
Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin System [pdf] - Spellman
http://www.columbia.edu/~jl4130/BTC.pdf
======
rb808
That is a very 2015 view - now days people don't buy bitcoin for its use in
transactions, they buy bitcoin because it keeps going up. The more it goes up
the less people are likely to spend it. We don't need many miners if people
never spend it.

Here is one high profile example [http://avc.com/2017/08/store-of-value-vs-
payment-system/](http://avc.com/2017/08/store-of-value-vs-payment-system/)

(of course when it starts to go back to zero people will all try to sell and
the infrastructure wont be there)

PS: The paper deals with a very interesting problem about how miners are paid.
I dont want to take away from it. Just that I feel the whole BTC environment
has taken a new turn that makes the problem less of an issue.

~~~
bobbygoodlatte
I think this is mostly correct, but I see it a bit differently. This initial
wave of speculation is slowly building up network utility. Use cases like
micro-transactions or Web payments become more and more viable as the network
size grows. Eventually enough people own Bitcoin that it makes sense for it to
be baked into a browser for micropayments, and for it to be used in lieu of
Venmo/PayPal. Speculation is the boot loader for real utility

~~~
wbl
I don't need to own bitcoin to carry out a transaction with it for longer then
a few minutes. With a global cap of soon to be 28 transactions a second
Bitcoin will never be competitive with Visa.

~~~
gerhardi
The capacity for large volume ("real life scale") of transactions with
reasonable verification latency is something that I have always seen as the
real blocker with Bitcoin. I continue to be slightly surprised that the issue
isn't covered more actively.

------
iamrobinhood123
Speaking of economic views, I think that people tend to overlook the most
fundamental part of the Blockchain based currency phenomenon today. While the
technology is great, it tends to overshadow the fundamental observation that
these cryptocurrencies are first and foremost currencies and then afterwards
technologies. Perhaps Hacker News is not the place to have such a view, but it
ought to be stated. There is a lot of misinformation out there and a lot of
excitement, we ought to continually remind ourselves of this truth. These
currencies and their intrinsic value are subject to the same rules of all
regular currencies: supply and demand. Do people believe that these are
valuable or not? The economic view trumps the technological view at the end of
the day. [http://benshieldsblog-blog.tumblr.com/](http://benshieldsblog-
blog.tumblr.com/)
[https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_E...](https://docs.google.com/document/d/18R6MTugMCZaL1A8b0gj_9F_EHavFHnN4385XfvKilAc/edit)

------
rothbardrand
This paper is a reasonable attempt to model bitcoin by people who only see the
surface of what bitcoin is.

Bitcoin is like an Onion- it has layers, and makes you cry.

As I have come to understand it there are many layers- both in technology and
economics- at work here.

Most obvious is layer 2 tech like lightening network, side chains, and segwit.
(which is a second layer inside the blockchain.)

But as you come to understand it better you realize, for instance, that the
network has been under attack and the cost of fees is mainly due to that (when
its not under attack because the attackers are moving their bitcoins) you can
do micropayments-- like $1.50 sent for $0.05 transaction fee with 3 hours
clearing-- which is faster and cheaper than credit cards. You get censorship
resistance for free!

~~~
quickthrower2
I can buy a coffee with a CC immediately but Bitcoin I need to wait 3 hrs?

~~~
trophycase
You don't need a globally redundant ledger to store your coffee purchases. The
benefits of a blockchain over traditional financial systems is borderlessness
and censorship resistance. Nobody is stopping you from buying coffee, why
would you need a blockchain?

~~~
dajohnson89
Expand from coffee to hamburgers, to gas station purchases, to groceries, etc,
and soon you have ruled out a major percentage of the consumer economy. Not a
deal breaker, but lots of hype for crypto is how it can replace fiat
transactions wholesale or damn near it.

------
snikeris
Abstract:

Many crypto-currencies, Bitcoin being the most prominent, are reliable
electronic payment systems that operate without a central, trusted authority.
They are enabled by blockchain technology, which deploys cryptographic tools
and game theoretic incentives to create a two-sided platform. Profit
maximizing computer servers called miners provide the infrastructure of the
system. Its users can send payments anonymously and securely. Absent a central
authority to control the system, the paper seeks to understand the operation
of the system: How does the system raise revenue to pay for its
infrastructure? How are usage fees determined? How much infrastructure is
deployed?

A simplified economic model that captures the system’s properties answers
these questions. Transaction fees and infrastructure level are determined in
an equilibrium of a congestion queueing game derived from the system’s limited
throughput. The system eliminates dead-weight loss from monopoly, but
introduces other inefficiencies and requires congestion to raise revenue and
fund infrastructure. We explore the future potential of such systems and
provide design suggestions.

------
virtuexru
From the conclusion which I thought was really interesting:

> Bitcoin is not regulated. It cannot be regulated. There is no need to
> regulate it because as a system it is committed to the protocol as is and
> the transaction fees it charges the users are determined by the users
> independently of the miners’ efforts.

> Bitcoin’s design as an economic system is revolutionary and therefore would
> merit an economist’s attention and scrutiny even if it had not been
> functional. Its apparent functionality and usefulness should further
> encourage economists to study this marvelous structure.

~~~
nosuchthing

      Bitcoin is not regulated. It cannot be regulated. There is 
      no need to regulate it because as a system it is committed 
      to the protocol as is and the transaction fees it charges 
      the users are determined by the users independently of the 
      miners’ efforts.
    

There's no need to regulate Bitcoin the protocol or software.

The gateways, such as the exchanges are more of an essential element in regard
to regulatory and economic influence on the cryptocoin economies.

~~~
stale2002
What if I were to tell you, that if bitcoin were to truly succeed, you won't
NEED a gateway or exchange. You will just transact in bitcoin.

~~~
nosuchthing
In a perfect world no true Scottsman would trade BTC directly.

Bitcoin will struggle as long as their development team struggles with fixing
the 3-4 transactions per second limit. $20 fees to process a transaction in 20
minutes? Good luck.

~~~
runeks
You don’t need to touch the blockchain in order to receive a payment
denominated in bitcoins. Every day millions of bitcoin-denominated
transactions take place on exchanges using a centralized clearing system (you
deposit BTC, transact, then withdraw BTC).

All we need is to standardize this behavior, such that each exchange doesn’t
have its own closed system (essentially an SQL database with balances).
Rather, we’d using an open clearing protocol, with multiple issuers in the
same way we use email with multiple email providers. Each issuer/email
provider is centralized, but the system as a whole is decentralized (similar
to Git as well).

The simplest example of such a protocol is Stroem[1], which offers trustless
micro-payments for consumers/payers, such that only merchants/payees take
risks (which are proportional to how often they redeem their BTC on the
blockchain). So, merchants get to choose their risk appetite: the longer they
wait with redeeming, the lower the per-transaction fee, and the more often
they redeem the more the security resembles on-chain transactions, with
proportionally higher fees.

[1] [https://www.strawpay.com/docs/stroem-payment-
system.pdf](https://www.strawpay.com/docs/stroem-payment-system.pdf)

------
netvarun
On a related note there was a paper presentation on the economics analysis of
the blockchain from the Toulouse School of Economics a few months back.

[1] Presentation [http://econ.sciences-
po.fr/sites/default/files/file/melissa/...](http://econ.sciences-
po.fr/sites/default/files/file/melissa/slides%20blockchain%20april%2026.pdf)

[2] Presentation [https://www.tse-
fr.eu/sites/default/files/TSE/documents/doc/...](https://www.tse-
fr.eu/sites/default/files/TSE/documents/doc/wp/2017/wp_tse_817.pdf)

------
nosuchthing
This paper mainly focuses on the miner-transaction fee-protocol economics,
completely neglecting the real world economic interactions and history of BTC.

Satoshi's core design of bitcoin minting favored early adopters to mint coins
at extremely low cost and processing power, this is why someone traded 10,000
bitcoins for two pizzas because it took no effort to generate those early on.
Satoshi decided to decrease the amount of rewards as the network grew older
and presumably more users would adopt it, why? This is a marketing gimmick
seen with beanie babies and base ball cards where the cost of production is
low yet you tell customers the supply is very limited so you must act quick
while supplies last. And the supplies of this type of service are increasing
with every day as alternative networks offering the same service (blockchains,
trustless distributed databases) are increasingly sprouting up. The question
speculators should be considering when evaluating the economic worth in
trading bitcoins or any other altcoin should certainly take into consideration
what value the network provides them versus alternative service networks, what
the risk of volatility in each network is especially because extreme drops in
value are much easier than rises in price as liquidity is severely limited and
many "whale" accounts often own enough supply of coins to crash the entire
market [1] [2] [3].

Exchanges like MTGox, Bitfinex, etc have been suspected of manipulating
exchange rates and insider trading via maliciously scripted exchange bots
within the exchange [4] [5] [6].

[1] [https://bitinfocharts.com/top-100-richest-bitcoin-
addresses....](https://bitinfocharts.com/top-100-richest-bitcoin-
addresses.html)

[2] [https://etherscan.io/tokenrichlist](https://etherscan.io/tokenrichlist)

[3] ETH had a presale which sold for $0.35 USD - $0.45 USD. The vast majority
of cryptocoin variations premine or rapidly mint their supply, and then game
speculators to pass the bag off to greater fools in what is essentialy a
pyramid scheme backed by a network of databases running double-entry
bookkeeping marketed as magic technology that's changing everything.

[4]
[https://www.theguardian.com/technology/2014/may/29/bitcoin-b...](https://www.theguardian.com/technology/2014/may/29/bitcoin-
bots-bought-millions-in-the-last-days-of-mt-gox)

[5] [https://medium.com/@bitfinexed/are-fraudulent-tethers-
being-...](https://medium.com/@bitfinexed/are-fraudulent-tethers-being-used-
for-margin-lending-on-bitfinex-5de9dd80f330)

[6] [https://medium.com/@bitfinexed/meet-spoofy-how-a-single-
enti...](https://medium.com/@bitfinexed/meet-spoofy-how-a-single-entity-
dominates-the-price-of-bitcoin-39c711d28eb4)

~~~
AgentME
>Satoshi decided to decrease the amount of rewards as the network grew older
and presumably more users would adopt it, why?

Mining needed to have a way to incentivize miners before transaction fees were
common, and there needed to be a system to get bitcoins out into users' hands
to begin with. Once a critical mass of users have bitcoins and transaction
fees support mining, there's less reason to continue minting new bitcoins.

It could be argued that continuous minting creating inflation would be
desirable, but that's a big free parameter that there isn't a known best way
to calculate. Bitcoin's monetary supply code was intended to function long-
term, and if minting was to continue indefinitely, it's debatable what the
minting rate should be, and if it was gotten wrong, it would be extremely
controversial to ever change. (Some people might think 2% is a good inflation
rate, but what if that's specific to now? Say economic and population growth
slow down; 2% could be too much inflation.) Having the cap approach a maximum
limit instead of increasing forever seems to have been a much easier decision
to make and get others to trust. If there's a fixed amount of Bitcoin, then as
long as Bitcoin's usage isn't decreasing, it's straightforward to imagine that
the value of Bitcoin shouldn't approach zero.

>And the supplies of this type of service are increasing with every day as
alternative networks offering the same service (blockchains, trustless
distributed databases) are increasingly sprouting up.

A big part of Bitcoin's value is the network effects of its current user-base.
The creation of an altcoin doesn't immediately fully dilute the supply of
useful bitcoin-like cryptocurrency if it doesn't have the userbase.

~~~
nosuchthing
There was no "getting bitcoins out into user's hands" other then Satoshi and
the small group of minters who generated the majority of early coins. It was
designed to exploit late adopters, more so when the published price is
controlled by only a few unregulated black box exchange "markets".

If you look at the coin supply minted over time, in the first year ~3,000,000
coins were minted, 1/7th the total supply minted to a very very small group of
humans. By 2014 half the entire supply was minted. These coins are now in in
the pockets of a very very limited amount of users who spent very little
resources to mint these and be granted credits in Satoshi's database. Think
about this.

There's no real network effect when migration to any of the other altcoins is
just as easy. It becomes incentived more so when actual usage of the BTC
network is cumbersome with latency of up to several hours, and or $10-$20
transaction fees.

~~~
stale2002
The early adopters also took an extraordinary RISK in buying the coins, or
spending the money mining them.

Bitcoin being mainstream and safe is a very new thing. I remember just a
couple years, everyone was freaking out because they were worried that China
was going to ban bitcoin.

And years before that, the worry was that the US, or whoever, would try to
force AML regulations onto it.

And a couple years before THAT the worry was that the US would do all of that
AND arrest everyone involved in the system, and send them to jail for
facilitating money laundering.

Being involved in bitcoin was a risk for early adopters, and that risk was
rewarded.

~~~
Freak_NL
Risk and reward should be in balance if you want to see Bitcoin as the type of
currency people would actually use as a significant part of their economy. The
first miners may have risked some (real) money, but that is nothing compared
to the massive wealth¹ they would hold if Bitcoin ever did supplant local
currencies — even if people used it just for coffee.

The amount of (untaxed!) wealth owned by those early miners would dwarf that
of Gates and Buffet. That kind of Ayn Rand level of capitalism doesn't seem to
agree with most people — although it does seem palatable amongst Bitcoin
aficionados.

1: [https://cointelegraph.com/news/who-owns-bitcoin-universe-
fro...](https://cointelegraph.com/news/who-owns-bitcoin-universe-from-satoshi-
nakamoto-to-winklevoss-twins-and-more)

