Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen

[mgt23]

http://launch.is/blog/l019-bitcoin-p2p- ... ve-ev.html

Sunday
May152011
L019: Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen
DateSunday, May 15, 2011 at 12:37PM
Solid discussions of this piece on BoingBoing.net, Hacker News, Slashdot and Reddit.

Rob Tercek has a follow up to this piece here.


L019: Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen

by Jason Calacanis and the LAUNCH team

A month ago I heard folks talking online about a virtual currency called bitcoin that is untraceable and un-hackable. Folks were using it to buy and sell drugs online, support content they liked and worst of all -- gasp! -- play poker.

Bitcoin is a P2P currency that could topple governments, destabilize economies and create uncontrollable global bazaars for contraband.

I sent the 30 or so producers of my show This Week in Startups out to research the top players, and we did a show on Bitcoin on May 10. Since that time the number of bitcoin stories has surged.



After month of research and discovery, we've learned the following:

1. Bitcoin is a technologically sound project.
2. Bitcoin is unstoppable without end-user prosecution.
3. Bitcoin is the most dangerous open-source project ever created.
4. Bitcoin may be the most dangerous technological project since the internet itself.
5. Bitcoin is a political statement by technotarians (technological libertarians).*
6. Bitcoins will change the world unless governments ban them with harsh penalties.


What Are Bitcoins?
=========
Bitcoins are virtual coins in the form of a file that is stored on your device. These coins can be sent to and from users three ways:

1. Direct with peer-to-peer software downloaded at bitcoin.org
2. Via an escrow service like ClearCoin
3. Via a bitcoin currency exchange

Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.

The benefits of a currency like this:

a) Your coins can't be frozen (like a Paypal account can be)
b) Your coins can't be tracked
c) Your coins can't be taxed
d) Transaction costs are extremely low (sorry credit card companies)

You can watch a simple video here: http://jc.is/jlcte0


Where Do Bitcoins Come from?
=========
Bitcoins are created by a complex algorithm. Only 21M can be made by the year 2140. Your desktop bitcoin software can make bitcoins, but at this point the electricity and time it would take to produce a bitcoin is larger than the actual value of a bitcoin (your laptop might take five years to make one, and they currently trade at $6.70 per bitcoin [ see https://mtgox.com/trade/buy for the latest exchange rate ].

Bitcoin miners use super cheap GPUs (not CPUs) to create the coins, but as more people come online to make them, the algorithm adjusts so that one block can only be made every 10 minutes.


Who Invented Bitcoins?
=========
An individual with the name -- or perhaps handle -- of Satoshi Nakamoto first wrote about bitcoins in a paper called Bitcoin: A Peer-to-Peer Electronic Cash System. This person has stepped back from the project and trusted Gavin Andresen to take charge as the project's technical lead.


How Does One Buy and Sell Bitcoin?
=========
Currently Paypal and credit card companies are making it illegal to sell bitcoins. Why? Simple: PayPal's terms of service prohibit "currency exchange."

CoinPal had its account frozen, details here.

Given that you can't whip out your Paypal account and buy them, and that it will become harder and harder to get them, bitcoins will be bartered for services in the real world.

For example, a Hacker News community member named Nicholas Carlson just boasted that he is being paid for a programming project in bitcoins.


Bitcoins in Real Life
============
In the next year you'll hear about people in casinos in Vegas buying and sell bitcoins for cash and casino chips.

Imagine a bachelor party comes to Vegas and STNY (someone that's not you) gives $550 to a guy at a bar and he takes out his laptop or tablet and ships 100 bitcoins to STNY's phone. STNY then goes to Craigslist and ships some bitcoins to an escort and a drug dealer, who then show up in person to provide goods and services.


The Drug Underground and Bitcoin
============
Last month folks were buzzing about an online drug marketplace called SilkRoadMarket, which was reportedly trading in, well, all kinds of drugs: marijuana, mushrooms, LSD, ecstasy and DMT.

Of course, since bitcoin transactions are untraceable, you would have zero recourse if you sent a dozen bitcoins to someone for a couple of tabs of LSD. Just like you might lose your $10 if you gave it to a kid in the school yard for a dime bag and he never came back.  


Let's Make Some Predictions
============
We are 100% certain that governments will start banning bitcoins in the next 12 to 18 months. Additionally, we're certain bitcoins will soar in value and a crush of folks will flood the system and start using them.

Currently there are 6M coins at $6.70 each for a total economy of about $40M. Bitcoin speculation and hoarding will also cause a massive spike in bitcoin value. For example, if 10M people find out about bitcoins in the next year and want to buy $100 worth, $1B will be infused into the bitcoin economy.

Finally, there will be massive breakage in bitcoins. If your laptop crashes and you didn't back up your bitcoins, well, you're SOL. If someone steals you laptop that has 10,000 bitcoins on it you won on Bitcoin Poker, you're SOL. Lost your USB drive with 500 bitcoins on it after a night out on the town? You're SOL.

Sites like 99designs, eLance and oDesk will start accepting bitcoins for payment. If they don't, they will face competition from folks who do.

Bottom line: The world is going to be turned over by bitcoins unless governments step in and ban them by prosecuting individuals.

This is about to get really interesting, everyone.


* We made this term up to describe the "good people" of the internet who believe in the fundamental rights of individuals to be free, have free speech, fight hypocrisy and stand behind logic, technology and science over religion, political structure and tradition. These are the people who build and support things like Wikileaks, Anonymous, Linux and Wikipedia. They think that people can, and should, govern themselves. They are against external forms of control such as DRM, laws that are bought and sold by lobbyists, and religions like Scientology. They include splinter groups that enforce these ideals in the form of hacktivism, such as the takedown of the Sony Playstation Network after Sony tried to prosecute a hacker for unlocking its console.  


-----------------

TWIST Bitcoin episode
============
Full show here.

Gavin explains the fundamentals of Bitcoin - clip

Who is Satoshi, the mysterious bitcoin founder? clip

The million-dollar bitcoin question: Can the system be hacked? clip

Jason sets his software to generate bitcoins and Gavin explains why that's a bad idea - clip

[Timothy_Fitzpatrick]

More evidence of a pending BEAST financial system?

[mgt23]

from what i can see bitcoin if you search hard enough are transferable to commodities and fiat money. this is what they fear, especially if the currency growth rate is accurate. my only concern is if the government was mining more than the "scene".

[Anonymous]

http://forum.bitcoin.org/index.php?topic=13690.0

Bitcoin will never be as good as gold and why ultimatly it will fail.

I will explain why the value of bitcoins will fall, the current market price of them is a joke but not from the reasoning people are using on the forums which is faulty. I will explain this below

There is only so much gold in the world, still alot of it has not been mined and will beable to be mined in the future. As for physical currency, out of all the elements, gold is the most desirable followed second by silver. Gold can't be diluted in value, ie a second identical currency coming being different in name only but having all the same properites of gold. Imagine another element that was the same as gold was found, and was able to be found in the same quanities of gold but it had a different color, say light green color and it was called gold2. Half the people began using gold2 in the same way as gold1 is being used. the value of gold1 would be cut in half with the new currency being put into circulation competing parallel with each other. Ofcourse this will never happen, there is no such thing as gold2.

Unfortunately this is not the case with bitcoin. Yes bitcoin is restricted to the total amount of bitcoins that will be found which is 21 million. Unfortunately it is a P2P currency and with the success of bitcoin, other identical P2P currencies will come into existence and the same problem will arise as in the case of gold1 and gold2. With P2P currency, the amount of different named P2P currency will expand. A second P2P currency will come along using the same source code as bitcoin or slightly different but essentially the same. We will call this second currency bytecoin, it has all the same properties as bitcoin as in only being limited in supply to 21 million bytecoins. People with mining rigs will stop mining bitcoins and begin mining bytecoins as it is just starting out, the hash sizes will be smaller and easier to generate more bytecoins than bitcoins. Soon the number of bytecoins in existence will be similar to bitcoins. Half of the people using bitcoins and the other half using bytecoins, also the value of the two P2P currencies is the same because roughly the same number of each are in existence but the orginal bitcoin would be cut in half.

There is incentive for people to move to the new P2P currency as in the early stages it is more profitable to generate P2P currency and as you have seen in bitcoins, the early adopters made the most money.

This process will continue on indefinitely until all P2P currency is worthless. At the end of P2P currencies life, there could be millions of different competing P2P currencies.

Throughout the ages everyone has been trying to turn everything into gold, Lead into gold, paper money into gold and now electronic bits into gold. P2P currency holds alot of the qualities of gold but competing versions of itself can not be created. P2P is a good way to transfer money, conduct business but not as a means of storing value. If the government made a mandate that only bitcoin was to be the only allowed P2P currency to be used on the internet, then it would become very valuable but that is not the case.

If you have bitcoins, you'd be a fool not to sell them at $30. I have also seen a personal website of someone willing to sell gold for bitcoins!!!! It is crazy. I could be wrong in the short term, but in the longterm I will be proven correct. Ideally hold onto your bitcoins until another type of P2P currency comes into existence and becomes being used in mass, that will be the best time to sell as it is when the value of bitcoin will be at it's highest just before people also begin using the second P2P currency as well.

Hope you found this interesting.

[mgt23]

http://cryptome.org/0004/bitcoin-triple.htm

Is BitCoin a Triple Entry System?

Date: Mon, 13 Jun 2011 23:03:59 +1000
From: Ian G <iang[at]iang.org>
To: jamesd[at]echeque.com, Crypto discussion list <cryptography[at]randombit.net>
Subject: [cryptography] Is BitCoin a triple entry system?

On 13/06/11 12:56 PM, James A. Donald wrote:
> On 2011-06-12 8:57 AM, Ian G wrote:
>> I wrote a paper about John Levine's observation of low knowledge, way
>> back in 2000, called "Financial Cryptography in 7 Layers." The sort of
>> unstated thesis of this paper was that in order to understand this area
>> you had to become very multi-discipline, you had to understand up to 7
>> general areas. And that made it very hard, because most of the digital
>> cash startups lacked some of the disciplines.
>
> One of the layers you mention is accounting.

Yes, so back to crypto, or at least financial cryptography.

The accounting layer in a money system implemented in financial cryptography is responsible for reliably [1] holding and reporting the numbers for every transaction and producing an overall balance sheet of an issue.

It is in this that BitCoin may have its greatest impact -- it may have shown the first successful widescale test of triple entry [2].

Triple entry is a simple idea, albeit revolutionary to accounting.  A triple entry transaction is a 3 party one, in which Alice pays Bob and Ivan intermediates.  Each holds the transaction, making for triple copies. To make a transaction, Alice signs over a payment instruction to Bob with her public-key-based signature [3].  Ivan the issuer then packages the payment request into a receipt, and that receipt becomes the transaction.

This transaction is digitally signed by multiple parties, including at least one independent party [4].  It then becomes a powerful evidence of the transaction [5].

The final receipt is the entry.  Then, the collection of signed receipts becomes the accounts, in accounting terms.  Which collection replaces ones system of double entry bookkeeping, because the single digitally signed receipt is a better evidence than the two entries that make up the transaction, and the collection of signed receipts is a better record than the entire chart of accounts [6].

A slight diversion to classical bookkeeping, as replacing double entry bookkeeping is a revolutionary idea.  Double entry has been the bedrock of corporate accounting for around 700 years, since documentation by a Venetian Friar named Luca Pacioli.  The reason is important, very important, and may resonate with cryptographers, so let's digress to there.

Double entry achieves the remarkable trick of separating out mishaps from frauds.  The problem with single entry (what people do when making lists of numbers and adding them up) is that the person can leave off a number, and no-one is the wiser [7].  We can't show the person as either a bad bookkeeper or as a fraudulent bookkeeper.  This Achilles heel of primitive accounting meant that the bookkeeping limited the business to
the size with which it could maintain honest bookkeepers.

Where, honest bookkeepers equals family members.  All others, typically, stole the boss's money.  (Family members did too, but at least for the good of the family.)  So until the 1300s and 1400s, most all businesses were either crown-owned, in which case the monarch lopped off the head of any doubtful bookkeeper, or were family businesses.

The widespread adoption of double-entry through the Italian trading ports led to the growth of business beyond the limits of family.  Double entry therefore was the keystone to the enterprise, it was what created the explosion of trading power of the city states in now-Italy [8].

Back to triple entry.  The digitally signed receipt dominates the two entries of double entry because it is exportable, independently verifiable, and far easier for computers to work with.  Double entry requires a single site to verify presence and preserve resiliance, the signed receipt does not.

There is only one area where a signed receipt falls short of complete evidence and that is when a digital piece of evidence can be lost.  For this reason, all three of Alice, Bob and Ivan keep hold of a copy.  All three combined have the incentive to preserve it;  the three will police each other.

Back to BitCoin.  BitCoin achieves the issuer part by creating a distributed and published database over clients that conspire to record the transactions reliably.  The idea of publishing the repository to make it honest was initially explored in Todd Boyle's netledger design.

We each independently converged on the concept of triple entry.  I believe that is because it is the optimal way to make digital value work on the net;  even when Nakomoto set such hard requirements as no centralised issuer, he still seems to have ended up at the same point: Alice, Bob and something I'll call Ivan-Borg holding single, replicated copies of the cryptographically sealed transaction.

With that foundation, we can trade.

> Recall that in 2005
> November, it became widely known that toxic assets were toxic.

In 2005, the SEC looked at my triple entry implementation, and....

>  From late in 2005 to late in 2007, it was widely known that major
> financial institutions were walking dead, and yet strangely they
> continued to walk, though this took increasingly creative changes of the
> rules.

...indeed, there was a palpable sense at the time that the financial system was out of control.  They were looking at this thing with worried eyes.

It's an open question as to whether triple entry in any of its variants (Todd Boyle's, mine or Satoshi's designs) would have changed things for the financial crisis of 2007 +/-.  I think the answer is;  it was way too late to effect it.  But, it wouldn't have hurt, and with other things added in [9], the sum would have changed things, assuming widespread implementation.

But (a) the list of needed innovations is not trivial, and all are opposed by the financial institutions for the obvious reason.

Also, (b) it has to be said that at the bottom of the financial crisis is securitization, which changes everything about finance [10].  And I do mean everything  Without understanding the role that securitization plays, talking about triple entry or toxic assets or ratings agencies or bad behaviour or poor people or whatever is pretty much doomed to irrelevance.

Which is how they like it!

> Today in 2011, there is still no audit that acknowledges that toxic
> assets were and are toxic.

This one winds all the way to [11] ...

> While doubtless a good monetary system should embrace all these aspects
> of knowledge, our existing monetary system does not.

iang

Notes:

[1] Reliably here means to play its part in the overall security model against attacks of fraud, etc.

[2] This rant is essentially a highly compressed version of: http://iang.org/papers/triple_entry.html

[3] There is an intermediate step here where Bob can also sign the payment into a deposit instruction, thus confirming acceptance.  But this can be optimised out.

[4] Think here of European Notaries, responsible to both parties to intermediate.

[5] Crypto people would recall the term "non-repudiable" although that is out of favour; "non-repudiation is repudiated .  BitCoin paper uses the term "non-reversible."  Finance prefers terms like "final settlement.  Legal people look for "evidence."  I choose the legal term here because in a dispute their opinion matters more.

[6] This is not really apparent on paper, only in code and implementation (aka issues).

[7] All of this logic is applicable & analogous & consistent when the bookkeepers are computers...

[8] Accounting history does not accept this point as proven.  Having seen the difference of both double entry and triple entry in accounting systems, I'd say its clear.  But historians don't have the benefit of seeing accounting systems stuff up in glorious fashion, they only have the dry old parchments to work from.

[9] Another of the things essential on the list is final settlement / irreversibility / non-repudiation, as pioneered in many digital cash schemes.  c.f., Mutual Funds Scandal.

[10] Everything important about the financial crisis in 4 short essays, start here:

http://financialcryptography.com/mt/arc ... 01297.html

[11] http://financialcryptography.com/mt/arc ... 01126.html

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[mgt23]

http://arstechnica.com/security/news/20 ... eedfetcher

New malware steals your Bitcoin
By Kevin Poulsen, wired.com | Published 2 days agoLast updated 2 days ago

In a sure sign that the virtual currency Bitcoin has hit the mainstream, a new Trojan horse program discovered in the wild Thursday seeks out and steals victims' Bitcoin wallets, the same way other malware goes for their banking passwords or credit card numbers.

The malware, Infostealer.Coinbit, is fairly simple: it targets Windows machines and zeroes in on the standard file location for a Bitcoin wallet. It then e-mails the wallet—a data file containing private crypto keys—to the attacker by way of a server in Poland, according to Symantec, which was first to alert on the attack.

"If you use Bitcoins, you have the option to encrypt your wallet and we recommend that you choose a strong password for this in the event that an attacker is attempting to brute-force your wallet open," Symantec's Stephen Doherty wrote in a blog post Thursday.

Bitcoin is an anonymous, decentralized virtual currency that's been percolating for the last two years, and broke out into widespread attention with Gawker's excellent June 1 story on Silk Road, the online drug market where Bitcoin is the standard currency. Independent of any national currency, Bitcoin is exchanged peer-to-peer, or earned by users who contribute CPU cycles to mathematically generating new Bitcoin, a process called "mining."

Hacker-types have been sniffing around Bitcoin since at least April, when a program called Stealthcoin debuted that's tailor-made for turning a botnet of compromised computers into a covert parallel Bitcoin mining machine. The first actual theft of Bitcoins was reported this week by a user who claimed a hacker transferred 25,000 BTC from his machine, theoretically worth about $500,000 at current exchange rates.

With its single-minded focus, Infostealer.Coinbit has the feel of an interim solution. In the future, Bitcoin theft will probably be a standard feature in full-featured Trojans.