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

Peter Todd pete at petertodd.org
Fri Feb 14 19:33:24 EST 2014

On Sat, Feb 15, 2014 at 12:45:21AM +0200, Sampo Syreeni wrote:
> On 2014-02-13, Peter Todd wrote:
> >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.
> I disagree. The idea was, from the start, that transaction fees
> would supplant mining fees in the end. Both are subject to the
> normal competition over nominal cost, and if you take a look at the
> monetary equation of exchange, both mechanisms work out pretty much
> the same on the same side of the equation. Profits from mining equal
> a percentage of M, profits from fees equal a percentage of V, and
> then in long term equilibrium both just work out to a fixed money
> supply combined with a market rate for transaction processing. So,
> it's good marketing for early adopters, combined with a steady state
> that is fully set by the market. What more can you ask for in a de
> novo non-state backed cryptocurrency?

Note that I'm not suggesting that transaction fees be removed, far from
it. I'm pointing out that both people doing a transaction now, as well
as all owners of Bitcoins, benefit from PoW security and thus both
parties should pay the cost of that security.

> >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.
> Then you'd be taking the position that steady inflation is a good
> thing. Satoshi took the opposite, gold bug position where a fixed
> (or highly inelastic) money supply and its attendant deflation in
> times of growth was seen as a good thing. Now we live with that:
> nobody says you should invest in bitcoin if you don't like its lack
> of macroeconomic stabilisation possibilities or somesuch thing. In
> fact, you could always fork the codebase and the blockchain and make
> yours better.
> But if you can't make it fly and drive Bitcoin out of the market,
> isn't that just testament to the fact that the idea of mining really
> *was* just the thing you need in order to get this kind of a virtual
> currency going?

I really don't care about economic theories about monetary supply; what
I care about is how to pay for security against a 51% attacker. Remember
that the percentage of the total market cap of a coin that goes to
mining every year represents the cost that an attacker would have to
spend to destroy the value of the entire system. It's similar to
terrorism really, where a fairly small expenditure can destroy a much
more valuable thing.

Right now it's obvious that the economics of Bitcoin do not represent a
steady state. One only has to look at how the cost per transaction,
mining reward * price / # of transactions, is currently $38 USD to see
that the Bitcoin price is based something other than it's value
currently as a transactional medium. Equally right now the inflation
rate of Bitcoin is still quite high, >10%

I do not expect any alternative system with a better long-term set of
incentives for miners to supplant Bitcoin until either a major disaster
happens, or an alternative with better incentives becomes popular for
unrelated reasons. (Dogecoin was accidentally created with a perpetual
mining subsidy for instance) In short, right now Bitcoin *does* work the
way I think it should, using inflation to support mining; it's only in
the future that we'll find out if I'm right.

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