Latest Blog Posts
September 12th, 2014 by Michael Kimani
7,315 viewsSeptember 11th, 2014 by Brian Cohen
Recent publications by the US federal government indicate that Bitcoin will likely be used in illicit cross-border transactions, and that the Office of National Drug Control Policy (ONDCP) is ramping up efforts to detect and interdict bitcoin transactions. There is a special focus on Canada and the United States.Read More
3,365 viewsSeptember 7th, 2014 by John Barrett
6,499 viewsSeptember 7th, 2014 by wildjo
The BitLicense is getting a lot of attention these days because it is the first significant regulatory attempt by a US authority to proscribe activity in the Bitcoin space. Not surprisingly, this first attempt is fundamentally flawed.
Last week, I demonstrated that the regulations proposed by the New York Department of Financial Services (DFS) were unlawful because the DFS lacked the statutory authority to regulate Bitcoin. This week we tackle the constitutionality of the regulations and come to a similar conclusion: the BitLicense violates the Commerce Clause of the US Constitution and is, therefore, unlawful.Read More
3,034 viewsCategories: LTB Network Shows
5,036 viewsSeptember 4th, 2014 by Adam Terwilliger
Editor: Chulseapple Original:
The security of an individual Bitcoin address is well documented and an awesome mathematical certainty. But what about the security of sending Bitcoin to somebody? Is there a mythical CEO of Bitcoin somewhere, warding off would-be hackers attempting to steal your funds through a man-in-the-middle attack? What guarantees the absolute certainty of your transactions? Quite frankly, mathematics!
The Telephone Game
Do you remember the telephone game from your childhood? A big group of people, say thirty, sits in a circle. One person whispers a word or a phrase to the person next to them. That person delivers the message to the next person, and so on, until the message goes entirely around the circle. The goal is for the message to get back around to the beginning exactly the same as it started.
Why the Telephone Game Fails
In a telephone game with thirty people, there are thirty separate, singular points of failure. This is a very important point, because even though the players in this game can be honest, all it takes is just one dishonest person to wreck the honest intentions of others. If one of the players decides to be that guy and wreck the game by sharing the wrong message, no one will know who threw the game. Since each whisper transaction is peer to peer, each player puts their complete trust in the one person that came directly before them to relay the correct message.
Change the Rules!
How could we fix the rules of the telephone game to ensure that it could never fail, keeping in mind the above issues? Instead of thirty people sitting in a circle, let's start the game with only one person in the room. This person creates a message, and then another person is allowed to enter the room and hear the message. We then change the rules so that no whisper will take place between just two individuals. We bring an independent group of 100 observers to assist. This independent committee records on a piece of paper all information possibly related to that whisper, including:
- The time the whisper takes place
- The individuals involved in the whisper
- The actual message that was passed from person to person
To incentivize this supervision, $1 USD is awarded for the successful recording of each whisper transaction. Unfortunately, bringing in this independent team would be expensive, especially if we paid every single one of these 100 individuals for each whisper in the game! After all, how much skill does it really take to listen to two people talking, and record the results? Therefore, we will require the winning observer to not only be the first one to record the whisper transaction, but also the first to solve a Sudoku puzzle correctly. I am pretty sure we could have asked them to do anything to prove they were working, but I like Sudoku puzzles, so Sudoku puzzles it is!
As soon as the first lucky observer solves the puzzle, all other observers come to a consensus on who won. That person gets paid the $1 reward, and maybe even any tips the two people playing in the telephone game decide to give them for being so awesome at solving Sudoku puzzles. This new process is now not only safe to extend through the end of the telephone game with just 30 people, but also feasibly forever with an infinite amount of participants.
In fact, the only way this game could be ruined is if a majority of observers are somehow in cahoots with one another, and decide to transcribe the message incorrectly. In theory, they could pool their puzzle solving power together, coordinate a fake message, and manage to solve the puzzle correctly before the other observers manage to be the wiser. This would be like re-introducing a singular point of failure to the system because a majority of the people in the room would have the power over the message being sent. We can fix this by inviting one thousand ... no ... one million observers to watch the whisper transaction! Good luck trying to coordinate a majority of that many people evil observers!
Would You Trust This Network?
If you had to get a message of value from point A to point B, would you trust the telephone game system I just outlined above? You ought to, because what I have outlined is essentially the Bitcoin blockchain. The blockchain is the irreversible ledger of all transactions that have ever taken place in the Bitcoin ecosystem, from one account to the next, and quite possibly one of the most significant innovations in technology of all time.
From my telephone game analogy, each person trying to get a message to the next person relates to what are called blocks on the Bitcoin network. A block in Bitcoin is a combination of three elements: the hash of the previous Bitcoin block, the Merkle root, or the hash of all of the hashes of transactions that have taken place from one address to the next in the Bitcoin system, within about a ten minute time span, and the nonce, or a completely random number unknown to anyone at the time.
The observers of the new telephone game I proposed are what we know in the Bitcoin world as miners. Miners earn a block reward for their work in the process of hashing together approximately the last ten minutes of each transaction, in addition to any transaction fees from user to user associated with that block. Just like in the new telephone game where merely observing took little to no skill at all, hashing transactions together is just as arbitrary. Therefore, a Sudoku puzzle-like game that mandates the miners to essentially guess a very large random number was created. This very large random number is known as the nonce, and it is added to the end of the previous hash to mint a block. This nonce requires the miners to prove they dedicated a lot of computing power to work; and at the same time, introducing a little element of luck to the process.
Where Do Bitcoins Come From?
In the beginning, no Bitcoin actually existed. Therefore, there were no coins to actually send from one address to the next, and no transaction messages to be broadcast. Just like the new telephone game, the Bitcoin network could not be started until an initial message existed to be sent. This initial message to be broadcast in Bitcoin is known as the genesis block. The reward for the first miner to observe this block, or any subsequent block for the immediate future, was 50 BTC (current value: approximately 27,000 USD).
Even though there were no initial Bitcoin transactions in the genesis block, by default, every block that ever gets discovered on the blockchain has an unspent open-ended transaction called the coinbase, which is reserved for the miner who eventually wins the nonce guessing game. So, at minimum, there is one transaction that MUST happen every block, even if there are no other transactions on the network. Any other transactions on the network will be added on top of this and hashed down the size of one block. This coinbase reward that goes to the winning miner is known as the block reward. This block reward started out as 50 BTC, but subsequently has gone down over time at a predictable schedule, to match the idea of the value of Bitcoin eventually rising over time. For the first 210,000 blocks, the reward was 50 BTC, but this reward is cut in half for every 210,000 blocks after that. Currently, we are on approximately block 315,000, or a reward of 25 BTC per block.
Attack of the 51!
The more miners who are playing the Bitcoin game, the more likely someone will randomly be lucky. On average, the difficulty is designed to take about 10 minutes to go block to block. If computing power gets better, difficulty is adjusted to maintain this ratio.
What would happen if the majority of the miners pooled their brute force computing power together to attempt to disrupt the network? Could this feasibly happen? Think of it from the miners' perspective.
When your Bitcoin wallet says 2 BTC, it does not mean that they are physically there, like paper currency actually sitting in a leather wallet. Instead, those 2 BTC represent a ledger of transactions that is traceable back to the genesis block and that prove the entire history of Bitcoin leads to you having that many BTC sent to your address.
If a miner were to pool their power with a majority of bad actors on the network, they would be able to essentially go back in time on the blockchain, and forge forward an alternate history that could fake transactions and swing the ledger to their benefit. This is what is known as a 51% attack, and it can completely destroy the trust anyone has in a [cryptocurrency] (http://en.wikipedia.org/wiki/Cryptocurrency).
If you have ever seen the movie Back to the Future 2, you have seen an a 51% attack. In the plot of the movie, the chief antagonist, Biff, overhears Marty McFly in the future year of 2015, talking about taking a sports almanac back with him to the past to earn a little extra money by betting on known sporting event outcomes. Thankfully, Doc talks him out of this, but this does not stop Biff from overhearing the idea and thinking to do this himself. Biff famously steals the Delorian time machine, travels back to 1955 with the magazine, and successfully creates an alternate reality past 1955.
So what exactly stops this from happening with Bitcoin?
First, and foremost, there is not just one Biff mining Bitcoins. There are thousands of miners out there. It is true that some do merge their powers to become more powerful miners, but still, there are many of these groups. Thus, there is a distributed workforce working together in the honest process of mining Bitcoins. The probability of a single group, or even a distributed group, of dishonest miners forging past the honest miners to form an alternate reality is nearly impossible. Of course, anything is theoretically possible, but very highly unlikely, as long as Bitcoin has financial incentive to a distributed miner workforce.
Why So Revolutionary?
The blockchain accomplishes a complete, trusted flow of information that no one person is in charge of, GUARANTEED by mathematics to be genuine. In a world where one does not have to trust just one person to verify that something is true, there are truly no limitations to what can happen, or to the applications that can be created. This is why people truly get evangelical about Bitcoin, and truly believe in the power of cryptocurrency.
Imagine any application where central points of failure create controversy:
- Stock Markets
Now imagine the rules for these being completely rewritten with blockchain technology. The value of Bitcoin as a currency is important. However, the value of the protocol is limitless!
New to the LTB network? Follow [this link]( http://letstalkBitcoin.com?ref=9de4636b) to let them know I sent you! While here you can earn all kinds of LTBcoin for actions you would already take, like commenting on blog posts, participating in the forums, and listening to podcasts!Read More
5,246 viewsSeptember 3rd, 2014 by Tron Black
It is no coincidence that the value of bitcoin goes up as the mining difficulty rises. It is also no coincidence that the mining difficulty goes up as the value of bitcoin rises. There is a very tight linkage between the two. To understand why, it is important to first understand how mining affects the difficulty.
Mining for profit is very similar to a regular manufacturing business. There are capital costs which include the mining hardware (ASICS -- Specialized mining hardware, GPUs -- Graphics cards, CPUs -- regular computers, and perhaps AC -- Air Conditioning). Then there is the variable cost which is electricity. The goal is to maximize the profit, which means getting the most out of the hardware, and then knowing when to stop mining and sell the hardware. Most miners sell their newly mined bitcoin immediately to recoup their costs, which decreases the value of bitcoin because of the market sell pressure. Those that hold bitcoin do better in most cases, and miners that hold also benefit the long-term value of Bitcoin -- more on this in another article.
The difficulty goes up as more miners deploy more mining hardware. The Bitcoin network automatically adjusts the difficulty up or down every 2016 blocks, or roughly every two weeks so that each mined block, worth 25 BTC, takes about 10 minutes to find. Every machine, even a weak laptop, has a shot at finding the block on a pro-rata basis of how many hashes they calculate. By joining a mining pool, miners can spread the reward in the same way that office workers get together and buy batches of lottery tickets to get a higher chance of getting a smaller payoff. In a pool, if one of the miners finds a block, the bitcoin reward is shared with all his fellow pool miners.
How and why is the bitcoin price correlated with the difficulty?
Every miner looks at the cost of equipment, the cost of electricity and then makes two educated guesses. First, ‘How fast will the difficulty rise?’ And second, ‘How fast will the value of bitcoin rise?’ These two numbers are critically important and impossible to know in advance, but looking back at historical rates and projecting forward gives an idea of what they might be.
Efficient market theory says that it will eventually be the same cost to purchase a bitcoin as it will be to mine a bitcoin. Why is this? Because if it’s cheaper to mine a bitcoin than to buy a bitcoin, miners will buy more hardware, burn more electricity, mine, and sell bitcoin into the market pushing the market rate down until mining is no longer profitable. If it is cheaper to buy a bitcoin, then the money that might possibly go into mining will instead purchase bitcoin pushing the market price up.
Why mine at all? Because the efficient market theory breaks down at the compressed timescales involved in bitcoin. Rational market forces haven’t gone away, but they simply can’t adapt as quickly as the bitcoin ecosystem changes. If you are prepared to mine when the price rockets on speculation and before the difficulty adjusts to compensate, there are significant profits to be made.
We’ve all heard stories from the early Bitcoin days, literally only a few years ago, when mining bitcoin with a laptop would yield blocks of fifty bitcoin. We’ve also heard stories of those same people turning off their computers because it just wasn’t worth it. “WHAT WERE YOU THINKING?!”, you want to scream knowing that those same bitcoins are now worth tens of thousands of dollars. But those folks were operating logically. The cost of electricity exceeded the value of the bitcoins at the time. It was better to buy bitcoin on the open market with the same money that would have been spent on electricity, although few did.
So what changed from those easy, breezy, laptop mining days? The difficulty has changed. By design, half of all the bitcoins that will ever be mined were mined in the first four years. Does this mean they were easier to find in the beginning? Yes, but not because they were just laying scattered around somewhere. The careful and considered design of the software by its creator, Satoshi Nakamoto, made them statistically easier to mine at the beginning and harder as more miners join the party. These details are controlled not by smug elite bureaucrats, but by the Bitcoin software, and while software can easily be changed, it’s necessary that all miners use software that follows the same rules. Since the rules are working well for the miners, it is nearly impossible to change the rules by getting most of the miners to switch software.
Now there are fewer bitcoins left to mine, and the reduced number of bitcoins are distributed proportionately among the miners based on the resources they marshal for mining. Add more miners and each miner gets fewer bitcoins until some miners drop out because their mining equipment is not as efficient or their electricity costs are too high. Efficiency is the reason that mining with a laptop is no longer recommended.
Mining is a great way to equitably distribute bitcoin and it does two other interesting things at the same time. First, it takes value away from bitcoin because resources are spent on mining equipment and electricity instead of purchasing bitcoin on the open market. Second, it increases the mining difficulty making each new bitcoin more expensive to obtain and therefore more valuable. These two competing forces are in tension.
In summary, value and difficulty are tightly correlated because when the difficulty rises to the point that mining is unprofitable, it makes more sense to purchase bitcoin which adds buying pressure to the market and vice versa. The value of a bitcoin is dependent on a high difficulty and the mining difficulty is dependent on a high price. With a few exceptions, like the recent exponential efficiency gains from improved hardware, the bitcoin value and mining difficulty will both go up, or both go down, but they will not separate - at least for very long.Read More
3,531 viewsSeptember 2nd, 2014 by Adam B. Levine
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