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059 – Bitcoin – a Digital, Decentralized Currency

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This episode covers Bitcoin, a digital, decentralized currency. In our conversation with Gavin Andresen, the technical lead of the project, we cover basic economics of money, the way users interact with Bitcoin, as well as the technical implementation of the system. Bitcoin uses a couple of clever ideas about implementing distributed clocks and global ordering, and is a very nice example of applied cryptography.

41 Responses to 059 – Bitcoin – a Digital, Decentralized Currency

  1. Marco says:

    Awesome show! Thanks.
    Would be great to have the same in German, too! Is there some chance for that?

  2. admin says:

    No chance :-)

    Markus

  3. Guido says:

    Very interessting show. But i am not such enthusiastic. I see some great shortcomings – not from the computer science point of view, but from the economical point of view.

    First the deflation thing. I the show about “Geld,Staat,Schulden” we heard a bit about how bad deflation is. Deflation is build in into bitcoin. So it could never be a good currency.

    In the show you said “bitcoin my be a good investment”. Sure it may be – but only if you are an early bird on this. Gavin said he sent 50$ and they are worth 10000$ now. It is a – in german called “Schneeballsystem” – a pyramid scheme – a that again puts a big question mark on it from the legal point of view.

    The founders will have thousands of bitcoins from the alpha and beta phase of the project where digging bitcoins only costs a few days. They are worth now real dollars and will become millions if the system grows. And who will pay these millions? We will – will we?

  4. admin says:

    Hi Guido, thanks for your nice feedback. I think I do have an opinion on your two issues, but I’d rather ask Gavin to reply to you :-)

    Cheers,
    Markus

  5. Regarding deflation: bitcoin is designed to be like gold– there is only a certain amount of it, and it is easier to find at first, and harder to find as time goes on.

    If Guido is correct and a deflationary currency can’t work as “the” currency, then bitcoin will probably end up being like gold– not a currency we use every day, but something some people use as a long-term store of value.

    Perhaps a bitcoin alternative that has built-in inflation and a different coin discovery algorithm will appear and will be more popular than bitcoin. There doesn’t have to be one choice, and competition is good!

    As for bitcoin being a pyramid scheme: I think bitcoin is no more a pyramid scheme than a high-tech startup company is a pyramid scheme. I have invested in high-tech companies in the past because I think they have a great idea. I think people buy bitcoins for the same reason– they think that they will be ‘a better gold’ or ‘a better euro’ and will be more valued in the future.

    As for the founders having lots of coins: yes, they will have lots of coins, assuming that they haven’t already traded them away. I think the early adopters deserve to make some money; the possibility of making money in the future is a great incentive to support the system and help it grow. It is not too late, by the way, to be an early adopter– all the bitcoins in the world are only worth about $5million. But do NOT buy any bitcoins unless you can afford to lose that money, and do NOT buy them if you think bitcoin is a pyramid scheme.

    PS: The 10,000 bitcoins I bought for $50 last year funded the Bitcoin Faucet– I don’t have those bitcoins any more, I gave them away. And I am not personally sitting on a huge stash of coins; I’m hoping to earn bitcoins by providing useful bitcoin-related services.

  6. Greg says:

    Another great show! One small administrative request — while you always display the date the podcast was posted, it might be useful to also post the date the podcast was recorded. I understand it takes a while to produce the audio, and it is a bit confusing sometimes when your guest talks about things that happened recently or are about to happen. Keep up the good work!

  7. admin says:

    Good idea! I will keep that in mind.

    Thanks for the nice feedback :-)

    Markus

  8. Alex says:

    Great discussion. Minor points for those interesting in the technology:

    Minute 11 Gavin said (paraphrased) “you can compute the public key from the private key but not reverse.”

    I believe Gavin meant that a message encrypted with the public key can only be decrypted with the private key. Similarly a message encrypted with the private key can only be decrypted with the public key.

    In a simple PK implementation there is no functional difference between the public and private key, except that we arbitrarily keep one secret and give the other away.

    Minute 16: 2^256 is more atoms than found in the Earth.

    This is strictly true. However, it’s also far more atoms than in the entire galaxy. It’s nearly as many atoms as in the observable universe (~2^266). So the statement “unlikely” approaches “impossible” given our current understanding of mathmatics, physics, and technology. However…

    Minute 31: Gavin discussed the possibility of BitCoin becoming invalid or shutdown, due to a network or software bug.

    A more likely scenario, is the implementation of quantum computing, which might be feasible within our life time. Quantum computing would also reduce many current cryptography systems to a trivial crack (along with ATM transactions, secure web browsing, and stock markets).

  9. admin says:

    Great additions Alex. Thanks!
    Markus

  10. Alan says:

    I’m entirely new to bitcoins, only heard of them today.

    However I dispute the notion that deflation is a bad thing. It simply means that goods and services become more affordable over time – which is exactly what SHOULD happen in any normal market.

    As productivity improves we expect more bang for our buck. My first “proper” computer ran at 100Mhz, had 4MB of RAM and a 650MB hard drive. My mobile phone today has a 1Ghz CPU, nearly 800MB of RAM and an 8GB card smaller than my thumbnail – and it was cheaper than that first computer.

    If central banks and governments quit increasing the money supply we would see prices steadily reduce all over. Instead we see the opposite in things that move slower than computing, such as food. They call it inflation.

    I call it theft.

    I’ve no idea of this bitcoin thing will take off or do well but I certainly hope so. :)

  11. Hadrian says:

    I am impressed with the openness of the questions and answers. I cannot claim I understand bitcoins well enough, yet there is something that strikes me and was not touched on I think.
    The idea and algorithm seem sound. However, what prevents one from using the same idea and algorithm to create say bytecoins and have a competing currency. Kinda like if bitcoins are the equivalent of gold, bytecoins would be the equivalent of silver.
    This would create competing markets, so if the second group would me more successful in marketing bytecoins (i.e. create a larger market) that would make bytecoins more attractive than bitcoins. And from there you can have other specialized e-currencies.
    Is that a possible scenario?

  12. RB says:

    REAL currenceis are storehouses of labor value, and nothing more. Deflation may reduce prices of goods, but it ultimately backflows into reduced compensation for labor that creates those same goods. No honest currency should be the object of speculation, because it alters exchangeable value with no relation whatsoever to the initial labor input that gave value to the currency in the first place. In other words, currency speculation serves no other purpose than as a mechanism to transfer and concentrate REAL wealth that originated as honest labor into the hands of those who labored little to not at all. America and the rest of the world has had quite enough of that already, thank you. For this to work, all Bitcoins must originate by trusted and verified attestations that the agreed upon labor, or its equivalent, has been tendered as consideration in the exchange.

    If I have no Bitcoins but wish to exchange my labor for a product, once my labor has been put on the table, Bitcoins should be issued to me, and then transferred by me to the provider of goods and services who is agreeable to the exchange.

    Therein lies the rub. The whole system of Btcoin issuance needs to ultimately be tied the performance of REAL human labor, and not the solving of some mathematical equation, which is NOT REAL work. My computer is solving massive computations right now, as I speak, but unless it accomplishes something tangible, it is NOT “work”. Silicon chips digitally masturbating their bits on the quantum electron level does not REAL “work” make. So long as it takes REAL human effort to create food and shelter, then our currency must have a REAL basis, not virtual. Virtual “work” creating virtual “money”, exchanging for virtual “food” leads to REAL starvation. Once labor value has been stored in a currency, it must remain intact, and not inflated or deflated away. Any currency, especially a virtual one, that can be made a medium of speculation as source of wealth creation should be avoided like the plague. It is NOT what the world needs right now, which is an honest and rock stable storehouse of labor value.

  13. @Alex: bitcoin uses ECDSA elliptic curve signatures; a fixed point on an elliptic curve is multiplied by the private key (using the wacky elliptic curve multiplication math) to get the public key. The security arises because nobody has an efficient algorithm for finding the multiplicand given the original point and the public key.

    RE: quantum crypto: there are schemes to move value from bitcoins to some future yet-to-be-designed quantum-secure system like bitcoin (involving spending your coins using a special transaction to move them from the bitcoin world into the qbitcoin world). I’ll start to worry when the quantum cryptographers can break 64-bit hashes or factor 64-bit numbers (bitcoin uses 256-bit hashes and keys).

    @Hadrian: sure, competing currencies based on bitcoin is already starting to happen (there’s a list of them in the bitcoin forums). They’ll have a hard time competing unless they have significant advantages over bitcoin, because the “network effects” of a currency are very, very strong– currencies are more useful the more people accept them, and they get more valuable the more useful they are, attracing more people to use them, and so on.

    @RB: it seems to me “currency is a store of human labor” is short-sighted. Currency is a store of value, and we value more than human labor– we value truth and beauty and tools that make our jobs easier as well as hard work. I value bitcoin because I think it is a tool that will, in the future, make it easier for me to do things like pay for a meal when I’m travelling in another country.

  14. Hadrian says:

    @RB, I believe your are missing on a few points. The cost of generating bitcoins increases exponentially. So the first bitcoins are generated for next to nothing, you are correct creating the opportunity for those who get in the game early enough. However, you seem to completely ignore the effort of creating a market, which *is* REAL work and has significant costs and risks (that go down in time as the market gets established).
    After the market is established the only significant way to generate bitcoins is by trading them for goods and services. You seem to have a problem only with the bootstrapping part, which rewards early adopters. That’s no different than any other startup, as Gavin mentioned.

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  16. MK says:

    Hi,

    just read about it in a major german online magazine, that means you are gonna become big – at least in germany;p

    Like commentators above me i’m a little concerned about the deflation.
    If the algorhytm is not crackable and the difficulty to create new coins is exponentially rising, the comparison to gold surely is near. maybe expect of its cultural impact (u cant hang bitcoins around your girlfriends neck^^).

    But anyway, the problems that come along with those coins will be the same that came along with gold-based currencies, which means deflation.

    That could actually lead into big time economic turbulances, since fresh money is steadily needed for investments. The past shows that the gold standard usually broke down after a couple of decades and was replaced by more flexible currencies.

    There are enough examples, like the break-down of bretton woods, the feds decision to give out fiat money or the british central banks decision to give up the silver standard and many more (ancient currencies too btw).
    Every time the standard was given up after huge economic problems. (too often wrong interpreted genius) John Maynard Keynes stated that a fixed currency standard is the wrongest thing u can do to an economy. Others – not less genius – said about the same.

    One comment above said that it is no problem if the currency is replaced by something better if the coins flaw of increasing value is too big.
    The problem with it is that usually that happens after something really bad happened. So my guess is that the coin has something like a build-in “best before” date in its algorhytm, after which the demand rises above the supply. As soon as that date is reached – and if the coin gets major attention of course – the system around it will neccessarily brake down.
    I guess if you compare the coin creation function with the general coin usage function u can even calculate that day;p

    A possible sollution to counter that day may be to built a currency above the coin that reflects its usage. A simple function that makes the overclocking curreny linear to the extension of its usage might do the trick. Thats basicly what central banks do and which means that the linearisation needs an independent authority that controlls ist. Not very sympathetic..
    And in the idea of many overclocking functions and therefore many currencies isnt a real sollution too, because there would be competition and in the end the strongest wins, creating a monopoly of one currency and neccesarily one authority.

    Another way may be something Silvio Gsell like with a date at which old coins expire. That needed a new information – the date – attached to every coin and on every transaction the date is checked if it is out of date. That way the algorhytms natural limitation could be extented whitout limit, old coins would get new dates and could be used again. The nice thing: it wouldnt need an authority for that. Problem is: whats the perfect expiration date? Friedman sais 15% per year, others say 2% and opportunists say it depends on the states state of dept;p But no one sais its -x%….

    I’m sure there are plenty of other elegant ways to fix that deflation problem, just read some economists. (i wonder what Marx has to say about it^^⁾

    Anyway wish u good luck with the project, hope u can fix ur problems with deflation and the CIA;p

    Gruss!

  17. Partnersuche says:

    I think, the project is really interesting:
    from a technical point of perspective as well as from a economical perspective.
    And: even the CIA shows its interested (no matter for what they head for), so it can’t be that “easy”.

    Alone, if the CIA is not capable of inventing such thing themselves, they should hand over their business better to Mossad i.a. ;-)

    But never forget: with a fixed limit of max. available BitCoins, it MUST cause deflation – otherwise you must stop increasing productivity/innovation/etc. – because all year producing more and more goods (due a productivity-increasement of around 1 – 2%) causes the need that money floating around increases as well, resulting you can buy a penthouse with just one BitCoin, in lets say 2020…

  18. Bernhard says:

    The project got public interrest (in Germany): http://www.spiegel.de/netzwelt/netzpolitik/0,1518,765382,00.html

  19. admin says:

    This is indeed strange. Especially since they say Bitcoin is dangerous because no central bank can influence the value of the currency in times of crisis. Isn’t that the point?? Scary!

  20. eqcitizen says:

    MK: I think you are reading the wrong economists. You many want to look into a few with a different perspective on deflation than Kenyes (seeing as though every time he has been listened to, a large economic catastrophe has ensued…ahem Great depress ahem….70s stagflation…ahem The Great Recession ahem). Take a look at Guido Hulsman (a german) and his book “Deflation and Liberty”, or just read Mises, Hayek, or Rothbard.

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  22. Joe Schmoe says:

    Re: MK

    The big advantage of bitcoins over a gold standard is that they can be designed to be infinitely divisible. Right now they are finitely divisible to 8 decimal places (if I recall correctly).

    Gold/silver standards require paper certificates/money after a few decades because you can only divide gold so far. Bitcoins are digital and can be subdivided as much as needed. It could be in 50 years that the cap of 21 million bitcoins could be worth trillions and trillions of dollars, but you can easily switch to a microBitCoin (1/1000000th of a BitCoin) standard if need be.

    Bitcoins are designed to be as secure and trustworthy and safe an investment as physical gold while remaining as convenient and usable as a credit card (although it currently falls slightly short of credit-card convenience and gold-level security).

  23. Great show, thanks so much for the informative back and forth. What a fascinating and ingenius concept!!

    Some of my own thoughts http://www.economicsjunkie.com/bitcoin-triples-again-thoughts-on-money-and-freedom/

    Gruss,
    Nima

  24. bwelkin says:

    It’s a pyramid scheme. The first people running the bitcoin software made a ton in BTC and now, two years later – at the BOTTOM of the pyramid – get nearly nothing.

  25. hi ho says:

    German podcast about bitcoin.
    http://chaosradio.ccc.de/cre182.html

  26. dee says:

    my question is, is this all stable for a long while… have this currency a real long future… because i think its the wright way having an internet currency, we´ve so many problems with “immaterielle güter” imma…(sorry for english).. that we have trade with something like that, ok the big problems are deflation, hacker and some other important aspects, but the bitcoin has a wonderful speculativ…(sorry..) site and the whole concept seems to be getting better by crowdsourcing, natural marketlaws a.s.o…. or isnt it this way… im very interested in more facts…thx 4 answer

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  29. Lelala says:

    What happens if someone steels the BitCoin wallet? Are there any recorded cases in that area right now?
    Are there any banks, that “accept” BitCoins in their accounts?

  30. Geoffrey says:

    I’ve heard a lot about bitcoins and was looking forward to its inception but, now that I really know how it works, I’m not that enthusiastic any more. I don’t think it’s just that I’m a Luddite, I just wan’t sold on it (no pun intended). That’s my two-cents worth (pun intended). Good interview.

  31. MaNo says:

    I think the hype of Bitcoin has also faded quite a bit by now. I still think the
    idea is interesting, though, even if just from a theoretical/crypto perspective.

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  33. Flash says:

    Can I exchange bitcoins into real US Dollars

  34. Neil Kitson says:

    I just heard this for the first time (April 2013). I’m obviously way behind, but the interview was of very high quality and very clear, even for the non-geek. Thanks!

  35. luckyluke says:

    150 MB blockchain. Lol:D
    Today , 2013-04-13 it’s 9GB. :D

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  38. David Kaštánek says:

    Great episode! I learned so much from it. Thank you.

  39. cnavigato says:

    Thanks for the podcast. Very well organized and sounded fine to me. Enjoyed it from a historical perspective. Great information resource. Thanks again.

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