How a Bitcoin Transaction Actually Works 174
An anonymous reader writes "Michael Nielsen has written a detailed article describing the nuts and bolts of a Bitcoin transaction. He builds the concepts from the ground up, starting with a basic, no-frills digital currency. He then examines it for flaws and tweaks the currency to patch up areas where we run into technical or security problems. Eventually, he ends up with Bitcoin, and explains how a transaction works. It's an interesting, technical read; much more in-depth than any explanation I've heard. Here's a brief snippet from a walkthrough of the transaction data: 'One thing to note about the input is that there's nothing explicitly specifying how many bitcoins from the previous transaction should be spent in this transaction. In fact, all the bitcoins from the n=0th output of the previous transaction are spent. So, for example, if the n=0th output of the earlier transaction was 2 bitcoins, then 2 bitcoins will be spent in this transaction. This seems like an inconvenient restriction – like trying to buy bread with a 20 dollar note, and not being able to break the note down. The solution, of course, is to have a mechanism for providing change. This can be done using transactions with multiple inputs and outputs...'"
Bitcoin is going through another period of heavy fluctuation: it fell from a high of around $1,200 per bitcoin to roughly half that, and as of this writing trades around $760 per bitcoin.
Comment removed (Score:5, Insightful)
Re:On the Early player advantage (Score:5, Insightful)
I thought we were trying to be all green now, yet the very idea of bitcoin and the idea that we'll be running mining for the next 2 decades runs very counter to that idea.
Do people *still* think this is a "currency"? (Score:2, Insightful)
$20 to $1200 to $600 to $750, etc in a year? This is not a *currency* in any reasonable economic definition beyond "any medium used for exchange". It's much more like a *commodity* (and a crazy volatile one at that).
Re:On the Early player advantage (Score:2, Insightful)
Yes, but I'm shocked at how no one is talking about the amount of electricity being wasted to generate digital coins.
Most bitcoins are mined where electricity is cheap, like Iceland and the US Pacific Northwest, that use hydropower. Water flowing through a turbine really isn't causing much environmental damage. Compared to the environmental damage of gold mining, this is much better.
Re:I find it funny (Score:5, Insightful)
Get into mining? Nah. Accept bitcoins for, say, some server side coding or configuration management or game asset creation, etc. Yeah, why not. Oh crap, my friendly tip is now worth hundreds of dollars? Hmm. Well, now. That wasn't so hard. Crashes? Who cares, I'd have done the work for free anyway. Wise man say: The first step is the smallest, simplest, and hardest.
For a quick money transfer between two disparate real-world currencies it could be quite useful. As it becomes less volatile it'll be better to store goods in. The worth of a bitcoin IMO is in its distributed nature and ease of transfer between peers -- a intrinsic property of the currency itself. The speculative exchange rate of the bitcoins is irrelevant to me. It has value as a transfer medium at present. At least it's not owned and controlled by the World Bank.
Re:Intrinsic Value (Score:5, Insightful)
An excellent weighing-in on the recent fluctuation. Bitcoins: The Second Biggest Ponzi Scheme in History [garynorth.com]
Bitcoin may or may not be a good investment, but it certainly is not a Ponzi Scheme [wikipedia.org].
The article lists the biggest Ponzi Scheme in history as Social Security. Social Security may or may not be good public policy, but it is not a Ponzi Scheme either.
Re:Nelson Muntz - Ha ha (Score:4, Insightful)
It only takes an hour if you elect to pay zero fee.. If you pay a higher fee (like 5 cents worth), your transaction will be processed near instantly. Then, it will be verified usually around 10 minutes to an hour later.
Also, the ledger is only gigs in size after years of Bitcoin use.. When it gets more popular, the ledger will increase faster. But, the size of hard drives is increasing - and you don't even need to have the whole ledger in order to participate. Lightweight clients, such as Multibit, allow you to only obtain enough of the ledger to be certain of the transactions. In the end, it might just be large institutions and hobbyists that all hold the Blockchain (ledger)..
As far as hacking, Bitcoin will get hacked the moment everything else is already hacked.
Re:On the Early player advantage (Score:3, Insightful)
Even if a nickle costs 6 cents to make, it gets used over and over again without incurring any further costs. There is a cost in compute power every time a bitcoin changes hands. Pollution created by mining gold doesn't have to be repeated over and over either, and there are practical useful applications for gold, between jewelry and electronic manufacturing.
Bitcoin has no actual practical utility. It is just an expensive, polluting way to come up with another pattern of 1s and 0s. The whole thing is, frankly, stupid. The idea of another currency is not, but the idea that the currency depends on massive amounts of compute power is stupid.
Besides, most money doesn't move via a physical nickle, it moves in 1s and 0s in computers. The cost to do that is almost zero in terms of power (and far less than to move bitcoin around).
Let me try another approach. If you use power to produce bitcoin, then you're adding to the CO2 in the atmosphere, all to create fancy 1s and 0s. Even if your power comes from wind or hydro, that power could have instead been used to offset coal, so ultimately since we have a fixed amount of clean power, you're polluting by mining bitcoin.
Bitcoin, the ultimate dirty, unclean, polluting, currency...
Re:On the Early player advantage (Score:4, Insightful)
There is nothing special about 1s and 0s in a computer, Bitcoin's entire design is about how we can consume as many resources as possible to create them, when in truth they could be created out of thin air. (just like US Dollars are)
First of all, the resources are not used to create the coins, they are used to support the distributed notarization system. Even if no coins were being issued, you would need the same process, and indeed it is slowly becoming the case as the block reward drops. So the "created out of thin air" bit doesn't have any relevance to the proof of work requirement. That's a common misconception that even Paul Krugman got wrong.
At this point, we (as humanity) don't know a better way to create a decentralized notarization system, but there are some candidates. After any of these are proven to be secure enough, Bitcoin can make the let go of the proof of work scheme. Until then, it's not fair to say that Bitcoin consumes as many resources as possible, even though within the system that might be true.