[chris (OP)]

This week I was asked to provide a commentary for the BBC on bitcoin and what this technology means. The peg was the discovery, by rapper 50 cent, of $8 million in bitcoins that he'd lost down the back of his sofa.

In the course of my research on the topic I came across a lot of extremely impenetrable and frankly weak explanations of bitcoin, the underpinning technology, including block chain, and why it exists at all.

I think we can all do much better and provide a really clear and definitive explanation of bitcoin, its inception, operation and future.

It would really help to have a series of questions that we can answer to explain this.

Who would like to kick off?

[jeffreyH]

Explain it to a five year old.
https://www.coindesk.com/bitcoin-explained-five-year-old/

[RD]

The peg was the discovery, by rapper 50 cent, of $8 million in bitcoins that he'd lost down the back of his sofa

The $8 million bonus was due to the recent dramatic rise in the value of BitCoin.
He had accepted BitCoin payments for sales of his 2014 album : BitCoin has increased by ~17x since then.



[ A year ago 50 Cent didn't have any cents ]     

[syhprum]

I think the complex calculations needed to produce bitcoins are done on special purpose computers using GPI boards a similar configuration such as is used in modern super computers only on a much smaller scale .
How much faster are these than a regular PC and would it be economical to buy time on a genuine super computer to produce them.

[evan_au]

Satoshi Nakamoto (probably a pseudonym) released a paper on the Bitcoin concept in 2008, and the source code for Bitcoin in 2009.

It uses encryption to produce a digital currency which is:
- Not controlled by any central bank or organisation; it is fully distributed
- Not subject to government policy shifts such as "print more money".
- Is planned to have a finite number of Bitcoins mined, at a planned rate.
- The rate of Bitcoin mining is controlled by changing the level of difficulty of a cryptographic puzzle, so that a new puzzle is solved after 10 minutes (on average).
- Is not backed by a government or central bank, which makes the price rather volatile, determined by changing supply & demand.
- Bitcoins had no monetary value until 22 May 2010, when Laszlo Hanyecz bought two pizzas in Jacksonville, Florida for 10,000 Bitcoins. This trade was arranged on the internet, and delivered by a conventional pizza shop, paid in $US. At today's Bitcoin exchange rate, those were very expensive pizzas!
- You can choose to manage your transactions yourself, or let a Bitcoin exchange do the transactions for you
- If you manage the transactions yourself, you don't pay fees to a third party, but you pay for the computer and bandwidth needed to manage your "wallet". There have been cases where people scrapped an old computer, only to recall later that it had some Bitcoins on it, and they then tried to dig up the computer (or its hard drive) at the local rubbish tip.
- If you use a third-party, the fees are competitive with credit card companies, but high enough to discourage really small transactions.
- Doesn't have a price penalty for international transfers, or a percentage fee for currency exchange
- Has transactions between anonymous sender and anonymous receiver(s). This can't be tracked by police forces, which is why it is popular with criminals.
- The legal status is pretty unclear in most countries. It bypasses national laws to report people doing large transactions (eg for money laundering).

As always, I recommend Wikipedia as a quick overview, and links to more detailed references:
https://en.wikipedia.org/wiki/Bitcoin
https://en.wikipedia.org/wiki/Satoshi_Nakamoto

Bitcoin mining (solving the cryptographic puzzle) uses specialised hardware, and is very energy-intensive. If someone invents more powerful hardware, the level of difficulty will just ratchet up, to keep the solution time at 10 minutes. The biggest miners are in China.
See: https://spectrum.ieee.org/computing/networks/why-the-biggest-bitcoin-mines-are-in-china

Most the details I know about Bitcoins comes from this podcast from 2011 (1.5 hours; unfortunately, this episode doesn't have a transcript). :
http://omegataupodcast.net/59-bitcoin-a-digital-decentralized-currency/

The underlying technology of Bitcoins hasn't changed since 2011, but the range of potential applications of blockchain technology has exploded since then, as has the number of would-be competitors (some of these competitors don't/ have the energy-hungry bitcoin mining flaw of Bitcoin).

[chris (OP)]

Thanks everyone for getting the discussion off to an interesting start.

Now some follow-up questions:

1) What's the point of "minting" bitcoins every 10 minutes? Why not just mint the whole lot in one go?

2) Who comes up with the complicated equations that need to be solved to release the bitcoins? Are they not as hard to dream up as they are to solve?

3) How is the public record of who owns what bitcoins instantly updated when transactions take place?

4) Although the number of bitcoins is limited to 21 million, I read that fractions of bitcoins - down to 8 decimal places - are allowed; if so, how do you split a bitcoin into up to 999 million pieces?

5) If someone writes down the key to their bitcoins and gives me the piece of paper then, in theory, I own the bitcoins, so how do I then use or access them?

6) With respect to the above, if I keep the coins in an "electronic wallet" on my computer, is that effectively just a document with the registration number of the bitcoins written into it?

7) What is the block chain, and what is its role?

[wolfekeeper]

The basic mining operation is to do a 'hash' function and if the hash happens to have a certain number of 0's at the front of it, then it's potentiallly a valid bitcoin.

A hash function is where you have an input number and the function scrambles the numbers together to produce an output number. A good hash function is irreversible because it's a carefully chosen, complicated function, and because the output number is nearly always shorter than the input number anyway.

Because you can't reverse it, you can't start with the required output and work back to the input. You have to just try input after input until you eventually find a hashed value with enough 0's at the beginning. You then have to provide the input and the hash when offering up the bitcoin, to prove you solved it and then the network records how and that you did it, and the network checks your hash, which is very quick, and then there's a sort of lottery between applicants, and if you win, the network credits you with a bitcoin- they basically add one to your account.

The blockchain is a sort of computerised ledger that records who has bitcoins; it's duplicated around the world, to avoid having any central authority. The problem with the bitcoin blockchain is that it's getting extremely large and transactions are slowing down; it can now take many minutes to complete a transaction.

Bitcoin uses SHA-256 which is a standard 'cryptographic' strength hash function created by the NSA which is intended to be completely irreversible:

https://en.wikipedia.org/wiki/SHA-2

The network creates bitcoins continuously, because it means that you don't have to trust a central authority, and if you create them at the right rate, then the value of bitcoins stays static. In practice the value of bitcoins is increasing because the number of people creating them has ballooned and so the amount of work you need to do to create one has been increased, and because the value is going up, more people want one to hold bitcoin for speculatory reasons (a deflationary spiral/bubble-like behavior of the market).

[evan_au]

1) What's the point of "minting" bitcoins every 10 minutes? Why not just mint the whole lot in one go?

Mining is (intentionally) difficult. Book-keeping for every transaction in the world is difficult.
People need a reward for doing this hard work, and that is the Bitcoins.

The ledger needs to be updated regularly = roughly 10 minutes (see answer to Q3), so Bitcoins need to be mined regularly.

2) Who comes up with the complicated equations that need to be solved to release the bitcoins? Are they not as hard to dream up as they are to solve?

See answer from Wolfekeeper.

There was a case where the US NSA & UK GCHQ intervened in development of an encryption standard to make it easier to crack than the committee expected. This can only be discouraged by open source for the algorithm, and publishing independent tests of the encryption algorithm performance.
https://www.theguardian.com/technology/2013/sep/16/nsa-gchq-undermine-internet-security

3) How is the public record of who owns what bitcoins instantly updated when transactions take place?

There is a public ledger of every transaction in the world since 2009, which is distributed to everyone who runs a wallet.
The full ledger is now 150 GigaBytes (January 2018), although you can apparently operate fairly effectively by just updating the last 0.5 GigaBytes of the ledger.

Anyone who wants to add a transaction must tell every Bitcoin miner in the world about their transaction, and it will be included in the list of "authorised" transactions by the miner who solves the puzzle. This process is not instantaneous - if you are lucky, it will be included in the next update to the official ledger, sometime in the next 10 minutes. If you are not lucky, it might take 30 minutes. That's a long time to wait at the ATM for your cash!

The Bitcoin ledger can only grow at 1 Megabyte every 10 minutes, which limits the maximum rate of transactions to under 10 per second, compared to many thousands per second for traditional credit card and banking networks.

See: https://en.wikipedia.org/wiki/Bitcoin_scalability_problem

4) Although the number of bitcoins is limited to 21 million, I read that fractions of bitcoins - down to 8 decimal places - are allowed; if so, how do you split a bitcoin into up to 999 million pieces?

Many currencies specify values to 2 figures after the decimal point, eg $US54.98.
Bitcoin allows you to specify 8 figures after the decimal point, so it is easy to pay someone B0.0000054.

5) If someone writes down the key to their bitcoins and gives me the piece of paper then, in theory, I own the bitcoins, so how do I then use or access them?

The transaction is not "official" until a bitcoin miner adds your transaction to the official ledger.
The paper transaction will never be included in the official ledger.

6) With respect to the above, if I keep the coins in an "electronic wallet" on my computer, is that effectively just a document with the registration number of the bitcoins written into it?

The official ledger verifies how many bitcoins are on your computer, so you can't spend more bitcoins than you have.

7) What is the block chain, and what is its role?

This is the official ledger, which includes every valid transaction.

[chris (OP)]

Thanks @evan_au

So - does everyone understand all that now?

[syhprum]

The power consumption of a typical bitcoin mining computer seems to be about 2kW nowhere near as much as setting up a cannabis growing system in your loft.
It is possible to get one set up in Iceland by proxy where electricity is much cheaper.

[evan_au]

The power consumption of a typical bitcoin mining computer seems to be about 2kW

The professionals fill a warehouse with computers like this, consuming several MegaWatts.
This would attract more attention from your local electricity supplier than a well-lit loft.

I guess these big players are gambling that the planned scarcity of future bitcoins will push up the price steeply.
They can then sell their current stockpile of bitcoins at a considerable profit (if the gamble pays off...).

[lucky33]

Guys, Bitcoin is not quite trendy now! Much trendier now DeFi!
Now there is a whole hype in this topic!

[Zer0]

Isn't promoting BitCoin, indirectly promoting Illegal & Unlawful activities?
🤔

Are BitCoins more Trustworthy & Stable in comparison to the USD?
🤔

What If the BitCoin bubble pops out overnight...will the Governments of the World protect & safeguard & repay for the Economical & Financial Loss of their Citizens?
🤔

P.S. - On the contrary, i Do Support digital currency...Not so fond of plastic toxic money & environmentally unfriendly paper money.
🙏

[evan_au]

Isn't promoting BitCoin, indirectly promoting Illegal & Unlawful activities?🤔

Some governments view it that way, and ban Bitcoins (if they can find them).
- I would say that criminals promote untraceable transactions, which is why they always like cash. Does governments printing cash promote Illegal & Unlawful activities?
- Bitcoin promotes speculation, and in most countries, speculation on currency, the stock market and/or horse races is legal.

Are BitCoins more Trustworthy & Stable in comparison to the USD?🤔

No.
- The US Federal Reserve will take some actions to protect the $US from volatility.
- No-one will protect you from Bitcoin volatility.

What If the BitCoin bubble pops out overnight...will the Governments of the World protect & safeguard & repay for the Economical & Financial Loss of their Citizens?

As above, Bitcoin promotes speculation, and no-one will protect you from Bitcoin volatility.

[hamdani yusuf]

Elon Musk shared this on twitter.
By investing 1.5 Billion USD in it,  I guess he has some credibility to say something about it.

[hamdani yusuf]

This is also a fun starting point.

[hamdani yusuf]

For more serious persons

[Zer0]

🙄

Hmm...ahem...ahem!

🤔

https://www.forbes.com/sites/billybambrough/2021/02/26/bill-gates-issues-serious-bitcoin-warning-as-tesla-billionaire-elon-musk-stokes-crypto-price-mania/?sh=13600e273892

P.S. - Better to be Safe Now...than to be Sorry Later.
🖖
(Not against E.M...just disagree to his viewpoint...E.M. is a Pioneer!)
👍👌👍

[hamdani yusuf]

[hamdani yusuf]

I'll let him explain in his own words.