Wednesday, December 10, 2014

Another Crack At Explaining Bitcoin II

You might do something for me because I agree to return the favor some day, right?  Suppose that there are a bunch of people doing things for others and expecting the favor to be returned in the future.  You might end up doing a lot of stuff for other people and so you will be owed lots of favors.  Not likely though, right, because it would be too hard to keep track of all those people who owe you a favor?

Suppose a group calling themselves "the miners" keeps track of all these earned-but-not-used favors.  Their tracking system allows you to collect a favor from someone who doesn't owe you one because they owe person A, who owes person B, who owes person C, who owes... who owes person Z, who owes you.  So when you collect a favor from that person, it cancels all the favors between person A and person Z.  That would be a pretty cool tracking system, right?

The miners compete with each other to protect the data they are tracking.  Every now and then, one of them finds a way to improve the protection of the data.  Basically, he or she makes it more difficult for anyone to mess with the database of who owes who a favor.  So perhaps it would make sense for everyone doing favors (and relying on the miners' work to keep track of them) to consider what the miner did to be a favor for which we all owe him.  This scheme enables anyone who wants to play to do favors for others without worrying that they'll never get paid back, because they can get paid back by anyone who owes a favor.

If you're smart, you're thinking this will never work because you might ask someone who owes a favor to do it for you, and they might refuse.  Quite right!  And you worry that everyone you ask might refuse.  These are good points and need to be addressed.  We address them by requiring that people do favors FIRST, before they are owed favors, and they will get credits for doing those favors.  But where do the credits come from?

Remember the miners who protect all the data about who owes whom a favor?  Well, now they can instead keep track of who has earned a credit.  Remember we agreed that they get credit each time they make it more difficult for anyone to mess with the data they're tracking?  The miners are the first people to get these credits - they do the first favors for everyone who will eventually benefit from this system.

As long as those miners do a good job of protecting this credit data and tracking who transfers credits to whom, we can continue paying them in credits.  As a matter of fact, this is exactly what bitcoin is.  We've implicitly agreed that after 210,000 successful attempts to make messing with the data more difficult, the credit for a miner who does it will be cut in half.  A bitcoin is one fiftieth of the initial credit, and today, miners only earn half a credit, or 25 bitcoins.

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