I'm a software dev who is considering becoming a bitcoiner, mostly to explore its possibilities. I think a currency free from the baggage of the modern financial systems will allow great things to be done. I see lots of other people are thinking the same way (there are numerous BC prediction markets, for example).

However, I don't want to invest time and money in a seriously flawed or doomed system.

BC appears to have at least one potentially-fatal flaw: the 51% attack. I'm unsure why it was assumed this would not be a problem? Profits from mining would seem to increase when on reaches over 50% of the world's mining power. This would seem to encourage powerful mining pools. While current norms and other incentives may discourage black-hat miners, I don't think it is reasonable to rely on these incentives.

Edit: In other words, is there an economy of scale in being the dominate miner?

Edit 2: While it looks like there was a successful BC double-spend, it was the result of a white-hat exploiting a bug, not a 51% attack. However, a few altcoins (e.g. reddcoin) have been the target of 51% attacks, so my research on their repercussions will start there.

In addition, BC would appear to have a number of other flaws:

• The necessity for each wallet to contain the entire block chain. Edit: Apparently I was reading some dated information. This is wrong.
• Governments have never seemed keen to give up their monopoly on the money supply.
• The computing power wasted by mining.
• It complects the generation of a public ledger with a specific currency.

Side note: After reading about BC and 51% attacks, I am beginning to think "the network effect is the mind killer" might be a more general expression of "politics is the mind killer". There is a lot of noise out there.

Help and insight is appreciated.

Vitalik Buterin has a new post about an interesting theoretical attack against Bitcoin. The idea relies on the assumption that the attacker can credibly commit to something quite crazy. The crazy thing is this: paying out 25.01 BTC to all the people who help him in his attack to steal 25 BTC from everyone, but only if the attack fails. This leads to a weird payoff matrix where the dominant strategy is to help him in the attack. The attack succeeds, and no payoff is made.

Of course, smart contracts make such crazy commitments perfectly possible, so this is a bit less theoretical than it sounds. But even as an abstract though experiment about decision theories, it looks pretty interesting.

By the way, Vitalik Buterin is really on a roll. Just a week ago he had a thought-provoking blog post about how Decentralized Autonomous Organizations could possibly utilize a concept often discussed here: decision theory in a setup where agents can inspect each others' source code. It was shared on LW Discussion, but earned less exposure than I think it deserved.

EDIT 1: One smart commenter of the original post spotted that an isomorphic, extremely cool game was already proposed by billionaire Warren Buffett. Does this thing already have a name in game theory maybe?

EDIT 2: I wrote the game up in detail for some old-school game theorist friends:

The attacker orchestrates a game with 99 players. The attacker himself does not participate in the game.

Rules:

Each of the players can either defect or cooperate, in the usual game theoretic setup where they do announce their decisions simultaneously, without side channels. We call "aggregate outcome" the decision that was made by the majority of the players. If the aggregate outcome is defection, we say that the attack succeeds. A player's payoff consists of two components:

1. If her decision coincides with the aggregate outcome, the player gets 10 utilons.

and simultaneously:

2. if the attack succeeds, the attacker gets 1 utilons from each of the 99 players, regardless of their own decision.

The attacker's commitment is quite counterintuitive: he promises that he will pay 11 utilons to each of the defecting players, but only if the attack fails.

Now the payoff looks like this:

Defection became a dominant strategy. The clever thing, of course, is that if everyone defects, then the attacker reaches his goal without paying out anything.

The cryptocurrency ethereum is mentioned here occasionally, and I'm not surprised to see an overlap in interests from that sphere. Vitalik Buterin has recently published a blog post discussing some ideas regarding how smart contracts can be used to enforce superrationality in the real world, and which cases those actually are. 

And apparently the sky is falling. From Ittay Eyal and Emin Gün Sirer at Hacking, Distributed:

But the fact is, this is a monumental event. The Bitcoin narrative, based on decentralization and distributed trust, is no more. True, the Bitcoin economy is about as healthy as it was yesterday, and the Bitcoin price will likely remain afloat for quite a while. But the Bitcoin economy and price are trailing indicators. The core pillar of the Bitcoin value equation has collapsed.

They note previous bad behaviour from GHash (which GHash attributed to a rogue employee).

Their proposal is a hard fork, with different parameters (to make huge mining pools no longer an economically rational choice), but respecting the blockchain to date so they can reasonably keep calling it "Bitcoin".

Thiel plays with the concept of last mover advantage when talking about what is valuable about Google and Facebook. His claim is that being the first social network (who knows what that was) is not, contra intuition, what matters, instead, if you are the last search engine or the last social network you win. 

Bitcoin is the first real cryptocurrency. But will it be among the last ones? 

Darkcoin, as Louie, Kevin and others told us a few days ago it would, has exploded. (Thanks for the money guys!)

I don't understand much about the properties that differentiate cryptocurrencies, but a few of Darkcoin's features seem very desirable. 

It has early incentive to increase because it is good for illegal markets and international transactions. This incentive is robust and absolute, non-traceability is binary, you can't be less traceable than untraceable. 

This is equivalent to Facebook starting off within the highest status social humans in the planet, young, healthy, wealthy and brilliant Harvard college students (compare to Orkut, which failed in great part because it spread worldwide too soon, allowing a lower social class (Brazilians, Persians) to overtake it, disincentivizing the elites to remain there).  

It has convention status. Its market cap has surpassed all altcoins besides Litecoin. 

This advantage was originally Orkut's (which is Bitcoin in the analogy). It is what MSN stole from ICQ, and facebook from MSN, and Whatsapp from all platforms. 

Effective altruists in particular should consider buying Darkcoin because the EA part of you should be less loss averse than the non-EA part of you, and Darkcoin is obviously a gamble to the extend the reasons I'm laying out here are false or insufficient.

Finally Darkcoin has a complex bootstrap reward system for owners of many Darkcoin, who can own masternodes,  and that is how Dropbox won, by creating a university level (copying Facebook's serendipitous "strategy") contest which would dramatically increase data storage of winning universities. Mine won and I have 30 Giga for free forever, for instance. 

There are other features that caused Facebook to win, or MSN to win. Are there features we want from a cryptocurrency that have yet not been captured by Darkcoin? Or are we witnessing a real last mover advantage in real time? 

I'm starting a contest for the best essay describing why a rational person of a not particularly selfish nature might consider cryonics an exceptionally worthwhile place to allocate resources. There are three distinct questions relating to this, and you can pick any one of them to focus on, or answer all three.

Contest Summary:

• Essay Topic: Cryonics and Effective Altruism
• Answers at least one of the following questions:
  
  1. Why might a utilitarian seeking to do the most good consider contributing time and/or money towards cryonics (as opposed to other causes)?
  2. What is the most optimal way (or at least, some highly optimal, perhaps counterintuitive way) to contribute to cryonics?
  3. What reasons might a utilitarian have for actually signing up for cryonics services, as opposed to just making a charitable donation towards cryonics (or vice versa)?
• Length: 800-1200 words
• Target audience: Utilitarians, Consequentialists, Effective Altruists, etc.
• Prize: 1 BTC (around $350, at the moment)
• Deadline: Sunday 11/17/2013, at 8:00PM PST

To enter, post your essay as a comment in this thread. Feel free to edit your submission up until the deadline. If it is a repost of something old, a link to the original would be appreciated. I will judge the essays partly based on upvotes/downvotes, but also based on how well it meets the criteria and makes its points. Essays that do not directly answer any of the three questions will not be considered for the prize. If there are multiple entries that are too close to call, I will flip a coin to determine the winner.

Terminology clarification: I realise that for some individuals there is confusion about the term 'utilitarian' because historically it has been represented using very simple, humanly unrealistic utility functions such as pure hedonism. For the purposes of this contest, I mean to include anyone whose utility function is well defined and self-consistent -- it is not meant to imply a particular utility function. You may wish to clarify in your essay the kind of utilitarian you are describing.

Regarding the prize: If you win the contest and prefer to receive cash equivalent via paypal, this wll be an option, although I consider bitcoin to be more convenient (and there is no guarantee how many dollars it will come out to due to the volatility of bitcoin).

A federal magistrate judge in Texas issue a decision on Tuesday that "Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money." More discussion on the legal reasoning is here. 

Some context from reading the decision: A promoter offered a profit if investors gave him Bitcoins. The Securities and Exchange Commission asserts that the promoter made false or misleading statements as part of this scheme (which is illegal). 

The promoter asserted the scheme was not within the authority of the SEC because it was not a "security." (Everyone agrees that the SEC can only regulate securities). To the surprise of (hopefully) no one, the judge ruled that the promoter's conduct was covered by the SEC. Specifically, the court found that the scheme was an "investment contract." One of the elements of an investment contract is that there is an "investment of money." 

Thus, the case is potentially interesting to BitCoiners because of the judge's reasoning about why Bitcoins can be characterized as an investment of money.

It's all right there in the title. Link. I believe the law under which the seizure occurred is Title 31.

Should you probably donate a bitcoin to your future self?

Bitcoin has been in the news a bit lately. In case anyone hasn't been following recent events, its price hit $266 per coin, toppled to $50, and then climbed back to a rate which has been between $80 and $140.

This goes to show its high volatility at the present time, which means that any individual trade you make will be something of a gamble with a noisy, hard-to-predict outcome. You could be buying in right before a boom or a bust. Buying and then selling at random intervals will probably cost you more money than you make, due to transaction fees. Trying to outsmart the market in the short term with nothing but your own human instincts and powers of induction will probably cost you even more money because Markets are anti-inductive. The most realistic way of making much money with bitcoin -- sans owning your own exchange, having skill and resources for serious technical analysis, a faster-than-usual trading bot, or fantastic luck -- is if you can determine that the current price is very poorly calibrated relative to its future value, and if you buy and hold very long-term.

Market swings constitute a psychological attack, assuming you know and care about them, so employing the buy-and-hold strategy can be more difficult than it looks. However, as it happens, you can render bitcoins almost purely unspendable (i.e. impossible to transfer via the network) for a finite period of time as a technical matter. You could for example create a brainwallet based on a lengthy memorized passphrase with a random value appended to it. The larger that appended value, the (exponentially) greater the amount of processing time needs to be spent to find out what it contains. Having access to the memorized passphrase gives you the overwhelming advantage over a brute force attacker, whereas the appended random value immunizes it against dictionary attacks. (Todo: Find or write a program for this. Prove it works, and move some of my bitcoin holdings to a wallet requiring a day or more to unlock.)

Early adopters with moderate crypto skills could thus have a distinct advantage compared to the average investor and realistically hope to beat the market on that basis if mere human psychology and resistance against short term panic-selling is the fundamental constraint. So that's one consideration that could play to our advantage. Assuming, that is, that bitcoin is worth taking seriously to begin with, and not just a matter of geeky fun.

The question that matters for that consideration (the one that differentiates long term speculation on bitcoin from various speculative bubbles in gold, real estate, tulips, etc.) is this: Of all the possible worlds, where is the probability mass concentrated with respect to the future of bitcoin, in terms of how it will actually be used? Is there an overwhelming tendency for bitcoin to fail and be replaced by other things (e.g. other cryptocurrencies, or fiat dollars) -- or is it actually likely (in at least the minimal sense of "not overwhelmingly unlikely") to turn into a major store of wealth in coming decades?

I rather think it is the latter. But first, let's consider what I believe to be the strongest argument against it, which unpacks to three parts:

1. Deflation. Bitcoin will never be more than 21 million coins strong due to the production rate going down by half every 4 years. That implies that it will always deflate, i.e. there will be less available to buy as time goes on.
2. Volatility. This is the natural result of deflation. As scarcity increases, people buy out of the speculative belief that value will rise forever. They fear to spend because really, who wants to have bought a million dollar pizza? Eventually, when enough of the value is due solely to this belief in future growth, people abruptly begin to sell, and the bubble bursts.
3. Distrust. Currency requires trust. Volatility decreases trust. If bitcoins continue to be volatile, because of deflation, which is built into the system, it cannot be trusted well enough to compete with more stable currencies -- and will therefore eventually die out.

Taken together, this seems like a pretty good knock-down argument. It apparently implies, as a matter of basic economic law, that some other cryptocurrency must win over it in the long term, and/or that fiat money will retain its dominance. But the thing to notice is that it's not so effective against bitcoin as a massive store of wealth per se, so much as a currency that will be directly used, in a manner directly analogous to how government-backed monetary units are used. Non-currency forms of wealth which serve some other purpose can safely handle quite a bit more volatility, because their value is not dependent on being trusted as a currency, but rather as a value storage mechanism.

Here is the general scenario that I think holds more probability mass than bitcoin-as-a-traditional-currency, and yet works as a fairly realistic alternative to bitcoin-as-a-flop:

• Bitcoin will fall out of circulation as a currency because of its relative volatility.
• Nonetheless, alternate currencies will be built into the blockchain.
• These alternate currencies will be designed for stability, instead of deflation.
• Mechanisms for trading alternate currencies for bitcoins will be part of the protocol.
• Rather than a currency, bitcoin plays a role as a scarce, fungible, stabilizing commodity.
• The ease of turning it into these successful alternate currencies gives it the ability to outcompete traditional options like gold.

Can this be done? Consider the following more specific scenario as an example:

1. Alice puts 100 bitcoins in a currency wallet denoted "dollars".
2. Alice withdraws 10,000 of a currency called "dollars" from an associated address.
3. The network knows that there are 100 times as many dollars as bitcoin, and makes a note of this.
4. The network will not allow Alice to withdraw bitcoins from the currency wallet until she replaces the dollars.
5. Bob puts 99 bitcoins in a currency wallet also denoted "dollars"
6. Bob withdraws 10000 dollars from it.
7. In the event that Alice replaced her dollars and withdrew her bitcoins quickly, the network recognizes this as valid. But in the event that she did not, the dollar is recognized as having more value and the network will not permit Bob to withdraw that amount unless he has 101 bitcoins in the wallet.

This is just one example I've come up with, and may not be the best. Various other schemes are possible. (For example, it could be possible for any dollar-owner to convert them back to bitcoin, as opposed to the person who originally minted them.) What the various possible models for doing this have in common is that they allow you to set up currencies which dynamically increase and decrease in supply, depending on how much bitcoin people are willing to invest into them, and how badly people want bitcoins back later on.

A competing scenario to the above would be one in which a better-optimized cryptocurrency protocol implements this, or some other stability-prone algorithm and thus outcompetes the volatile, easily manipulated, "primitive" bitcoin protocol in use today. I used to think I could just jump on the bandwagon when this comes around, maybe strategically sell someone a pizza and end up a millionaire.

However, I've somewhat lost faith in that possibility of late because I realized that bitcoin is much more powerful than it seems, and is capable of substantial self-modification if needed for compatibility with a newer and better system. The only thing locking us to the current protocol is the degree to which bitcoin-owning miners find it in their best interests to continue to use it as it is. A competing algorithm that makes bitcoins more valuable without violating existing expectations would probably not be hard to get people to update to.

Another thing that makes me think bitcoin will tend to self-improve to the point of winning against competitors is that at least some people with substantial assets in bitcoin form are likely to be very proactive in defense thereof. Assuming they remain committed to the long game, and are able to acquire sufficient short-term wealth to pursue their goals, they can do a number of things to defend it against the various plausible attacks: Hiring programmers to improve the client software and render it less hackable, hiring lobbyists to protect it against regulatory interference, employing botnets to attack competitor currencies, slowing down or preventing transactions that appear to be going through anonymizing laundries that could be associated with tax-dodging and illegal drugs, and so forth.

So it seems to me like owning at least one bitcoin and holding onto it for long-term purposes is probably a good idea.

The bitcoins that I had set aside for a Cryonics contest two years ago (and were unredeemed) are suddenly worth a lot more.

Details: I had added 10 bitcoins to get things started, and there were 4.75 worth of additional donations. These were partially lost when the hosted online wallet that I was using (MyBitcoin) was hacked, but 49% was recovered. As of today, after refunding part of the donated money, it is now worth 5.2675. I will be adding from my personal store to bring it up to an even 5.5. At $140 per coin, the new total is $770.

I've decided to follow the buy-and-hold strategy for at least another year, since it worked so well. I don't have exact details on what I'll do with it, but it will not be converted or spent for at least one year, and will eventually be used for promoting cryonics in some way.

Some things I have in mind if it gets big include:

• subsidizing cryonics dues for low-income people
• covering funding shortfalls for those unable to obtain life insurance due medical problems
• cryonics scholarships to support the development of expertise in neural cryobiology, the dying process, and other neglected areas of concern to cryonics
• hiring a public relations team professionally to repair the image of cryonics
• research to improve viability and reduce dehydration
• empirical validation through scanning the connectome

Contributions can be made to:

1Jdn36JUwvJdr3Qiie4aAseFdcoTsND9Qo

(Updated, since the previous address was attached to my personal wallet on an outdated client, which was causing money to be moved out of it by accident. The above is a brainwallet with a reasonably secure passphrase, generated using Blockchain.info.)

Less Wrong used to like Bitcoin before it was cool. Monthly threads popped up around the same time a pricing bubble brought mainstream attention last year. When the bubble popped, and price continued to deflate, discussion on this site stopped entirely. Was there a change of sign in the social status of the topic, is the topic fully explored, or has there simply happened nothing of interest over the last year?

If you are not familiar with Bitcoin, here is one intro I happen to like.

Kaj Sotala lists a number of previous threads on the topic:

There seems to be quite a bit of a Bitcoin interest around here, with several articles about it already: [1 2 3 4 5 6 7]

Less Wrong seems like a good place to discuss recent developments, if one does not want to suffer the inanity of the officially unofficial forum. If you are not longer interested in Bitcoin, perhaps send your remaining balance to the Singularity Institute?

Last Sunday, the largest BitCoin exchange, MtGox, was broken into. Reported details are complicated and possibly unreliable, but a fair amount is known. Trading is suspended while the exchange's source code is checked for vulnerabilities. All MtGox accounts are being put through a verification process and mandatory password reset. According to MtGox's support page, a compromised account with 500k coins did a massive sell-off, clearing the order book and driving the price down to 0.01; MtGox has announced that trades around this time will be rolled back. A database of hashed usernames, email addresses, and passwords was leaked on or before June 17 (several hashes from the leaked database were posted on a forum). There is also a report that a cross-site request forgery vulnerability existed, and was being used to steal from users, probably for weeks. There are also highly plausible reports of a SQL injection vulnerability. MtGox has claimed that only $1000 worth of coins were lost, but this is unclear; the large sell-off may have been an attempt to work around the withdrawal rate limit, by making the rate-limiter use an incorrect exchange rate. Analysis of the blockchain seems to suggest that MtGox does still control its coins, or at least a large number of coins.

In the best-case scenario, MtGox reopens for business in a couple days, some traders who would have profited from the sell-off will be angry, and the Bitcoin economy, such as it is, continues as before. In the worst case, MtGox is insolvent, either because they lost more coins as a result of this attack or an earlier attack than they've acknowledged, or because the coming run on the exchange exposes an undisclosed fractional reserve policy.

Meanwhile, TradeHill, the second-largest exchange, is trading at 13.2 USD/BTC with greatly increased volume, compared to 17.5 before this all started. The EFF has stopped accepting BitCoins, in response to these events, and donated their Bitcoin holdings to the Bitcoin faucet. Botnet herders have started hunting for Bitcoin wallets, and allinvain (real name unknown) reported losing 25kBTC from an unencrypted wallet that way.

And I, with a significant amount of both US dollars and Bitcoins frozen on MtGox, am having a very hard time focusing on cell phone app development.

We've started a habit of creating periodic Bitcoin threads to confine discussion thereof to those threads and prevent excessive proliferation of Bitcoin topics in the discussion section.  Here is a link to the last one, which links the other discussions.  Lot's to talk about, and another bounce in Bitcoin's value (up to 33 then down to 24), so share your links and thoughts!

What: First Las Vegas/Henderson Less Wrong meetup

When: Saturday, May 28, 2011 7:00 PM

Where: Putters Bar & Grill
6945 S. Rainbow Blvd
Las Vegas, NV

Look for a bitcoin sign and ask for Duke.

For personal convenience I am piggybacking on this Bitcoin meetup. A bitcoiner will be giving an informal presentation on cryptology and computer security. I don't have specific ideas for the LW aspect of the meetup so come prepared with your own. 

**Edit: Location changed**

There seems to be quite a bit of a Bitcoin interest around here, with several articles about it already: [1 2 3 4 5 6 7]

I propose that links and generic Bitcoin comments should be posted here, instead of making a new discussion thread for each interesting article about the subject.

Annie Lowrey discusses Bitcoin in Slate.  No clear thesis, but important that it gets attention there.  She gives a general overview, with emphasis on its benefits to fringe elements on society, and gives quick attack at the end.  The attack seems misinformed, but it links to something more interesting, specifically...

A technical critique by Victor Grishchenko, PhD, who was mentioned here in the context of causal trees.  He describes a few problems he sees with Bitcoin:

1) Asymmetry favors attackers, in that it takes a lot more effort to check for double spending than to attempt a double-spend, eventually requiring "supernodes" that have disproportionate influence over the network.

2) It needs to continuously spend spend cycles to stay free from attackers.  He then describes an attack I don't quite understand that involves holding on to a discovered block and then broadcasting it at just the right time

3) It doesn't compare well against existing systems in terms of privacy, speed, or transaction cost.  (I found this questionable because the system he's comparing it to is still subject to warrants, and Bitcoin takes significantly less time -- 1 hour or so -- to ensure a transaction than the wiring transfers Grishchenko discribes.)

Finally, he credits Bitcoin in being advantageous similarly to Bittorrent: the latter was clumsy and complicated compared to regular downloading, but could perform well enough in a niche niche to force change in the broader markets.

BitCoin is a recently introduced currency, based on public-key cryptography combined with a peer-to-peer network for verifying transactions. I've been thinking a lot about BitCoin recently, and particularly about BitCoin's main weakness: if your computer is compromised, an attacker could copy your BitCoin wallet and use it to steal coins. That's bad. But I've come up with a possible improvement that would greatly mitigate this risk, and was hoping for some help confirming its viability and filling in the details.

The basic idea is to make it so that rather than having a single computer which can steal your coins if it's compromised, you have two computers (or a computer and a phone), such that your coins can only be spent if both devices cooperate. It is much harder to break into two computers belonging to the same person than just one, so this makes coins harder to steal. You could also have one of the computers involved be a third party that you trust to keep its files secure, and while that third party would be able to freeze your funds, it wouldn't be able to steal them. Using a third party this way, you could also add withdrawal rate limits and time delays, further improving security.

I believe that this can be done in a fully backwards-compatible way, without any changes to the BitCoin protocol, using homomorphic encryption. BitCoin is based on elliptic curve cryptography; a receiving address is a public key, and a wallet file is a collection of private keys. The goal is to create a protocol where two cooperating computers produce a split key, such that they can use it cooperatively to sign transactions later, but neither one can sign transactions or determine the whole key on its own. My understanding is that homomorphic encryption can be used to implement a simulated computer that does arbitrary trusted computation, so this should be possible. However, I'm a bit fuzzy on the details, and I don't have the time or comparative advantage to implement this myself.

(To deal with the risk of one one computer being lost or damaged, there could also be an override key; both computers would have the public half of the override key, and the private half would be kept offline in a bank deposit box or something similar. Then both computers use the override key to encrypt their halves of the split key, and send the encrypted keys to a cloud backup provider.)

Tangential, but a subject of some local interest:

Why Bitcoin will fail by Avery Pennarun. "The sky isn't red." Thesis:

1. The gold standard was a bad idea.
2. Even if it [Bitcoin] was a good idea, governments will squash it.
3. The whole technological basis (cryptosystem) is flawed.
4. It doesn't work offline.

I'm not sure I buy these and am not competent to evaluate his claims on 3., but would like others' critique.

L019: Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen by Jason Calacanis. A rather more enthusiastic viewpoint of the project:

1. Bitcoin is a technologically sound project.
2. Bitcoin is unstoppable without end-user prosecution.
3. Bitcoin is the most dangerous open-source project ever created.
4. Bitcoin may be the most dangerous technological project since the internet itself.
5. Bitcoin is a political statement by technological libertarians.
6. Bitcoins will change the world unless governments ban them with harsh penalties.

The actual text contains many more caveats than the eye-catching selection of points above.