Pasky’s Log

In the next few days, I will be posting a couple of trivial short thoughts on some frequently debated “issues” of Bitcoins that keep coming up e.g. on #bitcoin and that I reacted to.

The basis of Bitcoin are “blocks”. Sometimes, they are regarded as just a magic device for getting bitcoins by the mysterious activity of mining. But the main purpose of blocks is to build a trustworthy distributed database of bitcoin transactions. The trustworthiness comes from the blocks, which confirm the transactions by a “proof of work” – non-trivial computational effort.

The reason we want this “trustworthiness”? We are tackling one of the major problems of distributed currencies – double spending. You have a coin tied to an address; at the “same moment”, you could send two transactions to two nodes of the network, in one sending it to Alice, in the other sending it to Bob. Which of the transactions becomes accepted by the network? Half of the network might think you send the money to Alice, half that it goes to Bob. The point of the “block chain” is that no conflicting transactions appear in it, and the transaction with the most computing power behind it wins.

Unfortunately, you might need to wait for a block with your transaction in it for anything from five minutes to 1.5 hour, and for your transactions to be trustworthy enough, some followup blocks need to be accepted (the “confirmations”). This is a nuisance if you want to make real-time with bitcoins, of course, be it buying a soda can in vending machine or hefty TV in an electronics shop. It is also sometimes used as an argument against Bitcoin.

But there are two ways to deal with the issue. The first way, even mentioned at the Bitcoin wiki, is just not caring about the problem. If the payment is just few bitcents for groceries, it is just not worth the hassle. Hassle drives away customers and the loss may be greater than an occassional double-spend cheater makes. The modern society (including credit card companies) relies on the fact that people tend to be honest when there is non-infinitesimal risk.

In case of a hefty TV, non-infinitesimal risk may be worth it. But the solution is again no rocket science: a trusted third party. Two schemes may be possible – with a flexible plan, the service would have a contract with the customer and the merchant. At the time of payment, the service will send the money to the merchant and the customer will pay to the service. If money do not arrive, the service will sue the hell of the customer; the merchant gets their money regardless. Thinking about it, this works a lot like credit cards.

With a fixed plan, there is even less hassle for the customer. They just make a deposit to the third party – this is an upper limit to their spending. When they purchase an expensive TV set, the merchant receives guaranteed payment from the third party, while the customer sends the money to the service. If money do not arrive, it gets reimbursed from the deposit. An initial deposit (and thus more trust in the third party) is required, but the customer may remain anonymous and the service can have smaller legal department.

Bitcoin Spending Insurance could be a suitable name for one service like this, but you could have countless, like you have multiple credit card companies and many banks. On the merchant side, another service might aggregate them conveniently, and on the customer side, they may compete with their bussiness plans, bonuses, advertisements and other wretched capitalistic means. ;-)

I.e., this reduces the decentralization of Bitcoin, but so do currency exchanges and other services – it is an optional addon and if the users do not mind the wait, they are free to avoid it. In short, no need to worry about the fact that transactions are not real-time.