Open thread: Bitcoin and similar currencies

2013-12-11

in Economics, Geek stuff, Internet matters, Security

This article is a good explanation of how the Bitcoin protocol actually works. This one describes some of the problems the Bitcoin system is experiencing.

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{ 12 comments… read them below or add one }

. December 11, 2013 at 1:37 pm

Many people claim that Bitcoin can be used anonymously. This claim has led to the formation of marketplaces such as Silk Road (and various successors), which specialize in illegal goods. However, the claim that Bitcoin is anonymous is a myth. The block chain is public, meaning that it’s possible for anyone to see every Bitcoin transaction ever. Although Bitcoin addresses aren’t immediately associated to real-world identities, computer scientists have done a great deal of work figuring out how to de-anonymize “anonymous” social networks. The block chain is a marvellous target for these techniques. I will be extremely surprised if the great majority of Bitcoin users are not identified with relatively high confidence and ease in the near future. The confidence won’t be high enough to achieve convictions, but will be high enough to identify likely targets. Furthermore, identification will be retrospective, meaning that someone who bought drugs on Silk Road in 2011 will still be identifiable on the basis of the block chain in, say, 2020. These de-anonymization techniques are well known to computer scientists, and, one presumes, therefore to the NSA. I would not be at all surprised if the NSA and other agencies have already de-anonymized many users. It is, in fact, ironic that Bitcoin is often touted as anonymous. It’s not. Bitcoin is, instead, perhaps the most open and transparent financial instrument the world has ever seen.

Anon December 11, 2013 at 10:22 pm

It’s pretty funny that all those Silk Road customers bought their drugs with the only currency in the world where every transaction is permanently logged and where every single user gets a copy of the log

. December 14, 2013 at 8:12 pm

The Bitcoin Ideology

One could argue that bitcoin isn’t chiefly a commercial venture at all, a funny thing to say about a kind of online cash. To its creators and numerous disciples, bitcoin is — and always has been — a mostly ideological undertaking, more philosophy than finance.

“The ideas behind it — that’s what attracted me,” said Elizabeth Ploshay, a regular writer for Bitcoin magazine, which describes its mission as being “the most accurate and up-to-date source of information, news and commentary about bitcoin.” And if the magazine has a mission, so, too, does the subject that it covers. As Ms. Ploshay explained it, bitcoin isn’t merely money; it’s “a movement” — a crusade in the costume of a currency. Depending on whom you talk to, the goal is to unleash repressed economies, to take down global banking or to wage a war against the Federal Reserve.

. December 22, 2013 at 11:04 pm

Why Charles Stross Wants Bitcoin To Die In a Fire

“SF writer Charles Stross writes on his blog that like all currency systems, Bitcoin comes with an implicit political agenda attached and although our current global system is pretty crap, Bitcoin is worse. For starters, BtC is inherently deflationary. There is an upper limit on the number of bitcoins that can ever be created so the cost of generating new Bitcoins rises over time, and the value of Bitcoins rise relative to the available goods and services in the market. Libertarians love it because it pushes the same buttons as their gold fetish and it doesn’t look like a “Fiat currency”. You can visualize it as some kind of scarce precious data resource, sort of a digital equivalent of gold. However there are a number of huge down-sides to Bitcoin says Stross: Mining BtC has a carbon footprint from hell as they get more computationally expensive to generate, electricity consumption soars; Bitcoin mining software is now being distributed as malware because using someone else’s computer to mine BitCoins is easier than buying a farm of your own mining hardware; Bitcoin’s utter lack of regulation permits really hideous markets to emerge, in commodities like assassination and drugs and child pornography; and finally Bitcoin is inherently damaging to the fabric of civil society because it is pretty much designed for tax evasion. “BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions,” concludes Stross. “The current banking industry and late-period capitalism may suck, but replacing it with Bitcoin would be like swapping out a hangnail for Fournier’s gangrene.”

Why I want Bitcoin to die in a fire

. December 22, 2013 at 11:05 pm

Bitcoin has a dark side: its carbon footprint

At today’s value of roughly $1,000 per bitcoin, the electricity consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by Bitcarbon.org. That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the realm of possibility given the artificially limited bitcoin supply – this impact rises to 8.25 gigatonnes, or 30 percent of today’s global output, and equivalent to that of China and Japan combined.

anon February 25, 2014 at 10:46 am
. February 28, 2014 at 4:49 pm
. March 10, 2014 at 12:16 pm

The problems began with the discovery of a flaw in Bitcoin’s code at the start of February. Bitcoin is, in effect, a giant shared transaction ledger, recording who owns each individual unit of the currency at any one time. Everyone must use the same copy of the ledger—known as the “blockchain”—to prevent the same coins from being spent twice. The flaw, known as “transaction malleability”, muddles up the ledger so that successful Bitcoin payments do not appear to have been made. This could make it possible for hackers to trick badly-coded software—such as the proprietary Bitcoin wallets used by some exchanges—into sending money repeatedly.

. March 17, 2014 at 3:28 pm

Allegations of theft and hacking continued to swirl around Bitcoin, a “cryptocurrency” with a devoted following. Mt. Gox, one of the currency’s biggest trading platforms, which is based in Tokyo, shut its website amid rumours that around 750,000 Bitcoins have been stolen. A joint statement to “the Bitcoin community” by several other big exchanges insisted the system was still “trustworthy”, but that “there are certain bad actors that need to be weeded out”. See article

. March 30, 2014 at 5:09 pm

This set-up is the first workable solution to one of the more nagging problems of the digital realm: how to transfer something of value from one person to another without middlemen having to make sure that the item is not copied or, in the case of money, spent more than once? And Bitcoin does the trick while being open (unlike conventional payment mechanisms, which aim for security by shielding themselves from outsiders). This means that third parties can make use of Bitcoin’s features without having to ask anyone for permission—as is the case with the internet.

Such “permissionless innovation”, in the jargon, should in time result in a cornucopia of applications. Bitcoin’s technology could be used to transfer ownership both in other currencies and of any kind of financial asset. This, in turn, would allow the creation of decentralised exchanges which let asset holders trade directly. And money could be “programmed” to come with conditions: for instance, it might be released only if a third person agrees.

BITCOIN, to its most ardent fans, is more than a useful way to pay for drugs. It is also a technological marvel that could disrupt much of the consumer-finance industry. But is it money? The Bitcoin economy keeps growing, despite the periodic disappearance of large quantities of currency in hacker heists. The total value of Bitcoins in circulation has risen to $7.9 billion, from just $490m a year ago, while daily transaction volume is up by almost 60%. If Bitcoin aspires to match dollars and euros for money-ness, it will need to be more than just a Mastercard for nerds.

That other currencies remain the medium of account has so far been the Bitcoin economy’s saving grace. If Bitcoin matured into a complete currency, with large numbers of workers using it as their medium of account, then its inflexibility could bring economic havoc. Money-supply “shocks”, like the disappearance of Mt Gox, could set off a systemic collapse. Given a loss of faith in exchanges, users might withdraw their coins in a panic, leading to a dangerous decline in transaction volume. Such hoarding could threaten Bitcoin’s status as a medium of exchange, leading to its complete demise as a currency.

Reputable exchanges with large institutional holdings could help stem such panics by advertising a willingness to sell their Bitcoins to meet liquidity demand. Yet because Bitcoin reserves are finite, users may not find the promise credible. By contrast, central banks with the inexhaustible resources of the printing press face no such inconvenient constraints.

. December 27, 2014 at 4:39 pm

Bitcoin Is Not Anonymous After All

“The Bitcoin system is not managed by a central authority, but relies on a peer-to-peer network on the Internet. Anyone can join the network as a user or provide computing capacity to process the transactions. In the network, the user’s identity is hidden behind a cryptographic pseudonym, which can be changed as often as is wanted. Transactions are signed with this pseudonym and broadcast to the public network to verify their authenticity and attribute the Bitcoins to the new owner. In their new study, researchers at the Laboratory of Algorithmics, Cryptology and Security of the University of Luxembourg have shown that Bitcoin does not protect user’s IP address and that it can be linked to the user’s transactions in real-time. To find this out, a hacker would need only a few computers and about €1500 per month for server and traffic costs. Moreover, the popular anonymization network “Tor” can do little to guarantee Bitcoin user’s anonymity, since it can be blocked easily.”

. April 25, 2016 at 5:23 pm

Hence the hype around “fintech”—the hope that the whole system can be overhauled by disruptive innovators, much as Uber is revolutionising the taxi business and Airbnb is taking on hotels. Fintech firms operate in many areas, from digital payments to automated wealth management. But at a London Business School conference this week, the greatest excitement was reserved for blockchain technology. A blockchain is a “distributed ledger” under which transaction records are held by a wide number of participants in a network; it is the technology behind Bitcoin, a digital currency.

Technology experts seem to think a distributed ledger is more secure. A hacker would be required to break into a wide range of sites rather than a single, central register. But there are doubts over whether such a system could handle the sheer volume of payments in the financial system—hundreds of thousands of transactions every second.

http://www.economist.com/news/finance-and-economics/21694531-all-money-spent-technology-banking-not-efficient-high-tech-meets-low

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