Sunday, September 29, 2013

Mind's Eye Re: Bitcoin

Nice video - I'd like to see Bitcoin take off as part of a new modular economics.

On Tuesday, 24 September 2013 20:26:54 UTC+1, andrew vecsey wrote:
Dear members of this group.

I have made a video on Bitcoin and would like to discuss it with you all and have your feedback.
For me Bitcoin is a breakthru that allows people to finally break from the banksters who in my opinion have held all of us hostage and have enslaved us with debt.
Before Bitcoin, the saying that "you cant`t live with them (the banks) and you can`t live without them" true.
Not any more.

The video on my YouTube channel is below:

For those that prefer text, you will find it below.

Bitcoin – Simplified

Bitcoin is to banks, what email is to post offices. Bitcoin allows you to send money to anybody, anywhere and anytime from your computer anonymously, securely, fast and with minimal cost.

Dealing with money requires trusting a centralized authority, like a bank, that issues money and manages your private data and your account and allows money in it to be safely transferred for a cost. They work with proprietary systems.  When your encrypted data and account is on a distributed file sharing network, like a peer to peer (P2P) network running with open systems, nobody but you can access it and you do not need to trust and pay anyone to manage it for you.

Each P2P computer functions like a bank. It continually looks for and detects fraudulent transactions such as double spending and creates new supplies of money. Conventional money created unpredictably and without any limits to cover debts cheapens its value at the detriment of everyone. Bitcoins on the other hand are created at a predetermined rate that eventually reaches a limit whereby no more bitcoins can be created.  Unlike money issued by banks, bitcoins are free to store and are not tied to a particular nation.  Like cash, bitcoins allow for trade that is irreversible, anonymous and person to person, requiring no middlemen. Because no middlemen are required, transfer of funds is fast and cheap making micropayments of just a few cents feasible.    

To deal with trust issues between sellers and buyers, escrow services are used. The bitcoins are placed in the control of independent and licensed third parties. Only when both seller and buyer verify that the transaction has been completed per terms set, is the money released. Any disputes between the parties in the transaction are resolved by the neutral escrow agent.

The detection of fraud is achieved by ensuring that honest computers in the P2P network that play by the rules have always more processing power collectively than any dishonest computers that cheat.  This power is constantly checked by having the computers that process transactions collectively solve a difficult challenge within a 10 minute period. The challenge is very difficult to solve but very easy to verify once solved.

The following example tries to explain the challenge and the role it plays in avoiding fraud. The challenge example is finding the 2 numbers that add up to a certain randomly chosen number called the sum.   As an example, If the chosen sum is 9, then possible answers to this challenge would be 1+8, 2+7, 3+6, and 4+5. The only way to find the solution to this problem is randomly trying combinations by brute force and checking each time if the 2 numbers are the correct answer.  The size of the number determines how many random tries need to be made to find the right 2 numbers. Once the answer is found by one of the computers, they can be very easily verified  by adding them to see if they add up to required sum.  

The level of difficulty to each challenge is increased or decreased by increasing or decreasing the size of the sum.  If the challenge is solved in less than 10 minutes, the difficulty level is increased. If it is solved in more than 10 minutes, the difficulty level is decreased.    As long as the combined power of honest computers is greater than the power of the dishonest computer, the challenge will be won by one of the honest computers, no matter how little processing power it has, because solving the challenge is purely random.   Finding an answer to a challenge is much like winning a lottery.  The computers with greater power have a greater chance of finding the answer just like lottery players who buy more tickets have a better chance of winning.   Because it takes time to cheat, and time to cover up fraud, the rules of the game called the protocol is set up in such a way that any cheating computer that wins the lottery by chance is handicapped and his chances of winning again are incrementally reduced.

Blocks of transactions cannot be changed without redoing the work that was required to create each block. The chain of blocks with the most number of blocks serves not only as proof of the sequence of transactions, but also records that this sequence was verified by a majority of the Bitcoin network's computing power. As long as a majority of computing power is controlled by nodes that are not cooperating to attack the network, they will generate the longest chain of records and outpace attackers.

The computer in the bitcoin network that wins this lottery by being the first to solve the challenge announces his solution to all the other computers who then accept his block of transactions as verified and start to work on collecting transactions and answering the next challenge.  The winning computer gets rewarded with a set amount of newly issued bitcoins and collects all commissions of the transactions in the block that are specified by the buyers. To increase chances of winning, computers join pools and share the rewards if one of the pool members win. Newly verified blocks are built on blocks already verified and they are chained into the ever growing chain of blocks that make up the transaction log or ledger of all verified transactions.This prevents anyone from changing any past transactions.

There are many other alternate currencies, but all of them are local. Bitcoin is very unique. It is already 4 years old and is the first one that is internationally adopted and used on the internet.   It promises to change the world as far as banking is concerned.  From the dismal performance of the banksters, especially those considered "too big to fail", it is high time they were replaced. The politicians, especially those that are "too slick to nail" are also worried.  The ground they are supported on is slowly sinking.  In the meantime, the man who started this revolution has disappeared, either in hiding or caught. No wonder, he stepped on too many toes.  There is talk about making bitcoins illegal. But being a distributed network with encryption that hides users and no one in charge to arrest, there is hope that bitcoins will survive.    

No doubt it will be attacked by the system that faces to lose so much by bitcoin`s success. Fortunately any attempts of attacks quickly become computationally impractical if honest nodes control a majority of CPU power. The P2P nodes vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. This makes the system inherently democratic.

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