Understanding Bitcoin - Stuntman Stoll 11-24-2013 submitted by
There are plenty of articles and videos that try to explain bitcoin, but I don't think they do justice in showing the genius behind it so I'll give it a try.
For starters, let work with an analogy (that is original as far as I know). Think of a wall of safety deposit boxes (they are called addresses in bitcoin lingo). The face of each box is 4”x4” and has a glass door which a numbered key can open. Each box has a number label on the door that is different than the number that is on the key (but the number's are linked – they only work with each other [the address can be deduced from the key but not vise-versa). Each safety deposit box has has a slit in the door so that people can be given the number to the box, find it, put coins in the box (from their box), see how much money is in the box (remember, it has a glass door), but they can't do anything with the contents without the separate numbered key. The safety deposit boxes are instantly available to anyone in the world with an internet connection, and anyone can claim as many boxes as they want for free. There are no names on the boxes but it isn't completely anonymous because there is a ledger with all of the transactions between the safety deposit boxes. There are a LOT of safe deposit boxes. It is based on 256bit cryptography which means it takes a string of 256 0's and 1's to identify each key, and therefore each box. The number of combinations those 0's and 1's can be arranged in could be shown as 2256,
or about 1ee77 (ie. 1 with 77 zeros behind it). The size of the wall of safety deposit boxes (remember 4”x4”) would be 2ee34 miles square (or 3,700,000,000,000,000,000,000 light-years square or about 37 billion times the size of the known universe). That makes the odds virtually zero that anyone would accidentally (or purposely) stumble upon the key that is associated with your safety deposit box.
Bitcoin as an idea was invented in 2009 by an unknown person or group of people who went by the pseudo-name Satoshi Nakamoto. It is believed that the first real world transaction took place in May 2010 when a pizza was bought for 10,000 bitcoin. It likely was invented in response to earlier attempts to create a digital currency to compete with the US dollar. Two of the most (in)famous attempts were E-gold and Liberty Dollar. They were both set up as a digital currency that was centralized on one computer system which had its currency backed by gold (and other precious metals in the case of Liberty Dollar. Liberty Dollar also minted their own physical coins). People could enter the currency by depositing gold or US dollars, and could cash out in gold or US dollars. The digital currency had the same value as the gold backing it. E-gold ran from '96 to '09 when the government shut it down, fined the company $3.7million, and confiscated 2.8 tons of gold (some of the currency holders were able to get their money back earlier this year). The owners pleaded guilty to avoid jail, but got a smorgasbord of other punishments including felony records, personal fines, monitored home detention, community service, etc.. The judge said they deserved lenient sentences because they didn't intend on engaging in illegal activity (news flash – some currency holders will use the money for bad things). Liberty Dollar ran from '98 to '09 when the government shut it down and seized 5 tons of gold and silver. The owner pleaded not guilty, was convicted in 2011 and is awaiting sentencing facing 20 years in jail. The prosecuting attorney described the Liberty Dollar as "a unique form of domestic terrorism" that is trying "to undermine the legitimate currency of this country"
I see E-gold as the near perfect currency. It took gold, which is nature's perfect store of wealth, and solved its short comings as a currency by making it digital. That solved the problems of counterfeiting (might fake a gold coin but you can't fake digital when the server knows where all the currency is), transferability (it's a pain to physically move gold), and divisibility (you can't make change with gold coins). The problem was that it was in plain sight for the government to shut down and steal the gold. Bitcoin's response was to make something that was completely intangible (nothing for the government to steal), decentralized (no company or server for the government to shut down [the computing is done by thousands of computers across many countries]), anonymous (relatively), but otherwise the currency was made to mimic what gold is like in the real world. Like with gold, there are a finite number of bitcoins (21,000,000) that are “mined” into existence. There are roughly 10,000,000 now in circulation with the maximum number to be reached in the year 2140. Mining is the term used for people who use their computers to process the enormous ledger that keeps track of all of the bitcoins. Those “miners” earn bitcoins from the system as it slowly releases the steady set rate of bitcoins into circulation, and from people who choose to donate a small amount to complete transactions (transactions are otherwise free). You can transfer fractions of a bitcoin. Each one is divisible down to .00000001 bitcoin.
Back to the analogy – It is one thing to claim one the 1ee77 safety deposit boxes (addresses) and its contents in theory, but it is another to actually use it to make transactions out of it. There are a number of programs that help you do this. You can either download a program onto your computer which you link your address(es) and key(s) to, or you can do it through a web based program. I believe the best way is online with blockchain.info. Of course there are issues with security (as with anything internet related) but there are methods to protect your money which I won't go into here. Speaking of blockchain.info, “blockchain” is the term for the complete ledger that keeps track of all the bitcoins in circulation. That blockchain is being solved continuously by thousands of computers worldwide. Ten times per hour, the work of those computers is compared to make sure there are no mistakes or fraud, and the blockchain is finalized every 6 minutes. That ledger is public and easily searched. It is kind of fun to go to blockchain.info and search an address of a person you know (it likely isn't that person's only address). For example, Stefan Molyneux (he's a minor celebrity in the anarchist world) has a youtube podcast channel and accepts donations at the address 1Fd8RuZqJNG4v56rPD1v6rgYptwnHeJRWs. If you search that address you can see the transactions and that there are about $300,000 worth of bitcoin in it.
To acquire bitcoins, you either become a miner (but that has become specialized and futile for most part unless you have fancy hardware) or someone with bitcoins transfers them to you (the way you get US $ [unless you do “quantitative easing” on your own with a color Xerox machine]). Since your employer probably doesn't pay in bitcoin, some ways of getting them would be to find someone local to trade with (craigslist, localbitcoin.com), ebay, or (the easist way) through a bitcoin exchange (coinbase.com is the best one for US citizens).
Now lets compare bitcoin to other methods of payment. The following is made with the assumption that bitcoin aps on smartphones are being used and that a payment of 1000 US dollars is made. -With paper check, it takes about a minute in person, a few days by mail, takes about a week to clear the bank, and is usually free for both parties (good luck with international payments). -A wire transfer usually take an hour of leg work for the average Joe to complete, is cleared very quick, and cost between $25-$50 for domestic and international. -Credit card requires special hardware for the receiver, takes a couple seconds to complete in person (a few minutes online), takes 1 or 2 days to clear the bank, and cost the receiver $20-$30 for a $1000 transfer. -Bitcoin takes about 10 seconds to complete (whether in person or across the world). Payment notification is instant, it takes 6-12 minutes to be “cleared” (finalized in the blockchain), and is free (unless you choose to donate a little to the miners).
Bitcoins started out worthless, are now worth about $850 each, and no one knows what they will be worth in the future. If a fundamental flaw is discovered, they will go back to worthless. If bitcoins become widely used and accepted, the value will greatly increase. The value is mainly dependent on how many people use it to save and/or transfer money. For purposes of comparison, lets look at the market cap (capacity [ie. total value of all of it]) of a few different things in trillions US $.
Bitcoin ------------------------------------------------------------------- .008 trillion Apple stock ---------------------------------------------------------------- .47 trillion Gold ------------------------------------------------------------------------ 8 trillion US$ M1 supply (monetary base) ------------------------------------------- 2 trillion US$ M2 supply (includes full value of checking, savings, cd accounts) ------ 10 trillion Worldwide M2 money supply ------------------------------------------ Around 50-60 trillion
IF bitcoin became ubiquitous worldwide and accounted for 1/5 of all currency and had a market cap of 10 trillion, that would make each bitcoin worth $1,000,000 each. I think the odds of that are very slim, but who knows?
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A collection of videos by Stefan Molyneux on Bitcoin. Freedomain Radio Bitcoin Donation Address: 1Fd8RuZqJNG4v56rPD1v6rgYptwnHeJRWs KnCMiner Jupiter - Bitcoin Miner 500GH/s+ 28nm ASIC chips - unboxing and setup 1080p - Duration: 4 ... Stefan Molyneux 262,812 views. 41:21. Keiser Report: Gold, Silver, Bitcoin FTW! (E527 ... Stefan Molyneux of Freedomain Radio joins Adam Kokesh on 'Adam vs the Man' to explain what may become the currency of the future. Stefan Molyneux goes full crazy on Bitcoin price bighammer hurts. Loading... Unsubscribe from bighammer hurts? Cancel Unsubscribe. Working... Subscribe Subscribed Unsubscribe 171. Loading ... The original video was published in 2014: https://youtu.be/tXBwcedQuQ0?t=11m38s