Guest Post: Enter The Bitcoin, Part Zero

(I’ve asked Pete Dushenski, of Contravex mild fame and arguing-on-this-site minor fame, to give our readers a sort of primer/polemic on cryptocurrency in general and Bitcoin in particular. We are starting with an introductory piece he’s written to get you up to speed. This afternoon I’ll be running a piece of my own to help you understand “hashes”, which are a big part of Bitcoin. Then tomorrow we will run the second part of the Bitcoin article. Many thanks to Pete for contributing this — JB)

When Jack asked me to write this, he told me that

Milton’s goal with Paradise Lost was “to explain the ways of God to man.” Here, you would be explaining the ways of the future to the merely present.

So,

What is Bitcoin ?

The future.

Is the future bright ?

Indeed!

How does Bitcoin work ?

Let’s find out.


Who is this Satoshi guy ?

Satoshi Nakamoto is the pseudonymous creator of Bitcoin. A man of unique intelligence and foresight, he was but one in a long line of cryptographers and computer scientists who attempted to create a non-statal (ie. private) digital currency. For over 20 years the problem had been approached from various angles but all were ultimately too centralised. Satoshi was the first to create the right incentive structure, the right fail-safe structures, and the necessary decentralisation to succeed. He published his White Paper on the subject in late 2008 and then mined the first coins a few months later. He nursed the project along from its inception in early 2009 until late 2012 when it was clear that the project had the legs it needed to be successful. Satoshi mined approximately 1,000,000 of the early coins, which would now make him a billionaire many times over, but his coins have never moved and may very well never move. It’s entirely probable at this point that Satoshi destroyed his private keys and that his coins are effectively dead.

Is Bitcoin money ?

In as much as anything can be money, yes. In as much as it has a dead President and a pyramid with a big eye on it, no.

Is Bitcoin only for criminals ?

No. Criminals probably use it, but they also use dollars and that doesn’t stop you from being paid in those, does it ?

What are private keys ? Or public keys ?

In public-private key cryptography, public keys are the mailbox and private keys are the keys to the mailbox. People can send mail (or any data, including money) to any public mailbox in the world but only the person with the private keys can open it. Bitcoin isn’t the only piece of software to use public-private key cryptography, Pretty Good Privacy (PGP) was developed in 1991 and was the first mainstream use of the technology – it’s used to encrypt e-mail. PGP is what Edward Snowden used and what serious privacy advocates still use to this day. Public-private key cryptography is used all the time but it’s usually in the background and you usually aren’t in control of the private keys. Bitcoin and PGP demand that their users solely control their private keys, which is no small burden.

What is a “hash” and how do you calculate it ?

A hash is a mathematical function that takes data of any size and spits out data of a fixed size. Hashes are essential for information security in general and Bitcoin in particular because they are one-way functions that are easy to verify but difficult to reverse engineer. Think of them like Sudoku puzzles in this sense. Computers calculate hashes for Bitcoin mining by guessing millions of combinations a second in an effort to guess the “correct” one that solves the newest block. It takes 10 minutes on average to guess the hash for the newest block and earn the block reward. Bitcoin also uses hashes as transaction records that form the blockchain, and in other ways. You can read the White Paper to learn more, and there will be a piece later today to explain it in basic terms.

What is a blockchain ?

You’ll see tomorrow.

What is a block reward ?

You’ll also see that tomorrow.

19 Replies to “Guest Post: Enter The Bitcoin, Part Zero”

  1. Cisco LaPerla

    Hope you guys will address the question of what use is Bitcoin if it isn’t private, is notoriously vulnerable to fraud, makes a lousy store of value and an awful medium for transactions, and couldn’t possibly replace fiat currency under any regime capable of collecting taxes.

    I mean I *love* the idea, really LOVE it. I hate governments and their meddling, but this just isn’t a solution

    Reply
    • hank chinaski

      I think that if it was truly private and untraceable and nontaxable, the Feds would have gone after it great guns by now.

      Reply
    • Pete Dushenski

      @Cisco What do you mean “if it isn’t private” ? If we’re playing hypotheticals, why not ask what the world would look like if Bitcoin didn’t exist at all ?

      As to being vulnerable to fraud, it’s unfortunately sheeple that are vulnerable to fraud, not Bitcoin. It’s not Bitcoin’s fault that fraud exists anymore than it’s Bitcoin’s fault that it’s cold in Winnipeg.

      A lousy store of value ? Bitcoin might experience exceptional volatility because it’s a thinly yet globally traded 24/7/365 unlike any other “conventional” asset, but over the long-run it has out-competed pretty much every other “store of value” I can think of. Unless you know of one I don’t ?

      As for Bitcoin being terrible for transactions, have you tried sending a wire lately ? SWIFT is the fucking worst. An hour at the bank branch and then a week of waiting. PayPal isn’t bad for user-friendliness but they can also close your account anytime they feel like it. Bitcoin nodes that you control can’t be shut down by anyone, but I grant that there’s a steep learning curve to operating them.

      If you really hate governments and their meddling, this really is the panacea you’ve been looking for. It might be disguised, but it’s there beneath the cloaks and veils.

      @hank The Feds have certainly tried to stop it but this is bigger than them now. It’s bigger than any individual country. You have a lot of faith in your government but did they stop Bear Stearns from going under ? Did they stop Pearl Harbour from happening ? They’re not omniscient nor omnipotent. If you’d ever worked within a large bureaucracy, you’d see that it’s composed of a bunch of middlingly competent form-fillers, not all-powerful deities.

      Reply
  2. -Nate

    Grumpy old man says :

    Sounds like bullshit to me .

    When I can buy new tires or a cold beer with it ! 7-11 stores, maybe I’ll consider it .

    -Nate

    Reply
  3. Bigtruckseriesreview

    I’ve made a long list of Cryptocurrency updates. I’ve been trading for 3 years and I’ve made a huge profit off of Bitcoin, Ethereum and Litecoin. I got friends into crypto too with COINBASE on IOS.

    I give them updates (like when to sell and give them the choice of whether or not to sell or hold).

    Here’s the reality:

    #1 NO ONE understands why cryptocurrency is.

    #2 NO ONE understands what Cryptocurrency’s future is.

    #3 NO ONE understands when to buy or sell because no one knows the”low” or high”.

    The bottom line of ALL stock trading: BUY LOW SELL HIGH.

    And that’s why I stick mostly to penny stocks or cheap crypto.

    REALITY: CRYPTOCURRENCY HAS NO INTRINSIC VALUE

    Bitcoin is FIAT. It’s valued by the USD – another FIAT currency and it’s only worth what someone else is willing to pay for it.

    People are “investing” into Bitcoin simply because they want it to “go up” and then they want to pull out more money than they put in.

    That is basically a PUMP AND DUMP or PONZI SCHEME.

    The crypto currencies are SUPPOSED TO BE “currencies” which allow you to buy goods and services.

    Here’s the problem: the value fluctuates so wildly, no one can reliably price their products with Bitcoin.

    10 Bitcoin used to be used to buy Pizza. The value of individual coins shot up so high that the pizza would now be a small fraction of one Bitcoin.

    Many services are stepping away from Bitcoin. It’s good for large purchases but terrible for small purchases. The USD by comparison works well for big or small because the value doesn’t fluctuate as wildly.

    GOLD and SILVER have been CURRENCY and COMMODITY since THE DAWN OF MAN.

    I used to mine Bitcoin until the ROI dropped to virtually zero.

    Realistically, it’s easier just to purchase some and wait for it to go up and then sell for a profit. But that can’t work indefinitely.

    Foreign countries who HATE AMERICA, HATE US SANCTIONS and want to be able to move money around are quietly entering crypto.

    Venezuela, North Korea, Russia…

    Eventually you’ll see more 3rd world countries do so – completely avoiding the IMF and moving their money with impunity. Zimbabwe is another example.

    They will back their cryptos on cryptos they already know work well: Bitcoin, Ethereum and Litecoin (for the time being).

    And that’s why you should drop $500 into Bitcoin, Ethereum and Litecoin…just sit back and wait.

    Reply
    • Pete Dushenski

      While I don’t agree that Bitcoin is a pump ‘n’ dump ponzi scheme, I absolutely love a guy who doesn’t let his ideology get in the way of his making money. This is the hallmark of a rare intelligence, and I say that in all seriousness.

      Reply
    • Athos

      Venezuela is on its way to “launch” its own “oil backed” crypto. The Petro!

      Dunno if it is for real or for the LULZ. Being the Venecostani “government”, prolly the LULZ

      Reply
  4. Pingback: Enter The Bitcoin, Part One: Hashes Explained - Riverside Green

  5. Rick T.

    I get most of it but totally not understanding the mining part, which generally gets short shrift in the explanations I’ve read.

    Thanks for this.

    Reply
    • Ryan C

      Here’s my garbage amateur explanation of mining, and I hope someone will correct the mistakes…

      See the idea of “hashing” up there? There’s types of hashing that are a one-way function, meaning easy to calculate in one direction, but very very hard to calculate in the other direction.

      As part of its design, Bitcoin says the next valid coin will be defined by a block of data with certain specific characteristics, and one important characteristic is the hash function will be a specific number. I believe the definition actually says the hash will start with a specified number of zeroes.

      If you make a hash from a block of data, that’s easy to do, and easy to confirm, but it’s computatonally very hard to create a block of data that hashes to a known value.

      So the “mining” is all about a brute-force search for the block of data that, per the rules, gives the correct hash. And the work is competitively distributed among all the mining rigs. And whichever rig finds the block of data first effectively gets awarded a bitcoin defined by the block that works.

      The search is pretty much generating a block of data that far to the rules and might (but probably won’t) have the right hash value, checking the hash, and then, if it’s not the right hash, generating another block of data, and checking the hash…

      Reply
  6. Athos

    Who could have guessed that clicking on that W126 post some years ago would take me down this rabbit hole. A hole that runs deep.

    One of the best things I have done in years. For that and much more, thanks Señor Dushenski and TMSR.

    This is a kindergarten grade explanation. You have made a fantastic job of putting this matter in lay terms. Will share this series with the guys in the office, which are absolute n00bs.

    Off for a tea cup for the hash post.

    Reply

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