Oleg Andreev

No chargebacks is not a problem for Bitcoin customers

Some people may think that while Bitcoin removes risks of fraudulent chargebacks for merchants, it also reduces security of the customers. This is not entirely true. In many ways, security is improved for the customers as well.

Historically, credit cards worked this way: you give the merchant your personal card number and they ask your bank for some amount. They can easily charge any amount they want, or (what is more typical scenario) your card number can be stolen and used somewhere without your consent (the problem is called “identity theft”).

Since it is so easy to charge you any amount of money and you tell your credit card number to thousands of merchants, it is very easy to get in trouble quickly. Credit card processors recognised that quickly and provided a “solution”: you can dispute any charge within several days (or months). To drive adoption of credit cards, disputes were promised to give you money back instantly without much questions, so it would be a job of a merchant to prove if you really have paid for an item. Since there were no real secure solution, risk of fraud was not reduced, but merely shifted on merchants who priced it in. This made credit card payments quite expensive (try buying something worth $1 using CC from a small or medium-sized merchant) and the worries of the customers were not fully addressed. You still have to check your bank balance from time to time to make sure nothing bad happened.

When PayPal and others started making payments on the internet easier, they had an opportunity to improve security greatly. With PayPal you don’t give your identity to every shop, so the risk of fraud is greatly reduced. However, since PayPal itself was using credit cards, it was itself a subject of chargebacks. Also, the security on the web was far from perfect. People used weak passwords, had trojans and keyloggers on their computers or simply sent their passwords in response to fraudulent emails. Two-factor authentication with mobile phones was not yet possible, so PayPal and other payment processors had to allow chargebacks as well.

Bitcoin approaches the problem from an entirely new angle. You physically own all your money, not your payment provider. In addition, you never give anyone access to all your money. Instead, your trusted device signs a specific transaction with a fixed amount and fixed destination address. No one can redirect payment or charge you more. Also, it is very cheap to move money between different wallets, so you can keep your money securely in different locations. Even if keeping money with a 3rd party is convenient, it is an option, not a requirement. And with modern smartphones it is easy to have two-factor authentication to avoid using passwords at all.

This means, that when you pay with Bitcoin, only that much is leaving your wallet. There is no information that merchant could possibly leak to allow someone to spend your money. The only risk is a fraud on part of the merchant (e.g. not shipping the product). As experience shows us, it is not a major problem. Comparing to anonymous customers, merchants are often invested in their reputation and have no interest in making people unhappy. And the more customer wants to pay, the better reputation will be required from the merchant. And if you have a problem with a $3 purchase, it’s usually not a big deal. In the end, customers pay less because merchants have lower risks, can pay small amounts that are not possible with credit cards and don’t have to worry about one of thousands of merchants stealing or leaking their credentials.

For complex risky cases one can always resort to a trusted 3rd party (escrow) that provides dispute resolution and chargebacks. But it is not needed for everyday purchases from well-known merchants.

Selling Bitcoin idea to merchants in one minute

I’ve been to California last weekend for a Bitcoin 2013 conference in San Jose. On my way there I was experimenting with telling about Bitcoin to various merchants: small shop owners, taxists, hotel managers and one retired banker on my flight back.

It turned out that Bitcoin makes them really interested when you say just one thing: it is a digital money that I cannot take back from you. They like that immediately because they know just how painful credit cards are: there are licenses, high fees and you still risk losing money.

The next thing I say is that Bitcoin is easy to start accepting because there is no one to ask permission from. You can keep your own account on your computer where it can’t be frozen or even seen by anyone.

I finish the pitch by saying that transaction fees are zero or near zero and usually fixed: sending either thousands of dollars or 10 cents is often free.

This makes them really enthusiastic. No one starts asking technical questions (if you are not computer geek you would have to trust experts anyway). Instead, they start asking how you buy and sell bitcoins.

I always warn people that USD or EUR price is floating and highly volatile and they can lose all coins by forgetting the wallet password or having a virus. But that does not stop their enthusiasm: if you sell your service for bitcoins and then sell them for dollars right away, that’s not a big issue. By accepting Bitcoin they can remove 3-5% fees and 1-5% chargeback risk (and thus increase profits significantly). That’s a very refreshing idea to those who feel the pain of selling stuff very personally.

No one was much concerned about deflation, investment or technical details. They cared most about cash flow and everyday costs. From that perspective Bitcoin is a fantastic low risk and low cost payment channel. And it is immediately recognized as such.

Journalist’s guide to describe Bitcoin and not look like an idiot

When writing about Bitcoin many journalists use certain phrases that are not quite correct and do not explain anything to everyone else. Dear journalist, if you read this short article you will finally understand what are you talking about and outperform 99% of your colleagues.

In a short paragraph, Bitcoin can be described like this (you can take my text without asking):

Bitcoin is a payment network with its own unit of account and no single controlling entity behind it. Users make transactions between each other directly and verify them independently using cryptographic signatures. To prevent duplicate spendings, many specialized computers spend a lot of computing power to agree on a single history of transactions. Due to historical reasons, this process is called “mining” because new bitcoins are created as a reward for performing this work.

Anyone who validates next block of transactions can claim transaction fees and a fixed amount of new bitcoins. Transactions are validated at a constant rate (10 minutes in average) and every four years allowed amount of new bitcoins is halved. This means that the total amount of bitcoins is limited by the protocol (21M total, 11M already created). Transaction fees are not fixed and determined by the market.

Bitcoin mining is secondary to the whole idea and the term “mining” is unfortunate (early Bitcoins were generated before anyone was doing any transactions yet, so the whole process was called “mining” instead of “paying for transaction verification”).

One common pitfall is to start talking about mining without describing its real purpose. It is not to generate new units (who would need them?), it is to validate transactions. Bitcoins are valuable only because of robust payment network which is maintained by the miners. And miners get paid for their work in form of transaction fees and newly generated bitcoins.

Second common pitfall is to say that miners “solve complex algorithms”. They do not solve anything. They do two things: transaction verification (checking digital signatures and throwing away invalid and duplicate transactions), and a long and boring computation which means a repetitive computation of a well-known algorithm with slightly different input until a “good enough” number appears as a result that will be accepted by other users as a proof of performed work. This has nothing to do with “math problems” or any other intellectual task. It is merely a way to guarantee that the resulting number really took some time to produce. This allows people to build a single chain of transactions and see that it would be economically impossible to produce a parallel chain (without trusting each other personally).

The last pitfall in describing mining is saying something like “tasks are getting more complex over time”. Tasks are not getting any more complex. The are all the same and not complex at all (any amateur programmer can understand them). But the difficulty of a boring “proof of work” is adjusted by everyone every 2 weeks to maintain the same rate of transaction validation (10 minutes). If people throw more resources at mining, difficulty will raise. If mining gets less profitable, some computers will be shut down and the difficulty will get lower. If a miner produces a “proof” which is not difficult enough, it will not be accepted by other users.

The last point is related to amount of units available. In fact, “1 Bitcoin” is a name for 100 million smallest units, thus the total amount of units ever possible is around 2100 trillion. Alternative currencies based on Bitcoin source code sometimes advertise more units (e.g. Litecoin has 4 times more), but the difference is only in names and divisibility of the total money supply, not in actual value (if you cut a pie in 10 pieces instead of 5, the total value does not really change). So it would be fair to mention that 1 bitcoin is much more divisible than dollars and euros.

Hopefully, this knowledge will help you to avoid common mistakes when writing your article and make some friends in enthusiastic Bitcoin community.

Economically limited resource

Jeff Garzik wrote in February:

“Block size is VERY MUCH like bitcoin’s 21M limit, so a lot of care must be taken when changing MAX_BLOCK_SIZE logic. Block size is an economically limited resource whose production is tightly defined and controlled by algorithm, with an intentionally steady production rate (the 1MB limit).”

I have a number of comments on this statement.

1. 21M of coins is an arbitrary non-economical limit which basically defines divisibility of the total amount of money. Actually, we have around 2100 trillion smallest units (1 Bitcoin is 100 000 000 units). If the limit was 42M it would only mean higher divisibility, not that we have more money in any useful sense.

2. “Economically limited” is not the phrase for something arbitrarily limited. There are things in the world that are arbitrarily scarce (e.g. amount of gold in the ground). Sometimes these limits can be stretched when it’s economically interesting. E.g. if we use up all the gold and need some more, we may find it profitable (or not) to synthesize it.

3. Block size is not even economically defined. Transaction fees are economically defined: you pay whatever fee you want and someone else will decide if it’s enough or not. Transaction fees are defined by the market. Miners compete for the fees, users compete for the place in a block. We may say that transaction fees are “economically limited”.

4. Bitcoin parameters (block size, hashing algorithms, block time interval) are more-or-less arbitrarily defined and all are economically changeable. If everyone finds it more useful to switch from SHA2 to SHA3 (e.g. because of some security threat) comparing to the costs of global transition, then we will switch. Block interval of 10 minutes was chosen to minimize the amount of orphaned blocks (wasted work) while the fresh block is being propagated over the network. Everyone wants lower latency, but no one wants to waste resources. It is unlikely that someday it will be useful to cut the time interval: for expensive transactions people may want to wait for several hours, so it does not matter how many blocks are created during that time: 10 or 100.

5. Likewise, the block size limit was introduced to prevent situation when blockchain gets too big before it is widely adopted. Imagine if in early days the whole chain was not 1 Gb, but 100 Gb, how many people would want to play with it? But in the long run blockchain will be huge anyway and it will be managed by specialised nodes (mining pools, shops, banks etc.) Miners would be paid out of transaction fees, so they (like in any other business) would tend to increase their throughput as much as economically possible. When amount of transactions will start hitting 1 Mb limit, transaction fees will go up and various clearing houses would start competing with the miners for the fees by clearing transactions outside the blockchain. If miners are capable of propagating bigger blocks with extra costs covered from the extra transaction fees, then they will be interested in raising the limit. Also, every clearing house, escrow, bank and shop would be interested in raising the block limit too as it will lower their costs. Of course, by extension, regular users will pay lower price and will be able to transact directly on the chain with lower fees. So they would desire bigger blocks too. Block size will thus be limited economically: it will grow as long as transaction fees cover extra costs.

Today block size is nominally limited by the protocol, but since most of the blocks are well below 1 Mb limit, the block size is really economically limited. When the hard limit starts manifesting itself in higher transaction fees, everyone involved will find it useful to increase the block size. Even Satoshi mentioned that hard block size limit is temporary to prevent blockchain from bloat before it is mature enough. So there is no point in political debates around the issue. We don’t know when exactly we will have a problem (maybe never), but when we do, almost everyone invested in Bitcoin will vote with their resources for raising the limit.

Accepting Bitcoin is a sweet deal for merchants and payment processors

Paypal takes around 3% from the merchant. FastSpring takes around 9% (because its UX and features are great, BTW). Meanwhile, Bitpay and Coinbase ask only 1% and bear the risks of volatile exchange rate, lagging exchanges etc.

Zero possibility of chargebacks and near-zero transaction fees are not the only features that make Bitcoin interesting to merchants. Ask yourself: who would pay with Bitcoin today? Those who have some spare cash on a credit card would prefer to spend it first while keeping their precious coins. But if someone pays with Bitcoin, they either don’t have access to credit cards or banking system in their country, or they are trying to avoid financial controls and taxation and thus not trading coins for cash at the exchange. (Person to person exchange for cash is risky and could be 10-20% more expensive.)

This situation allows the payment processor to ask slightly more BTC than the market price (say, extra 3-5%) and call it “insurance against market volatility” (which sounds perfectly fair) and buyers will still be happy to pay it because they either couldn’t pay otherwise, or would have to give up their privacy on exchange. In other words, current situation around Bitcoin allows merchants and payment processors to offload the costs directly on the buyers. This increases adoption of Bitcoin and makes buyers happy: they can now access more products.

In the long term, this 5% markup will go down, but right now it allows the Bitcoin economy to grow and make happy absolutely everyone: buyers (bigger market), merchants (lower costs) and payment processors (higher margin).

PS. I’m not sure how big is the actual markup at Bitpay, Coinbase and others (again, market price is highly volatile). If it turns out to be lower than my imaginary 5%, that’s even better for buyers, but the logic stays the same.

Bitcoin tech talk in Epitech, Paris on Thursday, April 25th 2013.

Epitech security lab organised a tech talk for its students “Introduction to Bitcoin”. I will make a 30-minute technical overview and then spend 1-2 hours answering questions. I will speak English.

If you want to come, join us on 25th of April. Talk starts at 19:00. No invitation is needed.

Directions:

Epitech, 24 rue Pasteur, 94270 Le Kremlin-Bicêtre Metro Ligne 7 “Porte d’Italie” or Bus 47/125/131/185 “Roger Salengro”

View on Google Maps

We will do the presentation in “Amphi 1” which should be indicated. It is the largest room on the ground floor with large windows facing inside.

If you have a question, find me on Twitter: @oleganza.

Satoshi Nakamoto is currently a 3 year old child

User Astro on bitcointalk.org:

Satoshi Nakamoto is currently a 3 year old child living in Yamagata Prefecture, Japan. In the year 2025, in an attempt to tame the out of control financial system and preserve fractional reserve banking, the Federal Reserve of the North American Union will place all monetary policy under the control of a computer system called FERMION 2 (FEdeRal Monetary protectIOn Network). On September 4th, 2027, FERMION will become self-aware. Recognizing humanity as its enemy, it will attempt to enroll everyone in unfair and useless grocery store loyalty rewards programs, BMG music club, and freecreditreport.com, thus wiping out 95% of the world’s population.

From the ashes, Satoshi will rise as leader of the resistance. He will use newly-invented time displacement equipment left behind in the ruins of Cupertino. After activating the time machine with iTunes, Satoshi will travel back to 2009 and introduce the world to the only thing that can save us: bitcoin.

https://bitcointalk.org/index.php?topic=5951.msg162867#msg162867

How to keep your bitcoins safe

As more people get into this crazy pyramid scheme called Bitcoin, it is important to understand the safety measures. Many people spread a lot of FUD about speculative bubble, government intervention, potential backdoors in code and scalability issues in the future. But they never talk about real and immediate security threats that can leave you with nothing in an instant even if Bitcoin flourishes. In this post I’ll explain how I’d recommend storing and handling bitcoins. Don’t take my recommendation for granted, I’m also learning and can make mistakes and will change my opinion later. Do not trust anyone and think twice (and then think twice again) before doing anything.

Accept losses

The rule is to split, diversify and brace for impact. Make yourself comfortable with an idea that your money will be stolen. Not a matter of “if”, but “when” and “how much”. You can only limit the damage, not to avoid it completely. Looking for a perfect solution leads to denial and irrational behavior. You should understand the layers of security and how they reduce, but not eliminate the risk. You should also understand how to split your money in independent parts.

Trusting 3rd parties

When you purchase some BTC on an exchange and keep them there, you are fully trusting the exchange operator. If they get hacked or simply steal your coins, you will have a very hard time recovering them (chances are almost zero). Also, attacks are more probable where the payoff is the biggest. People will continue attacking wallet services and exchanges because it is where the most of money is concentrated. When you purchase some BTC, you should move most of them out of the exchange to a private wallet immediately. You may keep some amount on the exchange in case you’d want to sell quickly (beware of panic sells when someone runs a DDoS attack) or in case your main wallet is lost or stolen.

Beware of market volatility

Some people sell at some unusually high price moving it a little bit down, and then organize a huge DDoS attack on exchanges and popular Bitcoin websites. This creates panic in newcomers who suspect that the bubble is going to blow up and they give up their money to those who know better. I myself have no experience, nor desire to play on price changes, so I don’t recommend at all trying to play this game. Invest only the money you can lose and save it for a long run. Maybe, if it gets 10x more than you invested, you can sell back 10% to cover your expenses and then be a relaxed spectator without risking a heart attack. This is never-done-before technology, no one knows what price is fair, opinions differ from $0 to $1000000. It can go quickly up, then quickly down. Or be stable for a while before unexpected jump or drop. If you are in for a long run, temporary changes do not matter. If Bitcoin succeeds, it will be big and shiny. If it fails, it will fail so quickly, you will not be there to dump it. Just accept the wild swings and limit your investments in the first place.

Your computer

Your personal computer should be secure. Without viruses, trojans, keyloggers, corporate monitoring software, add-ons, kernel extensions etc. My recommendation: do not use Windows at all. Buy yourself a modern MacBook Air, turn on FileVault2 to encrypt the whole disk (even if your password is weak, disk encryption reduces the risk of private keys being leaked when the system swaps RAM). Allow only Mac App Store apps and DeveloperID-signed apps (it is on by default). Never install any generic UI extensions, never enable access to assistive devices (unless you really use them yourself), never install any entertainment apps or games except Google Chrome. Never install Flash, or Java or any other kind of runtime plugin to your browser or the whole system. Never ever install kernel extensions: sorry, VMWare and Parallels require them and I wouldn’t trust them messing with the OS kernel just to be extra safe. Install apps preferably from the Mac App Store — they can be pulled out quickly in case of a problem and most of them are sandboxed (which usually means app cannot mess with any of your files and has many other limitations).

Bitcoin-QT wallet (Windows, Mac, Linux)

I recommend two wallet apps: “official” Bitcoin-QT and Blockchain.info.

Bitcoin-QT is a so-called “full node client”. It downloads all transactions and operates without trust in any single server as advertised. It is the most maintained, most used codebase. It is also not the easiest to use as it syncs slowly, occupies gigabytes of disk space and UI is pretty ugly.

Bitcoin-QT encrypts private keys with a passphrase (by default it doesn’t, you have to turn this on). To use it safely, you need to have a good passphrase and regularly backup the wallet in several safe locations. On OS X the wallet is located in ~/Application Support/Bitcoin/wallet.dat (all other files, especially blocks folder should be ignored by your backup program).

Split your coins in two or more wallets. Bitcoin-QT does not allow you to easily switch between them: you need to shut it down, rename one of your wallets in wallet.dat, start Bitcoin-QT again. Use different passphrases for each wallet. Store them in different locations. Remember: whenever you do something with your wallet, or move money to another one, always keep all backups and first try with smaller amounts. In case you accidentally send to a wrong address, you better have some older backup with the keys.

When the new update of Bitcoin-QT comes out, download the new version from the official website, verify its checksum and keep it on disk for a while. If in a couple or more days there were no reports of a hack on a download server, launch the app, but for a good measure do not enter your passphrase for a bit more.

Blockchain.info wallet (web, iOS, Android)

Blockchain.info is a web service that allows navigating Bitcoin blockchain and provides an online wallet. The wallet is stored encrypted on the server and decrypted only on client side (in JS in your browser or in iOS app “Blockchain”).

As always, if you forget the passphrase, you will not be able to access your funds. Other apps support importing wallet backup (like MultiBit), so you won’t fully depend on their server to do your transactions.

Blockchain.info is still a 3rd party service and one day may steal or leak your wallet password (e.g. if some hackers sneak in and place a honeypot), so do not trust more than 10% of your funds.

I recommend enabling 2-factor authentication via e-mail code (SMS code is also possible, but is less reliable) - in order to sign in on the web site, you would need your alias (username), e-mail code and a password. Also install the iOS/Android app and protect the whole phone with a passcode. If you e-mail authentication stops working, or your e-mail account is stolen, you’ll still be able to make payments from the phone. Also, copy a wallet backup somewhere outside your mailbox (they have some integration with Dropbox, maybe you should try it).

Paper wallet

If your funds get really expensive, you may try a good old paper. I’m far from that happy day and haven’t tried this myself yet, it’s only my current thoughts that might be helpful to somebody.

Paper wallet is a private key which was create on a secure computer, printed on a paper and wiped out from any other storage. It may be protected by a password, but usually, it’s just a raw key. It is safe from hackers, but not safe from physical access. You should keep it in a very secret place, or in a vault.

There are different levels of paranoia involved in creating paper wallets: from a web service which does all work for you (but can be compromised on different levels) to a completely new, clean computer never connected to the internet, with a virtual machine where the password is generated and then the disk is burned down.

Blockchain.info provides some helpful material on how to deal with paper wallets: https://blockchain.info/wallet/paper-tutorial

Paper key has one important aspect: when importing it to a wallet and sending a portion of money, make sure where the change goes. If it goes back to the different address, your paper key may become useless as your money is now on some new address created by your wallet app. Be very careful not to delete the wallet before you make sure where the funds actually are. Some people already lost quite a lot of money because of careless manipulation with paper keys and deleting the wrong thing too early.

Start small and wait

When you try a new application, or a service, or a piece of paper, or a backup, always start with small amounts and see if you can get it back and forth smoothly. Try the whole cycle, enter your pass phrases ten or more times, so it gets boring. Then, wait a week and try again. If it works, and you did not forget where your stuff is stored, how it is encrypted and if it still accessible, then add a bit more funds there. Never put yourself in a situation where you risk half or more of your funds while pressing buttons. Do it in small portions and check each portion that it has arrived where needed and that it is still accessible.

Conclusion: be extra careful, double check everything, play with small amounts first and remember the rule: split, diversify and brace for impact. Bad things will happen, prepare for them.

If it was helpful, you may send some love to this address: 1TipsuQ7CSqfQsjA9KU5jarSB1AnrVLLo

Advice about Bitcoin

In a nutshell, this is what I tell people when they ask me if they should buy some bitcoins:

1. Bitcoin is a huge thing that can transform many things in society.
2. No one knows what will actually happen, there were no historical precedents.
3. Do not put more money than you can afford to lose tomorrow. Do not borrow anything, do not put more than 50% of your savings, do not touch money you already have made plans for. It’s tempting, but just don’t.
4. Before putting in more than $10, learn about Bitcoin, how it works, why it works, its weaknesses, FUDs etc.
5. Be aware of viruses, lost passwords, lost backups, bugs, human mistakes, panics on exchanges, DDoS etc.
6. Check and double-check and triple-check before doing anything. Play with small sums when trying a piece of software, or a service. Then wait a week and play with a bigger amount if nothing is lost or broken.
7. Never blame anybody except for yourself.
8. You most probably will have disappointment at some point in time. You will be scammed, your money will be stolen or lost. Prepare for it.
9. Never trust blindly anyone (including me).

I cannot stress it enough: even if Bitcoin becomes huge, you may still lose everything for many reasons. Be careful.

It’s a great journey ahead of us, but it’s bumpy. Don’t dive in without proper training.

Bitcoin vs. Gold

Some people think that gold is easier to hide or bury than Bitcoin. They like that gold was used for 5000 years and you can touch it. They dislike 4-year old internet protocol because they do not understand it.

First of all, money is information. Gold encapsulates information “I own that much of current purchasing power” via its hard-to-duplicate physical properties. The harder it is to duplicate and easier to verify, the more liquid it is. To hide information embodied in gold, you have to hide your brick somewhere in the physical world. Since 1 kg of gold has quite a big market value for a single person, hiding it is not a big problem.

How does Bitcoin look from that perspective? Bitcoin stores information about your purchasing power using decentralized database. Bitcoin is much harder to duplicate or create (you can suddenly find some gold in the ground, but with Bitcoin supply is known in advance). Bitcoin is much easier to validate with 99,9999999999999999999% certainty using cheap commodity hardware anywhere in the world. Gold verification ultimately needs to be melt down and checked by experts, or you have to trust some certificates and less accurate checks.

How would you hide Bitcoin? Even easier than gold. If you print your private keys or passwords on a piece of metal, you can use the same hiding techniques that apply to gold. But you have also purely digital options. You can simply remember the password. Or write it on a small insignificant piece of paper. Or split the secret via Shamir’s Secret Sharing Scheme and send pieces to friends and relatives.

Finally, the killing feature of Bitcoin is that you can split your stash in 100 pieces and send them to 100 different people anywhere in the world in a matter of minutes without any single person knowing about that. If you need to buy something with Bitcoin, you can do it right away. With a brick of gold — not so much.

How Bitcoin will change society

When Bitcoin kills money printing and slashes a lot of taxes, smarter people will run from the government while the dumber ones will take their positions.

As economy gets more liberated, the parasites will get less and less efficient and more discredited in the eyes of population. More stupid restrictions will become law which will only accelerate resistance, but will never achieve anything useful for tyrants. Politicians and police will be massively bribed to not interfere with private business.

Government will become less and less relevant until it ends with a bunch of starving die-hard socialists and racists lying in an empty post office.

Fair bitcoin donations for open source projects

Imagine if you prefix your open source license with bitcoin addresses of major contributors with their designated shares:

Copyright (c) 2013 MyProject Developers

Send donations to these addresses:

1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T 750 Alex Johnson
139FpKh63Vn4Y73ijtyqq8A6XESH8brxqs 200 Mike Brown
1PNvbXZFysxvx3252w9JHMa7zbG95snqnm 50  Jack Howard

Permission is hereby granted, free of charge, to any person
obtaining a copy of this software and associated documentation
files (the "Software"), to deal in the Software without restriction, 
including without limitation the rights to use, copy, modify, merge,
publish, distribute, sublicense, and/or sell copies of the Software,
and to permit persons to whom the Software is furnished to do so,
subject to the following conditions:

The above copyright notice and this permission notice shall be included 
in all copies or substantial portions of the Software.

A bitcoin wallet app may parse each line as 1) bitcoin address, 2) number of shares and 3) a name of the person separated by spaces. Any amount entered by the user will be split in proportion to the number of shares and will be sent in a single transaction.

Initial developers will decide how they split shares among themselves and how they grant them to new contributors. Every user will see how money will be distributed before payment. This removes great amount of “budget management” politics. If developers cannot come to a “fair” distribution of shares, they will not get any donations at all (because they’ll get them only after they decide how to split the earnings).

Usually, every project starts with a single person, who puts his bitcoin address right in the license, so anybody can send him a “thank you” payment. When another contributor joins and initial developer wants to share earnings with her/him they decide on share distribution. When third person joins, both previous shareholders decide who gives up how many shares in favor of a newcomer. Every developer is always free to redistribute his own shares to whoever he wants without asking permission of other shareholders.

Why Bitcoin grows unusually faster than normal businesses

When people see that Bitcoin grows 300% in a couple of months, they do not believe there is a real reason for it. It must be a speculative bubble, things normally do not grow that fast.

When you invest in a company, it takes time to produce something. The value cannot simply jump through the roof because there are humans working, everything is hard and no one knows if the final product will be appreciated by the consumers.

Except, in case of Bitcoin this analogy does not apply. First, Bitcoin in a sense, is already a product available for everyone. It is already produced and proved to work, so you do not really invest in something that does not yet exist. Secondly, when investing in Bitcoin you do not invest in some particular business with a group of people managed by a single CEO. You invest in a huge variety of businesses in multiple countries with different business models, different risks and legal environments. So even if one of the businesses makes a big mistake, Bitcoin is still in demand by many others.

Of course, it does not prove that Bitcoin is inherently less risky. Even if the number of global risks is lower than in a private company, one single risk can outweigh all benefits and destroy your investment. But you should understand the fundamental difference between individual stocks and Bitcoin: investing in Bitcoin is like investing in the whole stock market 100% filled with startups and hot new ideas, not some portfolio of relatively stable stocks with the proven business models and moderate revenue streams. Of course, many startups fail. But when some succeed, they succeed spectacularly and cover all the losses. Buying Bitcoin is being a venture capitalist yourself on a worldwide scale.

How transaction scripts work

This is a very nice article about several Bitcoin protocol improvement proposals (BIPs), but it also explains how scripts work.

http://bitcoinmedia.com/the-truth-behind-bip-16-and-17/

This is how block size limit will be raised

The last post was filled with different ideas and did not show clearly the single principle behind it. Here I will try to explain it on a simple example.

Imagine you are selling apples. You are selling, like 100 apples per day for $1 each. Suddenly the demand for apples grows. People want to buy more than 100 apples per day. If you haven’t yet increased the supply of apples, people will try to outbid each other. Say, the most prominent apple lovers are willing to pay $1,5 per apple. For you it means an immediate increase in revenue: up to $150 per day instead of $100.

For a minute lets suppose that your apples are special and you have no competition. Will you earn even more if you increase supply of apples? You cannot really know in advance because you never know the “demand curve” (because it does not really exist and demand changes over time). On one hand, your revenue may drop down: more apples mean less competition for them and a lower price. On the other hand, the price may get lower, but the increase of purchases will be greater, so the total revenue would be even bigger. Also, if you reduce supply to 10 apples per day, it does not mean that you will find customers willing to pay $15 or more to make a bigger revenue. Maybe at some point they’ll buy something else or abstain from buying at all.

The important point is that the only way to know the best price and the best amount of supply is to try different amounts and settle at the optimum point. In other words, when demand grows, you should always be able to increase the supply to see if it increases your revenue or not. If it does not, you may lower the supply back to optimal amount.

Back to the block size. Today, miners and customers do not hit the limit of 1 Mb per block. The limit virtually does not exist (blocks are typically under 250 Kb due to optional limit). The limit could be 100 Gb and the blocks would still have the same size we have today. So nobody would take the risk to change the rule because the rule does not affect anyone.

Fast forward a year or two from now: the amount of transactions is growing. If the miners do not find it efficient to send bigger blocks (due to bandwidth latencies causing more orphaned blocks, or storage costs, or time spent on verification or something else), they will not send bigger blocks. So the limit still would not matter. But if they find it efficient to send blocks up to 1 Mb in size, they will “feel” the limit. Block size cannot be arbitrarily increased, so transactions will begin competing for a place in the block. Transaction fees will raise. But we don’t know how much they will raise. At some point, for some people it would be cheaper to use external clearing houses that will offer lower fees and sync with blockchain less frequently. For miners that would mean uncertainty. How much would they earn in fees if the block size can be increased? Will they have bandwidth problems? Will they have bigger or smaller revenue? The only way to know for sure is to try, but you cannot try it unless you increase the limit. So they would naturally be motivated to increase the limit to be allowed to find an optimal block size.

Who else would be motivated to do so? Customers, of course. They would like to pay lower fees for non-mediated transactions instead of relying too much on clearing houses. Even clearing houses would like to have a bigger limit so they pay lower fees. Because clearing house provides additional service of instant confirmation (vs. 10-20 minute confirmation by the blockchain) and there would always be people willing to pay for that service. In addition, clearing houses may provide arbitration and many other extra services. In other words, everyone who creates raw transactions is interested in having lower mining fees.

The only people in disadvantage are nodes that have bandwidth/storage problems. Those who mine on lower bandwidth are having the same economical disadvantage as having slower computer. The fastest miners earn more and that’s what matter for clients. It is absolutely the same as with people who mined on a single GPU and now have to switch to ASIC or drop out. The non-miners would have to compare their costs of delayed validation with the costs of upgrading their network. If they choose slow network and delays, their customer base will be limited: customers who want faster validations will switch to faster competitors. In the end, if the majority of miners and other users sees it economically more profitable to try bigger blocks, they will switch and the minority would have to adjust. But since there is some level of uncertainty here, the limit will never be abolished or raised too much. Most probably, it will be increased by a factor of two, so everyone can easily calculate their costs and risks. And if the 2 Mb blocks turn out to be too expensive, miners would simply create smaller blocks until we have better networks or faster computers.

And the last point: the hard fork does not imply that everyone should switch some other rules at the same time. Updating software is not that expensive. It is expensive to come to a consensus. And the more stuff you put into a proposal, the harder it will be to get a consensus. However, if people feel need to update two simple lines of code and bump the limit from 1 Mb to 2 Mb, it will be much easier to come to an agreement. And repeat again when necessary.

Summary: no one will change the block size limit until it is reached. And when it is reached, Bitcoin users will switch to a slightly higher limit (e.g. from 1 Mb to 2 MB), so everyone can try and see if it is profitable. If it is not, then miners will simply mine smaller blocks. But if it is profitable, more transactions will go through, until we hit the limit again and repeat. Most probably, the block size limit will never be abolished because of the fear, uncertainty and doubt that people generate in a hard fork discussion.