Bitcoin Forum

Hello all,

I'm fairly new to Bitcoin and very new to these boards. I've begun trying to learn as much as I can about the currency, and the more I read, the more questions I have! Honestly, this is the funnest learning experience I've had since I figured out that you could throw jelly and it'd stick to the wall :P

The part I am having the most difficulty with is the whole "Is Bitcoin deflationary etc" thing - trying to get that figured out in my head, coming from a background of absolutely no economics knowledge whatsoever.

So, my (probably daft) question is this:

Why is Bitcoin structured so that the amount of coins mined reduces? Would it not make more sense that the number would be low in the beginning and then rises with the difficulty? A sort of more work = more reward thing?

I'm pretty sure that I am missing a BLATANTLY obvious point here, but I'd much appreciate enlightenment.

Thanks :)

Ist.

you can't trust something illimited ...  ;) see the human bank structure. ::)

It would punish the early miners and as such would probably have meant that no one would try to improve the miners.
Crypto as an idea is supposed to be different the normal fiat currencies that are inflationary i.e. bad for savers and good for those who aret stupidly risking their money on risky wall street trades.  It's money for the people.

No sorry,I didn't mean that they should be unlimited. I agree that they should have fixed limit of coins. I meant why does the reward not increase with the difficulty rather than decrease.

Like I said, I am probably asking a stupid question.

Well wouldn't you say that:
- the savers of bitcoins have been the ones who have benefited most
- It would encourage people to join in, rather than seeing it as being "too late in the game"
- Bitcoin is surely inflationary??

Like I said, no economics knowledge here at all, just trying to work it out.

First, as bitcoin is mined, over time the amount of bitcoin entering the ecosystem reduces. This is called the "miners reward".
This was designed intentionally to created a "currency" that is deflationary or some think dis-inflationary.
As time passes and less bitcoins are released into the ecosystem (making them rarer), the price for a bitcoin should rise (making each more valuable).
This is the opposite of the current world banking system.
As world governments make (or print) more money and release it into the ecosystem, the more products cost to purchase.
In inflation, prices for products go up over time, in relation to a steady fiat ($1).
In deflation, prices for products go down over time, in relation to a steady bitcoin (1btc).

Second, low amount of bitcoins in the beginning and more bitcoins later, would be what the current world currency system is. (Low to High)
Bitcoin is an experiment in the opposite. (High to Low)

Third, Bitcoin is designed to release a steady amount of bitcoins into the ecosystem at a constant rate (averaging around 10 minutes).
No matter how many miners work, or how powerful they are, Bitcoin is designed to "readjust" to "balance out" again, to regain to 10 minute constant.

Basically, it is a steady decentralized release of "currency" into the world, in a deflationary manner, to guarantee that over time, each bitcoin is more valuable.
Current system is a unsteady centralized release of "currency" into the world, in a inflationary manner, to guarantee that over time, each USD/EUR is less valuable.

I think your question is intersting.  The answer I quoted seems to have most of it.  Also, consider this, if you're trying to kick off the bitcoin project, who do you want to reward more: the early adopters who invested time and possibly money on something which wasn't so clear whether it was a joke?  or the late bandwagoners who are just doing what everyone else is doing?  I think if you think of it that way, it's clear that you want to reward the early adopters and then they have incentive to bring more value to their greater holdings by getting more and more people involved. 

OK, this makes quite alot of sense. But, and forgive me if my naivetee is getting in the way of sense here, wouldn't the whole deflationary concept still apply if people were aware the supply was finite? But it might have the effect of being a bit more accessible to the people who came late to the party. Sorry, that is not clear, let me be a windbag explain...

As I understand it:

- Miners secure the network, and process transactions. But as it is at the moment, there's NO attraction to being a miner AT ALL. It costs tens of thousands to even get into the game, and you're gambling that the Bitcoins you MIGHT mine (if you're lucky) will keep enough value that your hardware will eventually pay itself off. I would love to see how many new investors go down the mining route. Seems to me that the miners are the early adopters. So the less attractive mining gets, the less that enter the activity and the more that drop out, unable anymore to keep up with the constant demand for new hardware, rising power costs, and lowering rewards (again, assuming Bitcoin doesn't explode). Wouldn't this lead to an ever-decreasing number of miners, and the ultimate threat of a 51% situation?

Sorry, as I was typing that, I guess I realised that what I am asking is this: As a non-early adopter, why would I bother to go into mining. And why would it make sense to anyone else?

I might not be making sense here, due to my general ignorance, as Stephen Fry would phrase it :P

There is a huge flaws in that way of thinking, from the point of view of the average joe:

The early adopters in this case are techs. It was released on a crypto mailing list, and I doubt it reached many businessmen. This is evident from the fact that very few developed Bitcoin businesses exit, and that there have been so many crises around the ones that did.

Your understanding is basically correct.
The only thing is that as miners leave (for whatever reason) the difficultly lowers (readjustment) and becomes easier to mine again, so thus miners can jump back in.
It is like a see-saw. The Bitcoin Protocol will keep "self adjusting" so that everything goes as designed at a constant rate.
But yes, currently, it is not profitable for new users to mine or attempt to mine. Most bitcoin users today are not miners. Those days are over.
The miners are basically gigantic farms with tens of millions invested. They are the future of mining now.

As with the 51% attack, that gets more complicated.
One thing to keep in mind is that if the 51% attack happens, the miner(s) who performed it basically killed bitcoin, thus making it worthless, thus they lose all their money.
It is not very profitable to do this. In theory, all miners want to work together, if one doesn't, everyone loses, even the 51% attacker. In theory.

To answer your question:
No one person will be mining (in a profitable way) anymore, those days are over, unless bitcoin crashes.
And it does not make sense for any new user to mine.
Bitcoin is basicly in a Phase 2 situation now, where now regular people need to get it and use it as "currency".
Phase 1 was the early adopters and miners, amongst themselves.

Your question isn't stupid at all. As you spotted already, Bitcoin is a very complex "experiment" and not much is obvious about it and its associated economics. The block reward is a form of subsidy, which skews the basics of the supply & demand model.

Just a thought:


Notice the discrepancy between time and difficulty. Block reward halving isn't linked with difficulty (rising), it's only linked with time.

Also, the problem with the more work = more reward analogy here is that as an economic principle, it only works as long as there is enough demand to absorb that work without making the price per unit of work decline on the market (again, supply & demand).


At this stage, it doesn't make sense. Mining is saturated. There is already way too much hashrate compared to the actual utility of Bitcoin IMHO. However, I would also say that mining is somewhat 'overrated', there's no point in getting into something once it reached a certain equilibrium. For instance, if there are already five different hairdressers in your neighborhood, and each of them makes enough profits to stay profitable, but none of them makes enough profit to get rich, there's no point for any one of them to close shop, neither is there any point for any new hairdresser to come to your neighborhood.

Oh, and it's heartwarming to see newcomers that are actually interested about the fundamentals like early adopters were, not just trolling and asking for free money, lulz and 2themoon ;)

As for no longer being an early adopter at this stage, well, only time will tell, but I wouldn't be sure about that.

OK, great, so I am absorbing something at least :P

So here's my issue....coming from the point of view of a clueless late-adopter - and like it or not, that is about 99% of people finding Bitcoin now, and in the foreseeable future:

I look at Bitcoin and see early miners holding tens of thousands of Bitcoins. These people are among the most vocal in terms of saying that Bitcoin needs to be mass-adopted, but at the same time their advice, over and over again, is "HODL" (it took me a while to get that joke - took a fair bit of reading :P). So they want people to use it but they don't want to spend it? So is it a currency or a bond or a form of pork-bellies or what? (again, that may be ill-phrased - I never did Economics 101).

I come here, to Bitcointalk, where all the news breaks, and the community is active, and people are throwing around (so it seems!) Bitcoins (full ones!) here, there and everywhere. And so far, it seems impossible to even earn one. Advice given to newbies is "faucets". Meh. This is not attractive to a newb. Seems like a really good game is happening, but until you have an NFL medal, you're not ever going to get to play. And there are no more amateur teams, only pros now. Average Bob doesn't fit.

I'm uneducated about this, and I **KNOW** I am, but I am trying to be the outside observer, specifically the newbie one. If the reward was increasing and I had 10K to blow (I wish I did) then yeah, I might invest it in a startup, a mining operation, something like that.....but right now? It's decreasing, and will continue to do so. What percentage of all possible Bitcoins have been mined and are moving? 50%? Why would I enter a world where 50% of all the wealth there will ever be is already held by a few?

Again, I have to apologise, I might not be phrasing my questions properly or might be missing the point.

Any help is really appreciated. I do like to learn new things :)

Ist.

I am not facile enough with the BB code to split up your post into parts like you did with mine. Need to read a 101 on that :P Nevertheless....

I did not know it was a time thing rather than a difficulty thing. Honestly....I think now it makes less sense :/ I could understand reward versus difficulty, but I am having a hard time understanding reward versus time... But it does look like you saw my point on this, so I won't argue, because I am thinking at this point I need to learn something about currency :P

The mining being saturated is completely understood. Of course there can only be so many people cutting hair in an area with only so many heads growing the stuff.

I need to think about all this, my brain is fried right now trying to just understand the core of it.

Damn fun class though :P

You need to copy and paste the quote tags and do the editing manually. It's a bit tricky but hopefully it'll be easier with the new software.


It's all about controlled supply (https://en.bitcoin.it/wiki/Controlled_supply). The specifics (halving every ~4 years and 21M cap) are somewhat arbitrary though.


Yup ;D

I think I got it!


Just wish there weren't a hundred more questions under each answer :P

First of all, I'm still a noob to Bitcoin in general. I found out about it during the price rise of November/December 2013, from an article on a financial website.
Everything I am explaining to you is my understanding from reading the forums and etc. Whether correct or not.  I do not have any coding or financial background.
I am not an early adopter, in comparison to others, but I believe I still am, since it has not hit mass adoption yet.

As to your question, "Why would I enter a world where 50% of all the wealth there will ever be is already held by a few?" is a valid question.

You could also ask yourself if you should continue to participate in the current world system, since 99% of all wealth is held by the few.
And the new wealth created (printed) in that system, doesn't make you richer, but actually, makes everyone poorer (through inflation).

The idea behind Bitcoin, is a "currency" that can not be counterfeited, regulated, or government controlled.
It is an experiment of a free "currency", for the free internet.
If you "invest" or buy bitcoin now, you are basically stating that you think it is a worthy idea/innovation/technology that is just starting.

Some have estimated that bitcoin could go for 10,000 USD, in the future.
In fact, some financial people are betting on it. (Personally, I think could go for millions around 2080 or so).

In theory, as time goes on, bitcoin will be worth more, since supply is limited and more people will want it. In theory.
So, in theory, you want to own (or HODL) them now, before the mass adoption, since that is when it will become expensive, in comparison to now.

Personally, I see bitcoin as a commodity currently, like gold, since using it as a "currency" has not reached mass adoption yet.

And there's the great big problem right there. It shouldn't be a commodity. It should be something to spend. I should burn a bloody hole in your pocket, just like your wages on payday!

EDIT: I'm sorry, that was blunt. Your points are well taken.

True, but i don't think we are there yet (as a currency), and thus we are still early bitcoin adopters.
Currently, when bitcoin is traded in financial markets, its considered a commodity, and governments are currently seeing it as a commodity/property for tax purposes.
But one day, that will flip, and it will be an established currency.

No need to apologize. I agree with you, but something that only appreciates in value over time (in theory), is hard to part with.
BTW, I have a very very little amount of btc, lol.

Yup. I don't think that's how it's going to pan out though. Apart from a few, people aren't perceiving it as a medium of exchange. Maybe that day will come if the market cap is much higher but by that point most the coins will be mined and deflation will kick in.  

Bitcoin is not deflationary, it's inflationary, currently at a rate of 3600 new coins every day, this value halves every 4 years or so, so eventually around 2140 there will be no more new coins.

Well, yes. OK, that point was cleared up. But my original question was why not increase the rewards over time instead of decreasing as long as the end limit remains the same.

It'd give late adopters a reason to opt in?

Right, but now you see that why that's not really good, yes?  You don't want to reward the later more than you reward the former because you can make a race to be the last in.  That would, of course, lead to an absurdity: no one wants to adopt bitcoin first because the later adopters are better rewarded so no one ever adopts it at all.  Obviously the better course is to make a race to be the first to  adopt and this is the sane thing which happened.  You understand this now, yes?

If only 1 satoshi is generated from the start, today, only 2 satoshi would be in each block. The fees would be hard to calculate and there would be less people using it due to the scarcity of Bitcoins.

I dint read others reply on this thread! My opinion:
Less Work= more coins in the beginning when coins were worth nothing!
Later on,
More Work = Less coins and coins have been a lot expensive than they used to be before ;) Hope this answer satisfies you! :)

it's not deflationary. It only is in the sense that, once all bitcoins are mined, they can still be lost.

Right now supply is expanding. And i'm not sure if there will ever be a time when more btc are being lost than generated because people will become much better at backing up their data as everything moves to the cloud.

The rewards are increased over time. As long as bitcoin doesn't die, the price per reward in real value terms will always get bigger. A good question would be why the rise is not more gradual instead of block halving why does not the nominal btc amount per block decrease every so slightly every block? This is a good question because block halving is a bit dramatic in the sense that overnight the rewards get cut in half dramatically impacting the profitability of miner set ups.

This good question indeed has been discussed in this topic (https://bitcointalk.org/index.php?topic=984958.0) a few days ago.

The point is, Bitcoin in the original idea was supposed to emulate gold. And with gold back in the ancient times you have gold mines that had very good quality of ore (many ounces per unit of cost) that were first explored and emptied. New mines that were opened later had much less gold and thus the cost of production per one ounce increased. Same with Bitcoin - low difficulty and huge reward for the early (individual) miners, afterwards little reward, complex mining machinery and huge mining costs for these coming at the end, when there is very little of available resources.

The interesting side question of why rewards aren't reduced in a different scheme is in another thread and this OPs question was about why block rewards don't go up over time rather than down.

I hope everyone (including the OP) can see that this leads to an absurdity where no one wants to be the early adopters because they get paid a lot less than late adopters, which leads to a case where everyone else is waiting for someone else to start.

This is like a funny game you might have played as a kid, the backwards race where the last to the finish line wins.  Everyone who has tried this realizes that it doesn't work.  No one has any incentive to move at all.

Hey there.  No such thing as a stupid question.  The short answer which has pretty much already been answered in earlier posts is to incentive-ize 'early adopters' to mine the coin in the first place.

Your reasoning, more work = more reward, is true for a 'currency', however Bitcoin is more of a commodity than a currency at this point which means that it works because it's rare. More people mining it means more people want it. More coins being created through mining would dilute the value.

It'd be very interesting to see how things would have turned out if you got a smaller amount of coins per block in the beginning.

It would not change our general perspective I think. It would only made mining bitcoins slower and we would have less bitcoins available today in circulation today. But remember that at the beginning bitcoin was considered just an experiment. No one knew if it will be successful or not.

Thank you all very much! I have to say that this forum is amazing for someone who is learning about this stuff!

Cheers :)

Ist.

I can see that, perhaps it may have even taken longer to get off the ground if the "reward" was lower initially (despite the fact that Bitcoin did not receive any substantial "value" from trading until 2010 or so).

exactly and very similar as it happens to gold. Many mine it, but do to low quality of ore, the output in terms of pure gold is tiny in comparison to the efforts spent.
See my earlier post.