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What you’ve got is a Bitcoin address (like a bank account number) and the key to that address (another number, which works like the PIN to the first number).2 The Bitcoin address is mentioned in transactions on the blockchain; the key is the unique thing you have that makes your bitcoins yours.
If you lose the key, your bitcoins are lost forever. If someone else gets the key, they can take your bitcoins. If you send bitcoins to a nonexistent address, they’re lost forever. If you send bitcoins to the wrong address, you can’t reverse it.
So how do you decide who gets to write to the ledger? The answer is: competitive Proof of Work, where you waste computing power to demonstrate your commitment.
A new block of transactions is created every ten minutes or so, with 12.5 bitcoins (BTC5) reward attached as incentive, plus any fees on the transactions. Bitcoin miners (analogous to gold miners) apply as much brute-force computing power as they can to take the prize in this block’s cryptographic lottery.
(The mining reward halves every four years –
There will only ever be 21 million bitcoins.)
Unprocessed transactions are broadcast across the Bitcoin network. A miner collects together a block of transactions and the hash of the last known block. They add an arbitrary “nonce” value, then calculate the hash of the resulting block. If that hash satisfies the current difficulty criterion, they have mined a block! This successful block is then broadcast to the network, who can quickly verify the block is valid. The miner gets 12.5 BTC plus the transaction fees. If they failed, they pick another nonce value and try again.
as of June 2017 the Bitcoin network was running 5,500,000,000,000,000,000 (5.5×1018, or 5.5 quintillion) hashes per second, or 3.3×1021 (3.3 sextillion) per ten minutes.
The ensuing evolutionary arms race, as miners desperately try for enough of an edge to turn a profit, is such that Bitcoin’s power usage is on the order of the entire power consumption of Ireland.7 This electricity is literally wasted for the sake of decentralisation; the power cost to confirm the transactions and add them to the blockchain is around $10-20 per transaction. That’s not imaginary money – those are actual dollars, or these days mostly Chinese yuan, coming from people buying the new coins and going to pay for the electricity. An ordinary centralised database could calculate an
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“Liberty” means only freedom from government; “tyranny” means only government; “force” and “violence” mean only government force and violence; “open societies” is a code word for “free market without regulations”; “freedom” means “free market without regulations” and only that.
Rothbard invented the term anarcho-capitalism for his ideology that a complete absence of government is essential, and that property rights, which are paramount, will somehow still function without it.
Really extreme Austrians like Hans-Herman Hoppe admit that all this would lead directly to functional feudalism. Which becomes neoreaction and the alt-right, but Phil Sandifer already wrote that book.24 25
Bitcoiners hold that immunity to central control is so overwhelmingly important that it’s completely worth all that electricity wasted on mining.
Bitcoin has reached capacity. This means a transaction may fail or be delayed for hours or days (if it isn’t just dropped), unless the user correctly guesses a large enough fee to get their transaction into the block. The Bitcoin community is unable to agree on how to fix this.
At 1 megabyte per block, the blockchain can only do a maximum of 7 transactions per second, worldwide total. Typical throughput in early 2017 was 2 to 4 TPS. Compare with the
Bitcoin was substantially mined early on – early adopters have most of the coins. The design was such that early users would get vastly better rewards than later users for the same effort.
Bitcoin is an imitation of the gold standard; the supply is strictly limited. Advocates tout this as an advantage as a currency.
forward to economic collapse as an opportunity for Bitcoin – continued availability of high powered computing machinery, mining chip foundries, fast Internet and electricity presumably being absolutely assured in the grim meathook Mad Max petrolpunk future.
Bitomat, then the third-largest exchange, were keeping the whole site’s wallet file on an Amazon Web Services EC2 server in the cloud that didn’t have separate backups
By the end of 2016, 75% of the Bitcoin hashrate was being generated in one building, using 140 megawatts133 – or over half the estimated power used by all of Google’s data centres worldwide at the time.134
Bitcoin relies on distributed consensus: the blockchain is what a majority of mining capacity says it is. The consensus model relies on the fact that you can’t outdo all the other miners casually – so it’s not “secured by math,” but secured by economics, balanced between multiple players.
Mining benefits from economies of scale, so it’s progressed from mining on your PC, to graphics cards, to programmable chips (FPGAs), to ASICs.
Nakamoto’s original Bitcoin white paper assumes a peer-to-peer network that anyone can join. In practice, the miners operate their own centralised communication pool,
If you control more than 50% of mining power, you can perform a “51% attack,” which allows you to write the longest blockchain, which will then be taken by the rest of the network as canonical. You can double-spend confirmed transactions, or reject any new transaction you don’t approve of. You can reject other miners’ blocks. You can’t spend someone else’s bitcoins, but you can stop the owner from spending them.
From 25% of the hash rate upward, a selfish miner can mount 51%-style attacks and expect to turn a greater profit than they would otherwise.137
Bitcoin decentralises things that should not be decentralised, then centralises them anyway but wastefully.
Satoshi Nakamoto even has a section listing people suspected of being him – cypherpunks Hal Finney (who had fallen ill in 2009 and died in 2014) and Nick Szabo, engineer Dorian Nakamoto, mathematician Shinichi Mochizuki …
The Bitcoin block size is 1 megabyte per 10 minutes, which allows a theoretical maximum of 7 transactions per second. Transactions were cheap and fast for many years – but by mid-2015, the blocks were often full. Suddenly there were delays and increasing fees. Bitcoin had reached capacity for the few users it had.
What this means is that users are in a blind auction, where they have to guess bigger and bigger fees in the hope of getting their transaction through. Transactions
They sent out a flood of complex chained transactions, which sent confirmation times from ten minutes up to eight hours at a cost of 2.4 BTC in fees
On the other hand, just increasing the block size won’t fix Bitcoin’s architecture, and the blocks will rapidly fill again – going by the trend from 2013 to 2015, blocks would be averaging around 1.6 megabytes by mid-2017 – and the blockchain will grow even faster.
“Which is pretty much the only way it can work in a pub setting. Zero confirmation has worked out so far. There’s been one occasion where a transaction wasn’t confirmed.
“The transaction backlog getting bigger and bigger as the block size stays the same is going to be a problem. A hundred percent of your customers can be honest, and you can still lose out because your transactions are dropped.
Approximately 95% of on-chain transactions are day traders on Chinese exchanges;239 Western Bitcoin advocates are functionally a sideshow,
Proof of Work is obviously wasteful. The other main proposed consensus model is Proof of Stake, in which the next block miner is chosen at random according to how many coins they already own. This saves on wasted hashing, but is a bit too blatantly a rentier economy
Transactions and smart contract programs (which they call “dapps,” short for “distributed applications”) require gas (a certain amount of the currency token, ether, abbreviated ETH), which is paid to the miner whose computer runs the transaction or smart contract. This also keeps smart contracts from running forever.
Ethereum has a current maximum of about 14 transactions per second300 (Bitcoin’s is 7 TPS). As at mid-2017 it’s running about 2-3 TPS, having rapidly risen over 2017;301 popular dapps already fill the blocks and clog the system for hours at a time, such as the Bancor and Status ICOs.
– Hunter S. Thompson, Fear and Loathing in Las Vegas The
Offering”). These are typically tokens running on top of the Ethereum
grey areas in human interaction is tempting: if you don’t understand
Smart contracts work on the wrong level: they run on facts and not on human intent – but legal contracts are a codification of human intent.
The purpose of law is not to achieve philosophical or mathematical truth, but to take a messy reality and achieve workable results that society can live with.
You may have a tamperproof system for running contract code, but the inputs have to come from outside this secure space.
Smart contracts rely on the program being perfect and not having any bugs. But they also rely on the language (e.g., Solidity in Ethereum) being perfect and not having any bugs. And the platform the language runs on (e.g., the Ethereum Virtual Machine) being perfect and not having any bugs. You can deploy fully-audited code that you’ve mathematically proven is correct – and then a bug in a lower layer means you have a security hole anyway. And this has already happened.342
You just learned chemistry and the first thing you built was a giant bomb and you can’t understand why it blew up in your face. – brockchainbrockshize, /r/ethereum354
The DAO launched on 30 April 2016, got massive publicity and became the biggest crowdfunding in history up to that time, with over $150 million in ETH from 11,000 investors in DAO tokens. Fourteen per cent of all ether was in The DAO.
This contract had been advertised as “the steadfast iron will of unstoppable code,”
Some seriously debated whether this should even be regarded as a “theft”, saying that code is law and intent doesn’t matter (unlike in real-world contracts operating in a legal system, or indeed in fraud law in general).
The DAO was shut down soon after, and on 20 July the Ethereum Foundation – several of whose principals were curators of The DAO362 and/or heavily invested in it – changed how the actual code of Ethereum interpreted their blockchain (the “immutable” ledger) so as to wind back the hack and take back their money. The blockchain was “immutable,” so they changed how it was interpreted. The “impossible” bailout had happened.
This illustrated the final major problem with smart contracts: CODE IS LAW until the whales are in danger of losing money.
