Hacker News new | past | comments | ask | show | jobs | submit login
On the Instability of Bitcoin Without the Block Reward [pdf] (princeton.edu)
154 points by nayuki 41 days ago | hide | past | favorite | 221 comments

One of the assumptions the authors make in this paper is that miners can turn their hardware on and off quickly, and that they will benefit financially for doing so. Mainly by paying lower electricity bills. It turns out the really big miners don't pay for electricity the same way you or I do. Big miners sign long term contracts for continuous consumption of energy, and don't save any money for turning mining hardware off for a short duration.

I know one of the authors personally and can try to forward on questions for anyone interested, though they have moved on from academic work so may have limited interest or context.

A much bigger assumption is that this will even be necessary, considering the last BTC mined will be in 2140. With such a long time horizon any prediction is basically fanciful guesswork; at that time miners might have all moved to renewables after they become cheap enough, we may have new forms of energy generation which make supply both super easy and cost negligible, or Earth may have entered a post-apocalyptic state and mining is no longer even a consideration. To assume no advancement in tech between now and then seems reductive.

The last BTC mined will be 2140, but the decay is exponential. The reward will halve in about 3 years, and it is likely to halve again 4 years after that, and so on.

But price appreciation is also exponential

That can’t stay that way, at least not in real terms (taking inflation into account)

Although that would arguably put Bitcoin in the same deflation trap that led to the collapse of the gold standard.

A money supply that grows more slowly than the economy that rests on top of it just might be the stuff that Malthusian dreams are made of.

The gold standard was the least of the Bretton Woods Era problems.

I also wouldn't call this new fiat regime with rising property prices and stagnant wages as a "net win" over Bretton-Woods, the gold standard was probably the only thing keeping the federal spending under control, and real wage growth up.

Price appreciation has to stop at some point. I doubt the price will rise to $10M after the 2028 halving so miners will be under substantial pressure by that time.

I read this comment with interest, thanks for sharing. Makes good sense to me.

If I may ask, do you think the distribution of bitcoin will be somewhat equitable as we approach 2140?

And do you you think it will actually become a medium of exchange as originally hoped? Or will it remain a store of wealth only (as things currently seem to indicate)?

And if it indeed remains only a store of wealth, will said wealth be distributed relatively equally, or will we be left with a relatively small pool of large holders?

Just trying to wrap my mind around the long-term evolution of bitcoin - and your way of explaining the energy conundrum above makes me think you probably have good insight on this.

I'd value your opinion, thanks :)

Again I can't really say much about what could happen at this point. History "behaves" too bizarrely, especially over such a long time period, and inflection points are usually completely random and unpredictable (black swans), being only obvious in retrospect.

One thing I can be fairly confident won't happen is that BTC will become a medium of exchange. This is because BTC mechanically behaves more like a commodity than a currency, which means that (for various, immutable technical reasons) it's not able to match the speed of settlement, the price stability and the reliability of supply that are required for a good medium of exchange.

Thanks Michael, appreciate your thoughts.

And I agree. I too doubt BTC will become the medium of exchange it was originally envisaged to be.

As to whether it will retain our confidence as a store of value remains to be seen.

I will continue to follow the heated discussion on HN with much interest. It's great to be able to read the consolidated thoughts of individuals who clearly understand this technology far better than I do.

It's impossible to predict the future. If everyone holds bitcoin as a store of value then the value should drop as it's not being used for anything one would think. I believe the best outcome is that people start using bitcoin for every day purchases and the hope is that by 2140 the price is relatively stable. Most likely there will be many large holders as there are with real money.

However, someone could maybe do a 51% attack on bitcoin at some point. Maybe there is a unforeseen flaw in bitcoin. Maybe something better comes a long. It's impossible to know.

" bitcoin for every day purchases and the hope is that by 2140 the price is relatively stable."

This is fantastically impossible.

It will about as stable as any other commodity plus the additional swings due to public stampedes one way or another, and the fact that there is no 'underlying value' to anchor the price (like Oil).

Feasibly, if exchange rates are razor thin (unlikely) then it might be possible buy milk and bread with BTC simply by doing the conversion on point, but that of course requires someone to do some 'investing math / intuition' every time they buy a stick of gum.

It can't be a functional currency, at least as it's designed.

And the notion that it consumes gigantic amounts of energy for no net value gained should have everyone up in arms.

> It can't be a functional currency, at least as it's designed.

Citation needed

> And the notion that it consumes gigantic amounts of energy for no net value gained should have everyone up in arms.

For what it's worth, bitcoin aims to deprecate every single brick-and-morter bank as well as all the armored trucks driving paper currency to and from them.

When you start to add up all of the energy that would be saved if bitcoin succeeds, the energy costs associated with mining start looking quite a bit smaller.

>For what it's worth, bitcoin aims to deprecate every single brick-and-morter bank as well as all the armored trucks driving paper currency to and from them.

Is this supposed to be some joke? No it doesn't. Someone had to create a fork of Bitcoin called Bitcoin Cash just to increase the block size. You've had your chance and you blew it.

What's going to happen from now on is that Bitcoin will be absorbed by Visa, Mastercard and Paypal who build an actual payment layer on top of Bitcoin and then people will use Visa, Mastercard and Paypal as their bank. It's the Bitcoin you know and love that is going to die.

"Citation needed"

I literally just explained it to you.

The price of BTC has always been highly unstable. There is absolutely no evidence it will ever be stable, to the contrary in fact, all evidence points to the fact that it will remain unstable.

Every single commodity or currency extant to an economy is unstable relative to the currency of that economy. The only thing 'stable' in terms of USD are things closely tied to the managed USD.

Just the mere fact that it's highly unstable - all other things notwithstanding - make it impossible to be a currency.

"For what it's worth, bitcoin aims to deprecate every single brick-and-morter bank as well as all the armored trucks driving paper currency to and from them."

It's really bizarre that anyone would believe this.

Starting with the fact that 'digitization of currency' is already well under way and so there are no 'truck rolls' in the future.

But of course, the implication that banks only provide a 'place to store' money is completely false. Financial Services are an entire industry. Lending, transactions, authorizations, contracts, accounting, risk management, asset allocation, it's a gigantic industry.

But it's moot, BTC will be the same in 20 years that it is one, something to talk about.

"Financial Services are an entire industry. Lending, transactions, authorizations, contracts, accounting, risk management, asset allocation, it's a gigantic industry."

Right, this is all on ethereum

Yeah, using the magic of DeFi I can easily get a loan for $100K with no bank approval and no wasteful bank employees checking my credit.

All I need is more than $100K worth of crypto assets I can tie up as collateral for my loan. So I'll be able to buy a car or a house, as long as I have more than enough money to do so already. Banks don't know about this one weird trick that makes them obsolete!

So Etherium will do credit checks? Evaluate the legitimacy and valuation of major assets? Validate small business plans? Check creditor references? Do due legal and IP due dilligence? Foreclose? Evaluate the credibility of executive teams? Evaluate contracts? Resolve commercial disputes? Do risk assessment of various kinds?

Etc, etc. etc?

The complete lack of understanding of anything financial postulated by the crypto crowd is really painful.

The notion of 'crypto' is actually interesting, and large swaths of the financial world would actually buy into it, but most of it makes no sense unfortunately.

Can't reply directly to the sibling comment on DeFi, but that solves the issue raised above e.g.: I have 100k worth of BTC, I want to spend that on something but I expect the value of my BTC to rise, so I use it as collateral for a pegged coin (say USDC or DAI) and make a purchase.

I am protected from losses of spending my BTC. As with all finance yes I also carry the risk of BTC falling and liquidating my loan - but assuming I have not also lost my loan I am protected from a major fall, as my collateral will be taken and I still have my loaned coins.

I dont know much about Ethereum but the mere existence of it threatens Bitcoin's "world domination" aspirations and who knows, maybe something will come out that will threaten Ethereum.

Bitcoin and Ethereum are both legacy blockchains.

There are many contenders. XTZ and ADA are both technologically far beyond what BTC or ETH can ever be.

Or maybe there's a foreseen flaw in bitcoin. It's based on public-key cryptography which can be broken by quantum computers. Those don't exist yet (at least not in any form relevant to cryptography in practise), but I think they will by 2140.

People often bring up the Bitcoin algorithm to make arguments against it, but don't seem to acknowledge the fact that the protocol is mutable.

If the sha-256 algorithm was cracked such that BTC blocks could be solved instantly, the existing miners would have to choose between:

1. No more income, or

2. Adopt a quantum-resistant protocol.

Market economics being what they are, I think it's safe to assume that BTC would survive the "quantum apocalypse." There's too much money at stake for any other choice to be the logical outcome.

From my understand, and I'm no expect, but the only known quantum attack against symmetrical crypto like sha-2 is [Grover's](https://en.wikipedia.org/wiki/Grover%27s_algorithm), and the recommended advice is to double the key size, so sha-256 would probably see a huge boost in "hash rate" but not be broken, a move to sha-512 would work probably work.

The problem is that Shor's algorithm breaks asymmetrical crypto used in the wallet signing, that means you can forge ownership of any transaction outputs, which would completely shatter confidence in the coin before they could migrate all ownership of all funds to a new post-quantum signature scheme, this problem is a lot harder to solve compared to a hash algorithm upgrade.

If they are physically realizable at all in practice, then they very likely will be by 2140.

But I think there's a non-negligible chance that the theory of quantum mechanics will break down as we move to superpositions of 2^1024 classical states that must be faithfully represented with physical elements.

The wealth distribution of bitcoin is even worse than the wealth distribution of society as a whole. Further, I suspect that this would be the typical state for any finite/limited asset. IMO, things like bitcoin (and gold) as a primary wealth store are how you create stratified societies with entrenched elites and banking orgs with more money/power than nation states. Not that bitcoin could ever happen dominate, but it's certainly not egalitarian in any sense.

I would expect it to get worse, over time, too. When the block reward was high, it meant that the (strictly financial) cost of actually operating the Bitcoin network was covered by Bitcoin dilution, which meant that everyone was paying it pro rata based on how much Bitcoin they actually own. As the block reward decreases, though, it increasingly has to be covered by transaction costs. That's going to progressively price people out of participation in the direct Bitcoin economy.

I can see using Bitcoin as a primary wealth store, similar to gold. I agree, it would have most the same social features, which seems problematic since none of that is really in line with Bitcoin's original political vision, but I'm not sure Bitcoin's original political vision is anything more than a piece of nostalgia cherished by people sitting on the periphery of the contemporary Bitcoin economy, anyway, so maybe that's no big deal.

The bigger problem I see with Bitcoin relative to something like gold is that it has some troubling practicalities. It's theoretically much easier to steal vast sums of Bitcoin in one go (because 1,000,000 BTC wouldn't be quite as subject to conservation of momentum as a tonne of gold bars would be), and it's definitely much easier for vast sums of Bitcoin to accidentally poof off into a crypotgraphic pocket universe where nobody can reach it anymore.

Can you give an example of an egalitarian currency or store of value?

One that has a fixed block subsidy. After any amount of time, whether years or decades or centuries, it will have been distributed evenly over all that time.

Rather than having 50% distributed in just the first 4 years, and only crumbs in later decades.

Gold is much more like the former.

I don't see how that logic follows, if this was a fixed block subsidy over the first 4 years instead of just 50%, surely the situation you are describing would be worse ?

There's a huge difference between fixed forever and fixed for only 4 years and then dropping to 0. Bitcoin is closer to the latter (instead of dropping to 0, it keeps halving every 4 years). Gold is closer to the former.

"Egalitarian currency" and "store of value" are somewhat mutually opposed goals.

A stable store of value is always going to socially/psychologically encourage hoarding and other human traits that lead exactly back to inequal distributions of value ("wealth").

A truly egalitarian currency would need to focus on the velocity and acceleration (the current of the currency) curves far more than the value at rest, which likely would be an afterthought.

>do you think the distribution of bitcoin will be somewhat equitable as we approach 2140

I don’t see why the distribution of anything would be “equitable”, outside of a communist utopia/dystopia. These days that word is mostly used by people exploiting the empathy of others to gain power for themselves.

I see what you're saying. Forgive my choice of wording. Perhaps "equitable" wasn't the correct choice.

I more meant whether it will become a currency of the people. Or a store of wealth for the average person.

I'm looking at this through an African lens. Bitcoin showed a lot of promise for cheap and reliable remittance payments and one day a fully fledged currency for the masses. Gave us Africans lots of hope in many ways.

These days I worry it is increasingly growing more difficult to acquire. It's no longer destined to benefit the people.

I don't mean to imply that everyone deserves an equal share. I hope I'm making sense. I guess I'm more wondering about its overall accessibility long term.

It's ironic. Bitcoin can only keep going up if it becomes more accessible and more people use it. Yet people resist making it more accessible. It's like they are betting on a failing technology stack that will blow up after x amount of users.

I don't see why Bitcoin's technology stack is failing if it's what is enabling its current value.

Keep in mind as well that the protocol is mutable as long as people agree to change it.

Saying BTC is doomed to fail as it's living alongside a multitude of other cryptocurrencies that attempt to solve its shortcomings is also a dubious proposition to me. Take for example the Mina Protocol[0], which eschews proof of work, huge blockchains, and slow transaction speeds for solutions built on top of zk-SNARKs.

If BTC has value as a long-term store of wealth, and if other cryptocurrencies exist to transact at faster rates with more liquid capital, and if that capital can flow between systems freely (as fast at BTC will allow), then every system is working as designed, right?

0: https://minaprotocol.com/

Exactly. I came here to say this, but you've said it quite eloquently.

I'll just add that some inequality is also a good thing. If you don't have differential outcomes then you don't have a meritocracy where "better" is rewarded. You have a system where everyone is equally poor like the USSR and there is no incentive to improve.

As a tangent, I wonder if Bitcoin mining could re-ignite the nuclear power industry. Nuclear power plants involve a high upfront capital cost, then produce a long-life of fixed electricity output at near-zero marginal cost.

My understanding is that one reason more plants were built in the 60s was because electricity prices were fixed by regulators. That made financial modeling easier, because investors could legibly forecast their payback on the capital investment. When electricity moved to free floating price markets, it introduced much more risk and therefore increased the cost of capital.

Seems like nuclear power and bitcoin mining are a match made in heaven. Demand remains smooth and predictable, even from minute to minute. The marginal cost of electricity is near zero. Many of the large mining pools are so large and well capitalized that they could afford to commission a dedicated plant.

Predicting nearly anything (today) about crypto over the timelines necessary to even only commission a new nuclear plant, let alone its lifetime, seems ... risky.

I wrote a bit of fiction recently which portrayed a future where a starship needed to run its own Bitcoin mining cluster (because "reasons") and the ship also happened to use a nuclear power plant. and for "reasons" the mining host hardware was also placed as close to the nuclear reactor as they could get away with (well the electricity generation portions anyway.) all needed for (arbitrary, fanciful) plot reasons, but one of ideas I used to justify it was because the power generation qualities fit the power needs of the crypto miners pretty well. stable load, low cost per watt, theres no wind or geothermal or tide in space, and solar is sometimes too weak and other times entirely blocked (picture situation when ship in planetary orbit, on far side from the star, so light is eclipsed.)

Most miners are on hydro, located right next to the dams, and probably colluding with them for either zero or near zero cost. Similar advantages to nuclear I'd imagine.

Nuclear power isn't cheap. Miners need cheap.

> Nuclear power isn't cheap. Miners need cheap.

Yep. And I suspect there isn't any power cheaper than the output of an over provisioned wind or solar farm on a windy or sunny day. And they all will be over provisioned. In fact they all assume a faction of nameplate output now.

Very unlikely it will be turned off, the miners could still keep mining other coins while mining bitcoin blocks even if there is no BTC reward. See "merged mining" https://blog.bitmex.com/the-growth-of-bitcoin-merge-mining/.

This is a good point that the authors don't touch on. There are many coins secured by sha256 and I'm sure many more will come along before BTC finishes it's release schedule.

Switching to any one of them is likely to provide more revenue than just attacking the network for a little extra transaction fee money.

This is one of those times it's really useful to make a distinction between bitcoin the currency and bitcoin the protocol. If it was the authors intention to describe a future problem on the BTC network then they messed up by not addressing the rest of the sha256 mining ecosystem. However, if it was their intention to describe a problem with the protocol itself then it kind of makes sense to not touch on miner's alternatives.

All other sha256 coins combined only account for less than 2% of bitcoin's hashrate, so this doesn't really change the arguments.

No, this is not what we are discussing. We are discussing using bitcoin's hashrate to mine other coins. No modification to bitcoin is needed, the other coins simply need to be aware of bitcoin and be able to verify bitcoin's blocks. Other coins can have an auxillary mining algorithm too, or even merged mined with other coins besides BTC, doesn't have to be sha256.

Miners do turn their hardware off quickly, we saw this in November 2018. After a long period of profit, suddenly only the top-of-the-line miners were making money, and they just threw out a pile of stuff. Writeup I did at the time: https://davidgerard.co.uk/blockchain/2018/11/27/the-bitcoin-...

Commercial energy prices do vary throughout the day though, so if they are signing a single fixed price contract per kWh that would miss the opportunity to run older hardware more profitably during cheaper times.

Besides, I doubt miners are keeping going during triad periods.

Absolutely! When miners are priced out they will be. If you can make a profit mining bitcoin, you’ll have already _arbitraged_ the pricing discrepancies in energy prices and made a boatload of money by now doing it.

And once you get priced out, you are operating at a loss. Then you turn the miners off, sell ‘em to the next person willing to gamble vs. doing their homework.

Re read that first paragraph real closely. I personally used to have a blog teaching people how to mine bitcoin on Ubuntu 10.04... until I didn’t anymore.

Now, whether anyone likes it or not: Bitcoin has both value and utility until at least 2040, block rewards incentivize mining for 20 more years (19, whoops) if we read the white paper.

Two thousand and forty. Every 10 mins, new block. Chain, new block. Huge billion dollar economy of SHA256 miners custom built for proof of work. That money to pay for all of that is coming from somewhere. Mark my words, proof of work doesn’t crash overnight. It wasn’t built built in a day either.

AFTER that, there’s 100 years of “will bitcoin live” because of minimal to NO block rewards.

These papers are so old and the subject matter is still misunderstood, it’s nice to see people learning and stuff but HN gah, just omagersh

Given that we’re talking about less than 10 minutes’ worth of energy, I wonder if a battery might be a viable option.

Energy from a battery is almost always more expensive than energy from a grid.

You have to account for the depreciation of the battery.

the box on page 5 defines DefaultCompliant as "The default Bitcoin mining strategy, including all available transactions, mining on the end of the longest chain, choosing the older block in a tie, and publishing all blocks."

the core code does not choose the older block in a tie, the code chooses the block with the largest legitimate chainwork (under current TARGET epoch)

Second note: this paper investigates the era in the future when there are no mining rewards, only transaction fees. How far away is that ? How valuable is one satoshi now? Much of what is said is relative to that far-away case

(reading through the paper) This is an interesting (and thorough) thought experiment for what behavior might emerge when only transaction fees are the reward for mining. However the case the paper makes for a serious security problem gets weaker, as the argument depends on a growing number of assumptions as the paper goes on..

I fail to understand why a PETTY-COMPLIANT miner would ever realistically take a set of Tx that does not short-term maximize profit, given the competition for new blocks goes WAY up as the value increases. In other words, the undercutting and LAZY-FORK behavior would be crowded out right away, as it is insufficiently popular.

In the AGGRESSIVE-UNDERCUTTING discussion, it assumes a lot of "forks" or alternate chain tips, to chose from, is this true in practice? Are there really that many chain tips to chose from, to make this practice even a consideration?

I see in page 10 that there is a more refined and detailed descriptions on miner strategy. From a math perspective this is interesting, but the comments above stand.. would anyone even have a chance to move ONE BLOCK using these considerations, given the value and competition for every single block?

>It turns out the really big miners don't pay for electricity the same way you or I do. Big miners sign long term contracts for continuous consumption of energy, and don't save any money for turning mining hardware off for a short duration.

Really? Those contracts don't let them resell the unused electricity at (some fraction of) the spot price?

Depending where they are and the nature of their rate contract, can't they can resell their unused, pre-purchased capacity back to the grid?

They talk about miner turning off the system just after they have mined a coin as they probability of getting another soon is very low while the cost of running the system same.

I don't think the probability changes, does it? But the block will be less valuable if there are fewer transaction fees to claim.

That sounds like gambler's fallacy.

Sounds like its based on a flawed assumption:

"Now, immediately after a block is found, there will be no more transactions in the network to be claimed by a miner making the next block"

The fact is there is usually a large backlog of transactions.

This paper was published when there were big fights going on about whether the block size should be increased. Om camp argued for the status quo, which was causing high transaction fees and long backlogs. The other camp argued for a larger block size, which would reduce or eliminate the transaction backlog. Eliminating the backlog was generally considered a good thing, and the arguments were mostly around the block size, but this paper essentially came in and said "wait a minute, we might actually need the backlog once the block reward is 0."

Not to disagree, but to emphasize that the idea that the only way to increase bitcoin capacity is increasing the block size is in error. You didn't push that idea but others do.

Nearly every release of bitcoin over past 8 years has increased capacity or efficiency, often both.

The point remains that eliminating the backlog of high fee paying transactions would jeopardize mining stability and security in the long term.

I think this is depends on how large the network has scaled at the time the block reward dies. If BTC is doing 100x visa levels, each transaction fee can have a tiny fee and mining would still be viable.

That being said, I don't BTC has any intention of scaling to that degree (or at all really). The BTC devs seem much more concerned with building second layer products like lightning network. All these products actually reduce the number of on-chain transactions and by extension, miner revenue.

The problem is that lightning is basically federated Paypal. You have to trust your specific provider to some degree. If he stiffs you, you can get arbitration on-chain. There are almost zero barriers to entry so Paypal can be replaced by Paypal 2.0.

I don't believe for one second that when you increase the size of the audience that anyone will care which provider they use. In practice that means they will just use Visa, Mastercard and Paypal, maybe even by skipping lightning entirely.

How many kWh does one transaction consume?

Is that higher or lower than 8 years ago?

Number of transactions is the wrong denominator for energy usage of the network. The same number of transactions could be confirmed by a single miner.

The miners contribute to network security (double spend protection), not transaction throughput. Common misconception.


"The average energy consumption for one single Bitcoin transaction in 2020 was 741 kilowatt-hours. This was significantly more compared to the cumulative 100,000 VISA transactions with only an energy consumption of 149 kilowatt-hours."

I don’t think individual transactions are meaningfully tied to an energy cost.

Why can’t you estimate the power consumption of the whole network and divide it by the number of transactions per second?

You can. But it is not a good metric. Assuming the difficulty adjustments ramp down you could still mine blocks with a couple of raspberry pis.

The energy consumption and capital investment in hardware is Bitcoins security model. As it would require you to put in the same amount of HW and energy to subvert the mining process. Probably we are at a point that this is almost impossible other than a state actor or a global conspiracy.

The block size increase/decrease is also tied to security. There are latency implications as well as the fact that some nodes might drop of if you increased the block size.

In both cases it comes back to security rather than the transactional throughput. I am a huge proponent but still kind of struggle with the idea of how much resources this thing sucks up. But then again if it truly becomes the worlds ledger for wealth preservation... idk ... might be worth it.

Because that would imply linear scaling. There is a fixed energy cost that doesn't depend on the number of transactions. It goes up and down all the time.

The choice of the word “meaningfully” was deliberate . Of course you can do that. But I don’t think it is meaningful. The energy use isn’t a result of the transaction.

Feels like natural progression as underlying technology (internet speeds and HDD space) improves. So more network traffic can now get synced across more nodes faster.

I think the analysis still hold even with a transaction backlog, as long as the fees in these transactions are exponential distributed (a few very high value txs, then it trails off quickly)

However I have know idea if this is close to what it really looks like.

The large backlog these days is mostly spam transactions with almost no fees. Bitcoin has increased capacity dramatically in the past decade.

Wrong; there is a large backlog of transactions paying over 50 sat per byte [1], which is over $10 in fees for most transactions.

[1] https://jochen-hoenicke.de/queue/#BTC,24h

Why is it $10? According to https://www.buybitcoinworldwide.com/fee-calculator/

Fee rate: 51 satoshis/vbyte

SegWit transaction with 1 input, 2 outputs: ~172 vbytes

In total: ~8772 satoshis == ~4.48 USD

Because the average transaction is over 400 bytes in size [1].

[1] https://bitcoinvisuals.com/chain-tx-siz


Make note of the inflection point around 2016. Yeah, it's right around the time your capacity chart starts looking like a wet noodle.

Yeah, that's when a few your scumbag BTC devs removed Gavin Andresen's commit access and killed BTC's last chance of becomming a real currency.

This is the first interesting paper I see here on HN about Bitcoin.

While many people think that Bitcoin's energy usage is too high, I honestly hope that it's high enough to deter a nation state sized attacker.

Many Bitcoiners argue that miner rewards shouldn't decrease more, but at the same time it's too late to change the concensus on it.

Maybe we need a heavy Carbon Tax on Proof of Work cryptocurrencies. Using the energy consumption of Argentina to verify financial transactions does not fit with moving to a Net Zero economy.

Carbon tax everything, why limit yourself to cryptocurrencies?

Exactly. To be precise, carbon tax energy, so that everything that uses energy needs to factor carbon emissions in their costs. The whole point of carbon taxes is to internalise the cost of carbon emissions into everything, to put the market to work on better alternatives. Limiting carbon taxes to any particular service or product would be a market distortion and would defeat the purpose.

If carbon taxes hurt cryptocurrency mining and their value collapses in favour of less-energy-intensive digital payment platforms, that would be great. If on the other hand cryptocurrencies innovate towards less-energy-intensive methods of mining and their value continues to soar, that would also be great.

Carbon tax carbon emitting energy.

Don't tax solar panels, that would be short sighted and regressive.

Of course, I meant applying a carbon (i.e. "carbon-dependent") tax at the point of energy production, not on energy production itself in abstract. I can see how it could give that impression by how I phrased my second paragraph in terms of energy-intensiveness rather than carbon-intensiveness, but my intention was to abstract away which specific source of energy each industry made use of, assuming a unified and homogeneous electrical grid.

Ironically, much that I am critical of criptocurrencies' energy expenditure, they may be more adaptable to carbon taxation than conventional digital transaction networks (SEPA, Visa, etc.) because they are in fact more centralised in their energy consumption. A cryptocurrency mining outfit could somewhat easily become self-sufficient in terms of energy relying on wind power or solar power, becoming immune to carbon taxation (and innocent in terms of carbon emissions). The energy consumption from conventional payment networks, even though it is not as inherently energy-expensive as cryptocurrencies, is so massively distributed across countries and businesses at multiple levels that they could not simply go non-carbon overnight.

Good points.

I felt the need to be pendantic on that point because I see a lot of lazy accounting around energy emmission harms. It is unfortunately common for people to write about the harms from an amount of energy consumption without considering what type of energy production is actually used.

I've read several articles in the past month that essentially had the lazy incorrect math such as: Activity Foo uses X MWh, X MWh is Y% of total energy production. Burning fuels emits Z tons of CO2 and W amount of other harmful polutants. Therefore Activity Foo is responsible for Y% of Z CO2 and Y% of W pollution.

Becoming a pet peeve of mine.

Bitcoin (~39%) has about double the proportion of green energy usage as global energy consumption (~17%)! If these numbers are accurate, it seems like cryptomining should be some-amount-less concerning than the broad energy economy in terms of greening our infrastructure.

Gaming uses more energy than Bitcoin.

Shall we place carbon taxes on gaming too?

How about a carbon tax on Gold and Silver, and on the whole of the banking system, which also consume more energy than Bitcoin?

In any case, feel free to contact the Bitcoin CEO and discuss your ideas on how to implement those taxes.

Yes, carbon taxes everywhere so we can solve this stupid problem and focus on other things.

Except you're wrong and all those things consume far less power than bitcoin. That's the entire point.

No they don't.

Gaming is the sole demand for all consoles and GPUs produced in the world. Those devices alone consume a lot more energy than Bitcoin miners (by about an order of magnitude).

Gold and Silver are extremely expensive to mine energy-wise.

The banking system is amazingly expensive to run. Not only it requires lots of buildings and transportation for millions of workers, it also requires a lot of computing resources to be run -- without even guaranteeing you can withdraw your money from banks, and with your money there being corroded due to inflation.

Bitcoin, in comparison, is actually pretty "green" once you consider the value it provides: a distributed ledger with 10+ years of operation and no flaws/attacks detected, meaning it's the safest store of value known to mankind, while not being under any control of any organization or government.

In any case, even if your point that Bitcoin is "evil" as it requires "too much energy to run" is true, what are you going to do about it? Feel free to short Bitcoin in a futures market, and leave all your wealth allocated in assets associated to fiat currencies.

> Gaming is the sole demand for all consoles and GPUs

Well, no, mining cryptocurrency is a significant source of GPU demand; GPUs also have non-gaming, non-cryptocurrency utility.

cryptocurrency mining is mostly done using ASICs

> cryptocurrency mining is mostly done using ASICs

Bitcoin mining is mostly only effective with ASICs, but cryptocurrency is more than just Bitcoin.

Cryptocurrency mining is mostly about Bitcoin.

Bitcoin has maintained at least 60% market dominance year-over-year since its inception (averaging 75% all time dominance). Ethereum (which can be profitably mined using GPUs) has currently 15% dominance, with most of the other top 15 coins not being PoW (except for Litecoin, Bitcoin Cash and Dogecoin, from which only Bitcoin Cash can be mined either with ASICs or GPUs). Also, Ethereum is in the process of moving to PoS.

> Cryptocurrency mining is mostly about Bitcoin.

What cryptocurrency mining is mostly about is entirely irrelevant to either the claim that GPUs, and the power thet consume, are used exclusively for gaming or the counterclaim that, on the contrary, significant sources of GPU use outside of gaming exist, including cryptocurrency mining. It doesn't matter if the coins for which GPU mining is viable are a much smaller share, by whatever measure you care to use, of the cryptocurrency space than Bitcoin, what matters is whether or not mining them (among other non-gaming uses) is significant in the demand for and use of GPUs.

Which it is, which is why Nvidia has recently taken steps to actively cripple mining on some gaming cards so that thet can actually reach the gaming market.

(GPGPU is also a thing, and non-gaming display acceleration; the idea that GPUs are only used for gaming is ridiculous even beyond the cryptocurrency applications.)

Also: how many gamers are there compared to how many crypto traders? It's not a meaningful comparison.

You should compare Bitcoin to some aspect of finance that is similar sized, e.g. a single bank with similar transaction volumes, or something like the Bank Of England CHAPS network, which has about half the number of transactions, but 30 times the total transaction value. https://www.bankofengland.co.uk/payment-and-settlement/chaps

We definitely need a heavy carbon tax on any energy production that has negative externalities. I don't care if its cryptocurrency, video gaming, datacenters or dryers, if it consumes a lot of electricity we need to incentivise people to use less of it or use energy from sources that have smaller carbon footprints. Same should be done for cars.

It would be really tough to enforce for the bigger ones. You can mine a block without revealing your location. You only need a connection to the internet through a vpn. It would be a game of whack-a-mole for enforcers.

It's a good idea though.

> I honestly hope that it's high enough to deter a nation state sized attacker.

What's the point though? Bitcoin has no real use case apart from speculation.

So people living in countries without a stable currency due to hyperinflation don't count as a real use case? It's sometimes the only way they can secure their capital. I think that we need to think outside of our elitist western bubble more often. Not all people live in a stable democracy with (semi-)stable currencies.

But for them there are better alternatives to BTC, one being BCH for example

And even if they do use BTC (they don't really, at least in Africa, i don't know about Venezuela), they do not trade using BTC but a second layer anyway.

This is either an uninformed or misleading take.

It isn't necessarily "Africa" or "Americas".

The heuristic is "is my local fiat shitcoin stealing my purchasing power".

Counter to your claim and easily provable with a basic search Nigeria is one of, if not the leading in BTC adoption %.



Is it the shitcoin or is it the fact that the economy itself is gone and thus your currency isn't worth anything because nobody is selling things to you?

Here is an interesting article:


BCH is trending to 0 in BTC. How does this solve Venezuelans or Lebanese store of value problem?


Yet they just passed BTC's daily transaction volume (regularly) . Like it or not, BCH is about to eat BTC's lunch and good for them. They've earned it.

SoV first and only then medium of exchange. Not the other way around.

That is because BTC extremely unstable, which is good for speculation but not for a currency

BTC isn't a stable currency in case you haven't noticed. Do you actually have evidence of BTC being used as currency in any of these dysfunctional countries you talk about or is it just a supposition that you're making?

In Venezuela, BTC is heavily restricted towards friends of the regime, for whom it serves similar experience as having hoards of "hard foreign currency" did in USSR...

They say nobody uses it but a "tiny minority". So basically what we already knew, BTC adoption as a currency is anecdotal even in those dysfunctional places where according to its proponents it's particularly suited for.

The article you linked to is from 2016 so I found something more recent: https://www.coindesk.com/bitcoin-adoption-venezuela-research

The article I linked to is from crypto folks, so caveat emptor.

What we need is a global organization that ensures that every nation will be self sufficient in regards to nutrition and only imports non essential foods for varieties sake.

That's how you solve hyperinflation. The problem isn't that the currency is bad. The problem is that the government is utter garbage and since when did Bitcoin market itself as a political tool to subvert authoritarian leadership? No, it's just another "currency" like the dollar.

Besides speculation there is a minority who does use it as an actual currency, often in countries where their domestic currency is unusable (sanctions, inflation, etc).

Also, just because there isn't a use-case now doesn't mean it isn't valuable to keep a currency immune to government interference around just in case you end up having a use-case for it later.

There certainly are some valid use cases. But the current usefulness/energy consumption ratio is pretty dreadful, and from my point of view it's future is not looking very good either. If energy was free, then who cares; otherwise I think it's legitimate to question whether the valid use cases of a few thousand people (total shot in the dark here, numbers appreciated) is worth using the same amount of electricity as Argentina, a country with 45M people.

I am dreaming of a crazy world where instead of foreign aid the US government simply enacts a bill that the largest agriculture companies have to expand into foreign markets with food shortages instead of exporting their food to them and replace the incompetent local farmers. It would be far more effective at solving inflation than a crappy cryptocurrency.

Okay, so then how do we protect ourselves, security services, where normally we'd use financially penalty against known bad actors via the Magnitsky Act - but can't do so through Bitcoin?

What would a nation state level attack look like? If they took over the network, it wouldn't really give them anything useful. If they took all the bitcoins, the value would plummet rapidly towards zero, unless they were willing to prop it up with their own currency.

Easier to just tax the crap out of BTC. i.e. any BTC mining done in this country owes us 80% of their BTC mining rewards.. etc.

If China did that, and they are currently doing some 60+% of the mining... it would change the incentives for mining BTC in China drastically, but China would make some sweet cash for a while, and eventually effectively ban BTC in China.

Rinse repeat in other countries, if they decide to hate on BTC.

Though really, I don't see any country wanting to do that right now. They are having too much fun watching who is transacting on BTC thinking they are hiding their transactions from the govt(which they aren't).

Someone made a comment the other day stating that a 50%+1 attack is more and more likely as it's becoming only a handful of people doing the mining.

I'm more worried about the concentration of miners in China than the miners themselves. For them it's not worth it to try the attack. But for China it may be worth to do it if too much Bitcoin is concentrated in American people's hands.

I'd rather you switch your language slightly to state that it'd be the CCP who could easily force the concentration of miners in China to do bad actions; afaik the CCP allows mining to occur in China but not for the Chinese to own Bitcoin?

That's technically true.

But. A 50% attack has the problem that an attacker with enough hash power to do it has enough hash power to simply mine on chain legitimately and create blocks and get 50% of the block reward and make tons of money that way, while actually doing the attack decreases confidence in the chain and might end up with massive losses in price.

Your point makes sense if your goal is making money.

If what you want is more power over the global economy. As a government, you may have more interest, say, in stopping Tesla rise (if you consider that making BTC a 0.1$ asset would harm them) than making some "tons of money".

There is a slightly subtle contribution here (hidden deep in the 3rd line of the abstract).

The stability of the blockchain and the equilibrium position amongst the miners might shift spectacularly when the chain shifts from new bitcoin to transaction fees. It doesn't matter if the paper's assumptions are good or bad after that - they showed there is a difference between the two states and that is interesting in itself.

I may be misunderstanding because I largely skimmed, but it sounds like this is saying this is due to the variation in the transaction fee amounts.

Assuming that that's the idea:

What if only a fraction of the transaction fees go to the miner of the block including those transactions, and the remainder is "stored", and doled out gradually over the next n blocks, or something like that, resulting in it being a fairly steady rate of payout?

Say, the total payout of mining a block is half of the fees from the block you mined, a quarter of the fees from the block your parent mined, an eighth of the block before that, etc. The fee payout of mining a block becomes the sum of block_n_fees * 1/n^2 for the last n blocks (bounded by the minimum respresentable value, "1 Nakamoto" or whatever it's called).


Everyone has by now grown used to having cryptocurrencies that can't be used to buy anything, but having a cryptocurrency that's not even worth mining will mark a new level of conceptual purity that will no doubt propel Bitcoin past the $100,000 mark.

Why can't Bitcoin simply transition to proof of stake after mining dries up? Once there are few or no bitcoins left to mine then PoW is a lot of ceremony for very little security gain at that point (and perhaps opens up risks that this paper points out).

> simply transition to proof

As opposed to Proof-of-Work, Proof-of-Stake is not as simple as it sounds. Any implementation faces a myriad of design challenges and potential attacks. Things like "nothing-at-stake", "costless simulation", "stake grinding", and "long-range attacks" [1]. And in the end, there is no objective truth about the state of the chain, as there is with PoW's simple longest chain rule.

There is nothing simple about a Bitcoin "transition" either, as should be evident from the endless blocksize debates, and resulting Bitcoin Cash chain splits. That was only about changing a single parameter. Now you're talking about changing the very essence of Bitcoin, with dozens if not hundreds more dimensions of choices and opportunities for disagreements.

[1] https://download.wpsoftware.net/bitcoin/alts.pdf

Oh I know the political implications of changing BTC are high, but the main arguments against changing anything to do with Bitcoin are its security profile. I agree that BTC is the most secure chain. But, if the mining reward dries up to the extent that it is less secure as transaction fees take dominance, then the community will have to sacrifice one of their sacred cows: 21 million supply or proof-of-work. Neither one of those are easy to change, but if necessary, it will have to.

Proof-of-stake has progressed quite a bit since that document was published in 2016. For example, nothing-at-stake is fixed by slashing stake when anyone submits a proof that the staker signed competing branches.

(But I agree that Bitcoin is unlikely to change.)

There is no such thing as “Proof of stake” to replace proof of work. Proof if work is a solution where you do not have to trust anyone, as the block is won by the person who finds the right math result, essentially a lottery.

Proof if stake is either really proof of work that is less secure and obscured, or more often dimply giving the creators of the coin the power and your trust.... which reverses the entire point of the creation of bitcoin.

PoW’s purpose isn't to distribute coins (though rewarding whales is the purpose of PoS).

PoW’s purpose is to decentralize control so nobody can control and make the system trustless.

>Proof if work is a solution where you do not have to trust anyone, as the block is won by the person who finds the right math result, essentially a lottery.

The same applies to Eth2's PoS network, as block proposers are randomly selected with on-chain randomness. Block rewards are also not a major source of income for a staker on Eth2 — the majority of income (>90%) comes from simply attesting the chain correctly. This attesting occurs once an epoch for every validator, or every 32 blocks.

>Proof if stake is either really proof of work that is less secure and obscured, or more often dimply giving the creators of the coin the power and your trust....

PoS vs. PoW is really only a matter of how you ensure your chain can't be attacked. For PoW it's equipment cost, burnt electricity, and opportunity cost for losing rewards due to attacking the chain. For PoS, the security is ensured through a high-enough buy-in cost (32 Eth), and penalizing attackers harshly through slashing.

You can imagine how expensive it would be to accumulate enough Ether to attack the current PoS chain. There is 3.3 million Ether staked across over 100,000 validators, and one would need more than half of that total stake to have a chance at attacking the network, a failed attack resulting in massive slashings. This is made even harder as the attesting validators are shuffled continuously.

I personally loathe the energy consumption of PoW, and believe PoS to be the future. The fact that hundreds of validators can be run on just 5 watts of power should say enough.

If all validators on the current Eth2 PoS chain were run on individual machines, the energy consumption would be ≈4.4 GWh yearly vs. the current PoW chain's ≈25 TWh — a 5000-fold decrease. This is decrease is in reality probably even larger since pools, decentralized and centralized, will be running multiple validators on a single machine which affects resource usage very minimally.

> really only a matter of how you ensure your chain can't be attacked

The consensus mechanism serves two distinct purposes. The first is to keep global monotonic time (which is what you call "protect from attacks"). The second is as an inflation protocol. Any time you create value where there previously wasn't you have inflation.

> a failed attack resulting in massive slashings

That's not a good mental model for adverse actors in blockchain systems. Failed attacks are normally not published, so they won't exist unless the conditions are right.

What would a successful attack even look like?

My understanding was that malicious validator has to publish votes for two different blocks in one round; which then can be used to slash them. Unlike PoW they can't "sit" on their second vote, because voters are known ahead of time, and once vote is done, opportunity is gone.

They also can't choose transactions to go into block unless they're the proposer, so that's only time they can control whether attack will even benefit them.

So they'll have to wait to get randomly assigned as proposer, in a committee where they control enough of the other randomly selected validators, and have pending txns at the ready to double spend (while receiving party has been sitting waiting for funds).

And even then, won't that just create a fork where the minority of the validators recognize the double vote, and slash them anyways? And what users / services will stay w original fork given that proof?

> and one would need more than half of that total stake to have a chance at attacking the network

Actually 1/3rd to disrupt consensus, and 2/3rds + 1 to take control of the chain like you could with a 51% attack on a PoW chain, only you'd get almost immediate and complete control over the consensus.

The strength required to take control is probably 1/3 as it is with most Byzantine setups. (The 1/3 control attack against Bitcoin is selfish mining.)

You can't control the network with 1/3 with BFT consensus, you need 2/3rds.

The way to understand this, ask if PoS would have been bitgold released in 2009.

As bitcoin wasnt valued in 2009-2011, its value in USD was basically zero. Yet the cost of attacking the PoW even during that time was the cost of electricity which was higher than zero.

PoS, if it was released in 2009 instead of PoW, the cost to attack it would have been zero, as the price of bitcoin was.

There is a solution to this but none of the shitcoins have it implemented, instead chosing to give the creators all the power and majority stake.

> There is a solution to this but none of the shitcoins have it implemented, instead chosing to give the creators all the power and majority stake.

What is the solution you are thinking about? Interestingly enough, IIRC, the very first PoS coin did not give the creators all the power and majority stake.

I hate the entire cryptospace and all the damn shilling of every shitcoin in every corner of the internet. I hate it with a burning passion, I hate all the shitcoins which overpromise and deliver shitty SQL servers.

If it is good enough you and others will be able to find it, without anyone needing to name-drop or shill it. If it isint easy to find, well it isnt and deserves to die. But please if/when you find it, dont shill it, dont mention it.

That sounds nice in theory, and for the first few years of Bitcoin's existence, this was largely true. However, once ASICs were engineered, and once large mining operation data centers were brought online, it has become more of a cartel than a "democratic system no one person controls". I like a chain beginning its life as PoW and then later as it matures transitioning to PoS.

At some point, the mining rewards will dry up, as this paper points out. Then the game theory mechanics for BTC will change such that transaction ordering and execution become the main competition for miners to fight for, with some blocks being much more profitable than others despite electricity costs remaining static for each block. That's a huge problem, and PoW doesn't have the fix for that.

Ethereum's current proposal on this is to burn transaction fees. This is possible because ETH doesn't have a capped issuance, so block rewards will never dry up. Bitcoin doesn't have this option. It will have to, at some point in the future (maybe 20 years, I dunno), either give up 21 million capped supply or Proof-of-Work to sustain itself.

Maybe I'm misunderstanding, but Cardano's Proof of Stake seems to be working rather well while rewarding everyone who gets involved. Whale status or not. So I'm not understanding why you seem to disregard PoS as a solution when there are working solutions

It's difficult for the Bitcoin community to find consensus on changes to the consensus rules. We couldn't change a constant from 1MB to 2MB. I think changing PoW entirely is extremely unlikely to happen. It's much easier for the people who believe in PoS to sell their Bitcoin and buy Ethereum instead.

Or any of the other PoS coins. If you want to invest (which is a word I hesitate to use in the context of any cryptocurrency) in a PoS coin there are more mature ones.

It would be interesting if someone would research why this hasn't already happened? It's not like that alternative hasn't been available for a long time now.

Bitcoin's value is not based on its technical ability or its usefulness. No one understands or care about PoW vs PoS. Its only practical worth is its name recognition driving more people to buy it as an investment. Bitcoin beat Ethereum and Bitcoin Cash and Ripple and Monero and every other coin because it was first, and people know the name "Bitcoin", and they've never heard of any altcoin.

At some point it will fail because of its technical failures though. The people buying it assume that Bitcoin as it is, is already perfect and never has to change when that is far from the truth.

Casper and LMD GHOST (which is what Eth2 uses) is one of the most mature proof of stake consensus algorithms out there. The other is Tendermint, but that's a practical BFT algorithm, so limited to 100-300 validating nodes, whereas ETH2 has hundreds of thousands of validators.

Network effects and also, any chain that starts as a Proof-of-Stake chain suffers from the problem of early investors and early developers essentially controlling huge chunks of the supply (sometimes 80%+), so there is much larger centralization risk and a less distributed community. I think beginning as Proof-of-Work and then many years later transitioning to Proof-of-Stake is one of the fairest distribution methods. In Ethereum (and Bitcoin), for example, no one person controls more than 1% of the supply. That will serve to hopefully make it more resilient to collusion and cartel mechanics.

It's because just because you write ,,simply'', it's not a simple thing. Just as an example Ethereum was trying hard to do it for many years now without any success.

But the real reason is that there is no real solid formally written and proven ,,proof of stake'' algorithm so far.

ETH2 proof of stake beacon chain shipped in December. There's tens of thousands of ETH2 validators live today. Proof of work is still in place for base chain, so ETH is a hybrid currently. But they'll be off proof of work within a year to year and a half. For blockchains as big and old as Bitcoin and Ethereum I understand migrating to a new consensus algorithm is no easy task and comes with risks. But it is doable. And they could even prove it out on one of the many BTC forks or dupes such as BCH or Doge or Litecoin if need be. My question isn't about the technical feasibility, but I'm more interested in the game theory mechanics. The arguments against proof of stake from that point of view seem to dry up as mining rewards dry up, no?

>There's tens of thousands of ETH2 validators live today.

Over 100,000 as of a few days ago!

If ETH is hybrid now, how much it helped the energy usage? Did it go down significantly compared to a year ago (even if measured in ETH)?

Bitcoin had a halving, which was very sifnificant energy usage decrease measured in BTC (which caused the significant price increase).

ETH cannot be described as a hybrid. The 2.0 chain is currently independent of the existing chain. The plan is to dock the existing chain as a shard of the new one, at which point it immediately becomes 100% proof of stake.

Calling the halving a significant energy usage decrease is the opposite of what happens after a halving. A halving means miners are paid half as many BTC for discovering new blocks, then prices increase, which means that miners can afford (and typically must to stay competitive) to pay more for mining equipment and electricity to mine blocks profitably.

The bitcoin community is at a general consensus that PoS is inherently insecure

The bitcoin community would be wrong.

It seems very simple to me. The network would be controlled by custodians including exchanges and banks. And under an attack the network would be over: the malicious stakers can basically pay themselves and suffer no cost to continue the attack. Conversely with PoW there is a sustained huge expense to continue to perform an attack, and the PoW can be changed by a fork. I would never consider this to be acceptable. Not that ASICs run by China aren't currently an abysmal situation either, but that is only a problem because bitcoin has no privacy

Malicious stakers could not reverse transactions without losing their stake. It's as if a 51% attacker in PoW got their mining rig burned down.

Malicious stakers could indefinitely conduct a censorship attack. To address this, the PoS equivalent of changing the hash function would be to fork the chain and leave out the attackers' stake.

It is without a doubt the only thing they can agree on.

... well except for these guys https://www.bitcoinpos.net/

Btc is what it it is because it is NOT centralized.

pos = centralization risk.

pos = shitcoin.

If you want to read in depth: https://voskuil.org/cryptoeconomics/cryptoeconomics.pdf.

This was published in 2016. The title should reflect that.


Arvind and the Priceton team did some awesome research and lectures back when most of us didn't pay attention to Bitcoin.

This paper goes into how markets and its participants and not just the algorithm plays an important part.

Just think how secure Bitcoin will be when we have to Dyson sphere the sun to do the "proof of waste". Uh I meant work. But if the work has value you could sell it for on the side, then it reduces costs of attack, so waste as a feature. I like "proof of wait" for inflation rewards better :). The good news is, we can have other socially enforced consensus networks. (As all blockchain consensus is actually social.) So there's hope for real efficiency, it's just not on version 1 of blockchains. Caveat: I'm biased.

Is there no date on this paper?

It seems to be from 2016, or thereabouts.

Correct, October 2016.

Suggest updating the title.


I think demand for transactions is an issue. When it fluctuates, miners' earning becomes volatile. Some blockchains, like Grin and Dogecoin, have tail emission. But that's a pretty dumb solution. The reward/supply rate would approach 0. It's effectively the same as zero new supply unless dev teams decide to increase rewards. Changing reward defeats the purpose of decentralization. This problem is prevalent in any limited supply crypto.

I've been involved with Bitflate, a crypto with 7% inflation. We propose running a parallel inflationary blockchain. Inflation discourages hoarding. People have incentives to spend. We can also "mix" the inflationary crypto with Bitcoin. This mixing allows us to create digital native crypto with any inflation rate. It also creates demand for transactions on the Bitcoin blockchain.

More information about the project: https://bitflate.org/

Whitepaper: https://bitflate.org/bitflate.pdf

PS: Some bitcoiners think that fee volatility is not a big issue. There will always be demand for transactions. Miners just have to deal with volatility. But fee volatility will translate to price volatility. It contradicts with the claim that Bitcoin will become stable.

> Inflation discourages hoarding. People have incentives to spend.

I'd rather we use a coin that people want more of (deflationary), rather than a coin people want less of (inflationary). There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.

> There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.

You're confusing spending and consumption. Bitcoin holdings don't do anything. They're a nominal amount on a public ledger, and if bitcoins also serve as the medium of exchange this would be subject to the paradox of thrift.

Instead, a healthy economy encourages people to invest. If I have money (or bitcoins) I don't need for immediate purposes, I shouldn't put it under the mattress (or on the blockchain). I should instead loan it out as debt or equity to someone else who wants to expand production in some way, producing a (probable) real return. That's how we become a wealthier society.

A deflating bitcoin is not well-suited for these investments, since a rational holder of bitcoin would probably prefer to continue to hold bitcoin (not doing anything) rather than take an investment with an interest rate less than the expected appreciation on bitcoin. At the same time, bitcoin's volatility is also bad for secondary finance because it becomes difficult to properly value future payments.

Hoarding currency should never be a viable investment strategy. That it is so for bitcoin is evidence for the speculative bubble hypothesis.

You're comparing want (saving) and utility (spending). They're contradictory. They have different purposes. A functioning money system needs to have:

(1) A Store of Value

(2) A Medium of Exchange

(3) A Unit of Account.

Bitcoin is mostly a Store of Value. It doesn't have the other 2 functions. We can try to fit all 3 into Bitcoin. The Gold Standard failed to do it. The US Dollar system is failing. Bitcoin will likely fail to do it.

> The US Dollar system is failing.

What makes you think that?

The US Dollar is supposed to be a Medium of Exchange and a Unit of Account. It is also being used as a Store of Value for countries with unstable currencies. Demand for the dollar causes trade imbalance, wealth inequality, and political problems. I think the Fed is doing a fairly good job in managing the dollar. It has becoming more political as the problems are moving closer to the source.

The whole economy depends on people spending. If everybody starts to hoard currency, economy will implode. That's why deflation is worse than (light) inflation, from an economic standpoint.

The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.

They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.

It's supported by both logic and experience.

It's easy to see logically if we flip the relationship. If house prices are steadily increasing (equivalent to inflation, where my purchasing power is decreasing), I want to convert my money into a house as quickly as possible. If house prices are decreasing (equivalent to deflation, where my purchasing power is increasing), I want to hold off as long as possible.

In recent experience, the rapid deflation of bitcoin has coincided with its identity pivot from medium of exchange to store of value - because why would you spend an appreciating asset?

That's not to mention the other side of the coin that deflation is necessarily accompanied by decreases in nominal income (because all the products you sell are cheaper in dollar terms, by definition) and nominal salaries.

And as coliveira stated, the economy depends on spending - and that applies just as much to an open free market economy. To suggest that the desire to want people to spend is somehow a feature unique to planned or state-run economies is nonsense.

Sounds good to me, if you don‘t buy the house because your money is not devalued consistently. House buyers might actually get more use out of it than holding their money, instead of just (or in part) buying it for monetary reasons

If the value of houses keeps going up and up at some point it becomes profitable to build more houses. It's just a matter of getting rid of stupid laws that prevent economic actors from doing so.

If the value of houses goes down over time then people will stop building houses. Housing can easily last decades or centuries if done properly. By the time the problem grows to become unsurmountable you might find that all the construction workers and companies are gone. That's what happened with the nuclear industry. You run a plant for 50 years until people retire all at once then you suddenly have to train thousands of new workers since you failed to maintain the industry.

This is a fundamental problem with providing food. Most food has to be eaten within weeks after the harvest. This means that you must ensure that at all times there are people farming for food. It's not possible to save it for decades or at least people don't want to eat 10 year old food (there are companies that specialize in prepper food). So ultimately, you need to keep the farms going all the time. How can you tell them to keep going if the price of food is going down... forever?

I'm on board with your socialist sensibilities when it comes to housing - but when the same effect is occurring throughout the entire economy the result is a depression.

Surely with a deflationary currency, interest rates would need to be significantly higher, making it harder to borrow the capital you need to start a business.

As someone with capital the expected rate of return will have to be high to make it worth lending rather than just holding on to it in a deflationary situation.

The opposite actually. The Real interest rate is the nominal rate minus inflation. So negative inflation of, say, 2% pa, effectively adds 2% of real interest to any loan, since 100k of principal today will be worth ~111k in 5 years’ time. In response lenders and central banks are likely to decrease interest rates as, firstly, the money is appreciating in real terms anyway and, secondly, the appreciating value of money makes it harder for debtors to repay debt, so people won’t be able to afford high interest loans. Compare that with high inflation periods where repaying the principal gets easier, since the 100k you borrowed five years ago is only worth ~90k in today’s money (with 2% inflation).

A lot of western economies experienced the inflation side of the equation in recent history - see the 70s/80s in the us, when both the inflation rate and interest rate were very high. In reality the Real interest rate is generally less variable than either inflation or nominal rates.

I'm obviously no expert, but I don't think it'd make sense for the real interest rate being higher under deflation to factor into anyones decisions about whether to make loans available, so the supply of loans would be lower.

Keeping the money in a hole in the ground gets you that return without taking on any risk, so when you're considering whether to invest your money in a potentially risky venture, you aren't going to care about the appreciation of money over the term of the loan.

My perspective is that if you want a return you consider the expected excess return over the risk-free return, and think about how much you're paying for that. Deflation increases the risk-free return you're comparing all investment opportunities with, so the number of opportunities with excess returns will diminish as that rate increases.

The availability of credit is a separate question from the interest rate, and may indeed fall.

Rising real interest rates directly impact borrowers and their ability to borrow, as their debt burden increases without any changes to interest rates. Borrowers are therefore both less likely and less able to borrow. Lenders may simultaneously decide not to lend. Japan is a good case study and has suffered from both phenomena. But interest rates in Japan are very low and fell substantially as soon as the economy got stuck in a deflation rut:

The charts below are illustrative if you set them both from 1979 to now:



Thanks, this is very interesting, and certainly gives me something to think about. Is the causation the right way round though (i.e. that the deflation has caused low interest rates)?

Could it be rather that because of the deflationary situation, the government tries to stimulate the economy with cheap money, and without that action, the natural rates of interest would be set by supply and demand and would be much higher?

I think you’re right on the supply side of the equation, that the profit motive applies upward pressure. But the constraint is on the demand side - if I increase or even maintain my interest rate, the number of borrowers that are able to service the loan drops and the amount of bad debt increases. That’s in addition to the general disincentive to bring forward spending caused by deflation, which has already reduced the pool of borrowers. If I lower my interest rate I’m making less money but still taking on the same risk (if I calibrated my reduction in the rate to that effect). I might then mitigate the risk by tightening my lending requirements. Or I can choose to just stop lending. The result is a simultaneous drop in interest rates and in available credit. The central bank can try to boost lending by dropping its interest rates. When rates get near or below zero things get weird.

Yes and no. Higher savings would also mean more capital to load from. Expected return on investment would be higher, which is probably just a good thing. Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.

Those savings would be distributed, and difficult to access, especially if they are primarily relying on deflation to increase their value.

Saying that the expected return would be higher is just the other side of saying it would be harder to find capital to start businesses.

> Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.

This seems like a huge topic on its own. If there's an 'ideal' availability of money to ensure that companies are providing value, just switching to a supply limited currency is extremely unlikely to luck into selecting the right value. In fact, because it makes it harder to adjust things it makes it pretty much a certainty that at least at some point the wrong value will be selected.

>The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.

That's not necessary. Simply reducing spending to the bare minimum possible is enough. Humans don't need that much to survive.

>They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.

Well, first of all, why would you start a business if your money works for you? It would be a waste of money. Secondly, if everyone is starting their businesses instead of buying things then who is going to buy the things those businesses provide? Nobody? Isn't an oversupply of goods just going to drive prices even lower, causing companies to close down? Would you really risk starting a company when you know that in the future your potential income will be even lower than today?

Exactly. People can depend on the value they've acquired to remain valuable, which means they can take on greater risk in the future.


Here's a video of Ray Dalio explaining inflation-deflation and some other basic economic principles. The process explained in the video is the reason why you can never have a real economy running on Bitcoin.

Deflation of a currency only increases the purchasing power of people who already hold that currency. If they start a business, they'll only be able to earn revenue solving the problems of other bitcoin holders.

I have a controversial view.. (more than) enough mining will still happen even if there were no block reward AND no fees.

Why would somebody mine Bitcoin in that scenario? Because they hold Bitcoin.

I imagine the average investor would be willing to spend around 2% of their holdings a year to “protect” their investment, I.e. make sure the network is functional and immune to attack.

Which comes out to about the total amount spent now on mining (1.8% annual block reward =~ 1.8% spent on mining).

The "tragedy of the commons" will make that argument rather unconvincing.

This paper is entirely based on a false assumption:

> We also assume that miners always have space to include all available transactions.

And that's exactly what the block size debate was about 2 years ago (paper is 4 years old). We did realize that it was crucial for Bitcoin to always have demand for block space, exactly for this reason.

If the authors want to contribute to the space, they should revisit that assumption and try again.

Also, the paper has a clear motive:

> Perhaps instead, designers of new cryptocurrencies must resign themselves to the inevitability of monetary inflation and make the block reward permanent.

Instead of suggesting changes that could be made to Bitcoin to reduce the thread of the scenario they describe, they suggest to discard Bitcoin altogether and move to a cryptocurrency with permanent inflation.

Honestly bitcoin core will never need to use it, I will die before,

It is not possible to adapt bitcoin as there is no governance (or a flawed one either accept what miners and few devs want or fractionate the community creating bch) , It is software, software needs to adapt, by definition.

I think the implicit idea that bitcoin will never change helps to grow now, as we get false sentiment of stability, But we are at the mercy of devs/miners.

If you think this is a concern, take a look at decred, is was born to be the best store of value, because it can adapt and evolve through governance, so it can last in time.

This is one of the reasons why I am glad that Monero has a tail emission: the block reward never drops to zero, but stays at a fixed amount per block, asymptotically getting closer to 0% inflation per year

Yes. This is yet another reason I think Monero will become an actually usable currency

Here is a paper on the fallacy of selfish mining: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3004026

I've been interested in what will happen without the block reward.

One (small) thing which really irritates me about bitcoin is how it is claimed it is "not inflationary", yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies -- it's easy to claim that at some point in the future you will stop inflation, I'll believe it when I see it.

> yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies

Why does every HN bitcoin thread have this ridiculously incorrect statement being mindless parroted? The inflation rate of bitcoin is currently 1.8%, this is easily confirmed for anyone willing to put in 10 seconds of research.

In comparison the US M1 monetary supply is up over 60% in the last year and the S&P 500 valuation is at all time highs despite a massive global recession. At what point will people actually capitulate regarding the value of cash in their wallet being rapidly inflated away across the planet?


I was just considering inflation that people see "on the street".

By including M1, aren't you including fractional banking? If that is so, if bitcoin became "standard currency", banks would just fractionally bank bitcoin.

Even if you are using CPI as monetary "inflation", it's still far below the CPI target of every developed economy on Earth.

Do think M1 is the more accurate measure here because the amount of bitcoin in circulation is the equivalent of M1 as defined by everyone: "currency in supply".


Growth in money supply =/= inflation. If price stability is what you want then the money supply has to increase as production increases to avoid deflation.

It's certainly the meaning in some contexts. The problem with the word is it is widely used for consumer price inflation. When talking about asset and monetary inflation people still shorten it to simply "inflation"

Growth in money supply is the proper way to compare to different monetary systems like bitcoin and the dollar.

> to avoid deflation

Last I looked nearly every person on Earth wants price deflation in food/electricity/cars/iphones/etc. The onus on you here to show why that is such a bad thing for society?

You don't need to 'claim' anything. It's written into the rules of the blockchain. You cannot change the rules like that and expect to have your blocks appended to the canonical chain.

It depends on where the miners and users go.

I don't know that we can predict today what people in the future will view the incentives to be, but its certainly not impossible that the collective view of the bitcoin community might shift towards some change on that front.

I'm not saying this is the only solution, but if having no block rewards really threatens the existence of bitcoin, and a regular inflation rate were deemed to be the beset way to solve that -- the cap on the number of coins isn't actually immutable. There would be a hard fork in that case, sure, but if that's where the people went, that's where the value would go.

Keep in mind that the miners would have some incentive to back a change to that cap. Every block reward would be extracting value from the non-mining users and distributing it to themselves -- similar to the inflation tax we face with normal currencies. It's not inconceivable that they could drag the user base along with if it was seen as existential. A 2% inflation rate is better than the collapse of something holding a significant fraction of one's wealth.

given that most users have some kind of hosted wallet service these days, can't the wallet provider do massive "coin join" transactions to dramatically decrease transaction delays?

This has been debunked numerous times. Layer 2 settlement (like lighting network as a single example) will batch transactions at an increased rate to the main chain, raising the fees and causing stability.

Reminder: Instability? Yes, bitcoin is a ponzi and will collapse. Learn how the investment fraud works. [1]

[1]: https://github.com/openblockchains/bitcoin-ponzi

"Needing new buyers for price to increase is not the definition of a Ponzi scheme"


Nocoiners said that at every single price and adoption milestone...

You can make money in a Ponzi scheme, too. Just saying.

Until you can't. And that's the parallel right there: in practical terms, it's a scam for rewarding those that are insiders.

Bottom line is there is no exit strategy for 'suckers' who are meant to be left holding the bag. When collapse is part of the curve and denial is part of the sales pitch, it might not literally be an exact Ponzi scheme, but you're meant to be one of the smart ones hyping and profiting off the dumb ones who chronologically come after you. That's the profit strategy.

Which suckers are meant to be holding the bag? At what point does bitcoin become useless altogether?

I haven't read the paper but I'll still be downvoted for this either way so please upvote, but Bitcoin uses a lot of energy that it shouldn't and banks work better and it is just a speculative market which means gambling, and I think it's probably racist. Please remember Bitcoin is bad.

If I was smart I might ask if this paper is relevant within the next 100 year given how Bitcoin works currently, but I'm not :(

> and I think it's probably racist

I know that you think you're being performatively stupid, but in a system where the benefits are captured almost entirely by a few techbros, and the pollution from the coal power plants powering it is felt mostly by ethnic minority rural poor (1) ... yes?

I suggest that the burden of poof is on the other side: attempt to make a coherent case why this technology is somehow egalitarian and not going to drastically worsen inequality. Good luck.

1) https://qz.com/1978807/bitcoin-has-a-xinjiang-problem/



This is a smug take.

Who do you think gets the benefit of the freshly printed fiat?

In the central bank cantiollionaire system, there are three classes of citizens:

1) jamie dimons, warren buffets and the like who get access to practically 0 cost lending rates 2) the ~60% of citizens with assets (e.g. stonks, real estate) that get pumped along with the money printer 3) everyone else

What do you think happens to "third class" citizens?

The rules are NOT the same for everyone under the central banking system.

The rules ARE the same for EVERYONE with BTC.


> The rules ARE the same for EVERYONE with BTC.

No, This is a very smug take from the "must be good because I got mine" BTC crowd. "Smug" practically defines them.

Anyway congrats on some smug "whatabout fiat"


The rules of btc will not change and become a multiple-tier system because of your feelings. Sorry.

I provided evidence (from NY fed) to your burden of proof request.

All one can ask is to have the same rules for everyone. Equal access. No special privileges.No cantillionaires.

If you are a cantiollionaire - good for you.

If you are not a cantiollionaire, then wtf are you defending a clearly corrupt system that further drives inequality and perpetuates cronyism? Is it because you want to be the person distributing freshly printed fiat?

Assuming your well founded intentions are to make the world less inequal via the money printer, the money printer has been proven to do the exact opposite.

If you want to properly critique btc, you can argue that there is a one time cantillon effect until hyperbitcoinization. Then you can get into the discussion of what happens to the people who don't have any. You could discuss UBI or other social systems.

Guidelines | FAQ | Lists | API | Security | Legal | Apply to YC | Contact