[Cryptography] Another Bitcoin issue (maybe) (was: BitCoin bug reported)

Peter Todd pete at petertodd.org
Thu Feb 13 23:52:56 EST 2014

On Thu, Feb 13, 2014 at 07:17:12PM -0500, Jeffrey I Schiller wrote:
> I?ve been playing with Bitcoin myself. When I first looked at it when
> it came out, I was convinced it would not scale because of the ever
> growing size of the blockchain (on my system it is currently around
> 20Gb). But then again, I though that .COM wouldn?t scale either. :-)
> So disks are getting bigger and we are seeing ?light weight? wallets
> (aka they depend on other peers instead of having their own copy of
> the blockchain). I don?t believe this will be a long term problem.
> However, I am concerned about mining and the diminishing
> rewards. Today, as has been said here, a tremendous amount of mining
> is going on. However the block reward is 25 BTC (~$15,000) so there is
> real motivation to use hardware and really go all out to do mining.
> However when the block rewards go away (years from now) it doesn?t
> make sense to me to spend a lot of effort mining for the tiny
> transaction fees. I know the theory is that the transaction fees will
> motivate miners. Really?
> Here is what I fear may happen. When the reward goes away, so will the
> miners. So the protocol will adapt by reducing the work factor
> required to create a block. At some point it will stabilize. But what
> of all of that idle mining hardware? I wonder if someone could
> purchase enough of it to capture the blockchain and have their way
> with us? The security of Bitcoin is dependent on no one entity being
> able to do more work then the rest of the network... but will this
> remain a valid assumption?

Frankly I think the reward schedule going to zero was a really stupid
idea. It makes for nice marketing - deflationary currency is an idea
with legs - but ignores the fact that all people owning Bitcoins benefit
and require the security that mining provides. A much better mechanism
would have been to target a specific inflation rate of, say, %1 on the
basis that doing so in effect means that you are taking the entire value
of the currency and devoting some % of that value to security ever year.
Equally from a marketting point of view you could call it the security
tax that everyone agrees to pay to keep their coins secure to avoid
kneejerk opposition to the word "inflation"; mathematically a universal
tax and inflation are equivalent with regard to value, although a tax
helps ensure that the numbers involved remain within the range of 64-bit
integers over the long run.

As for actually implementing this one obvious issue is that inflation
needs to be measured in terms of the actual economy; coins that are lost
for whatever reason need to be excluded from that measure. This strongly
suggests you want at least some part of the reward to be based on
something you can measure with an algorithm; coin days destroyed is an
obvious possibility. Thus, make every transaction output require a
certain amount of difficulty-adjusted mining to be done to spend it, in
proportion to the value of that output and the age. Older outputs will
require more mining to spend, which is economically similar to their
being a tax on them to pay for security. Meanwhile if you were to "pull
your weight" and mine in proportion to your share of the total coins out
there you would come out neutral. (minus your real-world costs of

A very similar approach is to just do demurrage and make the mining
reward equal to the loss in value of all coins in the system at any
given moment. Freicoin implements demurrage, although it unfortunately
doesn't only direct that reward to miners; it directs 80% to a
centralized Freicoin Foundation.

But for all the above, the Bitcoin inflation rate will remain >1% for
about another decade. By then who knows what else will have changed in
the crypto-currency space?

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