Quote from: temp1029 on February 24, 2011, 09:40:37 PM

Let me start off by saying that I am completely new to Bitcoin and really want to understand it well before I invest anything in it. That being said I can see the potential this currency has to change the world and really want to be a part of that.

I have been reading up on the technology side of Bitcoin and have a few questions.

My first question is about how Bitcoin prevents a very specific type of counterfeiting. If I understand correctly, when a new block is created the person creating it calculates what the current reward is and includes a transaction to himself for that amount. If this block creator tries to give himself more coins then the rest of the network will reject his block and he will receive nothing. A limit of approximately 21 million Bitcoins is enforced by agreement across the network on the reward for completing a block, which is based on the total number of blocks.

How am I, the individual, protected if even the entire rest of the network decides on a different reward scheme, specifically one that increases the total number of possible Bitcoins? Put another way, how much of the network would need to agree in order to increase the total number of possible Bitcoins?

Just like in the real world, where if everyone else on the planet starts treating your banknotes differently you are up a creek without a paddle, there is no protection against *everyone else* changing the way they use bitcoin.

Speaking more technically, to fork the blockchain effectively the majority of the network's processing power must agree to the change. And for a change as drastic as increasing the total number of bitcoins, everyone who wanted the change would have to start using a new Bitcoin program. If you chose not to upgrade your program you could still keep going as always with those who also did not upgrade. The value of your bitcoins, and the services available to you such as buying and selling for other currencies, etc. would depend on the people using that original software, and whether they would provide those services.

Speaking practically, no serious user of bitcoin, including the exchanges, major bitcoin businesses, etc. are going to accept a version of the program that changes the rules without a very good reason such as closing a security loophole. There is no practical scenario where your value in bitcoin is going to be swept away unexpectedly by the network, because everyone else on the network has that same concern.

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As a reference, there is a note in one of the sections on the Weaknesses wiki article (https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_computing_power), specifically:

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The attacker can't:

...
Create coins out of thin air
...

I would ask the question why not to the statement made in that article.

The method of coin creation is "hardwired" into Bitcoin, so even with all the world's supercomputers put together an attacker can't just put pretend coins into the mix--any blocks that do that won't be accepted by anyone else. Blocks are only accepted if they follow the rules. The only thing an 'attacker' could do is compete fairly for that set amount of coins that is being generated--and this costs that person just as much in hardware, electricity, etc. as anyone else.

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And this bring me to my second concern, Bitcoin loss. If I understand correctly no Bitcoins can ever be destroyed, the only thing that can be lost is the access to them, meaning the private key needed to sign the transaction transferring them. I also understand that Bitcoins are divisible up to eight decimal places, allowing for many more than 21 million transferable units. The problem I have here is the longevity of this currency even if people lose small amounts at a time. In my mind the eventual goal is to replace other currencies, such as USD, and if this happens lets assume we have 300 million Americans using Bitcoin. After enough loses the value of even the smallest transferable unit would be enough to buy a house or boat or other equivalently high value item, leaving lesser items, such as bread, milk, etc..., basically un-purchasable. Basically how are Bitcoin holders protected against the carelessness of others, or even someone maliciously (although admittedly to his financial detriment) "destroying" Bitcoins?

It can be difficult to imagine just how small 8 decimal places go. Let me give you an idea: the U.S. economy is around 14.7 Trillion dollars, or:

14,700,000,000,000

In servicing this size of an economy people have put to use about 1 Trillion dollars of hard cash in some form (approximately 3000 per person in that country). If we wanted to use Bitcoin to replace all U.S. dollars then one Bitcoin would be worth about $50,000. So a $1 loaf of bread would cost

0.00002 BTC

which only uses 5 of those 8 decimal places. That means bitcoin in its current form can handle 1000 times as much economic activity as the entire U.S. economy before you would have trouble buying a loaf of bread. You can imagine that this won't happen for a while.

Even if it were to happen, however, and/or some fluke circumstances took place such as a rich early adopter losing their 2 million bitcoins (ouch!), there still wouldn't be a problem because Bitcoin can easily be updated to use more decimal places. Unlike above, everyone would happily accept this small change in the bitcoin software since it doesn't hurt anyone and has a very good reason. So we can keep dividing bitcoins till kingdom come without issue.

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I did look around the forums and the Wiki before posting here, so if I missed the answers to these questions elsewhere then links would be appreciated. Also, sorry for the text wall, couldn't really think of a way to shorten it and still get my point across.

No worries--it can take a while to actually fit in to your head just how beautifully bitcoin solves all the potential problems with digital currency. I just discovered it a couple months ago and I'm still in awe of it. I'm also very happy that my investment has roughly tripled in that time. Both theoretical and actual substance working together--a rare event for our planet indeed!

sincerely,
eMansipater