Month: February 2012

 
Client side browser wallets almost exactly resemble managed online wallets in terms of how they appear to the user, but the key difference is how they work behind the scenes. Encrypted backups of the wallet are stored securely by the provider, but the provider has no way of decrypting them – the encryption and decryption is done within your browser with Javascript using your password as a key, so your unencrypted wallet, and the password you use to encrypt it, never leaves your computer.

 

Advantages include:

• Very easy to use, no software installation required
• You can access your bitcoins from any computer
• No need to worry about accidentally deleting your wallet or losing it to a computer failure
• Less of a need to trust the provider; the only opportunity the provider has to act maliciously (eg. upload your unencrypted wallet and use it, send bitcoins to its own address) is when you are actually using the wallet. If, for any reason, you stop trusting a provider, if you keep your own backup of the wallet (which both major providers make it easy for you to fo) you can switch to another provider and transfer all your bitcoins to a new address.

The disadvantages are:

• You still need to trust the provider to some extent. If the provider gets hacked, the hacker can change the code that gets downloaded to your browser when you use the wallet, and potentially upload your unencrypted wallet or send a transaction to the hacker’s address.
• Potentially the worst possible option in terms of privacy. You don’t gain privacy from the large pool of bitcoins operated by a centralized server-side controlled wallet service, and the provider can still see your transactions. Although providers may have policies of not keeping track of or even remembering transactions, there is no way to verify this.
• Both major options charge small fees (0.01 BTC or 1%) on outgoing transactions

The major options are the blockchain.info wallet and Strongcoin.

 

  

 

In a managed online wallet, everything is controlled by the wallet’s provider. You have an account with the provider with a username and password, much like an email account or an internet forum account, and you can log onto your account and send and receive bitcoins from any computer that has internet access. Generally, these services do not maintain separate wallets for separate users behind the scenes; they are more like banks in the way that all the money is pooled together and they just keep track of how much belongs to whom. The most prominent of these wallets are actually bitcoin exchange accounts like those with MtGox and CryptoXchange.

Advantages of storing your bitcoins at an exchange are:

• No software installation required
• You can access your bitcoins from any computer
• No need to worry about accidentally deleting your wallet or losing it to a computer or hard drive failure
• Bitcoin exchange wallets allow you to exchange bitcoins for other currencies like US dollars and store other currencies as well. This gives you the option of having easy access to bitcoins whenever you want without the risk of losing value due to volatile exchange rates.
• The MtGox exchange wallet in particular has a “green address” feature, which allows you to send your bitcoins from a special address that is publicly known and trusted, and from which some businesses accept bitcoins without waiting for confirmations (ie. in a few seconds rather than up to an hour).
• You gain some privacy from the public since the bitcoins you withdraw are likely not linked to the ones you deposit, so someone tracing transactions on the internet may not be able to track you as easily.

Disadvantages are:

• You might forget the password. Most services allow (some even require) you to have an email address as a backup to reset your password from, but relying on your email address for everything it itself a risky strategy since the potential losses from your email account getting hacked become catastrophic.
• You have to trust the provider not to lose your wallet to a failure or hack, or to turn out to be malicious themselves. MyBitcoin, which lost 51% of its users’ bitcoins in a failure in August (incidentally, the coins are just now starting to be spent, implying that the loss was a theft), serves as a cautionary tale.
• You lose some anonymity from the provider since the provider can see all of your transactions.
• With the exception of the BTCinch wallet and the MtGox mobile wallet (and to a lesser extent the MtGox browser wallet), these wallets are not primarily intended for day-to-day usage as wallets, so they may be more unwieldy to use

 

The major options available are MtGox, CryptoXChange, Cavirtex and Intersango, as well as the BTCinch wallet, which is designed more as a wallet but provides Bitcoin exchange features through the other exchanges. For Android and rooted iPhones (through Cydia), MtGox offers the MtGox Live Bitcoin application.

 

  

 

One of the main arguments in favor of fiat currencies as opposed to currencies based on a scarce resource, whether gold, silver or Bitcoins, is that time must be wasted mining something that has no intrinsic value. Would it not be much more efficient, fiat currency proponents argue, to agree to use something easier to produce, like paper, as currency and have one centralized agency prevent counterfeiting? However, while these arguments do have some merit against gold (especially due to the serious environmental damage that can come out of mining), Bitcoin mining is far more than the equivalent of minting or gold mining: it also secures the network against counterfeiting, provides receipt functionality (a decentralized database that allows people to reliably prove that a transaction occurred) and, at least in Bitcoin’s critical earlier stages, a means for people to get into the community and start using Bitcoins.The technical point of block creation that many object to is that it requires the miner solving the block to find a value which hashes to something starting with a certain number of zeroes, a problem that can only be solved by trial and error and is so difficult that it takes all the Bitcoin mining computers in the world an average of ten minutes to find a solution. Many ask why it was necessary to include this requirement, as opposed to making block creation a simple matter of signing all the transactions, creating a Bitcoin where all 21 million coins are created from the start with minimal computational effort.There are two reasons why this is not done. The first is the question of monetary distribution — to whom should the initial coins be distributed? As shown by the example of Tenebrix, people are unwilling to trust a system where the currency creator owns the pool and distributes it out slowly as a reward to people who work to benefit the currency, so the only option is to distribute it to the people. But who are the people? If coins are to be distributed to random Bitcoin addresses, then we will have miners calculating trillions of hashes generating addresses. If it is to random IPs, then Bitcoin would have triggered a massive growth in botnets and the impact of people chasing after IP addresses might well have pushed the world onto IPv6 half a year ago. Computational power, however, cannot be spoofed in this way; if someone figured out a way to make a 10-gigaflop computer pretend to be a 60-gigaflop computer (and thus, through recursion, a 360-gigaflop computer, etc.) that would be, to put it mildly, a major boon to software developers everywhere. No mechanism, aside from computer power, works to prevent multiple identity spoofing (aka Sybil attacks), and imagine how long a Scandinavian welfare state would survive if one person could pretend to be a thousand. And if one person could pretend to be 51% of the network, the consequences are even worse.The multiple identity spoofing problem is one of the greatest challenges of the Internet in general. Consider its results outside of Bitcoin. Domain name registration is centralized, Gmail account creation now requires a phone number, account creation anywhere solves the problem with a human proof-of-work, the captcha. Cryptographic proof-of-work, although inefficient, is the only currently available practical means of solving the problem while maintaining the anonymity of the Internet, and Bitcoin and Bitcoin’s ideological parent, Hashcash, an anti-spam system which required email senders to solve the reverse hash problem, recognize this.Now, how much electricity does Bitcoin use up? According to data from BitcoinWatch, as of April 2 the network’s total hashrate is about 10 trillion hashes per second, and mining hardware operates at an efficiency of about 1.8 Mhash/J for the best available GPUs and 18 Mhash/J for specialized FPGA devices. Assuming an average of 2 Mhash/J for the entire network, the network uses 5 million joules, or 1.4 kilowatt hours, per second. With an electricity cost of $0.10/kWh, that’s $12,100 per day. This seems extreme: a $45 million network taking a tenth of its value every year to maintain. However, this misses the long-term picture. At the end of 2012, the reward of mining will go down by a factor of two, and this will continue every few years until ultimately the reward disappears entirely and is replaced by transaction costs. What happens then?In the long term, the size of the network is driven by two things and only two things: the price of a Bitcoin and the block creation reward (set reward plus transaction fees). This is because each miner keeps running as long as he earns more than he spends, so the network as a whole must cost less than the value of USD it gains for itself. What is the most interesting in this equation is what’s missing: any consideration for the efficiency of the hardware. If all hardware gets ten times as cheap and efficient, then new miners will appear until the network is ten times as large and thus costs the same amount as it did previously. If miners figure out that they can dual-use their mining electricity by making their computers heat their homes during the winter, that would be a very positive change since it would decentralize mining to something every home or business does rather than a task done by centralized, specialized supercomputers and it would increase the network’s hash power and thus security but it would not ultimately reduce the mining cost.Since there will ultimately be no preset reward, how large will the network end up? Taking a random survey of 20 blocks, the total transaction reward is on average 0.01 per block, or 5000 times less than the current preset reward. Thus, if the reward were to disappear now, in the long term, once the distortion from the investment that has been made into existing hardware wears off, the network’s power would decrease to a mere 1.6 Ghash/s, or $2.60 per day. Now, what if Bitcoin were to take over the world’s monetary system? There are now 8.3 trillion US dollars in the world (both physical and virtual), so if Bitcoin were to take control of all that, its (equivalent, since in such a world USD would likely no longer exist) price would be $8.3 trillion / 21 million, or $3.95 million USD per BTC. Assuming that transaction fees stay the same (a fair assumption, since total fees as measured in real value and the real-value price of a bitcoin both roughly scale with the size of the community so the two cancel out), the network will cost at most the real value of the transaction fees (1.44 BTC per day) — $2.08 billion per year. Just the US Mint spends $7 billion per year right now, not to mention the private businesses that will be supplanted by Bitcoin — Visa, MasterCard, PayPal, much of the banking system, etc. Even with transaction fees 50 times as high, Bitcoin will be worth it.   

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If Bitcoin is to achieve mainstream success it cannot stop at the limited crowds of Internet geeks, libertarians and privacy advocates that it is hitting now, and it must find some way to attract the mainstream public. The mainstream public seems like a difficult target: it has eluded many products ranging from desktop Linux to Esperanto, as it seems like it values only convenience, but convenience cannot be attained without the public already supporting it. But the mainstream public is not a homogeneous entity; it has many dimensions — rich and poor, urban, suburban and rural, young and old — and some could potentially be more interested in Bitcoin than others. And it is by dividing and conquering that the revolutions that do succeed do so — Facebook started from Harvard students to students in general to now the entire world. Bitcoin can benefit from such a strategy, and the logical target for Bitcoin is younger people, who are less established and comfortable in their lives and are more willing to try something new. And who are the youngest and most adventurous of all? The answer is teenagers.

Here are five reasons why teenagers are an excellent adoption demographic for Bitcoin:

• Teenagers want Internet purchasing power. The idea of an allowance and even children having their own spending money is deeply ingrained in our culture, but there is simply no equivalent for the Internet. In many jurisdictions, you must be at least 18 to sign up for a credit card, so when someone younger than 18 wants to buy something the only option is to use a parent’s credit card. Parents can adopt one of two strategies: they can either freely give their children their credit cards and let them buy whatever they want, hoping that the child won’t buy too much, or they can make their children ask for permission for each purchase. The first is too negligent, and the second is, for many, too authoritarian and there is no easy way to strike a balance between the two under the current system. But with Bitcoin there is: parents can set an allowance, send that allowance to their children every week or month, and there is no way they can possibly overspend — an exact equivalent of cash for the digital world.
• Bitcoin teaches good financial wisdom. With credit cards, you spend first, and worry about it later. If you want, you can even worry about it much later since you can just pay the minimum payments every month until you are almost bankrupt and the creditors start calling every day. With Bitcoin, the opposite is the case. Money has to enter your account before you spend it, and although in a Bitcoin world there would still be debt, going into debt would be a conscious choice, not the seamless transition from positive balance to negative balance that it is now. There is a limit on how much you can spend and when you spend anything at all the transaction appears on the Bitcoin client and stays there until other, newer, transactions push it off the screen and replace it, and the pain of spending is felt yet again every time you look at your remaining balance. Just having one’s remaining balance in such a prominent location, to be looked at every day, has a powerful psychological effect: it causes you to constantly think, “I have 47.2 BTC left, and 14 days until I get paid next, so that’s about three and a half BTC per day, so is it really that good an idea to buy this new gadget for 15 BTC today when I might want to buy something else later?” It’s a proven fact that people spend less when they pay cash, and Bitcoin would have an even stronger effect.
• Bitcoin still allows teenagers financial privacy, just as cash does. People want privacy, and many teenagers these days would be horrified if they found out that their parents would be keeping track of all their purchases from now on. Our society perceives such infringements of privacy as unreasonable, and they are ultimately unhelpful: when the kid goes off to college he will immediately proceed to buy everything that his parents had earlier forbidden him. Bitcoin, on the other hand, is Weight Watchers for your wealth: it’s not what you buy, it’s how much you buy, and teenagers can make their own decisions about what they value most and adjust accordingly, rather than worrying about satisfying their parents’ ideas of what is financial wisdom and what is extravagance. Prudence is enforced by reality, not authority.
• Bitcoin encourages teen entrepreneurship. The Internet is more and more the primary way teenagers interact with each other socially, but it is also a powerful opportunity for them to start interacting with others economically. Everyone has their own talents, whether in music or art or writing or computer programming, and Bitcoin allows people to easily start earning money from their skills even while they are still in high school. Cash was the economic liberator and exciter of such youthful entrepreneurial energy 50 years ago, with the iconic images of children with lemonade stands and 11 year old boys on bicycles delivering newspapers, and the culture that resulted from this gave us the greatest era of economic prosperity we’ve ever seen. Now, the equivalent of this is the Internet, where the sky is the limit: if your work is good enough, you can reach hundreds of thousands of people and earn vast quantities of money that the lemonade stand owners would never have dreamed of. But for teenagers to be economically liberated, they need an economically liberating currency, and Bitcoin is the perfect candidate: unlike credit cards, being a producer and earning money is just as easy as being a consumer and spending it.
• Teenagers are the future. They are not yet bogged down by the way we currently lead our lives, with our credit cards, loans and mortgages, and some may even choose to lead their lives bank-free entirely, using Bitcoin right from the start. While for most people switching to Bitcoin is a short-term pain as they’re already comfortable with their credit cards, for teenagers getting through the process of applying for an account and a credit card is the pain, and they would really rather just get started earning and spending some coins. Finally, they are not yet corrupted by the credit card system’s psychology, one where quick, temporary money is much more easily attained by pleading than by producing, and the psychology that they adopt will, 10-20 years down the line, be the driving psychology of society. If we, the Bitcoin community, are seeking to fundamentally alter the way the world thinks about money, teenagers are the best place to start.