Bitcoin's crazyness

I've been following bitcoins with curious eyes for a few years, yes i was aware of their existence when they were dirt cheap, and if i had invested a few bucks back then, i'd be a millionaire, but that's life. I only bought some last year, and i'm still pretty happy about it :) (and i'm keeping them, because it'll grow a lot again this year).

Now, it's not about pride, but there is something interesting about how bitcoins works, and probably a lot of people are missing it.

The whole history of transaction is public, it's the very basis of the protocol that everybody has a copy, the whole security of the system is that you can't deny that an account made a transaction.

Because money is not what's important, it doesn't exist in the end, what do exist are transactions, and what's important is that the whole ledger is balanced.

Say we have a small network with Alice, Bob, and Carole, here is the state of the accounts.

+-------+-----+--------+
| Alice | Bob | Carole |
+=======+=====+========+
| 10    | 0   | 0      |
+-------+-----+--------+

But this table is actually an emergent property of a more complex scheme

+-------+-----+--------+
| Alice | Bob | Carole |
+=======+=====+========+
| 0     | 0   | 0      |
| +10   | 0   | 0      |
+-------+-----+--------+

Where does this +10 comes from? Well, we could say somebody else gave 10 coins to Alice, or that they magically appeared, but it's just a start point that we'll explain later.

The important thing is that this table will register any future operation, and the value in each account will simply be the sum of all recording before.

+-------+-----+--------+
| Alice | Bob | Carole |
+=======+=====+========+
| 0     | 0   | 0      |
+-------+-----+--------+
| +10   | 0   | 0      |
+-------+-----+--------+
| -1    | 1   | 0      |
+-------+-----+--------+

Alice Gave a coin to Bob, that's nice, now she has 9 of them, and Bob has 1.

The mechanism of validation of a transaction depends on the fact that no transaction is forgotten, or altered, to accept a transaction, people in the network must agree the money is indeed there and the transaction can be done, and can't be done twice with the same money. To avoid people flooding the network with confirmations of wrongful orders, a cost have been cleverly inserted in the confirmation process. To confirm the process, someone must take a number representing the transaction, and the state of the whole ledger before it, and find another number complementing it to match a challenge, this is costly because it takes a lot of computing power, but in order to give an incentive for people to confirm transactions, a prize is given to the first person to find a solution to the challenge, that's what mining is. Making the network run, and be paid for it, hoping to get ahead in a cost/benefice matter.

+-------+-----+--------+
| Alice | Bob | Carole |
+=======+=====+========+
| 0     | 0   | 0      |
+-------+-----+--------+
| +10   | 0   | 0      |
+-------+-----+--------+
| -1    | 1   | +X     |
+-------+-----+--------+

Since Carole helped the transaction happen (by finding an answer to the challenge), she gets some amount of bitcoins, the money is created, that's how most of bitcoins are created, the exception being the very first bitcoins in the network, which were created "magically".

Now, in bitcoins, we don't have names like there, we have accounts numbers, and to some of them are mail addresses associated, but they are only indicators, not proof of any owner identity. This very reason makes people think that bitcoin is anonymous. While it's true, you also need to think that all of the history is kept forever, so while you can't directly know who is who, you can "follow the money", and with advances in big data, you can get good ideas about what the money is used for, and of what people are behind the accounts. And when an identity is revealed, there is no possible deniability of the fact that the money was sent or received, it's signed, and it's been confirmed by the network, everyone have a copy of it. So while you are anonymous now, you may not be in 20 years, one simple mistake (from you, or someone you did business with) is enough to reveal much about your past.

I love bitcoins, i believe they are a beautiful idea, but it shouldn't be taken for what it's not. Decentralization is what's to love about it, security of exchanges, and even, dare i say, a sane pace of exchange, preventing fast-trading and other misuses of money, but anonymity is not the most important one, and not the one you should rely on.