Radar has a backchannel, and sometimes we have interesting conversations on it. Mike Loukides and I recently had a long chat about bitcoin. Both of us were thinking out loud and learning as we went along, and on re-reading the thread Im astonished by our advanced level of ignorance. I would like to publish it because it hints at just how hard it is to understand the bitcoin network. The founding papers that describe the system leave a lot of implementation to the imagination, and the level of mis(dis?)information around the web is staggering. Its no small thing to get the basics right. But beyond the basics, the bitcoin network has that property of an inside-out onion, where the harder you look, the more (and bigger slices of) complexity you find.

Anyway, were not going to publish it. I dont mind looking stupid, but I dont want to look that stupid also, the comments would be torture.

However, some of the things we were wondering about are worth wondering about publicly. Especially this: what happens when the mining subsidies end? Will transaction fees pick up the slack? I think ultimately the answer is yes, but maybe not in the way a lot of people expect.

If you read around the web, the typical answer to that question sounds something like, Yeah, of course they will. Costs will go down as some miners exit, but people will start voluntarily paying transaction fees. Also, unicorns. Of course, the transaction fee bit is striking because a lot of people think one of the key benefits of digital cash is that, compared to credit card processors, they dont charge fees.

Well, they dont now. Now they subsidize the operation of the network by printing new money, er, mining which I suppose is crypto libertarianisms answer to quantitive easing. With 25 new bitcoins being minted every 10 minutes or so (at a current value of $11,600), the dearth of transaction fees is just noise. But over time, the pace of mining will drop (halving after every 210,000 blocks).

Before I get to the question posed in the title of this piece, we probably need a brief explainer so the rest of what I say has a chance of making sense. If you already know how bitcoin works, you can skip this part. Or, better yet, read it anyway and tell me what I get wrong. Im well aware that Im treading into speculative territory and probably dont have this all sorted. In fact, thats true for this entire post.

Bitcoins central feature is a distributed ledger called the block chain that contains a record of every verified transaction ever, going back to the genesis block of the first 50 bitcoins. Its called a block chain because transactions are verified in blocks, and the blocks are chained together, each new one pointing to the one before it. Each block contains the worldwide transactions from approximately a 10-minute period.

Every bitcoin in existence can be traced back to one of these blocks. Either it originated in the genesis block, or it was issued as a reward to the miner who verified a more recent block.

One of the counterintuitive things about bitcoin is that there really arent bitcoins. Not in the sense that there is an indivisible coin with some unique identifier associated with it. Instead, users of the bitcoin network get value as an input (either from a transaction or from source coins issued in mining) and then they can either hold that value, or spend it as an output via a transaction. The transactions associate value with their key value, which substitutes for their identity.

Bitcoin is known as an anonymous or pseudo-anonymous system, but really it is completely transparent. Every transaction ever completed is available in the block chain for anyone to see. Smart users will take pains to change their encryption key with every transaction and be careful not to associate their public key with their real identity, but bitcoin probably has that common and awkward property of being less anonymous the more you use it. More data in the block chain means more opportunity to de-anonymize you.

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Bitcoin: what happens when the miners pack up their gear?