ThoughtStorms Wiki


How BitCoin works

It's starting to look like the BlockChain, the distributed, cryptographically signed public ledger of BitCoin is the really interesting and radical invention.

Increasingly other projects are adopting or using BlockChains for a reliable distributed database.


See also :

Quora Answer : Do you think the idea of bitcoins is ethical? It’s attractive to illegal sellers, requires the same energy to earn and sell for ‘solid money’, may not justify energy spent saving money, and could be outdated by another technology tomorrow.

Aug 6, 2013

1) All kinds of things can be used for criminal ends : computers, cars, aeroplane tickets, screw-drivers etc. etc. As long as they have good uses as well as bad, then they're just tools.

2) One of the big problems in the world is that most people don't understand where the money denominated in their national currency actually comes from. The short version in modern economies is this : private banks create it out of thin air every time they make a loan. When you take out a mortgage they don't give you money that someone else deposited there. They just make it up, type it into the computer, and credit you with it.

They can do this because governments have idiotically given them the right to do this, with very little oversight (what oversight there was has been reduced greatly in the last 40 years). That means banks make huge amounts of money collecting interest repayments on loans which didn't cost them anything. This has two bad effects 1) this acts as a strong force for concentrating the money in the world in the hands of the financial sector (through all those interest repayments), 2) because money is always created in the form of a loan that requires interest repayments there is always more debt in the economy than money to pay it off. This has all kinds of weird, socially corrosive effects.

(If you think this is all crazy, check out Positive Money, a UK think-tank that investigate this stuff)

So, the problems of money in the world aren't just "greed, poverty, corruption, extortion" as personal failings. Some of the problems are systematic, built into the way money is created.

One advantage of BitCoin is that the way it's created is completely independent of this system. Yes, it's still unfair, in the sense that only fairly privileged (in terms of wealth and knowledge) people are likely to be able to do their own "mining" (ie. creating the money). But there's still less of a barrier to entry than starting a private bank. And it's much more transparent.

And because money is NOT created in the form of loans (what we sometimes call "debt-money") it means that there are actually more bitcoins in existence than debts denominated in bitcoins (unlike pounds / dollars etc.)

3) We now know that other payment systems are compromised in different ways. We know, for example, that the NSA in the US is trying to collect and store pretty much all the information running through a computer anywhare. And that they claim they have the co-operation of large cloud-services, including Google. If they're sucking up meta-data about who mails who on GMail and what searches you make you think they won't also be looking in your Google Wallet?

A year or so ago I made a donation to wikileaks. (An activity I consider to be highly ethical.) Today, I believe that would be fairly hard as the existing credit card providers and paypal have unilaterally chosen to block such payments.

BitCoin payments can't be stopped by governments or corporations. And that's something we should welcome. You don't have to be a paranoid conspiracy theorists to realize that governments should have some limits on their powers.

4) I agree there is an issue with the spending energy on creating bitcoins. I see why it's integral to the system. And obviously it's tiny compared to the energy spent on other computer related leisure, such as surfing YouTube or playing games, but it would be nice to think that this energy could also be put to some use. I've suggested building electric heaters out of bitcoin mining hardware so at least people could get some benefit from the heat chucked out.

5) You're probably driving up the price of energy by a small amount. But I'd guess it's tiny compared to all the other uses we make of electricity. (Like I say, less than Facebook or overfilling the kettle. )

6) Well I'd have to see the actual amount of scarce resources and weigh up the costs / benefits. Ordinary money isn't energy-free to make transactions either. Gold mining has huge environmental costs.

BitCoin got prominence by being clever enough and viable enough for a libertarian-leaning geek community to take it seriously, and spiralled from there. It probably helps that our governments have been acting in an extremely untrustworthy way recently.

Update : since writing this, I've become more aware of the huge and increasing energy demands of "proof of work" crypto. While I think my points above are OK, I wouldn't be quite as blase about the energy / resource demands. It might be that PoW crypto shouldn't be adopted at scale because of the energy demands.