The number zero and Bitcoin

[ClaytonB]

The number zero and Bitcoin

It's a long but worthwhile read. Breedlove covers a lot of "big ideas" in this piece but don't get scared away, it's worth following through to the end.

A lot of people in the liberty movement are, naturally, suspicious of Bitcoin. After all, a pure digital money seems like the dream-vehicle for a world central bank. Ironically, the globalists and their central banks are terrified of Bitcoin and want to stamp it out. Unlike central banking and fiat money, no one will ever be compelled to use Bitcoin. A Bitcoin-based economy would still allow you to use gold and silver as hand-to-hand money. But if Bitcoin survives its infancy, you can be certain that it is a poison-dart pointed straight at the heart of the central-bank dragon. Whether or not you "believe in" Bitcoin, I would encourage you to consider the possibility that Bitcoin is a powerful ally of liberty.

Another post by Breedlove which I am currently reading: Bitcoin and the Tyranny of Time Scarcity

[ClaytonB]

Cross-posting from Liberty Authors (I had an issue with inserting links on the forum):

For the sake of less techie people on the forum, let me give an accessible breakdown of what Bitcoin is and why it's not just "money that can be invented out of thin air".

Full disclosure: I own a very small amount of Bitcoin, much less than one full Bitcoin.

1) Bitcoin is a network. I emphasize this point because a lot of people get confused with the blockchain terminology and think that Bitcoin is its blockchain. The Bitcoin network uses a blockchain but Bitcoin itself is the network.

2) Bitcoin is a peer-to-peer network. What this means is that the communications between nodes in the network are not routed through a central server. In this respect, Bitcoin is like BitTorrent. When you connect to the network, you are not connecting to a main server, you are sending out a request for a list of nodes currently on the network and you connect to those. It is crucial that you connect to multiple nodes and not just one, since if you accidentally connected to a single malicious node, it might try to defraud you (although you are protected against losses as long as you don't do anything stupid).

3) Bitcoin is a permissionless network. This means that the network does not maintain blacklists and anyone can connect. This is an important point because a network that chooses who can or cannot join is not compatible with the goal of an open (free as in liberty) money. A node or "full node" is a computer that is connected to the Bitcoin network and is running a Bitcoin client.

4) The Bitcoin network has one primary purpose: to maintain a secure, distributed, public ledger of transactions. In order to achieve this goal, the Bitcoin network maintains a data-structure called the blockchain. The blockchain is a sequence of blocks, starting from the very first block mined by Satoshi (called the Genesis Block). Each block added to the blockchain has a digital signature of all previous blocks. So, when adding block 1,001 to the blockchain, it will have a digital signature that validates blocks 0 to 1,000. And so on. That is what makes it a "chain".

5) Each block is just a group of transaction records specifying transfers from one Bitcoin address to another Bitcoin address. A Bitcoin address has some similarities to the numbered Swiss bank account. Anyone can transfer funds into an address with just the address itself. But to transfer funds out of the address, you must possess a cryptographic key that is mathematically bound to that address. You can trade away the entire contents of a Bitcoin address by simply giving someone the key. This is what is happening if you hand someone a USB stick with "Bitcoins" on it. You're just giving them the key to that Bitcoin address so they can transfer the funds out of that address into an address they control. In most cases, however, you are spending a portion of the Bitcoin address and sending the "change" into some other address you control. In this respect, Bitcoin addresses are different from a Swiss bank account in that they are "single-use". See here for more info.

6) The Bitcoin ledger is distributed, meaning, every node on the Bitcoin network has their own, independent copy of the ledger.

7) The current balance of every Bitcoin address in the ledger is calculated by downloading the blockchain, starting at Block 0, and sequencing through every block since then. This is a one-time synchronization that is performed only by full nodes on the network. If you install a Bitcoin app, you won't need to do this.

8) Because it is distributed, independent and peer-to-peer, no one actor in the Bitcoin network can dictate to the others. "You must use my copy of the ledger!" If you're a fraudster, you will simply be ignored. When a new block is "mined" (discussed below), it propagates through the network but each node only adds that block to their copy of the blockchain after it has been independently validated.

9) The process of block validation includes several components but the most important are verifying (a) that the block miner performed the amount of computational work required to mine this block (this is the "proof-of-work") and (b) that all transactions in the block are valid, that is, every source Bitcoin address has sufficient funds for the transaction and the cryptographic signatures authorizing the transaction are legitimate, etc.

10) The number of Bitcoins that could ever exist is set at 21 million. Some people in the hard money community are suspicious of this limit -- when the mining of new coins "runs out", couldn't the network just move the number of possible Bitcoins to some higher number, just like the Fed does when they want to print new money? The answer is that it can be increased but only by a process known as a fork. A fork occurs when some portion of the network "splits off" from the original network and starts validating blocks in a new manner.

The reason I emphasized that Bitcoin is a network is that a fork is all about splitting the network, that is, persuading some portion of the network to break away from the current block validation criteria and switch to some new criteria. For example, Bob and Alice are free to form their own blockchain between themselves at any time. Their own little "micro-crypto-network". But since there are only two people participating in that network, it's not very useful. No one would be interested in holding the coins in that network.

So, this shows that a fork is really about what people will want to adopt. For each node currently in the Bitcoin network (most of whom we can safely assume are Bitcoin holders), let us ask: does the operator of this node benefit or lose if the number of Bitcoins is increased? For every Bitcoin holder, increasing the number of Bitcoins that can exist is a loss for exactly the same reason that dollar inflation is a loss for dollar holders. Since no nodes in the network stand to benefit from increasing the number of Bitcoins that will exist, how would a proposal to move to a new fork with a higher number of Bitcoins be received? How would you persuade the Bitcoin nodes to "follow along" to your new fork with a higher limit? This is why such worries are ill-founded. In a very real sense, Bitcoin is the hardest possible money. Its supply cannot be expanded at all beyond 21 million, unlike even gold and silver.

11) The concept of "proof-of-work" might seem a little bizarre to those who are new to it. But let's walk through it. Bitcoin's proof-of-work actually originates in spam-filtering. Adam Back developed a technique called hashcash that worked as follows. In order to send me an email, you must first calculate a small cryptographic puzzle and send me the solution to this puzzle along with the email you want me to open. The cryptographic puzzle has the following properties: a claimed solution can be checked on my email server in a few microseconds or less but calculating the solution will require, say, one full second on your computer. One second is not a very long time for a legitimate user to wait (and the CPU can just perform this in the background, the user does not actually have to wait). The differential in the computational time required to find a solution versus the time required to check a solution is the basis of the hashcash spam filter. It requires millions of times as many CPU clock cycles for you to find the solution as it does for me to check it. So, if you are a spammer, to keep my email server busy, you would have to have millions of CPUs.

Bitcoin takes the hashcash idea and leverages it many times over. In some sense, the blockchain is the world's most powerful spam filter! Anyone is free to broadcast a "mined block" to the Bitcoin network, but only a block that has a high enough difficulty factor (this is the cryptographic "proof-of-work") will be accepted by the network. All other blocks will simply be ignored. They won't even bother validating the transactions in the block because it doesn't matter, you didn't achieve the required difficulty factor.

12) Mining is best thought of as a distributed lottery. The winner of the lottery gets to publish the next block and receives the block subsidy plus the transaction fees for all transactions included in the block. At a high level, the mining process works as follows. Imagine some input x and some function f that calculates an output y from x. So: x -> f -> y. The function f used by Bitcoin is a cryptographic function that has the following property: given x, it is easy to calculate y, but given y, it is very hard (effectively impossible) to calculate x. The difficulty factor d is just a number and a valid block must satisfy the property that y is less than d. So what a miner is doing is choosing a random number x, calculating x -> f -> y, and then checking whether y is less than d. It's actually not complicated. What is complicated is the details about why it is difficult/impossible to calculate x from y given f. Since it is so hard to "reverse" f and calculate its input from an output, this means that the miners cannot just choose some y < d and find an x that satisfies that constraint. Instead, they must make zillions of guesses for x, calculate y for each guess, check whether it is less than d, and continue. When a miner finds an x that satisfies this relation, that x is itself proof that the miner did the required work. So, x is called "the proof-of-work".

13) The Bitcoin network dynamically adjusts the difficulty factor to a level that keeps blocks being mined about once every 10 minutes, on average. Imagine all miners on the Bitcoin network in a single, gigantic warehouse. As you turn on more miners, they will mine faster, that is, a block will be found faster than 10 minutes, on average. As you switch miners off, the reverse will happen, blocks will take longer than 10 minutes on average to be found. So, the network dynamically adjusts the difficulty factor. The difficulty factor is specified in the last block that was mined and added to the blockchain (and there is a mathematical formula that determines its value). So it is not an arbitrary value that anyone can make up, it is a consensus value agreed upon by the network as each block is added to the blockchain.

There is much more that could be said but I will stop here. The most "technical" aspect of Bitcoin is in point 12 above and it is probably where people get into the most confusion. The key is not to get down into the nitty-gritty details until you've first got the high-level overview. Afterwards, then dig into the details to understand, for example, why it's so hard to mine Bitcoins, that is, how do we know there isn't some clever shortcut that would allow someone to just mine Bitcoins without expending the required work.