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What I don't get about Bitcoin is, since it is a distributed p2p currency system, Who is "generating" the digital bill? In normal currency, a central bank woul

What I don't get about Bitcoin is, since it is a distributed p2p currency system, Who is "generating" the digital bill? In normal currency, a central bank would generate notes that are backed by an equivalent valuable good (ex. Gold, Jewels, etc). I am aware that's not true in modern systems because a central bank can emit more inorganic notes, but that has a direct impact in the inner value of the currency. In this system, I can't see who is in charge of emitting the digital "note". So, how is exchange rate calculated then? Bitcoin mining is another blur concept. Does anybody know how this actually works? Edit: Fixing some typos

lucb1e 14y ago
A bill is only worth as much as you decide it's worth. We both have to agree on a method of payment in order to fairly exchange goods. Bitcoin is a method of payment. When someone sends you Bitcoins, your bitcoin software will decide whether they are fake or not. Since the entire transaction history is public, it can find all transactions to and from the person who is sending you coins, and see if they indeed have enough to pay you. The problem is that, at first, nobody had coins. To get them into circulation a system was built: For finding a "proof of work" (just assume for now that it's something that takes a computer a certain amount of work to find), the program agrees that you earned an X amount of coins. It used to be 50 coins per proof of work, right now it's 25. It will get down to zero eventually and there will be 21 million coins in circulation. Never more. A proof of work is easy to validate. It's like a big number is given, and you have to find its prime factors. It takes forever to search all possibilities, but once they're found, you can easily multiply them to check the validity. So when you are sent coins, your Bitcoin program (called the bitcoin client) will check the transaction history for who found proof of works, how much they gained from it, and who sent coins to who. After this you know how much money someone has, and whether he can pay you. It's up to your bitcoin client to use the same rules as everyone. You can decide that proof of works are worth much more or much less than everyone else agrees upon, but it will only prevent you from using the network. Most, ifnot all, other clients will reject your version of the truth. I hope this cleared things up. It probably rose other questions, but most are asked before. Just google for it ;) I also wrote a blogpost about Bitcoin, if you are interested: http://lucb1e.com/?p=post&id=99 http://lucb1e.com/?p=post&id=99
- pmelendez 14y ago
  Thanks for your response. But my doubts are still there. From your response I understand that running a process on a computer would let you to 'emit' a limited amount of currency with a general cap of 21MM. I am not doubting of your words, just trying to make sense in my mind, but if that's true that means that earlier adopters can generate coins for free and hence easy money. If I have a big enough cluster of computers, I can then generate enough proof of work in a cheap manner. Is that true?
  - jerguismi 14y ago
    > that earlier adopters can generate coins for free Never for free. For a much smaller cost, yes. It always required the computation or at least the effort to turn the the mining software on. The thing in the start was that nobody believed in the currency, therefore bitcoins were practically free. After some time people started using & believing in bitcoin concept, and from there on the currency started gaining value. Same as with traditional stocks. https://en.bitcoin.it/wiki/Controlled_supply#Projected_Bitcoins_Long_Term https://en.bitcoin.it/wiki/Controlled_supply#Projected_Bitco...
  - Nursie 14y ago
    More or less free, yes, and some of the early adopters are likely still sitting on masses of them. You can't generate a 'enough proof of work in a cheap manner' because the rate at which currency is handed out is fixed. You can only fight other people for the currency being generated by having more computers than them. IMHO this puts BTC in the 'massive waste of electricity' camp.
    - jerguismi 14y ago
      > IMHO this puts BTC in the 'massive waste of electricity' camp. You don't see any value in a currency that can't be counterfeited, manipulated by a central bank and also enables great privacy & low-fee transactions?
      - Nursie 14y ago

lucb1e 14y ago

A bill is only worth as much as you decide it's worth. We both have to agree on a method of payment in order to fairly exchange goods. Bitcoin is a method of payment. When someone sends you Bitcoins, your bitcoin software will decide whether they are fake or not. Since the entire transaction history is public, it can find all transactions to and from the person who is sending you coins, and see if they indeed have enough to pay you. The problem is that, at first, nobody had coins. To get them into circulation a system was built: For finding a "proof of work" (just assume for now that it's something that takes a computer a certain amount of work to find), the program agrees that you earned an X amount of coins. It used to be 50 coins per proof of work, right now it's 25. It will get down to zero eventually and there will be 21 million coins in circulation. Never more. A proof of work is easy to validate. It's like a big number is given, and you have to find its prime factors. It takes forever to search all possibilities, but once they're found, you can easily multiply them to check the validity. So when you are sent coins, your Bitcoin program (called the bitcoin client) will check the transaction history for who found proof of works, how much they gained from it, and who sent coins to who. After this you know how much money someone has, and whether he can pay you. It's up to your bitcoin client to use the same rules as everyone. You can decide that proof of works are worth much more or much less than everyone else agrees upon, but it will only prevent you from using the network. Most, ifnot all, other clients will reject your version of the truth. I hope this cleared things up. It probably rose other questions, but most are asked before. Just google for it ;) I also wrote a blogpost about Bitcoin, if you are interested: http://lucb1e.com/?p=post&id=99 http://lucb1e.com/?p=post&id=99

pmelendez 14y ago
Thanks for your response. But my doubts are still there. From your response I understand that running a process on a computer would let you to 'emit' a limited amount of currency with a general cap of 21MM. I am not doubting of your words, just trying to make sense in my mind, but if that's true that means that earlier adopters can generate coins for free and hence easy money. If I have a big enough cluster of computers, I can then generate enough proof of work in a cheap manner. Is that true?
- jerguismi 14y ago
  > that earlier adopters can generate coins for free Never for free. For a much smaller cost, yes. It always required the computation or at least the effort to turn the the mining software on. The thing in the start was that nobody believed in the currency, therefore bitcoins were practically free. After some time people started using & believing in bitcoin concept, and from there on the currency started gaining value. Same as with traditional stocks. https://en.bitcoin.it/wiki/Controlled_supply#Projected_Bitcoins_Long_Term https://en.bitcoin.it/wiki/Controlled_supply#Projected_Bitco...
- Nursie 14y ago
  More or less free, yes, and some of the early adopters are likely still sitting on masses of them. You can't generate a 'enough proof of work in a cheap manner' because the rate at which currency is handed out is fixed. You can only fight other people for the currency being generated by having more computers than them. IMHO this puts BTC in the 'massive waste of electricity' camp.
  - jerguismi 14y ago
    > IMHO this puts BTC in the 'massive waste of electricity' camp. You don't see any value in a currency that can't be counterfeited, manipulated by a central bank and also enables great privacy & low-fee transactions?
    - Nursie 14y ago