Trust Hacking: How The Bitcoin System Works


[Scott Driscoll] sent us a link to his Bitcoin explanation a couple of weeks ago. We glanced at it but moved on rather quickly. It’s been popping up here and there and we finally gave it the time it deserved. This video is interesting in that it doesn’t just focus on what the Bitcoin actually is, but how the Bitcoin system works when it comes time for money to change hands.

Quite early on in the explanation he mentions that “The Bitcoin system is amazingly designed so that no trust is needed”. That’s a powerful statement. For instance, if you sell your car, one of your friends will probably tell you not to take a check. That’s because a check means you’re trusting that the buyer actually has a balance in their account to cover the transaction. With Bitcoin the transaction carries its own proof that the currency is available by including information about the past transactions through which those Bitcoins were acquired.

If you have some idea of what public/private key pairs are you’re already equipped to understand [Scott’s] lecture. After you make it through the 22 minute video maybe you should get down to work doing some Bitcoin mining at home.

38 thoughts on “Trust Hacking: How The Bitcoin System Works

    1. If everyone still did mining in the background on their CPUs, we wouldn’t have the GPU/ASIC arms race. (Difficulty scales with the amount of processing power on the network.)

      I guess this is what happens when FYGM Randian Supermen dig their claws into your economics experiment.

  1. I think BT and LT are cool, but I’m not going to pay hundreds or thousands of dollars just to make ~60 dollars a month, if even that considering the requirements raise as time goes by.

    I might accept payments through it though since it doesn’t have the overhead(time, fees etc) of banks and money orders.

    Add that the operators of primary servers on the network keep getting hacked via trivial attacks like visible SQLi. Also that there are heavy trade regulations existing and it the works to counter virtual currencies, since most of US congress are investors in banks and other industry that rely on privately controlled banking infrastructure..

  2. No trust in the validity of the monetary transactions is needed. There is still plenty of need for real world trust in who you deal with. That is why we have things like charge-backs, etc. in the real world.
    Also the check analogy is kinda bogus. Apples and oranges. The check isn’t the transaction the way a spending BTC is a transaction. A BTC transaction going into the block chain is more like the check clearing the bank. (Actually this is probably the best analogy, the transaction chain is like the check clearing desk of the bank) Only difference is there’s [little to] no chance of the network reversing the charge.
    Also, unless you have some capital to expend on a massive ASIC and access to cheap electricity, mining is pretty much dead for individuals. Even those ASICs in the linked article are a drop in the bucket and unlikely to pay for themselves in the long run.

    1. Hey man, you can keep your filthy fiat money, I insist on doing transactions with a pseudo-currency that fluctuates +/-20% in just the time it takes for my transaction to clear. up, uP, UP!

    2. Oh please, I can also see so many things wrong with banking. Last time I tried to do an international bank transfer, it cost me $50 in fees and took four days. And one can only send to certain countries without arbitrary trade blocks. With bitcoin you can send money to ANYONE, INSTANTLY, FOR FREE. All they need is an internet connection. How is that not better than what you bankers offer?

  3. I guess I’m just dense. I can understand the mathematical foundations of Bitcoin, but I still can’t how money gets transferred in the real world. That is, I see how Bitcoin works as a (public) record of transactions, and I can see how bitcoins are “mined” and brought into the network. But this is all just math; it’s a representation of money. How does that representation get turned into something that has value?

    As an analogy, my work is in digital audio. I can construct a series of numbers that represents a sound. And I can ship that sequence of numbers around, transforming it in various ways, and do various kinds of analysis on it. But it’s only when I send that sequence of numbers to a physical device (like a DAC feeding a speaker) that the numbers are realized as sound. Until that happens, that sequence of numbers isn’t a sound, it’s just math.

    So same thing with bitcoin. I can grok how representations of money can flow around the Bitcoin network, but what I’m missing is how money (or more precisely, the value that money represents) gets into and out of Bitcoin. Maybe I’m not asking the right question.

    1. There are exchanges that let you swap Bitcoins for dollars. Ideally, no exchanging would be necessary, but Bitcoin is so unstable now it’s not a great store of value. I’m not sure value enters or leaves Bitcoin, it’s more a faith thing. You hope tomorrow someone will trade you a car for Bitcoins. Is that what you’re asking? If the US government started printing trillions a day, the dollar would also be worthless.

    2. It has value because people agree that it has value, just like paper dollars or gold bullion. Its a reasonable store of value within its own system because a bitcoin cannot be counterfeited, and because only a finite number of bitcoins can be produced. Its value relative to traditional currencies fluctuates quite wildly, and often for no apparent reason, but no one can steal your bitcoins value, whatever it is, by counterfeit or by inflating away its value.

      If I can trade a bitcoin for a gallon of milk, then its value is a gallon of milk — or about $4USD. It have value because I can exchange it for something I want, as long as someone will take it. The dollar doesn’t have value just because of a number the government prints on it. The only entity that’s actually *required* to accept dollars as payment is the government itself.

      All currency has an element of faith to it.

      1. Spot on, this is exactly how I was thinking about currencies, that is more or less, belief that it is worth something. For example, unlikely, but imagine, Canada invades USA and they can easily declare not to accept the USA dollar, however, the value for the gold reserves and so on, probably will still have the same value, since they are rare earth resources.

  4. Wow Hackaday, you are only a year late on this one. The difficulty is so high now that unless you purchased a high end mining rig 6 months ago, You probably will just lose money in the form of your electricity bill by getting involved now.

  5. I still dont get how any currency based on pointless use of cpu power is a good idea or has gained so much attention.
    Cant we based it on useful cpu work somehow? Folding@Home Units? or something else that doesn’t just amount to a waste of power ?

    Also, surely Google or Amazon can dominate mining whenever they can be bothered? Is the whole system based on no big player getting involved. (and I get that difficulty scales – but the existing rich will still be able to earn at a proportionately higher rate then everyone else wont they?)

    Of course, I still think the algorithm is neat – I just cant help but think disillusionment with current monetary systems has led to some ignoring the downsides of this one.

    1. is a little less decentralized, and definitely untested, but it may work as a similar peer-based digital currency that doesn’t require a CPU race as part of the security. It is very unlikely that any productive work can be done and still provide the same security in Bitcoin. The hash being solved for each block is a perfect problem to solve, because a new variation that’s just as hard as the last is available for each and every block. How would we provide a queue of useful problems to solve that couldn’t be solved before hand?

    2. It’s called the labor theory of value. In short, the idea is that value derives from the amount of work it takes to make/get something. This is the premise a number of economic models are built from.

      The problem is that bitcoiners tend not to understand that economic models are for *modeling economies*; they aren’t intended (and indeed are not) descriptions of how economies really work.

      Bitcoiners end up fetishizing and practically deifying their economic model of choice, and so bitcoins have value because its user believe they do. This is true to an extent for any currency, it’s just that “real world” money also has the backing of people with power and guns.

    1. The blockchain can be pruned to exclude spent transactions, the only relevant information is who last received the bitcoin and is holding it unspent. No need for every client to know the entire coins history.

  6. Let’s not forget that bitcoin:
    – is useless as a currency for transactions mainly because of its fixed quantity. In a world where the quantity of goods available for purchase increases, it makes sense to hoard bitcoins instead of spending them, as their value increases in relation to the goods (there is a reason that we moved to fiat money)
    – is more concentrated that any other currency, with the majority of it in the hands of the original miners. So instead of “cyber freedom”, bitcoin just created a new aristocracy.
    For more see this article of Valve’s resident economist

    1. The bitcoin aristocracy (the original miners) does seem a bit problematic, but current owners will have to spend those coins eventually to reap any reward. Thanks for the link, he makes an interesting point about the money supply needing to be flexible to support expansion periods, and that even without gov, banks could increase the supply through lending.

      1. The deflationary nature of bitcoins means that if they ever were adopted, their value would only go up. This has been seen over the past few years as the mining difficulty increased by orders of magnitude (to the point where it is only profitable to mine if you are getting “free” electricity) while the market was also expanding. There is also the fact that the total supply of bitcoins will tend to decrease over time (at a rate higher than they are mined before all available coins are mined) due to orphaned wallets (ie, people forgetting their password, basically), or people sending bitcoins to no address (deleting them).

        What this means is that even though those early-adopters who control the vast majority of bitcoins have to spend them to get a reward from them, deflation means that the actual value of their holdings can stay the same, or grow. While inflationary currencies encourage people to spend and invest their savings in order to maintain pace with inflation, deflationary currencies essentially reward you for stuffing your money in a mattress. This leads to ever decreasing money velocity and possibly a deflationary spiral.

        I guess what I’m saying is that bitcoins are dumb. Really dumb. Unfortunately, they have a following among Ron Paulites (despite even him saying they were dumb) and the kind of folk who like militias and/or compounds, and they tend to evangelize bitcoin at every opportunity.

        1. thanks for the detailed explanation. Many of the bitcoin competitors try to address problems in bitcoin… Litecoin has a faster block time, ripple doesn’t involve the cpu usage to prevent double spending, I wonder if there are any that attempt to address the deflation problem.

    2. The history of bitcoins is basically the history of currency, only super sped up:

      1. Bitcoins are created
      2. Bitcoins are traded freely
      3. Some people have large amounts of bitcoins stolen
      4. Entrepreneurs set up web services for securely storing people’s wallet files, carefully avoiding calling these services “banks”

      and so on. The current state of things is the gradually dawning realization of why inherently deflationary currency that also has an inherently limited supply is unsustainable long term.

  7. Everyone, be sure to stop buying hard drives, sd cards, processing power or anything else related to technology because it will be cheaper to buy it later on with any currency of your choice. For sure don’t buy the iphone 7, the 8 will be out in 6 months and the 7 half price. Oh wait, everyone buys all that deflationary stuff anyways because they want it right NOW. So all deflation can really do is stop people from buying stuff that they don’t actually want, oh what a horrible thing.

  8. Biggest scam in the world. Makes the $600 trillion dollar derivatives market look like child’s play……and that’s saying a lot since, the current market cap for derivatives is around ten times world GDP (economic output of the ENTIRE WORLD in one year, tmies 10)…..

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