May 24, 2013

What is Bitcoin

Why do we need Bitcoin

In the USA from 1837 to 1866, anyone can issue paper money
BerkShares: a local currency issued for the Berkshire region of Massachusetts by the BerkShares company.
Hayek: Denationalization of Money

As a general equivalent, like gold, it is:
- Easy to distinguish and measure
- Hard to generate
- Limited in a certain amount
- Storable
- Dividable
- Tradable
It has no difference with other commodity: the price is decided by the supply and the demand
According to Mises Regression Theorem:
- Today's value depends on yesterday's value
- Till the first day it has value

How does a decentralized monetary system record the owner of every coin?
- It is simple and brutal: Every node in P2P network stores all transactions from the first day of Bitcoin's birth
- Thus you can calculate out how much everyone has
How is the ownership of a Bitcoin transfered?
- An account is a pair of private key and public key.
- The public key is your address or accounts number.
- The private key proves your ownership,
- If Alice pays a certain amount of money to Bob, Alice should sign a message with her private key, which contains the last hash, Bob's public key and the amount of money she is going to transfer.
- There should be some guarantors that witness this transaction.
- Bob will not acknowledge this transaction until he knows this transaction indirectly from some other people.

How are transactions recorded?
- We need a unique history of transactions, called blockchain.
- Blockchain is a chain of blocks. Every block contains some transactions with hashed signatures, and linked to the previous block.
- The work of generating new blocks is called mining, which is the process of packaging transactions into a block.
How to sign a transaction?
- It relys on a mechanism called "Proof of work" (Hashcash Algorithm).
- You can add anything into a message (to be signed), as loog as the hash code of it meets some requirements.
- For example, the hash code is leading with a number of 0.
- It is proved that the best approach of solving this problem is exhaustive enumeration.

Who are creating blocks?
- Since creating new blocks costs a lot, there must be incentives.
- The solution is, the one who created a block will get some Bitcoin as reward: this is how Bitcoin created.
- Miners can also get trading fees spend by traders.
- Only the longest blockchain will be accepted.
How to set the difficulity and reward of mining?
- P2P network will tune the difficulity according to the computing power.
- The reward of mining every block is 50 at first and halves every 210000 blocks.

There are more nodes in China than USA

About $160 million costs in the last year (servers, electricity, labor), which means $11 per transaction!
History of all transactions are too large: for now serveral Gigabytes.
If it scales to as large as VISA, one block would be as large as 1GB.

May 24 2013