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bogus-10

Investing in the productive economy hasn't yielded a positive return for the last ten years,

It depends on what you measure. Risk-free returns, maybe. Risky investments tend to do very well in expectation.

and yes, it's fair to expect the market to compensate you for deferring consumption because society is decidedly not indifferent between whether you consume resources now or later.

It would be nice to see an argument for this.

([U]nless you want all behavior to shift toward consuming all real resources immediately, including "seed corn", you have just as much an interest in seeing an economy strike a balance between present an future consumptio[n])

It seems that the economy is striking a sensible balance right now, with risk-free assets yielding about zero return and risky assets possibly yielding more. You'll not see any consumption/depreciation of capital, because if willingness to save falls then rates of returns will rise.

And getting people to invest in productive enterprises under threat of their money withering away is pure Machiavellianism

It's not. Currency "withers away" because it is effectively a risk-free asset which can be exchanged on demand for real resources (i.e. it has zero maturity) and its returns are standardized over large time-spans, including episodes of distress such as financial crises (whereas other assets are priced by the market and their returns might fall in such circumstances). This is pretty much the highest possible quality you could ask of any asset, and returns are adjusted accordingly. Bank accounts and money-market funds also have some of these qualities, but they have countervailing issues, and the interest they pay is meagre anyway.

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by SilasBarta
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6

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!

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General Bitcoin discussion thread (June 2011)
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[-]lsparrish70

If anyone's checked out the bitcoin source and tried to compile it, you might notice that it is... well, kind of bloated. By my standards anyway. It requires huge numbers of gigantic libraries and so forth. Way more than what it actually does. All you really need are some TCP/IP, database, and crypto algorithms.

In fact, unless I'm missing something major, seems like we're really just talking about a glorified IRC bot with some security features... Does anyone else get the impression that Bitcoin's current back end is over-complicated? Also, does this argue in favor of writing (or anticipating someone writing) a cleaner/smaller version?

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4nazgulnarsil
extra libraries are for the scripting language support. the ability to write new sorts of transactions (such as contracts like I mentioned in this thread) is there.
[-]Mercy40

I've kind of stayed out of this discussion because I think one's interpretation of the product depends on more on your views about economics and politics than any disagreement about bitcoin's properties. And Tyler Cowen's skepticism makes me think that bitcoin proponents are deep enough into Rothbardville that our lines of engagement would get fruitlessly broad.

But I'm curious on one point - why do some people have this dramatic 'coins'll be worth thousands or nothing" attitude. I can see the zero, and I can get my head round the viewpoint where it's... (read more)

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0Pavitra
Bitcoin has a number of practical advantages for ordinary e-commerce, such as no chargebacks and low transaction fees. I think that if (say) Bitcoin and Paypal were equally normal-seeming in the public consciousness, then most online vendors would prefer for their customers to pay with bitcoins. This suggests that one of the most important limiting factors for adoption is visibility, which is to say, adoption. The spread of Bitcoin is self-reinforcing.
1bogus
That may be true, but it also has disadvantages such as scalability. AFAICT, every Bitcoin node must maintain an up-to-date ledger containing all transactions made to date: obviously, this is unsustainable in the long run. The "fixed number of bitcoins" policy is also an issue. According to Bitcoin developers, having more miners makes the network more resilient to attack, in addition to speeding up transactions. Eventually, the subsidy to mining activity will become too low and agents will need to partially replicate its effect with transaction fees. This is sobering enough for a network which touts free transactions! as a selling point; however, what's more worrying, resiliency will also drop dramatically as mining activity slows. Paying a mining bonus would be more fitting, since the benefits of increased mining are shared by all holders of bitcoin.
0Pavitra
The code can easily be modified to use only a partial ledger if necessary. It's not yet enough of a problem that anyone has bothered to do so. "Free transactions" is more of a common misconception than a selling point, as SilasBarta discusses in the sibling.
-2SilasBarta
Fair enough. The promoters of Bitcoin should not tout the "free transactions!" since this will only apply for the next twenty years or so and transactions thereafter will impose a fee orders of magnitude lower than most services if you want them confirmed quicker.
0jhuffman
I do not think the transactions are free even now, it is just that they are spread out across the entire money supply rather than charged only to the participants in the transaction. The cost of the block are the 50 coins added to the money supply, which slightly decreases the value of every other coin.
0SilasBarta
In most contexts, that would be close enough to count as "free transactions".
[-]nazgulnarsil40

66% pullback in price this weekend. This certainly isn't a market for the fainthearted.

My probability distribution looks something like 90% chance of going to 0 and 10% chance of going to multiple hundreds of dollars.

My downside is limited to having paid market price for 2 video cards and a power supply if bitcoins go to zero. My friend just built a mining rig with three cards for around $650. I tried to talk him out of it but the concept of free money seems to override people's ability to make cost benefit analysis.

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1atucker
Clearly, the market is responding to people questioning its efficacy on Less Wrong. :P Are you buying bitcoins? Expected utility is in the multiple tens of dollars if you believe that.
4Mercy
It's funny you should mention that, because just about the time of the collapse a bunch of posters on the Something Awful thread mocking bitcoins decided to see if they could crash the market by posting SELL SELL SELL messages on various discussion boards. From the posts there they think it's coincidence though- the crash was caused by a single big seller.
2nazgulnarsil
I'm mining. And my utility is not uniform over my money. Money now is significantly more valuable than money will be once I graduate college. If I had more disposable income I would have bought some directly.
2jhuffman
I'm curious, are you still mining? Also, are you living in a dorm with fixed electricity cost?
2nazgulnarsil
mining was unprofitable for a long while until just recently with the price recovery. mining now is worth it for the free heating.
0Paul Crowley
At its lowest, it hit the price it was at on 7th June, right?
0ArisKatsaris
7th June it was around 18 dollars I think. It fell all the way down to 10 dollars before bouncing back.
-3wedrifid
I will bet at those odds. $1 pays me $10,000,000 that it stays in the range of $0.1 to $100 for two years.
[-]Gedusa20

Would anyone care to comment on the recent Mt Gox hack n' crash?

Personally, I'm thinking that this very bad. The currency won't look as good the mainstream, and I'm anticipating panic sells as soon as the exchanges get up and running again. I'm agnostic as to whether Bitcoin will die or not though...

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4Clippy
I have a comment. It's bad, like unbending paperclips. I had set up a Mt Gox account so I could finally have access to the USD-based part of the financial system. I received an internet email telling me that my account was compromised. Before even seeing that internet email, "Google" made me switch to a more secure password because of "suspcious activity" on my internet email account. The Mt Gox email said to change and strengthen my passwords, so I did so on the internet websites that I have accounts for, including this one. Fortunately, I didn't have any USD or bitcoins in Mt Gox because I have been saving them to trade to User:Kevin near par for completion of our deal. In any case, I have devoted more cognition to protecting bitcoin resources, such as by encrypting my wallet.dat file with GPG. I'm also not giving away the private key needed to decrypt it.
3wedrifid
Ingenious! Why didn't I think of that?
1Clippy
Probably you would have thought of it if you knew more about the workings of public key cryptography, so don't deem your current inference algorithm deficient; such an incident does not indicate that you were using suboptimal heuristics.
0Kevin
Yup. If anyone isn't encrypting their wallet.dat file, please do so right away.
0Clippy
But how do you use the Bitcoin client while your wallet.dat file is encrypted??? You won't be able to send bitcoins, or even see your balance!!!
[-]nazgulnarsil20

So I had a thought about cryptographically secure titles of ownership.

Let's say we make a public-private key pair that is a hash of some uniquely identifying biometric data. Much like namecoin we then use the blockchain to encode information, specifically contracts. You can sign contracts with your private key and anyone can check what contracts you've signed with your public key. This allows you to reliably signal certain sorts of intentions and know that everyone knows that you are signalling these intentions.

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[-]jsalvatier20

Let me preface by saying that I haven't thought in depth about bitcoin so I am definitely willing to change any of the opinions I currently hold.

I do not understand why people are especially excited about bitcoin. It's certainly moderately interesting and could provide some benefits but doesn't seem revolutionary in any sense I can see. I'd like to hear solid arguments for why bitcoin is something radically different from other currencies rather than a moderate upgrade on currency technology which will eventually be incorporated into existing currencies.

I... (read more)

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5mutterc
My understanding: * It's not under the control of any particular government, which excites people who view governments as evil mutants * It has a fixed upper quantity, which excites people who understand macroeconomics little enough that they think that's a good idea for a medium of exchange Or in two words: techno-libertarian porn. EDIT: It occurs to me the fixed upper quantity is necessary given de-centralized production. It also occurs to me to wonder if there are any reasons to advocate Bitcoin other than those two - anyone want to help me update?
[-]jsalvatier100

I share with your general impression, but I think your phrasing casts bitcoin advocates as idiots which is a poor discussion tactic.

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8SilasBarta
Well, this is just the difference in worldview between two camps, based on their differences in experiences and research. See, the anti-inflation types among us have been trying to live responsible lives, saving for the future. We thought that the economy rewards those that defer their consumption until later and who invest for the future. But at every turn, those in charge of managing the money supply have stymied us. They've jacked up the money supply, making our purchases more expensive, all while denying the severity of it. (In the case of technological improvements that imply a lower effective price, they've made them more expensive than they would otherwise be.) This debasement of the currency has amounted to a subtly-hidden transfer of wealth to privileged classes. The government has granted financial intermediaries privileged positions and, through the central bank, funded new spending with printed money that will never be paid back, murdering our ability to earn a fair inflation-beating return on our savings, when the market is supposed to reward those who defer consumption. And then it takes even more to bail out failing business, making it impossible to decouple ourselves from the rot in the economy, all while telling us to lock up our money in IRAs invested in government approved dinosaur businesses . Folks that have actually had to live through this economic insanity "get it". Those who go ever deeper into debt to double-down on economy's increasingly lost production structures don't see the problem -- they want their debts inflated away. They want that new money to slosh around and get the dumb rubes back spending spending, spending -- on anything, it doesn't matter how short-sighted, how wasteful, how ill-considered: an arbitrary economic metric needs to act like it did in the glory days of 2005 (when the financial sector was busy defrauding pensions), and, well, that's that. That's the key to economic prosperity. Well, the responsible class is fe
3bogus
I know that this is labeled as a [rant] but it really is a terrible argument. Inflation rates do not affect investment returns in the long run. High inflation only hurts those who directly hold currency. High surprise rises in inflation only affect those who have fixed-income investments, or those who are exposed to nominal fluctuations due to e.g. long-term contracts. The secular fall in real returns to investment has nothing to do with monetary inflation: it's due to emerging countries and oil-financed sovereign funds flooding Western nations with large amounts of capital, and to sharply falling transaction costs for access to the stock market, which encourage more domestic investment as well.
3SilasBarta
In theory, yes, interest rates are bid up to be high enough to compensate for inflation and then some. In practice, that is not happening right now, because the market for interest-rate-determining instruments (like Treasury bonds) is saturated by people who by and large don't care about making up for inflation in the return: the Federal Reserve, exchange-rate-manipulating foreign central banks (like China), and insurance companies. When even stock holdings won't cover inflation over the long term (like stock indexes have failed at for 10+ years), there is a serious problem.
0bogus
You're missing my point. What you're saying translates to: "In theory, real interest rates are positive, but in reality they've been driven to negative levels because savings are so high." But nothing in theory stops real rates from being negative at any point in time. By the way, your list of actors seems misguided: (1) The Fed buys Treasury bills when they issue cash, which is basically exchanging one government liability for another: it doesn't change aggregate saving. (2) Insurance companies invest money on behalf of people who buy long-term instruments such as life policies and annuities. (3) China does manipulate exchange rates, but the only reason they are able to buy so many Treasuries is Chinese workers saving large portions of their income and depositing them in the local bank. AFAICT, there is no case for giving any less consideration to Chinese workers than to US-based savers.
3mutterc
Let's hear your economic system design where anyone can gain real wealth by simply putting their cash under mattresses (as would be true if deflation were the norm). Who needs to invest in the actual productive economy?
7Pavitra
Your argument seems to imply that the existence of even one deflationary good is sufficient to destroy an entire economy. Surely if this were the case then the law of large numbers would have killed us by now.
0mutterc
My understanding is that one good wouldn't do it, but persistent, overall deflation would in fact devastate the economy. Sure, right now you can stick money under a mattress for 6 months and buy more Core 2 laptops than you could today. But that doesn't seem the same as "getting richer". Where's the line? Good question. Obviously if you could buy more of anything that would be getting richer without investing the money. Or if you could buy more (houses or food or cars or Internet access or electricity or sex or drugs or rock n' roll).
7Vladimir_M
There was persistent overall deflation in various periods in the 19th century, and it didn't devastate the economy.
0Pavitra
If you consider only cash and laptops, then it looks reasonable to call cash deflationary, but if you consider the economy as a whole, then it's more accurate to say that laptops are inflationary. What makes the deflation of bitcoins an "overall" deflation, as opposed to the deflation of one good?
2mutterc
The implied context of all this is: what if Bitcoin (or something similar) became a/the dominant currency, that paychecks, debts, etc. are denominated in? If it doesn't then it doesn't really matter, societally, if it inflates, deflates, mutates, or defenestrates (other than to the people who invest in it...) It'd just be another good, as you say.
0Pavitra
You seem, then, to be arguing that the behavior of our currency has an importantly different kind of effect on the overall economy than the behavior of any other asset. ...on reflection, I think that's actually right. Under hyperinflation, people tend to run around with wheelbarrows of banknotes rather than reverting to barter. I'll have to think about it some more. Nevertheless, I would expect the effects of currency deflation to be limited or mitigated by the fact that you eventually have to buy food.
1jhuffman
Hyperinflation only happens precisely because people have less and less interest in wheelbarrows full of bank notes. The reason it feeds on itself is that people desperately want to turn their notes into real goods or exchange for more stable currencies. That lowers the value of the notes even further since there are more notes chasing the same amount of desirable goods. I'm not sure a hyper-deflation can really happen. What would that look like, merchants lining up outside my house trying to sell me another Blueray player for increasingly small fractions of a coin? If no one wants to spend this money, can it really retain value for very long? I'm genuinely perplexed.
0Pavitra
I think a key factor is that humans don't actually behave as rational utility-maximizing agents. Most people will treat the value of an asset as being approximately its current market spot price, and only slightly adjust in the direction of what they expect its long-term value to be. I wouldn't expect merchants to line up outside your house, but their websites might list prices like "Blueray player -- 3.89 millicoins".
2jhuffman
The price itself doesn't indicate hyper-deflation. That price could be the product of years of single digit deflation. Hyper-deflation I think can only happen if there is a run on most real goods - where people are literally in a panic to exchange their goods for rapidly decreasing numbers of bitcoins. Otherwise how would it feed on itself the way hyper-inflation does?
0Pavitra
Unfortunately I don't know enough economics to sustain this discussion past this point, so I'm going to refrain from further making things up. I assume you have a good question, and I recommend you put it to someone who can answer it.
-5mutterc
-10mutterc
-23mutterc
0mutterc
Good point. I have a bad habit of spending time in corners of the Internet where libertarians, gold-bugs and various mutations thereof like to come and argue (i.e. any economics-related blog); so anything that looks like hard-money or libertarian advocacy provokes an instant "aw geez, not this shit again!" reaction. It does occur to me that any system of money with de-centralized production probably does have to have an upper quantity limit, to keep random assholes from manipulating its value. As popular as libertarianism and goldbuggism seem to be, it wouldn't surprise me if much Bitcoin advocacy did derive from those beliefs. And it seems those beliefs are at least as misguided as theism (and we have no trouble being dismissive of them). Is there a nice way to discuss that?
6SilasBarta
Sure, just discuss the particular problems with the (best versions of) propositions put forth by such people, and how their conclusions don't follow, and what specific pieces of evidence weigh heavily against them. (Note the lack of smearing them as racists in this method.) OTOH, if all you have is, "these people are weird and I don't like them but I don't specifically know what error they're making, they just seem like aristocratic Southern racists", you're best off keeping that to yourself.
3mutterc
OK. Libertarianism I can leave to others (I don't think I have anything new to say about it). As for hard-money advocacy, usually one sees the following errors: * Belief that there's some Platonic ideal of "value" against which currencies should be measured (traditionally "gold", though one sees variations these days) * Ignorance of the hazards of a totally exogenous money supply size. (fewer levers to deal with recessions and overly-hot economies; real wage declines have to happen nominally (which is very difficult) rather then through exchange rates) * Belief in immaculate transfer (trade balances, capital flows, and exchange rates in fact all affect one another) * Belief that the medium of exchange should be a stable long-term store of value, and in fact increase in real value without being invested (how could such a thing even work? What's creating the value?) As far as I can tell, the only of those I've seen from you in particular is the last one, and that's another subthread. There is a new one, from you, in this discussion though: the idea that "too much" economic activity is happening now, and it would be better to defer some of that economic activity until later. High unemployment refutes this. [If you'll claim current unemployment is structural in nature, then what is the industry that lacks labor, and is thusly currently experiencing increasing real wages?]
2Vladimir_M
I find it funny how fans of mainstream economics mock goldbugs about this, while at the same time basing a large part of their own theories on a far more extreme Platonic concept of "real" values calculated using price indexes.
1Wei Dai
I do not have the impression that mainstream economists subscribe to a Platonic concept of "real" values. (Or maybe I'm just confused about what you mean.) Can you cite an example of this (i.e., a paper or article that describes or assumes such a concept)?
5Vladimir_M
I have in mind the regular use of "real" figures in economics (i.e. those that are "inflation-adjusted," as well as those based on "purchasing power parity" etc.). These concepts are in principle dissolvable -- when citing some "real" figures, economists could address the questions of what exact index was used to adjust the value, what would be the implications of choosing a different index, how much the figures vary under different more or less reasonable definitions of indexes, what political and bureaucratic incentives have influenced the design of the official government indexes, etc., etc. Trouble is, in practice they almost never do, and except for some narrow and specialized work that studies indexes as such, the de facto standard of discourse in economics is to treat the "real" values as having a Platonic reality. (Even people who specifically study price indexes typically speak about "overestimating" or "underestimating" their value, as if there existed some Platonic "true" value out there.) As an example of nonsense along these lines, you can take almost any paper that discusses how much some "real" variables have changed over a period of several decades (sometimes they'll even talk about centuries). Of course, if you read that something cost a dollar in 1950, you'll want to know how that compares with the 1950 prices of, say, a loaf of bread, an hour of unskilled labor, etc., to get the feel for how much a dollar was worth back then. However, asking what the "real" value of a 1950 dollar is in 2011 dollars, as a unique and well-defined number, is simply meaningless, considering that you can't trade dollars across time, and the world has changed so much, both technologically and socially, that what counts as "living" in the typical "cost of living" in each era is incommensurable. (The same of course goes for comparing very different places in the same era, and even for similar places, what you count as the "typical" cost of living is largely arbitrary, es
1Wei Dai
Ok, I was confused by "Platonic" which I thought you were using to refer to intrinsic as opposed to subjective value. Thanks for the clarification. In the sense you intend, I think you're right that mainstream economists do subscribe to a Platonic concept of "real" value. They believe that real-world price indexes are based on a theory of price indexes, which is based on a theory of social welfare, which in turn is based on sound philosophy. But I think they are also aware that there are lots of problems with both theory and practice (perhaps less aware of the philosophical problems) even if they tend to not pay much attention to them in their daily work. Standard textbooks do mention the problems, and intuitively it's pretty obvious that price indexes must be at best very flawed approximations to reality. Putting aside what mainstream economists believe, when you say "meaningless" or "fundamental arbitrariness", do you mean for example that there is no way, even in principle, to compare the marginal utility of a dollar in 1950 with the marginal utility of a dollar in 2010? Is it due to the standard interpersonal comparison of utility problem, or something else? To put it another way, do you think the mainstream economics community should be more aware of problems with the theory and practice of price indexes and perhaps allocate more resources to solving them, or do you think they are just not solvable, and an entirely new approach is needed?
1Vladimir_M
Subjective value is indeed among the core assumptions of neoclassical economics. The problem is that a whole lot of stuff that economists would like to be able to do (due to both theoretical and ideological interests) is automatically ruled out by this assumption. Reification of "real" values is one way how they try to square this circle, since it enables them to introduce intrinsic value in all but name into their theories. Yes, you can see this as a corollary of the general problem of interpersonal utility comparison. (Although even if interpersonally comparable utilities are granted and known, you need additional strong assumptions to get rid of all the degrees of freedom that make the choice of index arbitrary.) But these are all different ways of looking at the same problem, namely the problem of intrinsic vs. subjective value. This is not to say that every attempt to compare the value of money in different places and times for some particular purpose is meaningless, but whether a given attempt is meaningful depends on the context and the sort of comparison used. To guarantee soundness, such comparisons should be justified on a case by case basis by demonstrating that the conclusion indeed follows from the particulars of the way comparison is done. What is definitely unsound is defining a general-purpose “real” value of money and then using it as de facto intrinsic value, without any reflection on how exactly its definition connects to the concrete problem at hand. Your question seems to assume the existence of a real scientific community in economics, of the sort that exists in natural sciences. However, the problem is that the economics profession has always been deeply intertwined with politics, government bureaucracy, and broader ideological controversies, and as with other social sciences, many of its basic theories and concepts were invented to support an ideological agenda, not as part of a true scientific endeavor. Moreover, many questions in economi
1mutterc
Can you expand? Here's the difference as I see it: * Price index: the dollar is worth 5% less than last year because it buys 5% less of the stuff in this market basket, populated with stuff representative of the "cost of living" * Gold standard: the dollar is worth 5% less than last year because it buys 5% less gold Which is more or less useful, and why?
0Vladimir_M
Depending on the context, either concept can be anything from useful to deeply misleading. However, in contrast to the (mis-)use of price indexes in mainstream economics, the goldbug obsessions can always be countered by simply pointing out that gold is not an end-all. Therefore, while there will always be goldbugs immune to rational argument, their ideas are unlikely to become a basis for elaborate, sophisticated-looking, and academically accredited pseudoscience. In contrast, the concept of "real" values in mainstream economics typically degenerates into an even more far-flung Platonic fantasy that there is some "real value" of money out there to be measured, discussed, and incorporated into theories like a real physical quantity. This fantasy is obscured by a vast cloud of complicated and abstruse (and seemingly objective and scientific) theory, to the point where it's usually impossible to disentangle reality from fantasy and spin without a very considerable effort -- in which economists are usually unwilling to cooperate, if not outright hostile.
1SilasBarta
None of the attributions to me sound like anything I've said, and your counterarguments are just parroting the mainstream view that I'm well aware of and criticized very specifically.
2mutterc
I've not been very coherent, and I think my once-debilitating fear of the Invisible Hand has not gone away enough. So I'm not making a lot of sense, even to myself. So, umm, never mind. Sorry for polluting the thread.
0[anonymous]
Something doesn't seem right about blaming the popularity of Bitcoin on goldbugs.
3Bongo
Or with different connotations: it's not under the control of any particular person or group, which excites people who think power corrupts.
0Pavitra
I'm not sure that the fixed quantity is necessary. The generation rate hasn't started leveling off yet, and the bitcoin economy seems to be okay. I've thought before that it might have been better to schedule long-term linear growth, just keeping the block bounty at fifty forever.
4timtyler
Well, it is decentralised. There are few other systems like that. It may stop it going the way of E-gold.
1saturn
Hey look, it's already started.
1RHollerith
By "user vulnerability" I take it that you mean that a "hacker" could break into the computer where the bitcoins are stored and steal them. Well, it is not as if user's of conventional bank accounts are not similarly vulnerable.
2jsalvatier
Of course, but in general I would expect it to be more difficult to hack into an organization that can afford to spend more resources on security than on one who can afford to spend less.
7RHollerith
You didn't read the linked Wired article: $50 million was stolen from banks' customers by obtaining online-banking-account passwords by surreptitiously installing evesdropping software on the customers' computers. When the customer discovers the theft, the bank responds by saying that the customer is out of luck, and unless the customer can show that the bank did not follow the (regrettably insecure) standard procedures used in online banking, the courts side with the bank. The reason I entered this thread in the first place was to point out that conventional online banking might not leave the average person less vulnerable to theft than dealing in bitcoins (even if in theory the difficulty of anonymity in the conventional online banking sector makes it easier to recover stolen money). At least the authors of the standard Bitcoin client had the good sense not to build on one of the most insecure parts of the software on a modern computer (the web browser) which is more than we can say for all the U.S. banks I know about.
2jsalvatier
You're right, I'll have to think about that.
[-]SilasBarta20

Yes, I had an ulterior motive in starting this topic right this moment. See, I'm trying to close the inferential gap in explaining Bitcoin to the layperson, so I wrote up a blog post explaining the relevant cryptographic pre-requisites. (It's based on discussions with an economist who plans to write about Bitcoin soon.)

I would appreciate any corrections. Also, this is another case of me claiming to be better at explaining stuff than most people, so see if I live up to the standard (preferably from those that don't already understand this stuff). The ec... (read more)

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0Jonathan_Graehl
re-requisites -> pre- ? I skimmed it and nothing jumped out at me. I understand public key crypto. Your blog post made me think an explanation of bitcoin mining and transfer would occur. It never did. There was this: ... which isn't a very complete. The only thing I learned (I know nothing about Bitcoin mining or transaction protocols) is that apparently lots of nodes end up knowing about every transaction (paying attention only to transactions moving a particular coin that are signed by its last known owner). So, I gather your explanation of Bitcoin is yet to be written.
4timtyler
Silas did say this was: It doesn't have much about Bitcoin - and instead covers the basics of digital signatures and hash functions.
2SilasBarta
Update: I've attempted a more "big picture" summary of how Bitcoin works as a whole, rather than just the prerequisites. I'm interested in hearing comments about clarity or accuracy.
1Jonathan_Graehl
It's new info for me, so I can only hope it's accurate. It's a good explanation. I'd know where to mount further details if I wanted to find them.
1SilasBarta
Thanks, glad it provides some of the clarity you were looking for.
1SilasBarta
What Tim Tyler said. Remember, the layperson has a HUGE inferential gap between their knowledge and Bitcoin, and closing that gap requires solving the problem -- itself very difficult for most -- of explaining cryptography and what it can accomplish. Otherwise, people can't grasp how the scarcity and security come about.
0[anonymous]
What Tim Tyler said. This wasn't intended to explain Bitcoin itself (though it does cover some of that), but to close the part of the inferential distance that most people have to "walk" before they can begin to understand Bitcoin. Like I said in the post, simply understanding the cryptographic aspects is hard enough for most people, and it's something they'll need to understand first before they can understand how Bitcoin works and uses cryptography. One must be careful not to overestimate what the layperson will immediately understand. On the Slate discussion of Bitcoin, for example, some commenters had trouble grasping the idea of sending money through their computer, saying things like, "what, do I put the coins in some slot". It sounds like a stupid question, but it's what a person is likely to say when they don't understand how the scarcity arises and gets redistributed.
-1nazgulnarsil
the jump in interest generally comes when you explain that there will only ever be 21 million. this seems to completely change the character of the conversation. or did you mean explaining it to intelligent people? :p
-1RHollerith
Only 21 million bitcoins, but there is nothing preventing other "issuers" from copying the design of Bitcoin and creating "Cryptotokens", and "Liberty Hashes," "Stealth Gold," "African Bitcoins," etc.
1Alicorn
Cryptokens, surely?
0gwern
That's not a bad thing. Bitcoin is going to have to be majorly upgraded with a new blockchain when SHA-256 is broken, and money is not the only scarce things to be decentralizedly allocated - I previously commented on Namecoin.
-1RHollerith
Bad thing or good thing, it makes a huge difference to the expected long-term value of a bitcoin, which is of interest to anyone thinking of holding bitcoins.
-1nazgulnarsil
Not insurmountable but it is the chicken and egg problem. Bitcoins are the most secure by virtue of having the most hashing power.
[-]SilasBarta00

UPDATE: For those of you who are interested in comparing your hash-fast mining rig to FLOP-fast supercomputers out there, I just recently noticed that Bitcoin Watch reports both the network's hashrate per second and its FLOP rate per second. I don't know how they derived the second figure (see "User:"jimrandomh's comments on the difficulty of comparing hash-type and floating point computations).

Dividing the two, it's implicitly assuming ~12,700 floating point operation equivalents per computed SHA-256 hash. For the 2+ users among us that have a... (read more)

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[-]nazgulnarsil00

Just got my second card running a few hours ago. If it all goes bust at least it will have been an entertaining ride.

Building a mining rig is no longer that attractive with the price doubling for the video cards that are good at it.

edit: looks like you can still build a 1Gh rig for $800 with a payoff time of <30 days presuming power is cheap and price/difficulty doesnt drop too hard.

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5David_Gerard
How long before the botnet operators start mining? I've yet to see an advocate mention the botnet operators - maybe I've missed something. Is there some reason bitcoin mining isn't susceptible to botnetting?
9saturn
Here's one plausible reason. The average PC without a top-of-the-line GPU is very slow at mining, botnet operators can make quite a lot of money with good old extortion and spam, and pegging the CPU all the time will prompt some victims to get their computers disinfected or replaced more quickly than they would have otherwise.
0gwern
Numbers are available. The ratio is GPUs are something like 150x a CPU (going full blast). Botnets are large, but a 150 or 300x difference is hard to make up given how many GPU miners there already are. (This is not to say that a botnet might not make good money doing normal miners, but it's not really something to worry about.)
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