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1  Other / Beginners & Help / Some technical and economic concerns on: June 17, 2011, 12:18:11 AM
Greetings all,

A buddy posted a link to a story about Bitcoin the other day, and I've spent some time since trying to parse out the system. I downloaded the source code and read through some of the interesting parts, and I now feel I have a pretty good handle on how it "works." That said, I do have a few questions, and I hope that some veterans around here might help to enlighten me.

Let me start by killing a sacred cow. Satoshi clearly had a great idea when it came to the structure of Bitcoin, but some of his coding seems ad hoc and arbitrary to me. It's understandable really, at some point you just have to make a choice between spending days of theoretical analysis or actually getting down to writing code. Consequently, the following will address some of the limits that are programmed into the software, so prepare yourself if you are a hardcore "Satoshi-ist".

1. The ten-minute limit: The Bitcoin system is designed so that a block is produced, on average, every ten minutes. The reasoning is clear, he wanted to find a value that's long enough that block traffic doesn't swamp the network and transactions have time to reach every miner, but not so long that it takes forever for transactions to get traction with a number of confirmed blocks. However, I'm wondering if the ten minute time is really the best. For one thing, I think it stands in the way of Bitcoin ever being used as an "everyday" currency system. Most restaurants aren't going to want to wait 30 minutes to make sure your money's good before giving you your cup of coffee.

I'm curious if transitioning to a more rapid scheme is being considered as the network grows. Perhaps a move to a block per minute or two, with a corresponding drop in the subsidy value from 50 to 5 or 10. Would this increase the incidence of orphaned block chains too much? I know it's difficult to study how quickly a block propagates across the network, but it seems that if we waited 2 or 3 times the average time (when in theory 95-99.7% of the network has received the block), it would probably be safe and more responsive. This would also have the benefit of increasing the granularity of how the money is distributed, in that instead of having 50 Bitcoins distributed to one miner, you will have 5-10 miners with 5-10 Bitcoins each. It seems like a good direction to go if the system can support it.

2. The 4 year drop: Almost everybody knows that the ultimate number of Bitcoins will be somewhat under 21 million. However, in the code, this is implemented by a 50% drop in subsidy value every 210,000 blocks (approximately 4 years, less now that the network is growing so quickly though). It seems like having a drastic drop like that could lead to some nasty effects. All of a sudden, every mining rig in the world will be producing half as many Bitcoins. (Ok, more than half, but the fees are a pretty nominal percentage of a miner's income.) My admittedly basic understanding of economics tells me that up to that point, if the market has reached equilibrium, there will be just as many miners producing Bitcoins as is profitable. With that drop, it's hard to imagine a substantial fraction not taking their machines offline and scaling down. This will have the effect of significantly dropping the network power, which will make blocks occur less often. The difficulty only resets every approximately two weeks, and with the power reduced, it will make blocks take longer to mine. Not only does this mean transaction confirmations will be even slower, but also the system will take longer to adjust, which means that even more miners may be forced out, which means the adjustment period will be longer, and you see where I'm going with this. Certainly a new equilibrium will be found eventually, but a step response to a system is usually a bad idea from a controls perspective.

I don't see why rather than having the sudden drop, we couldn't have a gradual phase out if economic reasons really dictate that the subsidy must be reduced. I suppose it depends on how quickly people lose their wallet files, if the goal is to keep the money supply in circulation relatively constant. I'm an engineer, not an economist, I know next to nothing aside from what I learned in Microecon 101. But if the community started reducing the subsidy by .5 mBTC/block after block height 160,000 or 1 mBTC/block after 185,000, it would give the same 25 BTC reduction in subsidy with what seems a much less abrupt hit to the miners.

As a follow-up, I'm aware that these limits and algorithms are hardcoded into the system now, and would require a change to every client in existence. However, that's not a sufficient reason to not have them implemented as long as sufficient time is given for the community to accept them. The Bitcoin is a currency of consensus, and those who run counter to the consensus would simply find their blocks rejected by the network. I just say this to hopefully shut down some of the "it's part of the algorithm, it can't be changed" responses I might otherwise get. Also, I'm not as much actively arguing for these changes as I am looking to see if these issues have been/are being considered, and if so, what the community thought upon them is. It's the kind of stuff you really don't find in the FAQs.

Thanks for taking the time to read. I look forward to an interesting discussion.
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