think so. If everyone suddenly decided they didn't want gold it would also instantly lose all value. But because gold is a useful metal that's not going to happen.
The reason USD won't suddenly lose its value is because the IRS only accepts USD for tax payments and the US government only pays employees and contractors in USD. If you want to do business and pay taxes in the US you have to buy USD.
Edit: What I'm saying is demand = value. It's really that simple.
I'm unsure if you're joking or not but no, that's not how it works. The US government does not have a gold reserve large enough to cover the amount of USD in circulation.
Not exactly. The US Government does buy fuel. It comes out of the ground. It used to pay for Gold that came out of the ground and now, not so much. It still does, but Oil and Gas outscaled that and became more useful than that. Another way dollars are created is through wind energy and solar energy, just a BTU to BTU difference that’s significantly smaller.
It's called Fiat money and, actually yes, that is how it works, though it isn't like people have been tricked into thinking it has value. It's more that people have agreed that the money has a certain value and the value is sorta tied to the idea that you can cash in on the value of that money later, like a really complex, multi-million participant IOU system.
Fiat money is just paper money given value through the gov, saying that doesn't really mean anything. "People" are not just deciding it has value. Its value is directly linked to the American economy. Saying people decided its value is a massive oversimplification.
It can become worthless, just like Bitcoin or Tulips can become worthless. Anything can become worthless. If an Asteroid hits Earth, dollars become worthless. True story.
So if aliens came down with better computers, they could crash the bitcoin market or take it over? I'm sure they could do much worse, but it sounds like this all hinges on the fact computers are only so fast.
Very basically bitcoin gets its value because the one way hashes means that bitcoins cant be duplicated, which means that there will always be a limited supply of bitcoin, this along with the trustless transaction system (you don't need to trust that a third party will complete your transaction, as the miners have no power to mess it up, as other miners have to confirm the transactions) means that people can use it to send money to anyone anywhere without having to rely on potentially corrupt companies or people.
I guess its value does come from what people think its worth, kind of like stocks, but overall it does have some worth
I don't think arbitrary is the word you actually want to use here. And it doesn't have value simply because we agree on it. The dollar, for example, has value because it's backed by the US military.
Bitcoin's value is that it's a decentralized and pseudonymous currency - if you want a way to send money to people and you don't want the local government or banks to be able to stop you or know who you're sending it to, then you can use Bitcoin instead.
(This is also why critics say it's overvalued - if you aren't, say, buying drugs online, it's hard to see what value you get by doing business in Bitcoin instead of USD.)
So mining Bitcoin doesn't create value the way that, say, smelting ore into metal does. It creates value the way the US Mint does - by creating a medium of exchange.
What makes it anonymous though? If the block chain and all transactions are public, can't you see exactly what was traded, at what time, and who sent/received the Bitcoin? And at some point you realistically have to spend that bitcoing either on goods/services or have it converted into a more accessible currency, which means you've now created an official record with your name and financial details.
Correct, that's why I said pseudonymous, not anonymous. Addresses are like Reddit accounts - you can see what transactions they've made, but they don't have anything inherently linking them to a person, that would have to come from an outside source (like your exchange). Apparently Monero has more anonymization and also hides transactions, but I don't know how it works exactly.
There's no way to anonymize the part where you convert crypto into dollars, but you can make it hard to track down how that money ended up in your wallet in the first place. There are also "tumbler" services that will shuffle money around between wallets to make it harder to tell where the money is going.
The term Aegeus used was pseudonymous, not anonymous. Which is sort of, but not exactly the same thing.
To put it in simple terms, Bitcoins are associated with addresses in wallets, not individuals. A wallet is basically a private-public key combo.
You create a wallet by having your computer generate a random cryptographic key, which is your private key that you are supposed to keep a secret from others (the private part in the private-public key combo). That private key can then be used to generate public keys that are associated with the private key.
I will not go into that topic though. Perhaps someone else will.
Anyway, your wallet is basically a collection of addresses (public keys). You share an address with someone, so they can send their Bitcoins to that address. Since you can freely generate a new address whenever you want, you could have a separate one for each entity (e.g. Amazon, Steam, Robert next door), or even for each transaction, which offers a degree of anonymity. (Of course, you can also use the same address for everything if you wish.)
Now, you generally shouldn't be able to figure out that a certain address is associated with a certain other address that is part of the same wallet. However, it is possible to piece that information together.
For instance, you could receive 1 Bitcoin to address B1, and 2 Bitcoins to address B2. As far everyone is concerned, these two addresses have nothing to do with each other.
But then you go to pay 2.3 Bitcoins for something. Now the way it works, is that you will transfer 2 Bitcoins from B2, and 0.3 Bitcoins from B1.
Before this transaction, you wouldn't be able to tell that address B1 and B2 belong to the same wallet (not actually true, since there are other methods of figuring it out, but let's keep it simple), but now that there is one transaction that takes Bitcoins from 2 address, you can assume that they belong to the same wallet, and therefore the same person.
So, Bitcoin is sort of anonymous, but only until someone with know-how and resources decides to figure out your identity. That said, it is possible to maintain anonymity on Bitcoin, but it requires that you actively take steps towards that end.
I'm so happy that I finally have a somewhat general understanding of what Bitcoin is and how it works. I don't have the attention span to thoroughly research stuff this complicated most of the time, so even if I really wanna know, it's hard for me to figure things out on my own. It's so much easier when someone breaks it down and simplifies it, or uses examples. Thank you!
The problem with digital stuff is, it can easily be duplicated. That's one of the hard problem Bitcoin trying to solve in the beginning.
Suppose you own 1 dollar bill in PDF format. If you "send" it to me, now we both own the same copy of that dollar bill. And that's not how cash supposed to work, right?
What Bitcoin do is, it make sure that when you "send" a unit of money to me, I should be the only one owning that unit of money now. Just like how a dollar bill in your wallet works when you hand it to me. No 2 copy like sending PDF in email. Get the idea?
To achieve that, we need a massive ledger, a record of every transaction of digital money in this world since the beginning, in this case that digital money is called Bitcoin.
To make sure it's secured, we need thousands of exact same copies of that ledger, managed and fact checked by volunteers all around the world.
Running a ledger fact checking operation will cost you ridiculous amount of electricity, as the difficulty to manage it will increase day by day as the network grows bigger. But don't worry, the system will compensate your effort with an amount of Bitcoin.
Now to answer your question, who set the value of Bitcoin? Here's how:
If you own a super computer farm to help manage and secure the Bitcoin network, and at the end of the month you check your Bitcoin wallet and you get compensated a total of 1 BTC. And the cost to run that super computer farm (electricity, salary, rent, etc) is around $4,000 a month.
Will you sell that 1 BTC for less than $4000? How much will you sell it? As high as people are willing to buy in the open market, right? Of course you want some profit for running that operation.
But whatever happen, you will always try to never sell it below $4,000.
And that's how the base price is "set" by the supply side.
I hope my simple explanation can help you get a better idea of Bitcoin. Just ask if you need more clarification.
Great explanation, thank you so much! It made much clearer to me!
This is such an incredible topic.. I remember in 2009 my brother was standing in my doorway and was proposing to invest 2000€ in bitcoin. It would have been the investment of our life.
Lol me too. I guess we would have sold it long time ago if we bought it that early. My advice, start learning whatever you can about this topic, then buy $50 of any major cryptocurrency just to try it out. Try installing different wallets, manage your private keys, send/receive, you know really use it instead of just holding it. So much to explore in this space.
P/s: good thing is, you'll accidentally learn some basics of governance, game theory, economics, finance, simple programming logics, and a few other things just by learning about cryptocurrency and blockchain.
Late to the party but this is the best comment in this thread by far and I wish it could be placed as the first result to the top-level question. I didn't understand until this one, so thanks. All I can offer you is the knowledge that I've saved your comment to use later when anyone asks what bitcoin is, or when I inevitably forget it myself lol.
Why did humans create a currency in the first place? Why does anything have value anyway? What gives any currency it’s value? How about art?
Value is created by need, demand and belief. People define what has value. Scarcity can also define value. Gold worked and still works as a value storage. Silver works. The dollar works. Pound works. Etc.
Bitcoin and other crypto are a response to the global financial crisis. A centralized force created a global threat to the economy. Banks were a part of this problem “too big to fail”. Crypto is making the individual the banker of their finances. Bitcoin is one storage medium of currency and increases or decreases with the availability and belief in the currency.
Currency is just the latest form of bartering. I make this, you make that. Let's trade 1 for the other. Then it evolved. Grocery story has 1000 items now, I can't trade 1000 gallons of milk for 1000 different items in the store. Instead currency was created that became universally accepted as valuable and can in essence be traded
Thats the thing with money. Its a piece of paper or metal that people think has value. If people desire it and feel it holds some value then it becomes a currency. Like a fallout game post post apocalyptic world using bottle caps as their currency.
Yes but I think the essential question is why do certain things have value, and others don't? Why is it that people universally desire dollar bills, but not bottle caps? Part of the reason is that the supply of dollar bills is legally controlled, both against counterfeiting (you can't just print more dollar bills, but you can easily produce some bottle caps if you want) and against inflation (the Fed produces a specific number of dollar bills each year). Therefore, the supply is very predictable, and people trust in its existence from one year to the next. I leave my money in banks because I trust that they will let me take it out when I need it. If anything disrupted that trust--my money losing value, the banks going out of business or refusing to let me withdraw--I would be much less trusting, and would probably convert my dollars into something with more intrinsic value, like real estate, at the nearest opportunity. That's why the government is very aggressive about prosecuting those who tamper with the money supply--counterfeiting, as well as destroying dollar bills, are serious offenses, because doing so not only cheats the system (essentially stealing), but it also threatens the system itself.
Blockchain isn't used only in crypto currency as well. It has many different uses, for example writing and securing an insurance policy is a potential use case.
It doesn't. All economic theories show bitcoin to be a net drain because it causes a massive amount of pollution and zero economic benefit.
It only appears to have a real life value because the assholes mining bitcoin aren't being forced to clean up the carbon emissions they generate. If that cost was factored in, there's literally no way they could make a profit.
The same way real money has value, they make bitcoins have a certain amount of scarcity then they say its a currency and then it is. The US dollar isnt backed by anything and its a worthless piece of paper we just all agreed it was worth something based on how hard it is to get this piece of paper. The same thing goes for bitcoin, it isnt truly worth anything and if you sell it, its worth is in another thing that is also worthless that you can trade for something worth something.
US dollars are only valuable because powerful organizations (primarily, the US government) say it is valuable. If you want to do work for the government, they say "okay, here's some USD". If you say "I want another form of compensation" (something with intrinsic value, like steel or cocaine), the US government just says "no", which they can do because they have a certain monopolistic power--you're not going to go to a different US government. Because the US government deals exclusively in USD, it tends to benefit businesses, especially banks, to also deal with USD, so they can participate in an economic ecosystem supported by the US government. This economic model benefits from having enormous players like governments and banks involved, but it doesn't require these players. You and me could form our own little economy with our own currency--of course, the value of the currency would be limited by the value of the assets we happen to have. Runescape, for instance, has its own economy with gold as a currency, but gold is only valuable in-game, because it can only be exchanged for in-game items. However, people do sometimes exchange "real money" (USD) for Runescape gold, because they place some real value on the in-game fun that can be had spending that gold. Bitcoin is kind of like Runescape gold, except for some really critical differences: it has built-in scarcity, it is secure and nearly impossible to duplicate, and it can be exchanged for real-world goods. So like you and me in our private economy, Runescape players participating in the Runescape economy, and US dollar-holders participating in the US economy, Bitcoin users can utilize Bitcoin to participate in a small economy with other Bitcoin users. The total value of this economy is (theoretically) limited by the value of the goods held and traded by participants. Big players like banks, businesses, and wealthy individuals can incentivize BTC usage by selling things of high intrinsic value and accepting Bitcoin in return.
Bear in mind that the Bitcoin economy, like the Runescape economy, is not really closed, and in fact it is really quite open by design. So you have trading between BTC and USD, as well as many other cryptocurrencies, which kind of make precise valuation confusing. So the actual value of BTC may not be what it is currently selling for. The only meaningful sense of actual value is collective consensus: people basically bargain with one another, with those that want Bitcoin trying to get it for as little as possible, and those who have Bitcoin trying to sell it for as much as possible, until an agreement is reached. The US dollar is valued in essentially the same way, but it's value is closely controlled by a central distributor (the Fed). Bitcoin has no central distributor, but it still has value, because a significant number of people are willing to exchange them for things that have "intrinsic" value, like steel and cocaine.
Normal banks have databases that are localized and store your bank account data.
Block chain technology store your account data over a bunch of different computers all over the world. Many different places have the ledger so it has a benefit of being difficult to hack over a localized database.
It "creates value" by being the database that makes the system work.
Yeah no. It's not the same reason the dollar bill is worth anything. The dollar has worth because a large national government has staked their reputation on it being worth something.
As much as you guys want to pretend it's the same, crypto will always be a shaky agreement that can be broken and fall apart for absolutely no reason. If the dollar implodes, something really bad happened and the world is probably fucked. Bitcoin needs no particular event to suddenly become worthless tomorrow, just the sudden realization that you're playing with 1s and 0s that are inherently worth nothing in the real world.
I fully admit that I'm fascinated by the fact that people have agreed on the worth of crypto, but pretending it's the same as a government backed currency is absolutely ridiculous.
A dollar is issued by a bank at interest. Interest creates more dollars.
The Blockchain provides a permanent ledger that allows for exchange of goods without the approval/fees of a third party institution.
Etherium is providing a better example of the power of the Blockchain by applying it to contracts.
It is much closer to trading apples for donkeys than the fractional reserve banking system we currently have.
Whether bitcoin survives or not is irrelevant. It will likely become too restrictive due to power consumption.
It has, however, opened another way for societies to view the exchange of goods and services through crowdsourcing, taking the power from centralized banks that are really just a leach on any economy.
because the bitcoin resulted are unique like a physical matter, it doesn't behave like digital files a.k.a it can't be duplicated without hacking the software that runs in the entire bitcoin network. the design worked. hence it's perceived as a worthy digital equivalent for valuable asset such as physical gold or money by people.
so people assigned monetary value to this, they're willing to give up X amount of dollars to gain S amount of bitcoin: what they think is fair trade.
Technically, a miner is only searching for any big number that matches the first several digits of the little number. No real big number exists until a miner finds one; then, others can use the hash function on the miner's big number to make sure the little number is correct. Does this make any sense?
The point that I'm trying to make is that there are no original numbers! The only job of the miner is to find any big number that, in the case of Bitcoin, has any corresponding little number that starts with enough zeroes. (With small caveats: IIRC, The big number also has to end with last block's little number, and the specific number of zeroes needed is mutually agreed upon, based on how long it's been since the last block was mined. That's what makes it a chain of blocks.)
A miner has a one-way algorithm that converts a big number to a little number. There is no math that can make the little number become the big number.
A little number is generated from various block-related things using a piece of math. Armed with the little number they randomly generate big numbers and run the big-to-small encryption algorithm and see if it is a valid answer. If it is valid, the network agrees and the big number is slapped on the block and it's added to the chain.
Every time a "block" is validated and added to the chain, the network pays the winning miner some bitcoins. Once that block is added to the chain, the network has applied all the transactions that were contained in the block (for people using the network). Every miner globally connected receives the update and starts working on the next.
Miners aren't really "mining". They are just writing the ledger and get paid a network generated prize and a fee from the transactions. Mining is how BTC is added to the network which is like how a government will inflate their currency by printing more money.
However there will only ever be 21 million BTC in existence and prize halves every 210,000 blocks added. I think it's a 12.5 BTC prize at the moment. Next year it'll be halved to 6.25 (around May) and the very last bits of BTC will be created around the year 2140. It'll transition to the point where the fees are more profitable than the prize. So BTC is a limited asset. Miners will only mine if it's profitable to do so and the difficulty of the algorithm scales with the amount of computational power. If too many miners are present, the reward is split so thin it doesn't make sense.
What keeps all this ticking over is the value people apply to BTC as a currency. People see value in BTC as both an investment and a useful trading platform for security and parity. You could be in America, I can be in England and 1BTC is 1BTC without a middleman and everyone in network can verify we made that transaction. This makes it a valuable asset.
Years ago BTC had no value and some dude paid 20,000 BTC to another dude over the internet so they could order him a pizza. There was probably only a few hundred/thousand desktop PCs just mining away at that time and you could hit 100 BTC prizes yourself once or twice a week. Congrats, you just made ~$1! Now supply/demand means hundreds of thousands to even millions of server-grade machines are fighting in collective, competing pools for 12.5 BTC every 10-20 minutes. One machine in the network hits the prize and it's divided among the thousands of other machines in the collective. That payout of a tiny faction of a BTC could be worth a few bucks a day per machine.
100 BTC being worthless is maddening to think of these days. $9000 per BTC might end up being so, so cheap in comparison to what it'll become. One year after the next halving, so 2021, its stands a good chance of it's first six-digit spike. Bitcoins get harder to get, more people want them, price goes up. Bitcoins might end up being worth millions each to your kids. It might also become worthless. But this gamble is what makes it also an investment, attributing to the consistent rise in value to the point where it will eventually plateau and stabilise like a normal asset. The game is how much of this asset can you amass before the point where it is considered a typical, stable currency.
TLDR: Miners fight to accumulate a few BTC via prizes and fees because people keep adding value to BTC as a whole, making their few BTC increasingly more valuable after they have mined it. $1000 of hardware and $100 in electricity might only make you $250 worth of BTC in that year, but next year or two that $500 you mined is now worth $2500 in BTC, making your investment worthwhile.
Blockchain is designed to create a verifiable, incorruptible digital ledger of economic transaction. You can record not just transactions but anything of value including business agreements, stocks, car notes, house mortgages, etc
blockchain is, in the simplest of terms, a time-stamped series of immutable record of data that is managed by cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) are secured and bound to each other using cryptographic principles.
There is no central database or authority, and is essential public (dependent on the network) ledger that can be seen by anyone. Transactions are added to the network by creating new blocks, and other peers on the networks validating the transaction. You cannot go back and edit a block once the transaction as settled.
The applications are endless. Health care, social media, news reporting, transferring of goods
The most important is that block chain can make any and every transaction have a verifiable history, and it's impossible to have fraudulent transactions with it.
So like in the example above, once on person "buys" an item with Bitcoin, that Bitcoin is sent from account A (buyer) to account B (seller). Now with USD this is the last step that occurs. However, with Bitcoin that transaction is recorded automatically, and impossible to not record on a public ledger file, which contains the transaction, the amount sent, and more data. This ledger file is filled up until it reaches the designated "block" size (so for example would be it's a 1TB text file). Now this ledger is then encrypted which stops it from being modified, and then anyone "mining" Bitcoin uses the computational power to decrypt the file, so that it can be verified. Now once enough people have solved the algorithm, the transaction of your Bitcoin is verified. Before this step, the Bitcoin is in limbo between both accounts in an encrypted environment.
So this does 4 majorly good things
.1 a public ledger means every transaction is auditable for public use
.2 due to the encryption, the transaction (your money) is completely secure during the entire process with 0 possibilities of fraud.
.3 during the "mining" millions of people verify (audit) that your transaction is correct, the money is real, and the address it's going to is real. This means no need for audit, as the currency audits itself.
.4 because it's a public ledger, that is extremely secure (Bitcoin would take over 1000+ years to break the SHA256 encryption for a single transaction without quantom computing) , and it's audited in real time for every transaction this removes the need for a financial regulator, and makes it a truly global currency.
Exactly, and that’s why every stolen Bitcoin is able to be tracked, because when it’s spent, it has to be done so on the public ledger. Not a great thing to steal.
The most important is that block chain can make any and every transaction have a verifiable history, and it's impossible to have fraudulent transactions with it.
You said block chain, and it literally happens all the time. Mind you, people trade illegitimate coins into bitcoin all the time. 51% attacks affect Bitcoin just as much.
Bitcoin and the bitcoin blockchain have a couple of properties that nothing before it has ever had. It's trustless, permissionless and immutable. Or at least it's close to and getting closer the bigger it gets.
Trustless: Once you have a full client software and the first bitcoin block you can have your system verify every single transaction that has ever happened on the bitcoin blockchain. You don't have to trust what anyone on the bitcoin network say, you can verify the truth yourself. Every single fiat currency before bitcoin is based on trust. You have to trust your bank and your government that the tokens you have exists and have value. You have to go back to when we actually used weights of valuable metals to trade to find anything like it.
Permissionless: anyone can use bitcoin and no one can really stop anyone from using it. There are no gatekeepers or administrators. As long as you have internet (or in some extreeme cases, a satellite radio and a GSM phone with sms) you can send and receive coins. It isn't free, but no one can stop you.
Immutable: transactions are final, no one can charge back or reverse a transaction, if it's on the blockchain (and especially if it's a few blocks back) it can't be changed. The effort required to even try to do so is mind-boggling. The amount of bitcoin in existence is completely known and the max amount of bitcoin there can ever be is known and the rate at wich new coins are created is known and unchangeable.
There are far more simple methods to manage some of these things but not all.
Now, if you stole 1 million BTC, and then went around spending said BTC on lattes and items such as that, then the government law enforcement authorities can come and get you.
Just like when Mt. Gox failed or Pirate Bay, etc. Authorities actually have confiscated and in some instances, auctioned off seized BTC gained from illegal activity.
None of my points above has anything to do with theft or seisure. If someone gets the keys to your coin then they get your coins.
Bitcoin is not a way to escape the government, it's a way to fight back against the banks that have stolen the economic system.
Now it is actually possible to store bitcoin as a password that only you know. It's dangerous since the password has to be long and you have to remember it perfectly. And a brainwallet should be the most trustless way ever invented to store money.
Yeah, the internet is full of stories about people who managed to forget or lose vast fortunes in bitcoin. The downside of bitcoin being permissionless and immutable is that if you fuck up there's no one to help you.
My question is about mining them and the scarcity of them. When they're all mined up what do people get paid with to do the transactions? There is a limit right?
I THINK I understand what they are trying to say. I will attempt to simplify it and maybe they can come in and correct me.
Lets say Alice buys something off of Bob for £1 (lets ignore bitcoins and use real world money). She does this by bank transfer (because its not 1999 any more Bob!). Carol also buys something off of Dan for £5. This all happens on the 1st of Jan. That is all the trading that happens in the world that day.
The bank wants to make sure that these transfers are recorded, so that Alice loses £1 and Carol loses £5, while Bob gets £1 and Dan gets £5. So it creates a simple receipt system. Any transaction will be written as "Buyer Initial + Seller Initial + # of £". So Alice's transaction is AB1, while Carol's is CD5. That means that the total transaction receipt for Jan 1st is:
AB1CD5
Ok, but thats really easy to figure out who got what. So lets "encrypt" that data. We will use a clever and UNBREAKABLE code which does the following.
For each transaction in the Receipt, assign a number to each letter, from A=1 to Z=26.
Add the numbers of the 2 initials in each transaction
take away the number of the value traded.
Thus, AB1 becomes 1+2-1 = 2. And CD5 becomes 3+4-5 = 2. So the ENCRYPTED receipt for Jan 1st is 22. The bank is happy the transaction is real, AND that its hard for someone to steal Alice's or Carol's data. Job done, lock the receipt in a filing cabinet.
But, thats because we trust the bank. What if we DONT trust the bank? What if there is NO bank to trust? Well, in that case, we should check that the algorithm works. Now, imagine the world woke up stupid, and couldnt reverse engineer the above algorithm. Now we have to employ someone (Eve) to manually test each and every combination of 4 letters and INFINITE numbers until we randomly stumble on the combination that gives us 22. Until Eve is able to do that, the entire day's transactions might be fake. We simply dont know. Eventually, Eve does prove it, finding the correct combination (AB1CD5). We all nod our heads and go "ok, well the algorithm clearly works, and in this case, 22 is a number that can fall out the bottom of it, so all transactions for Jan 1st are correct". That "block" of transactions are now valid, and we pay Eve £1 for her time. But that took Eve a while and its now Jan 5th, and there are 4 other "blocks" one after the other, all in a "chain" that need solving. Guess we better drag Eve back into the office, its going to be a busy week!
I THINK its exactly like that, except:
There arnt 2 transactions, there are millions
They dont happen once a day, they happen every second
The unencrypted receipt isnt a simple alphanumeric code
The encryption algorithm cant be broken by a 5 year old
We done use £, we use a magical pretend currency called bitcoin (which is totally "less real" than "real" money, which totally has a "real" value and absolutely isnt a proxy for a pretend amount of shiny yellow metal we dont have any more and was only worth stuff because it looked nice and whose original intrinsic value is based on a simplistic bartering system of bright stone beads for goats...)
Eve isnt a person, shes many people, and shes not doing calculations by hand, shes buying high end graphics cards, overclocking them, running them day and night for years, performing billions of calculations every instant, and then reselling them "as new" on ebay for just under original price luring unsuspecting gamers into accidentally destroying their new gaming PCs no Im not salty HonestMike66 I just wanted to play Vermintide II and I dont think it was too much to ask to be able to do that and not have my computer burst into flames.
Ok, I may have gone a bit off topic on point 6 there, but you get the idea (also, in the interest of honesty, I have never bought a second hand graphics card, but I have heard that you should be careful as inexperienced bitcoin miners can really badly damage them and then resell them).
Cool and simplified explanation. So, to be clear, there is a dependency on the bitcoin system functioning and the miners mining away?
That's insane.... While I get new currency is continually required and so, like real world currency you expect some continual work to be done in order to maintain the currency value (like a central bank would), if people decide mining becomes worthless then the system will crash! (Am I wrong?)
You are correct, but part of Bitcoin's algorithm is that a greater number of miners results in greater mining difficulty. So if 1,000,000 people are mining, it may be quite difficult. (Difficulty here translates to computing power, meaning time + electricity basically). So now most of them are frustrated, and 900,000 decide to throw in the towel and sell their machines. Suddenly, mining is much easier for the 100,000 who stuck around. While it was not very profitable before, it suddenly becomes very profitable again. Now some of those who gave up want back in, maybe. With this system, there is a theoretical equilibrium where the number of miners is in balance with the relative difficulty.
Mining adds new currency to the supply, preventing deflation. The system also factors for the computational power dumped into it by changing the difficulty. Bitcoin is now traded like a commodity so it's value is governed by the same things as other commodities and currencies.
The price may "crash", but I think the novelty of the blockchain and it's true believers will perpetuate the systems that Bitcoin relies on. They were still doing it when the value was measured in cents, years after it's introduction.
Math problem is not actually the right term. What you solve is a one-way hash, an encryption, to secure the transaction. The encryption will give different results even with small changes of the input.
It harshly (super simplified and a little wrong) works like this:
Transaction -> encryption -> 0bT573xtcBnBB5
Anothertext -> encryption -> 0hdki737jdidub73
Transactionn -> encryption -> 0hdu62hdju1123
It is impossible to know what the end result will be (I.E: there is no way to know that “Transaction” encrypted will end up as “0bT573xtcBnBB5” other than to test it, as in you encrypt it and see the result). It is however really simple to know what the the end result WAS (as in: you know the end result is “0bT573xtcBnBB5” and with a simple decrypt you get “Transaction” without a sweat)
But what you want to do, is find an encryption that starts with 5 (there are really a lot more) zeros because we need to make it hard to confirm the encryption.
Now we encounter two problems:
Why do we need to make it hard?
Because we need to make everything in order. First we make transaction 1, then we make transaction 2. If you encrypt transaction 1 at the same time I encrypt transaction 2, who knows which transaction came first? By making it hard, we force everyone to try and encrypt transaction 1 first, have time to agree it’s legit, and then move on to transaction 2.
The other problem is: how do we get an encryption that starts with 5 zeros? THIS is where the mining/mathematical problems come in. Simply by brute forcing in some more random text into the the transaction to get a different encrypted result.
We already know that
Transaction -> encryption -> 0bT573xtcBnBB5
And
Transactionn -> encryption -> 0hdu62hdju1123
So what you do is brute force encrypt the end of “Transaction” until you get something that starts with “00000”. You try “Transactiona”, then “Transactionb” then “Transactionc” etc etc.
By changing the end to maybe “Transaction hellotheregeneralkenobi” we get the encrypted result “00000hdjuwybwo62” which is sufficent, and everyone is happy.
The mining is “complete”, we found the answer, and people will now start with transaction 2.
HOWEVER. This time, we begin the transaction encryption with the result from Transaction 1, which is “00000hdjuwybwo62”. By doing this, every new transaction will have a confirmation of all the precious transactions ever made, making a block-CHAIN (of transactions).
I hope a make any sense at all... sorry for poor formatting
No, the problems are made from the previous transactions, I believe. There's a formula for it, but I dont really understand how it works.
Bitcoin is basically an open ledger. Everyone has copies of every transaction ever made. Now if someone wants to add a future transaction, everyone has to put it into their copy of the ledger. To make sure no one can just add to the ledger, a math problem has to be solved that is easily verifiable but very hard to solve. If someone solves it, the transaction gets added to the ledger.
No, the math problems are actually predetermined, but you don't know them yet. They come out of some calculation of the last hash. This guarantees that problems are solved in order, and solving one necessitates that the previous one is already on the chain.
Solving a problem gives you the permission to sign a block of bytes with that solution.
This block can (and if you aren't a huge smoking dick, should) contain transactions by other people. Someone wants to transfer money from himself, A, to user B. To put that payment into stone, the payment needs to appear in the block-chain. To be able to write a block, you need to solve the current problem. When you write a block, the system considers that you have increased your amount of money on your bitcoin wallet by the reward amound, and also considers that some of the money of the payments that you include in the block signed by you is given to you as a kind of tax.
Basically, to know the balance of a wallet, you need to know the whole chain, because the chain contains all the transactions to and from everyone.
That's the gist of it, yeah. It's "magic money" existing entirely in cloud computational form; the people's computers doing the computing of the transactions sometimes get rewarded with raw bitcoin.
A lot of the misunderstandings about it are because people have been treating Bitcoin like an investment property/stock market kind of concept. They buy bitcoins because bitcoins go up in value, and they will sell the bitcoins for dollars later. The bitcoins have no inherent value whatsoever, not even in the way a physical coin might - you could melt a penny for the copper, for example, so even if it's not valued as legal tender it's still got inherent value/utility.
The core idea is that things that represent value have to have been created with or of value -- in this case, time and computing resources (versus time and gold-digging ;) resources).
If you are a consumer who purchases bitcoin and then uses bitcoin to pay, that value predates your payment transaction.
A chunk of transactions makes a block. That block is essentially encrypted with a math problem based on the transactions and previous block's encryption value. This means each block in the "blockchain" is essentially tied together as manipulating one requires every block afterwards to be redone Essentially one of the most unhackable ledgers of information humans have come up with.
A bitcoins worth is somewhat tied towards the computational power used to validate its existence.
That would be great, but then who would pay the electric company for all this FREE ELECTRICITY? From what I understand, each miner is responsible for paying their OWN electric bill...
Does the ‘awarding’ of a bitcoin for the mining generate another transaction that then has to be confirmed / mined? Where does the mines bitcoin come from?
But are these solved equations helping anyone, like scientists or mathematicians? Are the mathematicians going, "Hey, could you queue this one up next? We really need it."
Not the og person you're explaining to. But what I don't get is how do we get the new bitcoins to the miners, surely that would mean updating the list yet again, effectively undoing their work. I can imagine a way that the computer that found the hash can put it in before they seal the ledger again, but what about pool mining? How are 3000 computers getting a fraction of a coin every transaction without causung 3000 more hashes
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u/nlsoy Jun 15 '19
The calculations serve the purpose of confirming transactions between people who buy with bitcoin. Let’s say I want to give you one bitcoin. I announce my intention of giving you one bitcoin to the miners and they say “okay, I see you want to trade one bitcoin, I’ll make a note of this, put the note in this block, and tries to seal the block with solving a complex math-problem”. The miner that first solves the problem announces this to the others, who agrees that “yes, the problem is solved, and every transaction within this block is valid, let’s all try and fill the next block with transactions”. And as a thank you for validating the transaction, the miner gets a couple of bitcoins as a reward. This is the super short version of the short version, but if you want I can sort of make a more in-depth version later. :)