Bitcoin Forum

Hi there,

so I stumbled over the concept of bitcoins some time ago and I must admit, at first glance it is really appealing. It has some properties that are very much desirable for a currency - anonymous, decentral, protected from inflation.

But looking a bit more into details, there are major drawbacks. All of you are very aware of the upcoming deflation. And you don't care at all? Or do you all hope to have jumped the train early enough to profit from this deflation? Deflation ruins economy and stops the currency from circulating, because spending is just unwise, since you could get much more goods for you bitcoin a bit later.

And what about the guys who were able to easily mine tons of bitcoins in the early days? They own a considerable fraction of all existing bitcoins. If bitcoins become the new world currency, they will literally own half the world - or rather one quarter? Do you think that's fair, acceptable at all? For me it isn't.

So for these two reasons, I feel it is not a good idea to support bitcoins. All of you guys in this forum, and quite some smart guys among you seem to disagree. I'd like to know why.  ;)

Deflation doesn't stop economies.  Computers get cheaper every year thus nobody buys computers right.  Might as well wait forever for cheaper ones.  Oh wait they do.  Computers, movies, games, HDTVs, ipods, ipads, digital cameras, renewable energy products (PV solar, wind turbines, etc), and essentially all electronics all get cheaper with time.  Obviously they are the slowest and most stagnant part of the global economy right.

For someone to "own half the world" they would need to
a) mine half the coins - which is impossible.
b) never sell not when the coins the have are worth $10K, not when they are worth $10M, not when they are worth $10B.
c) risk losing everything by a & b.

I can see it now.

"Fuck no I am not selling my stash.  It is only worth $82 billion.  Billions is for suckers I am living in my mom's basement until it is worth trillions.  Trillions is the smart money. ..... NO MOM I CAN'T TAKE OUT THE TRASH.  I am trying to become the worlds first trillionaire".

Yeah; I always defer my consumption of food and water because I know I'll be able to get them cheaper next week.

The computer I'm typing this on cost a quarter (without even taking inflation into account) of a computer I bought 10 years ago.  It's about 50 times as powerful.  Which of those two computers would you say I (and everyone else who buys computers) didn't actually buy because of deflation?

(price) Deflation and inflation both each have positive and negative effects.  For every buyer there is a seller, for every saver there is a borrower.  Deflation is no worse than inflation.  There are some other things to consider when deflation comes about because of a reduction in money supply (which is where deflation has got its bad name).  But the world has never seen a currency like bitcoin -- deflation that comes about from the strength of the currency, rather than from contraction of an economy.


Fair?  What is fair?  Where can I see this rule book you seem to have about how many bitcoins the early miners should be allowed to keep in order to maintain "fairness"?  Who says it is bitcoin's job to enforce your arbitrarily chosen scale of fairness?

Bitcoin wouldn't be in the position it is now without those early adopters.  It will not be in the position it comes to in the future (assuming success) without our efforts/support now.  There is a reward for taking those risks; for seeing the opportunity before others.  


Don't support bitcoins: that's fine.  I have no wish to persuade you to act against your thoughts.  Your choice is simply another datapoint in the final outcome.  Perhaps sufficient market participants will agree with you and bitcoin will never be a success... of course then there will be no deflation so your reasons for not joining will have been wrong.

On the other hand; if enough market participants don't agree with you, then they will all profit and you won't.

In essence: that's why early adopters are going to be rewarded.  No one knows which of these two outcomes is going to happen.  You pays your money and you makes your choice...

<sigh>

Another newbie who believes he actually understands how money works.

Early adopters are making a risky investment and doing work that if successful, later participants will benefit from at little or no cost to themselves. Keep in mind this is all voluntary, if the central banks of prevailing currencies want alter the money supply, participants don't have much say or much of an exit. With bitcoin the inflation is known to participants from the offset, and no one has to use bitcoin.

I know how money works ^_^.

Runaway price deflationary spirals don't actually result from currency deflation, but rather from an accumulation of toxic assets by banks, which are then forced to halt lending which throws a wrench in the normal operation of businesses. People lose trust in banks and businessmen, and because they are uncertain about their own financial future they then refrain from discretionary spending and beat each other up at Chuck-E-Cheez. In other words, the US economy.

When prices deflate for other reasons, for example more goods are produced, foreign exchange appreciation, and so on, businesses do the opposite: cab drivers run their air conditioning, gyms give you extra perks, and everyone is more than happy to give you extra value for your koin.

I am assuming you don't support any currency for the same reason, correct?

OR

Do you feel this situation is in some way different than our current fiat currencies?

You're confusing falling prices with credit contraction ( deflation ). These are two totally different concepts. Credit contraction does indeed ruin economies, usually after a massive bubble created by central banking. But falling prices do not; falling prices is a blessing and one of the great benefits of economic growth combined with sound money.

Thanks for your answers (except for the Troll that is).  ;)

DeathAndTaxes and realnowhereman point out that deflation in electronic devices doesn't stop us from buying it. There is some point to that, however let me point out
a) part of the equation here is innovation and not pure deflation: I can't buy the same $1000 PC of 10 years ago for $15 today (assuming approximately 33% deflation per anno) and I don't want to; I want to buy the way faster one that was not even remotely available 10 years ago in the same space and energy envelope, no matter how much I would have been willing to spend.
b) deflation actually does slow down economy in the IT business; there is tons of stuff that I would buy now, if I expected no more innovation and no more falling prices.

More generally, you guys argue that nowadays deflation is usually the result of an economic depression and not its cause. But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn. Sure realnowhereman will still buy water and food, but who with a sane mind would still buy e.g. a house or car if you get two houses or two cars for the same money 18 month later?

But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable. Where would bitcoin be 10 years from now at that rate? $5 * 64 = $320 per bitcoin, 20 million coins mined, total value $6400 million - sounds like a lot, is just $1 per human being. In other words irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.

Or do you expect the monetary base of bitcoin to be broadened by book money at banks? BrightAnarchist and Haplo point to credits and bank assets as reasons for current crisis. But I guess you would not put your bitcoins on a bank account, because that would give up most of bitcoins advantages?

2 houses 18 months later?  really?

That would assume an annual deflation rate of 40%.  How about deflation rate of 4%.  Why buy a house today if you could get 2 hours in 30 years?  I don't know maybe because you could own a house today?  Also monetary deflation doesn't mean all prices will fall equally.  If everyone thought buying a house was a bad idea then enough people wouldn't and prices wouldn't fall as much.  Less new homes would be built and relative to monetary deflation prices would RISE (in real terms not nominal ones).  When that happens you rent will be rising too.  Eventually an equalibrium will be established where buying a home (even if you could buy 2 for the same price in x years) would be preferable to paying more and more of your income in rent.


Lets assume a quadrillion % population growth per second is acceptable.  Humans would kill themselves off in less than a minute.  Yup human race is fatally flawed.  How about you assume something less asinine than 33% deflation?  Yes hyper deflation is bad, so is hyper inflation? Would 33% inflation be better?

Why is the finish line 10 years from now?  How about 15% price deflation over the next decade, 10% over the next two decades and 5% of the next two decades.

That's a $12B monetary base.  Larger than most nations in the world. 

Ok, so you agree with me that 40% or 33% deflation is quite deadly.


Where would bitcoin be 10 years from now at that rate? $5 * 1.5 = $7.5 per bitcoin, 20 million coins mined, total value $150 million. In other words totally irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.  8)

$150M monetary base is larger than some nations.   To put it into a useful context Paypal for example only processed $5B in transactions last year.  With a velocity of 10 (money changing hands 10x annually) $150M monetary base could support $1.5B in transactions.

If 30% of Paypal is a nerd niche well I welcome the nerd niche.  Still for the last time why is 10 years the finish line?

Higher deflation is certainly possible in the short term but I put the finish line for Bitcoin at decades out.  Bitcoin is still inflating (printing money) although that rate of inflation is continually declining.  Rapid adoption in the short term could result in significant deflation however as the base grows the rate of adoption as a % of that base will slow and deflation will slow with it.

So as I indicated above if Bitcoin deflated at 15% for the next decade, 10% for the following 2 decades and 5% for the next 2 decades it would have a monetary base of $12B.   Hypothetically if 50 years from now Bitcoin had a $12B base and continued to deflate at 3% to 5% per year that would "kill the economy" or be a "nerd niche".

Well one can only hope for such killer deflation and niche status.

The price of the bitcoin going up isn't quite the same as deflation.  Bitcoin won't experience deflation until the block reward is reduced to near zero, which isn't going to be a real problem for at least a generation.  If the whole world is using bitcoins in thirty years, the value of a single bitcoin is going to be pretty high, but the actual deflation rate would likely be less than 0.5% annually.  Perhaps far less, if effective safeguards against lost address keypairs are developed.

An annual increase of the bitcoin value of 30%+ is indicative of a rapid growth in the bitcoin economy, exceeding the current inflation rate by at least that much.  Although the rigid nature of the bitcoin monetary base could act as a brake on economic growth, it's literally impossible for rapid growth to be "deadly" to the economy.

Most of us expect that the annual velocity of bitcoin to be much higher than fiat currencies, due to the relatively quick settlement rate of the bitcoin network.  Although most people get paid for their work weekly, with about a week delay on average, before they can again spend those funds themselves; it's actually possible for employees in a bitcoin economy to be paid daily and spend those same coins an hour later.  The higher velocity capable with bitcoin also means  that the bitcoin price is likely to be suppressed compared to a currency with a much lower velocity due to technical constraints.

For those who don't understand what I'm talking about; although cash is an instant form of settlement of trades, most transactions in modern economies are credit transactions.  Although such transactions are 'completed' instantly (based upon the credit of the buyer) they take up to 45 days or longer to be 'settled', during which time any real funds involved in the transactions are not available for further transactions.  Think about sending a paper check in the mail to pay a bill; the funds to pay the bill are supposed to be in your account before you write the check (otherwise it's "kiting" which is fraud) and mail the check.  The check must travel via mail to the company, then back to the bank, before the transaction is completed.  This is true even if the company credits your payment upon arrival or not.  But the company cannot use those funds when they credit you with the payment, they must wait until the check clears your bank and is on account at their bank.  As you can imagine, just a paper check can take weeks.  Businesses with merchant accounts at the credit card companies can get access to those funds faster (as in a couple of hours) because the credit card company can credit the merchant's account for an (assumed) valid CC transaction; however, such credit based transactions are not final for much longer due to rules and laws governing consumer credit protection.  So a merchant could re-spend his new funds pretty quickly, but if it turns out that he was burned he loses those funds after the fact, (chargebacks) and then finds himself in the debt of the CC company.  It doesn't take long before merchants start to maintain a standing reserve balance, just like one would do for a checking account.  The aggregate result of all these reserve accounts is a drop in velocity/increase in cash demand/increase in relative fiat currency value.  (Yes, the suppression of velocity can result in the increase in value of the currency, so long as the issuing institution is expected to still be able to follow through).

Since bitcoin is truly settled (as fast as) in one hour, those funds really can be re-spent without fear of chargebacks.  Thus reserve accounts are less necessary under bitcoin than under a credit based fiat economy, which was the only way to do online transactions up until this point. 

(a) is only adding to the evidence.  You were fully aware 10 years ago that your PC-in-ten-years would be better and yet you bought it anyway.  That's exactly the point.  Your need for a PC now was higher than the deflationary reward you got for waiting.

(b) that's as maybe -- your choice to spend or not to spend now is entirely yours, based on your own evaluation of current need.


I think you've missed my point (which I expressed a little facetiously, so it's my fault).  All that deflation does is move the threshold for action.  Let's take your extreme example -- that in 18 months your money will be worth double.

During that 18 months, do you require the use of a house?  Do you require the use of a car?  Your argument is probably that "well, I'll make do with what I've got for 18 months".  But of course in 18 months that same logic will hold, you can have 4 cars in another 18 months -- so you'll stick with what you've got.  Eventually, the car you've got will not be sufficient for your needs.  You will have to buy a replacement.  Your choice of when that happens will be based on how much car you can buy for the money you have now and how much you desire the replacement.  Exactly as it is in a non-deflationary world.

Further: ask yourself where you would live during that 18 months while you wait to buy your two houses?  Rent?  Well that will reduce the money you have available to buy your two houses.  So much so that you will be able to afford one house in 18 months; not two.

I will accept that a huge sudden change in the inflation/deflation would be painful to adjust to for an economy.  But it is not the absolute percentage that is the problem though, it is the suddenness of change.


This is a little unfair; this is mixing in bitcoin's market success with economic deflation.  If bitcoins had huge inflation (oh look, they do), they could still be worth more next year because of supply and demand.  To talk about bitcoin's deflationary properties, you really need to talk about it assuming it has become a huge success and is a recognised currency, with large market penetration (and that would mean you have to start with bitcoins worth about $10,000 each in ten years).

33% deflation would be insane. However, what you're probably referring to is currency appreciation, as the inflation rate falls and the value climbs. More realistically, the amount of deflation caused by lost coin, and the amount spent on transaction fees is probably less than 1% total. It would take 100 years or more for that to have a notable effect.

The effect of currency appreciation is largely unknown, however the main effect is numerical rather than real. That is, while it may appear that things you bought last year were expensive and you're "losing money" in nominal terms, you may still be making money in purchasing power terms. Again, the larger and more rapid the change, the more potential damage it can do to the BTC economy. You could compensate via inflation (a la governments), but that will only give you two problems instead of one. However, if the extent of the change is known, businesses can adjust their accounting to account, and as long as the change is either steady or short-lived, then the effect would largely be mitigated by individual action. As long as the currency isn't jumping up and down all the time, the economy can adjust.

About banks, BTC banks work much closer to the fundamentals of a real, legitimate bank than do any of the banking institutions which carry fiat. The banks can't inflate the currency (and therefore cannot create economic bubbles), don't have "prop trading desks", and usually don't have problems with solvency. There's no "credit default swaps" or anything like that, just straightforward lending mechanics. Also, unlike Goldman Sachs, if a BTC bank decides to rip off its customers, there's a considerable community backlash. It's not like they can get away with running a ponzi indefinitely, and there's nobody to bail them out if they do.

Aside from the occasional scam service (something which could be improved, I'm thinking about a Bit-Better-Business-Association) the worst I've seen in terms of bankruptcy is the WBX disaster, which seems to have happened because the guy running it wasn't too smart and got his AUD bank accounts scammed or something. The BTC end of the business remained secure the entire time, however, and the liquidation looks like it's being handled properly (and will probably finish years before they ever finish liquidating Lehman, which they still haven't).

Compare to MF Global. "Oops, sorry, the CDS holders get all your money. Too bad."
Honestly I don't believe a bank should even be allowed to list on a stock market. That's a huge conflict of interest, added to the multitude other conflicts of interest in the modern banking system, many of which are provided directly by the state(s) in order to shield them from otherwise corrective market forces (and pitchforks).

I'll personally liquidate my BTC to cover all my costs, then I migth wait and see, but not before :) which is usually 9-10 months of mining with usual setups.

dark.w, welcome to the forums, your opinion will add a lot of color to the discussions here.
As you have already noticed, there are mostly Austrian Economists (how I hate that term, originating from Austria and knowing that it never got a stronghold there) and Monetary Libertarians here (at least those are the ones who shout loudest  ;))

One article you might want to look at is here:
http://realcurrencies.wordpress.com/2012/01/10/bitcoin-a-positive-step-in-monetary-reform/
While they are not technical about Bitcoin, there's a bit of economic discussion going on in the comments section.

You said "But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn".
Actually sadly not true. The British tried to return to the gold standard under Churchill and got a major depression in turn; even Churchill admitted that in was a mistake to return to the gold standard, and they eventually abandoned it again. So the evidence for your statement is actually right there, it's just that Austrian Economics will always find a clever way to dispute it. 

One thing I'd like to point out that Bitcoin has been basically designed as a commodity like gold, and everybody likes to see commodity values rising.

Personally I'd like to see Bitcoins as currency, but most arguments really run down the commodity path (even if the term currency is used) and there's already evidence that people rather hold than circulate bitcoins (which you are right is not good for a currency as means of exchange) which would be preferable for an economy.

But I also believe that Bitcoins has many traits that are needed for a viable eCurrency, and it appears to be a human character trait to adopt something that promises an increase in value more easily.

I actually find the signature of Revalin quite revealing:
https://bitcointalk.org/index.php?action=profile;u=39897 (https://bitcointalk.org/index.php?action=profile;u=39897)

So I'm supporting Bitcoin, but keep my mind open for other new eCurrencies that might come along.

And besides, most of my hobbies only cost me money, this one actually has the potential to pay for itself, at least right now.  ;D

Going from gold/silver to fiat is very, very easy; print money, forget about it. Going from fiat to gold/silver means the state somehow has to collect enough gold/silver to back their fiat, through some means like taxation. Also, depending on if the conversion rate is fixed or floating can cause various sorts of trouble. Without knowing the specifics of how the British tried to do it, it's impossible to say what they did wrong, and my history isn't that good :P.

Also, the point isn't necessarily that the value always rises, but that there's no central bank to interfere with the market's decision as to which way it should go. That, and an inflationary currency is like a company that continuously releases new IPOs. Every current shareholder loses money as more shares are created and eventually the stock is worth next to nothing (called stock dilution). That's probably the simplest and most direct way to think about it.

Finally, I've seen the "BTC hoarding" argument before, but given that it's only a few years old and still in its high-inflation stage, it's too early to make concrete statements like that. Additionally, from what I have read most recently, BTC trading patterns are stabilizing into smaller, more day-to-day transactions, and is not particularly being hoarded any longer. Since BTC has no commodity value (there's no commodity...) its value is primarily based on the trading community built around it, so it would be worthless if nobody actually bought or sold anything with it. While possible, it'd be pretty superfluous to use BTC just for FX trading. BTC is a currency built on pure voluntarism.

My intention with bitcoin is to be a part of the new economic infrastructure.  My mining equipment may produce fiat currency if I choose to convert it, however I have more power keeping a nominal balance of coins and circulating the rest to support my infrastructure (paying my electricity bills, buying new equipment and even renting server space for other ventures).

I was trying to explain bitcoin to my girlfriend last night and she (as many others have done) jump to the conclusion that this is a network poised to consume the existing monetary systems.  That thinking misses a whole pile of intermediate steps (we had to have MySpace before we could understand Facebook). 

To me bitcoin is a way of bringing the value of information in line with the value of other commodities.  I can see a future where instead of paying for YouTube (for example) with advertising, a site could charge a small (micro or even nano) amount of BTC for watching a video on that site.  With Google Wallet, Paypal, Interac etc, BTC is a vector for those services that will become much more stable than the current fiat currencies (USD, CAD, EUR etc) which are reliant on political stability and individual countries economic output.

The bottom line is inflationary pressures in the USD, EUR, CAD, AUD, etc markets will be independant from bitcoin value.  BTC worth is more closely linked to electricity and infrastructure value which will likely become very small this year with FPGA technology.

Exciting times are ahead.

I was also, at first, quite worried about such things.

Certainly, if the currency deflates at a high enough velocity, it stops circulating, and becomes worthless as a mode of exchange.

But I have been convinced to let things run their course now - to see what happens.

Perhaps these may help assuage your fears:

• I doubt Bitcoin will ever be the mode of exchange for all goods, everywhere. It seems to me more likely that it will simply become another economy, alongside the various parochial fiat economies.
• Should the Bitcoin economy dominate regardless of the above, only an early adopter who has held their coins entirely through the currency's meteoric rise has the capability of becoming a plutocrat. Wouldn't that be strange, for someone to see their coins worth $100? And then $1000? And still not sell? And even then, if that person were to wait until they hold 1% of the money in the world... they could never spend it all at once. It would be like a man who finds a mountain made of a single flawless diamond, and proceeds to try to sell it, and in doing so sends the price of diamonds down in flames. Such riches are difficult to actually use.
• But putting such theoretical plutocrats aside, here is the argument that convinced me to not be so concerned about the Bitcoin's deflationary properties: on this Earth, there has never been a deflationary currency. There has never been a currency whose supply increases predictably and significantly more slowly than the supply of the goods it represents. We do not actually know how such a currency will behave in the wild, and while we may speculate, we are speculating. Bitcoin is, in some ways, still an experiment.

Gold?
Well, if you talk about extremely long periods of time, decades, generations, ...., then you can't really have a net-deflationary currency forever; it's like the energy or mass preservation law in physics. But for sure, whenever a currency is fully tied (not partial reserve or other monetary instruments) to the value of a scarce commodity (such as gold) then you will get a deflationary currency. And we already know how that works: Value of the currency rises (other goods drop) to the point where the economy cannot sustain it any longer, then a depression follows as correction, and then it starts again. In the process, more and more assets are transferred to the money power.
I already mentioned an example of a failed forced re-introduction of the gold-standard by Winston Churchill, and the result was massive deflation and a depression that followed.
I understand there are always other factors at work, and Austrian Economists will ignore most of the evidence that's there and tell you "human nature cannot be predicted". 
But the statement "we do not actually know how such a currency will behave" is simply untrue; we have a really good idea how it behaves, that's why the money power would love to have it.

@ DandT... Trillions is the smart money. ..... NO MOM I CAN'T TAKE OUT THE TRASH.

lulz


Ok, what is one of the reasons that people are freaking out about over the US economy?  Individual savings.  Saving is required for sustainability.  At least for the individual.  Of course, you can argue that a capitalist economy works better when everyone spends their entire income.  An example of short sighted, unsustainable capitalism.  Then again 10% of US households have the privilege of "earning" so much cash that they can both comfortably survive and save regularly and substantially.

Approx. 75% of US households make $75,000 or less.  A mildly deflationary currency system would be a boon to making the little that this class of society can put aside for savings really count in the future.

That 75% of US households will still need to immediately spend the majority of their income.  They will have no choice, but spend in order to survive and raise their families.  
There is no serious argument that $75,000, at the high end, is an excessive amount of money for a household with 2 adults, ~2 children.  

The economy will not fail when the 75% are still obligated to prop up the economy in order to have a modest lifestyle.

Deflationary (mildly) currency = doom = an argument that exists in a vacuum outside of reality.

Good points that should be seriously considered.

Let's think about "money power" from another angle.  Any free market economy is biased towards "money power."  The 75% are obligated to spend almost all that they earn.  The 25%, 15% more realistically, have the luxury of resources, thus time, in making calculated decisions in attempt to better their position in the economy.

If this weren't true Warren Buffet wouldn't be warning us of a dangerous rise in 'dynastic wealth.'

A deflationary (mild) currency would benefit both the have's and have-not's.  Though, the bias towards "money power" would be magnified, thus causing increased potential for instability over time.  So, there we have the problem.  An increasing bias towards "money power," over time that exists in any free market, but is magnified in a deflationary economy.

This should make the thoughtful person wonder whether the root cause of instability in an economy should be attributed to currency properties or the bias towards "money power."

How to reliably solve a problem of this magnitude?  I have no clue.  I know the problem will not be solved until we have an accurate understanding of the actual problem.  Intellectual inertia of the status quo will not likely be leading us to this state of enlightenment.  :P

[/list]

A scenario which closely resembles the bubbles we see in modern currencies.

I am uncertain. There is a part of me which imagines that the current system also provides advantages to the money power, via access to the mechanism by which money is created. And these advantages are removed in a system where anyone can become a transaction signatory, given a landlord who pays utilities.

The other side of the coin, however, is that, if Bitcoin is truly an "experiment", then people ought to be willing to learn from it. If your proposed scenario is truly how things go, then I should hope that, once the story starts to play out in our economy, people will be wise enough to notice, and will react by creating another blockchain that has more Keynesian properties - leveling out to, say, a one percent expansion per year, rather than zero.

Absolutely. That's why we need to continue to have these discussions and not just treat Satoshi's white-paper as the Bitcoin bible; he proposed an experiment that will provide insights which could be used to improve our monetary system.

We will probably see more block chains with modified characteristics in the future.

Bitcoin is never deflationary. Bitcoin is inflationary, with the rate of inflation falling toward zero over time.

If/when the rate of coin destruction exceeds the rate of coin creation then the money supply will shrink = monetary deflation.

Both of you are literally correct.  Bitcoin is designed to be inflationary during the early 'bootstrapping' years, and trend toward stability, but the permanent loss of bitcoins cannot be accounted for, so in the long run bitcoin is slightly deflationary.  However, economicly these things are a matter of degree; and bitcoin isn't going to be nearly as deflationary as every fiat currency on earth has been inflationary.  We are talking about deflation rates that would be barely discernable over a normal lifetime. (that is, unless you're the guy who's dumb ass rich dad died without putting the passphrase to his wallet into his will)  The growth of the bitcoin economy, and the business cycle that will occur once the economy is a stable size, are variables that would dominate the deflationary nature of bitcoin by orders of magnitude.  And, sorry to say for all the 'deflationary spiral' daydream believers on this forum, those are two aspects of any economy that is beyond the scope of the currency unit itself.  There is literally nothing we could hope to do to manage either condition, whether you might consider them problems or not.

Probably.

By the way, we've been having this kind of discussion repeatedly for two years.  Many people have tried to spin off new blockchains that incorporate various tweeks to the protocol to compete directly with bitcoin based upon whatever perceived flaw they though existed.  Only one of those blockchains remains remotely within the realm of viablitity, and that's Namecoin, which technically isn't a currency so much as it's a domain name registration & transfer ledger.

Perhaps I have been misled.

I was under the impression that "inflation" and "deflation" referred not to an increase or decrease in the size of the monetary supply, but rather to an increase or decrease in the ratio of money to goods.

That is, if the economy and the money supply are both growing, it isn't "inflation" - that for it to be "inflation" requires money to be created faster than the valuable things upon which the money might be spent.

Here's a little hint for you to consider your error in logic.

If the money power would love to have a gold standard, we would have a gold standard.  [/list]

And you support Ron Paul, because he actually supports a return to the gold standard (which he indeed does, being heavily invested in gold himself)?

I really don't see your logic...

That's a common error, perpetuated by poor news reporting by people who, themselves, don't understand economics.

True deflation or inflation are in increase or decrease of the overall supply of the monetary unit in circulation relative to the overall size of the economy that employs that unit.  It comes down to the law of supply & demand, if the economy doubles in size; and therefore there are twice as much in goods and services, while the monetary base remains exactly the same, then we can assume the relative trade value of that monetary trade unit to double.  Said another way, the value of the dollar goes up, so the prices of those same goods go down.

The same is also true in reverse, if an economy halves it's economic productivity while the currency base remains the same, prices double because the value of the currency has halved.  This would be a 100% inflationary event, which would be catastrophic.

However, while a doubling of an economy would be equally disruptive, it's hard to argue that it would be catastrophic in nature, because an economy can only double if the economy can manage a doubling, otherwise other economic forces will delay that same growth.  Resulting in a slower (but never negative) growth rate.  This is what the bitcoin economy experienced last year, for the economy grew in size so fast as to outpace the growth in the monetary base. 

I support Ron Paul because he's an honest man, whether or not there is a return to a gold standard is inmaterial for me.  Actually, if we ever were to return to a gold standard in the US, Bitcoin is screwed.

There are two ways in which "deflation" could occur.

One is that people start dumping their fiat for BTC at an obnoxious rate, leading to rapid currency appreciation. If the money that jumped into BTC decides to randomly jump out, this could cause major disruptions to the BTC economy, as inflation rates might jump up and down and even be forced below zero for periods of time. If the fluctuations are at least somewhat predictable, intelligent business owners could deal with it adequately.

The other is that the rate of currency destruction exceeds that of currency creation. Eventually (100+ years, probably) this would lead to a loss of fungibility of BTC, and the smallest unit of coin would end up buying more than the smallest items you would want to buy. As long as the rate of currency deflation is slow enough, and as long as people don't suddenly lose huge chunks of coins (ie maybe 10% of the coinbase disappears overnight), this will have virtually zero effect on the BTC economy. Interest rates will remain low to reflect the appreciation of the currency, and that is all.

Compare to USD, where the rate of inflation is 8% and the usual interest rate is under 5%. If you have USD in a savings account, you're losing money. With BTC, you still make < 5% interest, but since the currency is increasing in value you're actually making more than what the interest rate reflects.


Austrian economics doesn't say "human nature cannot be predicted", it only makes that assumption to simplify the effects of various economic events. Also, Churchill's failure with trying to return to the gold standard occurred for one reason and one reason only (I had to look this up, thanks a lot):

Full Article (http://goldnews.bullionvault.com/churchill_gold_120120104)

If the US government put a price fix on gasoline at say, $0.50, nobody would be able to sell gasoline in the US because it would cost more to procure than what they could sell it for. If that happened it would be a disaster. Do the same thing to your currency, and you get the same result.

Since BTC is immune to this sort of manipulation, that sort of economic disaster basically cannot happen to BTC. Governments today can even control the price of gold and silver through fraudulent futures contracts and by stealing bullion from other countries (*cough*Libya*cough*). Again, they have very little ability to steal BTC, although if BTC were traded on major stock exchanges they could try to push the value down by naked shorting futures in the same way that they do with gold and silver. If you take a quick peek at the price of gold, you can see how well that's working out for them.[/list]

Haplo, thank you for your lengthy response. Where do you get the 8%  number for US inflation? The average over the last 3 decades is about 3.3% per annum, which numbers are you using?

MoonShadow, I don't think bitcoin is screwed if the dollar returns to a gold standard,  these are not mutually exclusive. Comparing the graph for gold value to bitcoin I don't see the correlation, and I don't think these two will be excluding each other even if they would both be deflationary. They are 'controlled' by different mechanisms for starters.

Okay fine, correct in that case if people lose coins :) But the algorithm and structure of Bitcoin itself is never deflationary.

http://www.shadowstats.com

Government issued inflation numbers say exactly what the government wants them to say, even if it means excluding energy, mortgage payments and anything else important they feel like excluding from CPI numbers. Inflation can't actually be derived from CPI anyway, since it depends on how much money is issued by the Fed, the Treasury, and inflationary reserve banks.

That said, I overstated a bit, it's more like ~6%, although it varies. That's still more than you'll make in any US based savings account.

While I do agree that the CPI doesn't fully reflect reality as the standard basket of goods which it is based on keeps changing.

But with 6% we are looking at a doubling of prices on average within 12 years, or halving of value.
That simply hasn't happened. I remember well enough what my purchasing power and of the company I work with was in 2000 and how it changed given income and my standard of living. I guess there are some areas in the US where that happened, but I don't see it.
SGS recently calculated even 10.5%(!), nobody could believe that we are dealing with stats that have longterm validity here. There value is just as skewed as the CPI, just in the other direction.

Well, unfortunately things aren't so simple. The main issue with the USD is that because it's used as a reserve currency (see: oil) the US can export it's inflation to other countries. As a result, we only see a small amount of that inflation in the states. Until everyone throws their dollars back at us, prices will rise faster everywhere else than they do here.

A common (although colloquial) method of gauging this is the "Big Mac Measure". Ie, the price of a Big Mac in various countries over time. In other places like Australia and South America (many south american countries basically use the USD as their official currency, or unofficially by backing their currency 100% with USD), the price of a Big Mac has skyrocketed, although unfortunately I no longer have those particular numbers available.

Technically that means that if you make more than the "nominal" inflation rate in interest, if you cash out quickly enough you can keep your gains and avoid being crushed by the sudden inflationary backlash that is coming, but that's catching a falling knife to say the least.

There are a few other reasons that apparent inflation is relatively low, mainly to do with the unnecessarily complicated way in which the banking system works, and the interactions between inflationary lending and deflationary paying back of the loans. Price inflation is non-linear, which is why "economic bubbles" happen rather than all prices going up evenly. When the bubble "pops", the price of the bubble asset moves back towards a fair market value, and anyone who had financial securities in the bubble asset goes shit broke, a la the whole financial industry in 2008.

Bubbles have occurred in college tuitions (most people graduate with literally a mortgage worth of debt today), automobiles (subprime auto loans) and houses, just naming the main ones. All are a result of artificially low interest and easy money policies (a la robosigning). The general chain of events goes something like:

Easy money policy -> Artificial demand -> Rising prices -> Stagnation -> Insolvency -> Government Bailouts

Rinse, repeat.

Maybe not 'screwed', but it's adoption would be hampered if the US $ returned to a true gold standard, because then the US $ (which is already fairly digital in nature) could easily go the distance and become an online competitor worldwide against bitcoin.  Since bitcoin is neither backed by anything, nor is it an international reserve currency like the US $ is, it would likely get crushed if Ron Paul wins and actually succeeds in ending the Fed.

...so let's just hope that a person like R.P. never wins a presidential election.

I think you guys are trying to apply real world economic concepts to a completely virtual structure.  Bitcoins have zero value beyond the BTC Network.  Sure they are exchange traded against currencies like the USD, EUR etc, but it is unlikely that BTC would be used as a replacement for those currencies.  Just try and move some of your coins to pay for your electricity bill, with the fees it suddenly kills your $/kWh.

For me, BTC are valuable in an age where information is the commodity that is constantly traded; open an article on Huffington Post and you are exchanging your impression of a diaper ad for an article on Lady Gaga's meat dress.  That paradigm of advertising to support information has a limited life span (my guess is another 4 to 6 years), beyond that information will need to be directly monetized to its audience and a micro payment structure will be required to handle the transactions.  Right now there is not enough infrastructure to make this viable with BTC (we would need many magnitudes more of hashing power) but it will happen down the road.  Remember, BTC are divisible to 8 powers of ten. That is the smallest fraction of a BTC would be 0.00000001.  Maybe this will be called fractional currency expansion?

Mining with FPGAs will allow people to have an interest paying bank in their back pocket for information purchases.

@Haplo,
I totally agree with your description of the debt/interest cycle.  It is important to remember that our current interest rates are practically below inflation, which in China is diluting their currency against their infrastructure.  Isn't the only way out to stop participating?

Or, perhaps, you could learn that the POTUS doesn't have the power to abolish the fed, nor institute a gold standard?

Honestly, it's not realistic regardless of who wins.

Yes, I knew that (one reason why I don't take RP seriously), but the thing that I just learned is that it is hard to take your statements seriously, it seems either you contradict yourself or you don't consider the logical implications of your statements (do you see a difference of 'ending' or 'abolish' in the context of your statement, or simply believe that the preamble 'actually succeeds' invalidates or even negates above statement anyways)?

Most modern currencies have zero value unless someone accepts them or backs them up. That's one of the reasons some people wish for a gold standard again, but really a currency gets their value by acceptance and the economy that it supports (which is still growing in case of bitcoin).


And the dollar has a fraction of 0.01, many internal accounting systems have many more digits after the coma, where's your point?
If your point is, that BTC is supposed to increase in value to the point (in a distant future) where we will be paying with mBTC or uBTC, there's a term for that, it's called deflation. So what was your point again?

Ahhhh, so? Let's recall the title of the thread:  "Hyperdeflation, own half the world by headstart - don't you care at all?"


Yes, I would think that most of us realized that interest rates are not just 'practically below inflation', they are definitively below inflation right now. The fed thinks we should spend more to boost economy...
After commenting on you stating the very obvious, now to something different (I'm not quite sure how you made this turn): You may have noticed that with China holding a serious amount of US debt (and of other countries; many politicians are pounding on that right now) and given a globalized economy, how do you envision your way out to stop participating? And would you care to elaborate on how exactly this directly relates to the topic at hand?


 

<cough>  Ahh, no.  It's not.  That would be currency appreciation, not deflation.  I don't understand why this concept is so hard.  From an economic perspective, deflation is a (relative) reduction in the monetary base in circulation.  Changes in the value of the currency/the prices of goods in that currency is often a symptom of deflation or inflation, but changes in the monetary base are not the only (or even the majority) reason for such visable symptoms.

Hope your cough gets better soon MoonShadow.

Deflation/Inflation have a simple definition: Change in money supply over growth rate of supporting economy.  
(there's actually also the other definition that the CPI uses).
Important is the rate of change. Money supply doesn't need to shrink to cause a deflation; if the economy grows at a faster rate than the money supply, it is a deflation. But that's nothing new, it has been discussed up and down everywhere. If you like to call it 'currency appreciation' based on your diagnosis of 'symptoms', whatever. I guess you just want to emphasize that inflation is not necessarily equal to rising prices according to the classical definition of inflation, that's fine with me.

If there's no way to regain lost BTC then surely there'll be there be a gradual fall in the supply once we reach the 21 million as people inevitably lose their wallets/forget their passphases/die without telling anyone?

By then the big (central) banks will probably have created their own version(s) and mandated that people use it but then you get the same problem just with different beneficiaries.

Yes, but I don't think that issue has a scale large enough to be of economic concern to BTC.

Certainly if you think in astronomical time intervals that would mean eventually there would be just a few BTC left as we inevitably continue losing coins. But then again, when will we have an issue with that? 15 years, 20 years, 25 years? Will we even have BTC then, BTCv2, something else? A new chain with different proof-of-work/stake concept, better encryption, SHA3, something else?

So I would not think that there's a practical contribution of the lost coins to the longterm deflationary properties of BTC.  

@wogaut
I am an engineer not an economist, I will try explain my thoughts more eloquently.
I think what I was trying to say is that BTC is much easier to split and transact than dollars and cents.  I don't see the value of BTC going down relative to real world items(electricity for example), more like the commodities (articles on a news site for example) that are represented by BTC grow quicker than and will drop value at a rate proportional to the growth of the BTC economy.  For example, New York Times charges a 0.001BTC/article when it costs the network 0.0001BTC/transaction.  As the network increases its hashing power, the cost per transaction decreases to say 0.00001BTC/trans., the CPA could drop to 0.0001BTC/article.  Does that make more sense?
The difference here is that there is a limited supply of BTC, so the 'interest' for lack of a better term is actually a reward for supporting the network.  And remember, the greater the Hash/s, the greater the difficulty.
A good way to stop participating is by not taking on more debt.  It has nothing to do with BTC, but everything to do with the broader economic topic.  My apologies if it has distracted this thread.

Seems to me that you would have made a good economist, but I'm glad that you're an engineer.  Economists don't actually do anything economicly productive, at least not those that actually call themselves economists.

Actually, that's not likely true in the long term.  You see, even though that Bitcoin was designed so that lost keys are unrecoverable, those lost in the past few years are likely to be recovered eventually so long as Moore's Law holds up for another couple generations and the value of a bitcoin shoots for the Moon.  This is because Bitcoin's address creation method is (intentionally) modular, so that newer and more secure algos can be added (or swapped) into the system under the fair expectation that eventually all cryptographic systems that computers can use become insecure with the march of Moore's Law.  So eventually, a different set of algos will replace the current set to stay ahead of that problem, and over a few years all current users will move to the new algos.  Then the lost bitcoins will be visable to everyone because they are the unspent transactions that remain after this move.  Eventually, Moore's Law lowers the bar for brute forcing the old algos enough that 'treasure hunters' are incentivised to set up data centers to hammer at those remaining transactions looking for a keypair 'collision' that produces a private key capable of spending those old coins.  And then they are no longer lost.

This process is likely to take 80+ years even with Moore's Law, however; so don't be worrying about such things right now.

2^160 is a big number.  Even with Moore's law 80 years is not sufficient time.  I do agree that if Bitcoin remains active then eventually coins could be recovered but we are talking on a timeline of centuries or even a millennium.

The same kinds of assumptions were in place for many algos that are now considered broken.  I made my guesstimate based upon the likelyhood that someone is going to come up with a mathamatical shortcut to help them brute force these current algos faster.  But the root of my point is that assuming that the algos that Bitcoin uses at present are secure forever is both wrong and unnecessary at the same time.

If it becomes a serious issue, in the far distant future (assuming BTC doesn't crash before then for other reasons, and I've got a running list of them now) more BTC can be printed if needed. BTC might be recovered off of a ledger sheet from addresses that have been inactive for 100 years or more, but that's a very long time before any coins could be recovered, and by that time it'd probably be near irrelevant.

Another newbie who thinks he alone has discovered the Great Bitcoin Flaw (tm) that all the rest of us missed.

Please, enlighten us.  What have you discovered?

It's not one "great flaw", but rather a war of attrition.

51% attacks could be used to destroy the currency basically by any government who cared to do so. At the current price of $21 million hardly any government around today would sneeze for that cost. There are a number of ways that 51% could be used malevolently, including timejacking attacks, block reversals, empty-block DoS, and so on, some of which may be appealing to self-interested miners, which may lead to problems with internal monopoly.

Other problems include difficulties with consensus if some major change to the software or protocol was required. A central agency (like a bank) can just take some of their servers offline and run off a backup. The same can't be accomplished in BTC without breaking the blockchain to bits. The blockchain is also an economic weakness since it requires common ownership of a limited, and worse yet time constrained resource.

Finally, issues with privacy for users and security for merchants makes the currency relatively unattractive for someone wanting to do business with it, and if enough business support for BTC is not accumulated by the time the block reward drops faster than the exchange rate increases, then the BTC economy may not be able to continue supporting miners through tx fees. Without continuous incentive, BTC would cease to exist, and this is maybe 2017-2025 at the latest. That's not a very long lifespan for a currency, especially not as a "store of value".

The fact that BTC has to deal with both economic issues and technical issues makes it both more complicated and higher risk than other currencies. BTC might die for technical reasons, or from communist revolution or monopoly action by miners, or by lack of economic support, and so on. Until at least some of those issues are dealt with or proven irrelevant, BTC is nothing but an experiment and a speculation, and can't be considered an "investment" in any intelligent sense. BTC does have some potential advantages over gold, but while gold might be easier to confiscate, its market value isn't going anywhere. BTC could disappear overnight for a number of reasons, all of which are harder to predict and prevent than confiscation.

Not a single one of those is still valid.  The 51% attack issue was a real problem a year ago, but it no longer is.  Any government that tried to build a gpu cluster capable of overtaking the network now would distort that market and pay huge premiums to do so, even if other goverments didn't secretly oppose them.

No govt (or other entity with $1M+ budget) would build a hashing farm out of GPUs they would contract for some sASIC or ASICs.  Still any govt which killed Bitcoin would only prove the system works and is important enough to try and destroy.

Bitcoin even "killed" would be the cryptocurrency equivalent of napster and would spawn the the crypto equivalent of bittorrent.  Every attack would only make the next generation more robust, more popular and more mainstream.  Most people didn't even know about mp3 or file sharing before the record industry attacked Napster.

You can't kill ideas.  No doubt people will keep trying but open source means knowledge is retained and perfected.  The next version isn't starting from scratch.  Cryptocurrency WILL be mainstream.  It might not be Bitcoin but it will happen.

Trying to stop it is as futile as trying to prevent public access to encryption (which yes the US govt did try back in the 1970s - 1990s).

Hmmm, probably so, but the end result would be similar.  Such moves against bitcoin wouldn't go unnoticed forever, and there are certainly factions both between and within governments that would likely move to undermine any such attacks.

The US government happily spends $1 Trillion every year in bridge to nowhere projects. That's 1000 billion dollars. 100million would easily erase BTC forever, and there's absolutely zero that could be done about it. Mind you I'm ignoring any current computing clusters they might have available to compete.

Sure, it might be obvious that something is going wrong, but let's not forget who invented Tor, so if you think it will be easy or even possible to stop, think again. If the government wants to DoS BTC, then BTC will be DoSed. The developers would have to spend all their time trying to come up with some sort of counter-strategy, and development on the actual features of BTC would stop (best case scenario). However, given a few months eventually people would give up interest, and that's the end of that. Since the government can play by the rules and still do damage, there's basically nothing you can do against it.

Furthermore, timejacking attacks and similar don't even require 51%. There's some evidence that certain pool operators may be doing this already, although for the most part pool operators have refrained from causing trouble. (well, except for luke jr, and all of that noise)

Finally, at a current rate of only 80tx per block, it's totally unknown how the network will behave if/when things get really busy. It's also unknown how things will play out as the mining subsidy drops off, although already there's problems with empty blocks and botnets and such. An unreliable network is worthless to someone who wants to do business. Imagine if VISA transactions could be randomly dropped and had to be resent, or if it took an hour or 6 hours just to be sure that didn't happen. There would be no VISA. Not only that, but privacy on BTC sucks, which is one of its supposed main advantages vs centralized money. While there are a few ways privacy could be improved (that I know of thus far), an improvement in blockchain reliability would require some major changes to the protocol, and it's not necessarily obvious what would work or what wouldn't. That sort of effort isn't likely to happen unless its with another currency, or in BTC until it's much too late to fix.

I never said that cryptocurrencies were a bad idea, or that they can't work at all, just that BTC is an experiment and likely to come crashing down at one point or another.

You display your ignorance of the system with these above statements.  No, the US government couldn't do more than irritate the network with an Anonymous style DoS.  It would take some talented work for them to find just my node, much less all of them.  And you can't DoS what you can't find.  It's literally true that the only way to stop Bitcoin now is to shut off the entire Internet and keep it that way.

I'm not talking about a network DoS. I'm talking about DoSing the blockchain and its functioning.

http://bitcoin.stackexchange.com/questions/1099/string-along-is-this-possible-and-is-it-an-attack
http://culubas.blogspot.com/2011/05/timejacking-bitcoin_802.html

Some combination of the above while only generating empty blocks, and virtually no tx will get to the blockchain anymore. If enough tx back up, it can become impossible for all the backed up tx to fit in a single block, and once that happens tx will be dropped more often than they succeed.

Except those theories are B.S.  The only way to do what they imply is to have enough of the hashing power to deny all other miners the chance to broadcast a valid block, which either requires significantly more than 50% of the total hashing power of the network (which is actually over 100% if you are attacking the network, the 50% number assumes the worst case, that half of the previously honest network suddenly turns malicious) in which case you can do much more harm to the legitimacy of Bitcoin than a simple DoS attack on the blockchain; or one must be able to deny Internet access to a significant majority of your mining competitors for as long as you can (thus creating a sudden drop in the effective hashing of the network, leaving you with a cluster that is effectively half of the network anyway, but even this still requires that you be the biggest single cluster on the network).  The only known effective way to deny all miners access to the Internet, is to turn the entire thing off.  I seriously doubt that is even possible these days, for Bitcoin isn't particularly dependent upon DNS, which is the 'normal' way that is imagined about an 'internet kill switch'. 

In the long run, the most damage that either of these methods could do is to delay transaction clearing, not prevent them from occurring.  This could be a problem if the network could be backed up for days, but that is extremely unlikely.  Even Deepbit (should it turn to the dark side) couldn't do either of these things for more than an hour, assuming that the contributing miners didn't bail.

And as you pointed out, the current transaction rate wouldn't result in much backup at all.  Bitcoin would have to be several orders of magnitude more popular for that to be any risk at all, in which case bitcoin would also have several orders of magnitude more market cap value, and thus several orders of magnitude more hashing power (at least if the past three years is any guide in this matter).

I'm surprised no one else seized the opportunity to correct this false logic. Bitcoins are infinitely divisible. That they are presently divisible only to 8 places after the decimal point is just an implementation detail of the current protocol. It would be trivial to adjust the software so that, after a certain block number is reached, the decimal point becomes shifted for all blocks after that (until the next time a shift is needed). Some day, the Satoshi will not be the smallest possible unit of Bitcoin. We will have milli-Satoshis and perhaps even micro-Satoshis eventually. The beauty of a digital commodity is that it is infinitely divisible with perfect accuracy.

Personally, I didn't feel like it.  But good call considering you haven't been here very long, most people don't understand this is possible.

This is a superb point.

and what will happen when all 21 millions bitcoins will be on the market ? wont be easier to attack the network at that time ?

If everyone stops mining it will.

Possible now because the network is small and tight knit and the developers can "Stop the World" whenever it's necessary to make major changes to the protocol. If/When BTC is as big as Visa, even minor tweaks may be completely impossible without breaking the clients for half the users on the network.

In particular, I'm not sure how BTC values are stored, except that Satoshi did a lot of stupid and unnecessary things. Even if shifting the currency to the left by one decimal doesn't break backwards compatibility with clients, it would at the very least cause a great deal of confusion. Moreover, it's something that won't even be remotely relevant until decades from now, when the market cap of BTC is either zero or unpredictably large.

Not counting coin losses, BTC is only capable of holding dollar influx equal to $21Tn before it is no longer divisible by units smaller than $.01 without absolutely increasing the division. Admittedly, that's not much of a problem since BTC and the blockchain don't scale properly to that sort of throughput anyway.

Developers can't "stop the world" in any context, and tweaks can be made to the running network anyway, at least as long as users are willing to upgrade.  The network is particularly fault tolerant.


You don't know how the system works, but in the same sentence claim that Satoshi did a lot of stupid things?  Are you trolling?


Point one isn't true, but only because a decimal shift isn't how it would be done.  The values are stored in a 64 bit integer variable, but only about 54 bits are in use, so the leading bits can be taken as a 'marker' to tag values using an extended standard.

Point two is certainly true.


Where did you come up with that BS number?

I am digging this banter. Keep it coming!

Like they did with the overflow bug? It may be true they can't now, but it could be necessary, and/or it will take a very long time to get everyone to upgrade. Assuming it doesn't get broken because people "upgrade" themselves to game the system.


When I say "stupid and unnecessary things", I mean the 2GB blockchain that's been generated in only three years and with provably less than 5-10 tx per minute! At VISA levels that's totally unsustainable. 90% of all "usages" of scripts and contracts are totally economically useless and will probably never be used by anyone for anything, whereas per file size scripts take up the vast majority of unspent txOuts that need to be tracked. The only thing BTC really is is a giant, overglorified balance ledger sheet, that needs only to track unspent account balances per account in order to be accurate. Instead it tracks unspent txOuts individually, which then all must be put into txIns individually in order to be spent, yet again multiplying the size requirement of the blockchain.

If the blockchain had been engineered to efficiently fill its primary purpose- simple yet secure monetary exchange, rather than a bunch of useless contracts by default, then the blockchain could be < 50MB rather than > 2GB. I consider it a product of Satoshi's economic ignorance, although beyond that I can't read his mind so I don't know what else he was thinking when he designed it to be such a complicated mess. The abstraction between public key and address hash is also extra without actually providing much benefit (unless you want to keep your SHA256 pubkey from being stolen by quantum computers.. which would make bitcoin useless in about 50 different other ways anyway).


21,000,000,000,000.00
The number of BTC that will ever be produced (est) with 1 satoshi = 1 cent per decimal places, and what you get is 21Tn, or about twice the M2 money supply of the United States, only divisible down to 1 cent.

A uint64 could potentially hold about 50 times as much (although that's questionable given that it was set up backwards it probably can't fully use the uint64). Comparatively, absorbing the world economy and still maintaining divisibility so that tx fees are still reasonable compared to exchange value would require maybe 20 times a uint64 at minimum, given the disparity between current economic status and potential economic output.

More importantly, the means for changing the decimal place rests solely in the hands of the programmers, as there is no user-defined setting for it. That means as prices shift and the currency appreciates, users and merchants will not have any means of shifting what is considered a "base unit", and no way of standardizing what they mean even if they implement that functionality privately. Having to complain to the devs about something basic like that in regards to the protocol really defeats the purpose of decentralization of the currency, or at the very least makes it cumbersome to use.

The devs didn't stop anything over the overflow bug.  All that they did was contact a majority share of miners, let them know that there was a problem, and asked them to cooperate.  They did.  If they had not, the devs couldn't had done much of anything to stop the overflow bug.  In hindsight, it wouldn't have amounted to much anyway.  Once those same miners had upgraded to the patched client, those same clients just started to reject blocks with an overflow transaction and backed up the blockchain as far as was required automaticly.  There were still old clients trying to submit tainted blocks for weeks because there were miners who had not been paying attention and had not upgraded.  I was here when that all went down, and wasn't mining; and I can honestly say the network didn't really skip a beat from the perspective of a casual user.


<sigh>  Again, you display your ignorance in such matters.  There are sound reasons for everything that ou sight, and foreseeable solutions to the potential problems that you noted.  These topics have been debated to no end long before you ever arrived.  The search function is your friend.


21,000,000,000,000.00
The number of BTC that will ever be produced (est) with 1 satoshi = 1 cent per decimal places, and what you get is 21Tn, or about twice the M2 money supply of the United States, only divisible down to 1 cent.


[/quote]

Okay, I see what you did there.


Again, there are sound reasons for the choices.  Do some research, please.


Not yet, but someone is going to add such funtions before they are really neeed.

Well, I can see quite plainly that BTC is still around. However, that was what? 2-3 years from its beginnings? Every year more BTC users and miners are added to the overall pool. How long until the people not paying attention outnumber the people who do? What happens if some change requires a major update to clients as well as miners?

Moreover, if I'm not mistaken when the overflow bug was discovered, the devs issued an "emergency alert" similar to the "check for new updates" function present in basically all other modern software. This feature, while only a half-implementation of automatically detecting new updates, has since been disabled. I don't know that there's even a "correct" answer to that problem, with the complexities of alt clients added into the mix.


I have read most of the arguments, as well as a lot about the protocol itself on the wiki. That is how I know that many of the design choices were either economically or programatically unsound.

There definitely needs to be a connection between accounting and the security of that accounting, but there is no need for them to be inseparable, and ultimately the accounting is more important than documenting the security forever, not to mention potentially orders of magnitude more efficient spacewise.

There does not need to be any direct connection between standard tx and contracts with complicated scripts. Standard tx have no need for scripts, and of the few (like 2 at most) scripts that have an actual use, they could be simplified a great deal. Currently you can't even use the scripts that are useful, ie the minimal trust escrow feature.

Finally, the "solution" of pruning the merkle trees of previous tx doesn't help miners any, and furthermore excludes clients (ie anyone who doesn't own a giant server cluster) from verifying tx for themselves. Not only does that kill decentralization, but it also stops merchants from verifying tx, which means either they can't use BTC or else the customer has to stand around for an hour or so waiting for the first confirmation. I don't call that a solution at all.


Sound economically? Sound in terms of programatic and storage efficiency? Sound in terms of flexibility?

That's too vague to agree or disagree with. I still have yet to read the whitepaper, but I'll get around to it soon enough. ATM I couldn't tell you specifically what in terms of satoshi's theory I may agree or disagree with, only what I've seen in the actual implementation thereof.


Perhaps. That depends on what hooks are left in the original client for this and whether or not they are flexible enough to allow what needs to be done. It also depends on how standardized said hooks are, and whether there will be disagreements on how to extend the implementation. In terms of shifting decimals fluidly and the storage of the values and the standardization thereof there's a whole lot of room for compatibility to break. The longer implementing it in a standard way is put off, the worse the potential disconnect becomes.

I'll have to read the whitepaper to see if it says anything specific on the matter.

I bought a t-shirt.  I was worried that it was a bad purchase because the price of bitcoin might go up.  A very easy solution, buy more bitcoin.  Problem solved.

Haplo it is amazing that you can write so much and yet be consistently wrong.  I mean probability would indicate that a monkey randomly pressing keys would occasionally be right.

Haplo Myth:
the block chain could be 50MB.

Reality:
There are 1.8 million tx in the block chain thus 50MB/ 1.3 = ~27 bytes.  Entire tx stored in 27 bytes which can't be brute forced?  (cough cough) bullshit.

Haplo Myth:
pruned blockchain will prevent verification of tx by node without full blockchain

Reality:
Merkle tree was chosen because pruned blockchain will still allow tx verification

Haplo Myth:
There is no reason for the public address vs public key

Reality:
Addresses can be constructed from a public key but also can be constructed from other base types.  The use of an address allow similar processing regardless of the underlying structure.  It also provides cheksum, version, and protocol identification.  This greatly reduces the probability coins are sent to "nowhere".

Haplo Myth:
complex contracts take up more sense.

Reality:
p2sh allows massively complex scripts and contracts to take up no more space in blockchain that a "simple" tx.

Haplo how about you actually read the whitepaper, wikis, and code before incorrectly pointing out flaws.  
 
Haplo has no clue.

Please read this post (https://bitcointalk.org/index.php?topic=52859.0) and then you can go back to your ad homs.

By reducing the blockchain to the current unspent txOuts, he was able to reduce the total size from ~1GB at the time to 75MB, the majority of which was taken up by the scripts. Without needing scripts for standard tx, that could probably be cut in half, and if unspent txOuts were reduced to account balances it could probably be cut down to 1/4 that. The biggest change that would entail is that txIn would take the full value of the account rather than the full value of each referenced txOut, which would no longer be required for txIns. You would still have to store a few weeks of blockchain on top of that, but that's still < 100MB easily.

As for the method by which addresses are created, I never said there weren't reasons for it, just that it could be done better. Hash of pubkey+checksum+version = 2 levels of abstraction. Pubkey + checksum + version = 1 level of abstraction. On the other hand, for what I have in mind it may not even require reducing the abstraction, just creating a second address type. The main reason for reducing the abstraction is so that both need not be included when signing a tx, which might reduce the raw blockchain size by a small amount, although any amount becomes significant at 100tx+ per second.

Miners running off of centralized pools are already "dumb", and that with the current blockchain bloat this tendency toward centralization is guaranteed to continue (I don't see droves of DeepBit members jumping on the P2Pool train) which would basically defeat the whole purpose of BTC as a decentralized anarcho-currency. AFAIK pruned merkle trees can only be used to verify your own balance, and not anyone else's. That is, you can't mine using only that, and you if you can't mine then you also can't verify a tx someone has sent to you.

You can if your pruning algo follows the specs in the white paper.  Again, as you have already mentioned, you don't know.  You've done some research about the topics at hand, this much I can tell; however you don't completely 'grok' bitcoin.  Don't take that too personally, it took me weeks before I even understood the most obvious functions of the system.  The system works in so many interconnected ways to support itself, that I have insisted that Satoshi was either a team of professionals acting as an amateur or a truly gifted polymath just learning the art of programming.  The truth is, the system is elegant with finely tuned incentives, interactions and security tricks all in play, not some kid genius's after-school project hack.

For these reasons and others, it would be a terrible waste of effort and bandwidth form me to attempt to explain any of it to you here.  You're simply not close enough to it yet.

You don't see a problem with that? Currently a 51% attack "only" alloww the attacker to
* stop the network
* double spend his own coins (reverse txs he created)

If network is reduced to a flat ledger a 51% attack would allow the attacker to change balances of accounts he doesn't own which massively increases the economic value of 51% attack.  Even the potential is damaging.

Then again 75MB + 50MB per week (say 4 weeks of history retained) = 275 MB which last time I checked > 50MB claimed.  Also that was a back of the napkin estimate.  Someone actually did create a ledger and the size was 10% of full blockchain.  So that would be more like 200MB + 200MB for 4 weeks of history = 400 MB. 

The cost estimate for a pruned blockchain is ~500MB vs 2GB raw so you are saving very little.  Pruned block chain provides most of the space reduction with no loss of security.


Not correct but at least this time you correctly indicated it it your belief not fact.  

Pruned merkle tree allows verification of blocks, verification of your tx, verification of other users tx, and mining new blocks.  There is no functionality that is lost with the exception of tracing coin history beyond the oldest unspent output.

To verify tx (yours or anyone elses) you simply need to verify the prior outputs of the inputs in the tx to be verified.  By definition those would be included in a pruned blockchain.  Mining doesn't require anything beyond verifying txs other than access to prior blocks block header, the block height, and the ability to verifying work created by peers.

It might be a good idea to actually read the white paper.

Why are you guys trying to defend deflation? Of course it's bad it stops people spending, acts as a disincentive for people to sell products. Computers are different as the decrease in price has come about due to technological innovation

realnowhereman sarcastically said "Yeah; I always defer my consumption of food and water because I know I'll be able to get them cheaper next week.". This is a silly point food and water are obviously not going to be affected because they are essential goods with inelastic demand but you will defer the purchase of a car if you know its going to be a lot cheaper next month.

Already asked and answered.

So you haven't yet bought a HDTV right?  I mean they likely will be cheaper next year (and they were cheaper this year compared to last, and both were cheaper than 2 years ago, etc).

So you are still waiting?  Same thing with cellphones, laptops, gaming consoles, video games, DVD/Blurays, Video on demand, etc.

You haven't bought any of those right?  Price deflation has destroyed all those industries.  I mean just look at Apple.  Its stock is at a 52 week low because people are delaying purchasing an ipad because the KNOW there will be one cheaper/better out in less than a year.

That is just on the consumer side.  Businesses (where ROI% rules) haven't even upgraded to gigabit LANs yet.  I mean the cost is bound to keep falling by 30% or more per port every year.  What kind of idiot company would pay $20 per port today for a managed switch when Moore's law all but ensures they can get the same managed switch for $10 per port next year.  Don't even get me started on the internet.  We all know deflation has killed backbone spending.  Nobody is upgrading carrier grade switches and routers.  CISCO is almost bankrupt with all the backbone grade equipment which goes unsold every year.  The internet backbone is only going to get faster once we see some price inflation in bandwidth costs.

Technology is a unique sector though, deflation can destroy other sectors like the car industry. If deflation is present in an economy people will be reluctant to buy now due to their future price expectations. Yes some individuals will continue to buy now, but take the whole economy into consideration and overall demand will be down which causes increased unemployment, firms will be unwilling to expand when future prices are going to be dropping. Modems, routers and Ipads are not the whole economy!
Deflation is more dangerous than inflation. A low stable rate of inflation is the best situation.

The price deflation in technology areas are due to innovation and cheaper production costs which is different from an economy in deflation!

So companies waste millions of dollars buying IT products when they could just wait?  Of course not.  They buy new equipment because despite the fact that prices will be lower next year they gain MORE by making that purchase today.

Likewise say you decide you will wait a year to buy a car.  Guess what?  Prices are 5% lower.  So you should buy now right?   You saved 5%. But wait they will be 5% lower next year so you should wait?  Next year they will be 5% lower?  So you should wait.  Next year they will be 5% lower.  So you should wait?  End result you will never buy a car?  You should just wait 10,000 years and car will be 0.001% of the price today.   Just like a company will never upgrade to gigabit ethernet?  Someday gigabit ethernet will be ebay salvage so they should just upgrade then.

Even with falling prices there is an equilibrium where a new (or newer) vehicles is cheaper than waiting and using an older vehicle.  If Bitcoin base grew large enough eventually the price deflation would decline to a small % as the monetary base remains fixed and demand for currency grows at a slow rate. 


Production costs for vehicle manufacturing adjusted for inflation are lower today than at any point in the past.  The idea that the tech sector is magical is silly.  All industries use technology to boost productivity. 


So users will continue to buy ipads, laptops, cellphones, video games, movies, online services, bandwidth, storage, etc TODAY knowing all those products will be massively cheaper in a year.  We aren't talking about 5% price deflation we are talking about 20%, 30%, sometimes 50% price deflation.  So despite knowing they could save as much as 50% they DON'T delay consumption. However those same consumers WON'T buy a car because it will be only 5% cheaper next year. 

Computers are not different, just an extreme example.  Deflation is neither good nor bad unto itself, but think about the consumer.  Is it bad for the consumer if the price of a gallon of milk drops 5% a year?  Of course not!  Is it bad for the farmer?  Maybe, but his own costs are likely dropping by 5% per year also.

Obviously you didn't read very far. Ledgers would be validated in the same way as blocks, via hashing power with periodic ledger hashes. They could additionally be verified with proof of stake, and you could reduce the maximum reorg down to 24h of blocks, or possibly even less with additional measures.


If you had read more than one post, you'd know that he got it down to 7% of the total blockchain size, not 10%. 50MB per week suggests a 5GB blockchain by the end of 2012. Either the blockchain is more than doubling in size every year now, which is in excess of moore's law, or you're full of crap on that figure.


You know I put off reading the whitepaper primarily because I assumed it would be a full dissertation. I was disappointed.

However now I understand the way merkle trees work for the most part. Here's a comparison:

-When you prune merkle trees, you still have to keep the block header, all of the merkle tree hashes, and the full tx of any tx that have any unspent txOuts, including all of the txIns, all of the scripts for the txIns, all of the txOuts (including spent txOuts) plus all of the scripts for the txOuts. Verifying tx still requires either a full pruned blockchain or that you trust centralized nodes to provide you with the correct merkle tree entries that you request.

-For the linked ledger system, you throw away all but the unspent txOuts plus the scripts for the unspent txOuts. All block headers older than a certain time can be discarded along with all of the merkle hashes and tx, and each client only needs to keep 4-5 weeks of blockchain and 3 ledgers (1 for an old seeding period, 1 backup, 1 current), of which 2 weeks of blockchain and 2 ledgers can be compressed since they're seldom if ever needed.

-If all unspent txOuts which have the same address are added together and condensed, that would reduce the size of a ledger by ~50% or more. This would also require using the full value of an acct as txIn, but that also reduces the size of txIns on the blockchain as a result.

2000MB * .035 = 70MB Per ledger
70MB * 2 = 140MB of ledgers that can be compressed
33MB (est weekly block size with reduced txIns) * 3 = 99MB uncompressed blockchain (maximum, varies)
66MB compressible blockchain (2wks historical for seeding)

70 + 99 = 169MB uncompressed
140 + 66 = 206MB compressible

I think your 500MB estimate for pruned merkle trees is overly optimistic. I'll believe it when I see it. Assuming you can compress data to 66% of original using zip or similar, with ledgers you'd only keep a maximum of about 305MB, and only 215MB for a lite client.

That's assuming that 6 months of total blockchain are retained over the mining network for seeding so that clients can do a "full verification" on first start, and is still ~1/2 to 1/3 the size of a fully pruned complete blockchain, and ~10% of an unpruned one, even with backups.

If you think that you could do better, do it.

You obviously didn't read much further in the thread.  I already answered that point (I even directly covered the car example).

Food and water are just an easy example.  All products are the same.

Inflation and deflation are irrelevant; all they do is move the threshold of action to a different price point.  I happily agree that a sudden change in inflation or deflation rate would be hard for an economy to adjust to quickly; but at any absolute level there will always be a point when $UTILITY_OF_PRODUCT > $SAVINGS_AVAILABLE_FROM_DEFLATION.  At that point (which will be chosen by each individual) they act.

Computers are not special; they are simply a convenient example -- they are experiencing price reduction on such a huge scale that they are even outstripping the massive inflation built into our present economies.  The behaviour of the buyers is not special though: they defer purchase of a computer until the utility they perceive they will gain from the computer is greater than that saving.  e.g. they will value access to the internet, ability to store/retrieve work, access to huge software libraries more than they value the net present value of the cash in their pockets.  How is that different for any product with any level of deflation in the economy?

To answer your car example (again): you say that you would defer your car purchase for a month because it will be cheaper then.  What you don't say is that for that month you have no car.  Whatever utility you personally get from that car, you have to do without it for the month in order to save the money -- that has a value too.

If I may be so bold; I suggest a reading of Bastiat's Essays on Political Economy (http://www.gutenberg.org/files/15962/15962-h/15962-h.htm).  Particularly the Capital and Interest section; which wonderfully demonstrates why utility has value.