The Miners' "Greed" will Save Bitcoin

It occurred to me that the Bitcoin system of production does not need to be controlled at all, not pogrammatically, not even by any rule. What will limit production is the profitability of miners. At this stage of development, Bitcoin is increasing in value, and mining is very profitable. It cannot remain so forever, if production is not limited by absolute quantity. Assume for the sake of discussion that there is no limit. Every miner, to increase profitability, would produce as many Bitcoins per second as he could. There will be over-production, and subsequent inflation (inflation in quantity, and then eventually reduction in value [the alternate "definition" of inflation]). As the value of Bitcoins come down, naturally the profits of miners will come down also, if measured in terms of how much a Bitcoin can buy. The system will tend towards a state of equilibrium, one in which the profitability of miners is throttled by inflation (in the second sense), and the value of every Bitcoin stabilizes.

This absolute limit on quantity is fictitious anyway, and I daresay it is GOOD that it is fictitious.

Let's say that the miners "collude" among themselves in order to remove the absolute limit on quantity. As the moderator of this forum pointed out here: https://bitcointalk.org/index.php?topic=145475.msg1543280#msg1543280, there is really nothing that can stop the miners from changing the quantity rule, except the wallets in everybody else's possession. What if the miners themselves also start distributing their vesion of the wallet, with compelling advantages to the user? (For example, a version with a much pruned Merkle tree, so that everybody with a smartphone or any handheld device can use it.)

So now the question to ask is, if the limit on quantity is fictitious, what sets Bitcoin apart from any fiat currency in use today? Every fiat currency is controlled by some monopoly, a monopoly necessarily sanctioned and enforced by the state. In Bitcoin's case, such monopoly does not exist. In Bitcoin's case, its own market will control its quantity, while fiat currencies are prone to hyper-inflation because its monopolistic structure does not present a feedback mechanism to limit production or "printing".

The two worries I expressed in the OP are in reality no cause for concern. I now believe in Bitcoins much more than I ever did. If a version of the wallet that can run on a handheld becomes available (as I am sure it will, soon enough), then its proliferation will further enhance its own integrity, as I explain here: http://ctapang.wordpress.com/2013/01/30/more-on-bitcoins/.

I understand your point that it maybe possible to game the measure of velocity, what I don't see is the motivation for it. If I were a miner for this new currency (which would simply be a slightly different version of Bitcoin), sure I would want to relax the production spigot for that currency. But by doing so I would be affecting not just the production of my mining rig, but the production rate of all my competitors as well. We can all conspire to render that spigot ineffective altogether, but then doing so would NOT be in our interest. Why? Because, like the oil-producing cartels, we don't want to flood the world with cheap currency. It wouldn't be in the interest of miners to lower the relative price of the new currency, just as it's not in the interest of oil-producing countries to cause the price of oil to come down. What every oil-producing country wants to do and is continually doing is to announce that it would reduce production, but then secretly do the opposite (increase its production). However, all the other members of the cartel are doing the same thing, and so in general they find it very difficult to directly cause an increase in the world price of oil. The current high price is certainly not of their doing.


Some programmer thought at one point in the history of desktop PCs that it's OK to allocate only so many digits for the year. And so during the year 2000 an enormous amount of effort had to be spent just to fix this date limit bug. My point is that the eight decimal places for every Bitcoin may still not be enough. If the U.S. dollar were to continue as the dominant world currency, the M1 count would definitely grow, maybe indefinitely.

Thanks for a thoughtful reply, niko. I have been waiting for your kind of reply.


Not necessarily, right? In the same manner that the Bitcoin network is self-protecting, it can also be programmed to be self-regulating: we can program the increase in quantity, one in which the increase depends only on the velocity, by some (still undetermined) formula.

While I am not a Krugman fan myself, I think his point here does make sense. If we focus on WHY the Bitcoin economy can fail, the only reason it can fail now, I think, is the hard limit on quantity. I am not a Keynesian either, but the two extremes are equally bad: on one extreme, we have the unlimited quantity of fiat money that can be "printed", on another we have Bitcoin which has a hard limit on quantity.

I believe what is GOOD is to have a pre-determined formula for increasing the quantity, one that depends on the velocity of the currency. I am discussing this matter on another thread: https://bitcointalk.org/index.php?topic=156960.0

The bad news is that there is no such thing as "store of value". There is only medium of exchange. If the Bitcoin currency loses its value as medium of exchange, it will have no other value, and your savings would turn out to be of no value. Remember, it is people that ascribe value to any currency. Not just you, not just me, but all of us. If we all think that Bitcoin is nothing, then it is nothing. And yet it has real value as medium of exchange. Its value resides in us using it as medium of exchange.

I am a Bitcoin enthusiast myself, and am invested in it. It is also in my interest to see Bitcoin thrive, but emotions aside, an objective analysis of the situation really puts a question mark on the hard limit. Like I wrote in the opening, I believe it is not the unlimited quantity per se that is bad (about fiat currencies), it is rather the absence of rules about increasing the quantity. As I have shown, increasing market price will cause hoarding, and thereby reduce velocity, which is not good for any currency.

The metaphor may not be correct in that Unix derivatives now dominate the handheld and embedded markets, but if we limit our discussion on the desktop market, there is no doubt in my mind that Windows has won. Of course, we are now in the handheld era, and in this market Windows is clearly losing. My only mistake here is that I did not qualify what I meant by "fate" -- which should be the Unix fate in the desktop.

Rather than dispute the metaphor, I want to get people's opinion on the real subject, which is Bitcoin bifurcation, and the reason described why it makes sense to do it, to start another currency that has no hard limit on quantity.

I have seen the Grand Canyon of Arizona, and I am still smarting from its effect on my perception of reality. Its grandeur reminded me of a paradox, the paradox of what I would call "chance and permanence": nature works mostly by chance, but what it has wrought so far is almost permanent. In the beginning, I am sure the path of the mighty Colorado river that formed the Grand Canyon was determined mostly by chance. As time went by, and the canyon went deeper, what was determined by chance is now almost permanent. Every twist and every turn, every steep cliff that formed, every rock that stayed put and not washed away is there by chance, and yet now permanent. It would take great effort, time, and money to change the path of the Colorado river. So we, as observers of the Grand Canyon, can appreciate how its path was formed mostly by chance, but can also appreciate its permanence. And so it is with the rest of the universe.

We can consider even human institutions in terms of the same paradox. Sure, we'd like to think that all our institutions are there by design, and not by chance, and that is true. But there are certain important aspects of our institutions that become permanent purely by chance. We cannot possibly know beforehand which little twists and turns in our lives become very important later, but there is no doubt in my mind that the sum total of those decisions can make each one of us successful or lose out and simply become a statistic. It certainly makes sense to leave less to chance, and the less we leave to chance, the better.

Just as an example, let's take the Windows operating system. It has now become an institution. It is very difficult to replace precisely because it has become an institution. We can appreciate the fact that until now, despite the presence of free (and some say even better) alternatives like Linux, Windows remains the most widely adopted operating system, by a wide margin. It is not that the proponents of Linux have not tried enough. A huge effort is being spent, not just by the Linux community, but also by the Apple OS community, to dislodge Windows from its position as number one, but so far to no avail. This is what I mean by becoming an institution, mostly by virtue of Windows' virtues, but also partly by chance. There were crucial steps that Microsoft took, during its early days, that caused Windows to be an institution. Some of those steps, like partnering with IBM in the early days, did not happen by chance. What was left to chance was which little OS to start with, during the earliest epoch called "DOS".

(Microsoft started not with an OS of its own making, but bought out some OS from an obscure company.  Incidentally, it would be wrong to conclude from this that Windows won by great marketing alone. It had to be a good OS also, limited only by available hardware, and had to continue to compete by being the best. Being a good OS is a minimum requirement, and by now that should be obvious.)

Now I have no doubt that Bitcoin will become an institution, something that maybe very difficult, if not impossible to change in the near future. I would not invest in it myself if I did not believe in it. But there are a couple of things that worry me, and I am writing this to see what other serious thinkers would say.

There have been several attempts to bifurcate the path of transactions. Let us remember that these attempts had a sinister purpose. I believe it is also possible to bifurcate the path of transactions, to have more than one set of transaction files, simply by distributing another branch of the software.  The system is designed to protect itself from invalid transactions with a sinister purpose. However, if this is done NOT with a sinister purpose, but in order to come up with a better currency, then politically such new branch would be adopted by a large number of users, which would then cause the path of transactions to bifurcate. We would end up with not one database of transactions, but several incompatible databases. The Bitcoin currency would then bifurcate several times to spawn several other currencies, all competing against each other.

Remember Unix? I believe that Unix should have been the number one OS instead of DOS/Windows. It was certainly better, by any measure, than DOS. It did not win out because it bifurcated several times into different versions, all incomptible with one another. Would Bitcoin suffer a similar fate?

The other thing that worries me about Bitcoins is the rule that puts a hard limit to its quantity. I believe that this is reason enough for it to bifurcate. I still have to hear from a reputable monetarist thinker that a hard limit on quantity is good. Here is why I think it is bad.

What makes gold still THE number one standard currency is the fact that its quantity cannot be increased by a simple human decision. It has to be mined. There have been times when its quantity increased by more than the world economy can sustain, and it inflated just like fiat currency (during the Gold Rush, for example). However, there is no hard limit to the quantity of gold in circulation, and I think that the reason it remains the best currency is because it continues to be mined and so continues to increase in quantity. In the end, I think that it's not the increase in quantity of a currency per se that's bad, it's HOW it increases in quantity. I believe that the best currency is one that increases in quantity in relation to worldwide economic activity. In the future, gold cannot remain the best currency because its increase in quantity is not necessarily a good arithmetic function of worldwide economic activity.

A currency is only as useful as how convenient and beneficial it is to use as a medium of exchange. In this regard, Bitcoins are far more useful than gold. Gold has other values apart from its use value as currency. It has jewelry or ornamental value, it has industrial value (as electronic connector in integrated circuits), and monetary value. Its monetary value has now exceeded its two other values because the U.S. dollar is failing in this function as worldwide currency. Contrast this with the pure monetary value of Bitcoins. Bitcoins have no other value than its use for exchange. We can say it has pure exchange value. One of its attractions is that, by being based on the power of the Internet, it is money that can travel friction-free from one point in the world to another. Very much unlike gold, which weighs so much it takes not just some reliable means to transport, but also a secure one. It takes a lot of money just to transport gold; it takes almost zero to transport Bitcoins.

However, and this is a big caveat, even a Bitcoin itself can see its exchange value reduced. It can reduce in exchange value precisely because its perceived value, or market value, is increasing. As it increases in market value, many holders will start to horde it. (Like me: I plan to hold on to as much quantity of it as long as I can.) Now when it is hoarded and stashed away, the total count of Bitcoins in circulation necessarily goes down. Hoarding necessarily affects the count of daily transactions that occur per quantity of Bitcoins: its so-called net velocity goes down. When the velocity of a currency goes down, we can say its usefulness as currency goes down also. Therefore, what we may see happen is a long-term trend upwards in market value, but punctuated by violent fits of steep drops in price, as the exchange value compensates for market value, and vice-versa. This is precisely what we want a currency to fix: the occasional steep drops, the violent business cycle.

I propose that the violent cycles of ups and downs can be avoided, simply by increasing the quantity of Bitcoins, not asymptotically as it is now, but as a function of velocity. (It should not be a function of market price because market price by definition is always in relation to another currency, like the U.S. dollar, which can also be volatile.) Velocity is easily measured by the count of transactions per minute or per hour or per day even. Note that "velocity" is different from speed (as in elementary physics). Velocity includes the component of direction, not just speed; so for example, a million transactions that occur only between two accounts contributes less to velocity than transactions that occur between many different accounts.

I am a programmer by trade, and I can go in there and make this modification myself, and come up with a different distribution. If enough people believe that my version is better, then the database of transactions will bifurcate, which is not good. Rather than do that, I have chosen to discuss this matter with the Bitcoin community. Even just two currencies competing at this early stage can be fatal. We have a world to conquer out there, and we don't want to end up like Unix. Rather, we want to be like the Colorado river, cutting deep into the very foundation of world commerce. However, we want Bitcoin to be successful less by chance like the Colorado, and more by conscious decisions like Microsoft's Windows OS on the desktop.

I am a Bitcoin economy participant. I am using a pseudonym (flyonwall), but I am willing to reveal my real identity. I blogged a couple of times about bitcoins http://ctapang.wordpress.com/2013/01/30/more-on-bitcoins/.

As you can see, I have nothing against bitcoins because I am for the free market. However, I do have a concern about the future. I believe that the bitcoin economy cannot grow if its quantity is limited. I understand that each bitcoin can be subdivided into smaller and smaller subunits, but such subdivision is also limited. I have only one purpose in joining this community: to discuss this matter seriously.

Hi. I am a newbie here. Would like to do serious posts about Bitcoin economy.