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I have a layman's question about Bitcoin for people who know more about the currency: Who or what controls the overall monetary policy for Bitcoin? In other wo

I have a layman's question about Bitcoin for people who know more about the currency: Who or what controls the overall monetary policy for Bitcoin? In other words, is there some sort of digital central bank that controls inflation by deciding how many Bitcoins are released per area?

ojiikun 13y ago
There is no authority, just code. The algorithm essentially self-adjusts so that new coins are created at a globally steady rate, rewarding miners proportionate to their effort. (at least until all coins are mined) https://en.bitcoin.it/wiki/Difficulty https://en.bitcoin.it/wiki/Difficulty
- jared314 13y ago
  Also, it is good to mention, that to change the code/algorithm would require replacing the code on the peers accounting for 50% of the network's hashing power.
  - tlrobinson 13y ago
    In theory it's actually the "economic majority" that matters: https://en.bitcoin.it/wiki/Economic_majority https://en.bitcoin.it/wiki/Economic_majority
    - HarryHirsch 13y ago
      And in practice this majority is held by a dozen or so mining pools. This is the usual schizophreny in US politics making yet another appearance: because people do not trust public oversight in the elected government they hand over the oversight to unelected private entities. No central bank, it's mining pools instead. One would think that the leading figures of these pools know each other. One would think it's outside the realm of conspiracy to think that the designers of Bitcoin expected the mining pools to emerge once difficulty had grown sufficiently large.
      - sk00byd00 13y ago
        > One would think that the leading figures of these pools know each other. One would think it's outside the realm of conspiracy... No it is not outside the realm of possibility that people could conspire to perform a double spending attack, you are completely right. What you have to consider, however, it is not very likely that people conspire to undermine their own economic interest. That doesn't happen very often in this world, it is not in our nature (but it is a possibility). There are much cheaper and easier attacks that could be pulled off right now by a single attacker, lower hanging fruit (like flooding the network with transactions with above average fees, this will effectively block most other transactions for as long as the attacker can afford). If a double spending attack was to occur at the mining pool level, you wouldn't even need to have a conspiracy to make it possible, just a single large pool operator with a period of extraordinary luck would be able to get 6 blocks in a row (it has happened before, it will happen again).
      - tlrobinson 13y ago
        getblocktemplate (https://en.bitcoin.it/wiki/Getblocktemplate https://en.bitcoin.it/wiki/Getblocktemplate) pretty much solves this problem by making it completely transparent what blocks miners are mining. If pool operators conspire to double spend or change the protocol there will be a mass exodus of individual miners from the pools.
      - cookiecaper 13y ago
        Mining pools cannot arbitrarily modify bitcoin's policies (that is, they cannot execute a 50% attack) because each pool is comprised of tens of thousands of individual miners running third-party, open-source mining software. Miners connect to the pool just by passing a username and password on the CLI/config file. You can be connected to multiple pools at once, executing the same binary to produce results for each pool. Bitcoiners are savvy enough to get raised eyebrows if a major pool started encouraging and/or requiring users to use a proprietary, closed mining software that may attempt to modify the bitcoin network's behavior to do something unsavory.
      - sliverstorm 13y ago
        because people do not trust public oversight in the elected government they hand over the oversight to unelected private entities. Yeah, this sounds like exactly the sort of thing that people would do.
    - deleted 13y ago
      [deleted]
thomasbk 13y ago
The mining pools (groups of miners who've joined forces) control it in practice. This effectively gives a very small number of people control over significant things, like transaction fees.
- fnordfnordfnord 13y ago
  But anyone can mine, so it would be difficult for miners to say, form a cartel and jack up transaction fees.
  - thomasbk 13y ago
    You can only mine (for a significant share) with very significant investments, and transaction fees competely go to miners, so it's in their interest to raise them (albeit slowly, to not curb the adoption of bitcoin too much.)
    - 1123581321 13y ago
      Collusion is impossible because other miners can work for smaller transaction fees. If it is profitable, someone will do it. If it is not profitable than there is not an unfair collusion to raise fees since the fees can't be undercut. The behavior of clients does influence fees, but consumers using Bitcoin will happily switch to the client that lets them pay the fee they want to pay (talking about the excess fee not the fee described in https://en.bitcoin.it/wiki/Transaction_fees https://en.bitcoin.it/wiki/Transaction_fees .)
      - thomasbk 13y ago
        If the large pools make a deal, any transactions they don't pick up will only ever get accepted after a very long wait. Hell, since they control >50% of the network, they can simply make the new transaction fees a new rule and force lower transactions to not be accepted by anyone (i.e. ignoring those blocks, like a 51% attack.) Policy by economic (mining) majority could be an issue in the future when the policy directly determines the profits of that majority.
redthrowaway 13y ago
No one. Miners compute cryptographic hashes based on the previous block in the blockchain plus a nonce. If the hash starts with a number of zeroes (currently 7), it is considered valid and the miner who computed it is rewarded with a chunk of bitcoins by the network. Only 21M BTC will ever be mined (although each BTC is composed of 10^8 Satoshis, which are the actual "unit" of transaction). As more BTC are mined, the difficulty of finding new ones increases and the reward decreases. Once the difficulty goes up, only those hashes that begin with 8 zeroes will be considered valid, so it will take twice as much effort to find a valid one. Currently, a successful block nets 25 BTC to the miner, down from 50 a while back. Soon, it will drop to 12.5 BTC. Bitcoin is, by design, deflationary. All other things being equal, the value of a Bitcoin will continue to rise as the pool of unmined coins shrinks. There is no central authority, rather inherent scarcity and the effort required to mine the coins gives value. The exchange rate of BTC -> fiat is determined by the market, operating on exchanges such as Mt Gox. There is no mechanism for anything outside of market effects to alter the price or availability of Bitcoin.
- eru 13y ago
  > Bitcoin is, by design, deflationary. No, they have a very carefully controlled (and diminishing) inflation of the money supply.
  - Nursie 13y ago
    >> they have a very carefully controlled (and diminishing) inflation of the money supply. With a fixed total amount and no magic bullet to wean us off our addiction to growth. It's deflationary by design.

ojiikun 13y ago

There is no authority, just code. The algorithm essentially self-adjusts so that new coins are created at a globally steady rate, rewarding miners proportionate to their effort. (at least until all coins are mined) https://en.bitcoin.it/wiki/Difficulty https://en.bitcoin.it/wiki/Difficulty

jared314 13y ago
Also, it is good to mention, that to change the code/algorithm would require replacing the code on the peers accounting for 50% of the network's hashing power.
- tlrobinson 13y ago
  In theory it's actually the "economic majority" that matters: https://en.bitcoin.it/wiki/Economic_majority https://en.bitcoin.it/wiki/Economic_majority
  - HarryHirsch 13y ago
    And in practice this majority is held by a dozen or so mining pools. This is the usual schizophreny in US politics making yet another appearance: because people do not trust public oversight in the elected government they hand over the oversight to unelected private entities. No central bank, it's mining pools instead. One would think that the leading figures of these pools know each other. One would think it's outside the realm of conspiracy to think that the designers of Bitcoin expected the mining pools to emerge once difficulty had grown sufficiently large.
    - sk00byd00 13y ago
      > One would think that the leading figures of these pools know each other. One would think it's outside the realm of conspiracy... No it is not outside the realm of possibility that people could conspire to perform a double spending attack, you are completely right. What you have to consider, however, it is not very likely that people conspire to undermine their own economic interest. That doesn't happen very often in this world, it is not in our nature (but it is a possibility). There are much cheaper and easier attacks that could be pulled off right now by a single attacker, lower hanging fruit (like flooding the network with transactions with above average fees, this will effectively block most other transactions for as long as the attacker can afford). If a double spending attack was to occur at the mining pool level, you wouldn't even need to have a conspiracy to make it possible, just a single large pool operator with a period of extraordinary luck would be able to get 6 blocks in a row (it has happened before, it will happen again).
    - tlrobinson 13y ago
      getblocktemplate (https://en.bitcoin.it/wiki/Getblocktemplate https://en.bitcoin.it/wiki/Getblocktemplate) pretty much solves this problem by making it completely transparent what blocks miners are mining. If pool operators conspire to double spend or change the protocol there will be a mass exodus of individual miners from the pools.
    - cookiecaper 13y ago
      Mining pools cannot arbitrarily modify bitcoin's policies (that is, they cannot execute a 50% attack) because each pool is comprised of tens of thousands of individual miners running third-party, open-source mining software. Miners connect to the pool just by passing a username and password on the CLI/config file. You can be connected to multiple pools at once, executing the same binary to produce results for each pool. Bitcoiners are savvy enough to get raised eyebrows if a major pool started encouraging and/or requiring users to use a proprietary, closed mining software that may attempt to modify the bitcoin network's behavior to do something unsavory.
    - sliverstorm 13y ago
      because people do not trust public oversight in the elected government they hand over the oversight to unelected private entities. Yeah, this sounds like exactly the sort of thing that people would do.
  - deleted 13y ago
    [deleted]

thomasbk 13y ago

The mining pools (groups of miners who've joined forces) control it in practice. This effectively gives a very small number of people control over significant things, like transaction fees.

fnordfnordfnord 13y ago
But anyone can mine, so it would be difficult for miners to say, form a cartel and jack up transaction fees.
- thomasbk 13y ago
  You can only mine (for a significant share) with very significant investments, and transaction fees competely go to miners, so it's in their interest to raise them (albeit slowly, to not curb the adoption of bitcoin too much.)
  - 1123581321 13y ago
    Collusion is impossible because other miners can work for smaller transaction fees. If it is profitable, someone will do it. If it is not profitable than there is not an unfair collusion to raise fees since the fees can't be undercut. The behavior of clients does influence fees, but consumers using Bitcoin will happily switch to the client that lets them pay the fee they want to pay (talking about the excess fee not the fee described in https://en.bitcoin.it/wiki/Transaction_fees https://en.bitcoin.it/wiki/Transaction_fees .)
    - thomasbk 13y ago
      If the large pools make a deal, any transactions they don't pick up will only ever get accepted after a very long wait. Hell, since they control >50% of the network, they can simply make the new transaction fees a new rule and force lower transactions to not be accepted by anyone (i.e. ignoring those blocks, like a 51% attack.) Policy by economic (mining) majority could be an issue in the future when the policy directly determines the profits of that majority.

redthrowaway 13y ago

No one. Miners compute cryptographic hashes based on the previous block in the blockchain plus a nonce. If the hash starts with a number of zeroes (currently 7), it is considered valid and the miner who computed it is rewarded with a chunk of bitcoins by the network. Only 21M BTC will ever be mined (although each BTC is composed of 10^8 Satoshis, which are the actual "unit" of transaction). As more BTC are mined, the difficulty of finding new ones increases and the reward decreases. Once the difficulty goes up, only those hashes that begin with 8 zeroes will be considered valid, so it will take twice as much effort to find a valid one. Currently, a successful block nets 25 BTC to the miner, down from 50 a while back. Soon, it will drop to 12.5 BTC. Bitcoin is, by design, deflationary. All other things being equal, the value of a Bitcoin will continue to rise as the pool of unmined coins shrinks. There is no central authority, rather inherent scarcity and the effort required to mine the coins gives value. The exchange rate of BTC -> fiat is determined by the market, operating on exchanges such as Mt Gox. There is no mechanism for anything outside of market effects to alter the price or availability of Bitcoin.

eru 13y ago
> Bitcoin is, by design, deflationary. No, they have a very carefully controlled (and diminishing) inflation of the money supply.
- Nursie 13y ago
  >> they have a very carefully controlled (and diminishing) inflation of the money supply. With a fixed total amount and no magic bullet to wean us off our addiction to growth. It's deflationary by design.