This is inaccurate. Difficulty is the same for everybody. Total difficulty will be determined by the aggregation of all transaction fees.  

When paying transaction fees, you're paying for faster processing.  You are getting a tiny little bit more security as a side effect, but you are paying for the collective security of everybody, not for your own security.

If difficulty/security is lower than what the majority of users desire, no action of an individual user can do anything to increase difficulty significantly.  No individual will thus have an incentive to pay for higher security, only for faster processing.

The free market leads to a solution that maximises individual self-interest, therefore the market will not sort out that problem.  Not in the current implementation of Bitcoin anyhow.

That is like saying,

You can either secure your house with a $10,000 steel vault door, or a $20 plywood door that anybody can kick in.  Pick your option.

This isn't a binary choice, you know.  There are in-betweens that are reasonably priced and reasonably secure.


I do agree though that Bitcoin transaction fees suffer from a tragedy of the commons situation that hasn't been resolved yet.   However, it will take decades  before this becomes a serious problem, and it won't become a problem overnight, so this will give us plenty of time to think of a solution.

Go work on a construction site and ask to be paid in Bitcoin.

Like anything that exhibits strong network effects, a blockchain is a natural monopoly of sorts.  Free market forces will always push towards the ONE big blockchain.  

There is a strong incentive for new users to choose the social networking site that already has most users, to edit the wiki that already has the most content, and so on.  This discussion about rebooting the blockchain reminds me of Wikipedia in the earlier days, when several Wikipedia clones popped up, all of which failed or remained extreme niche of course.

IMO network effects in Bitcoin are even stronger than in Facebook or Wikipedia.  I think that is it inevitable that new chains will appear, but the older and longer the main chain becomes, the harder it will be for them to stand a fighting chance.  Right now, I think that only Gavin has a chance of succeeding with this and soon not even he will.

The only exceptions are chains which fulfill a very different need than the main chain, such as Namecoin.


@unk:

None of us can pretend to know if we are in a bubble or whether it will pop.  There is no objective way of measuring this reliably. This is really nothing more than a hunch of yours (and other users).  There was bubble talk after the first price spike in July 2010 and people were complaining that 0.06 USD/BTC was grossly overvalued  .  That bubble, if it ever was a bubble, never popped of course because the goods and services offered for BTC on the internet eventually caught up with the speculators' expectations.  

Is it really worth doing something as drastic as a chain reboot, based on a hunch? It wouldn't even solve the supposed problem, because the new chain would be just as prone to speculation as the old one.

I don't think speculation is such a bad thing anyhow. The market has already decided that Bitcoin is useful as an investment vehicle on top of being useful as a way to transmit money. The market isn't going to change its mind soon, and even if Bitcoin became primarily an investment vehicle, that doesn't mean the economy won't be sustainable.

I don't think it's a bad thing at all.  We already have a competing currency: Namecoin. And I bet it won't be long until the anti-deflation crowd starts their own variable supply block chain.

What would be a bad thing though is a splitting fo the existing community into factions. One big chain is harder to attack by a Bitcoin antagonist than many small ones.

Great, then we would have two competing currencies, Bitcoin v1 and Bitcoin v2. Until somebody comes along and thinks that Bitcoin v2 is unfair too, and starts a Bitcoin v3.  The community would be split into three tribes, The Pioneers, the The Restarters, and The Laggards.   The majority of users (who don't care about our politics and just want Bitcoin to work) would end up purchasing all three of them anyhow, to make sure their cash is accepted everywhere.

As if Bitcoin wasn't confusing enough for newbies already.   KISS.

Good point, what if it's just the first 4 characters of the SHA-256?

Aaaah, but anybody can change their nickname to Mike Hearn. How do we know you are the real Mike Hearn? Could you please post a copy of your passport and birth certificate?  
 

Seriosly though, I'm going to follow Satoshi's example and not post under my flesh name, for all sorts of practical reasons.

For example, I don't want a prospective employer to be able to google me and read about my philosophical stance on intellectual property on this forum.  This has nothing to do with lack of integrity, not standing up for my beliefs, or whatever. It's purely a matter of self-preservation. It's a jungle out there and I want to place myself in a good negotiation position, which means being in control over what you disclose about yourself.


PS. If you want to I'll post a SHA-256 of my real name.

If Bitcoin ever becomes a major currency, it will effect a considerable redistribution of wealth in society.

We all have a pretty good idea of typical demographic of the earliest adopters:

Young, anti-establishment, libertarian, technophilic, rationalist, atheist/agnostic, globalist, entrepreneurial, open-minded, forward looking, optimistic, creative, conceptual thinkers.


But who will be the last people to adopt Bitcoin?  You know, the day that Bitcoin is taken for granted by everybody and even the last skeptics finally shut up about it and just get on with using it. My guess is,  they will be the exact opposite of the early adopters:

Old, authoritarian, pro-establishment, conservative, traditionalist, nationalist, irrational, religious, bureaucratic, technophobic, pessimistic, closed-minded, concrete thinkers.


The demographic of Bitcoin newcomers will gradually shift from one extreme to the other, as we can already observe with newbies on this forum.

If there is one thing that will do the world a favour, it's a redistribution of wealth from the latter demographic to the former.

That's why I don't resent the enrichment of early adopters.


PS. One thing I'm not so happy about though is the wealth transfer from female to male. (Female geeks where ARE you??)

In the Bitcoin economy the cost of lending is transparent.  Because there is no central authority policing fraud, users are incentivized to decide for themselves wheter they trust the counterparty.  Since Bitcoin users are not guaranteed to be bailed out if they make stupid lending decisions, they are likely to think very carefully who they lend their money to, and this will lead to the emergence of decentralised trust systems such as otc-wot.

That's why I think it's unlikely that we will see irresponsible speculation with borrowed money on a massive scale.

What's deviant for one person is vanilla for another, and vice versa.  Sexual freedom isn't so much the issue here as sexual equality.  If I can't tell you how to have sex then neither can you tell me.  Obviously there are limits to sexual freedom as soon as sex becomes coercive, but those limits should apply to everyone equally.  Things like religion cannot be an excuse for exemptions.  


But to answer your question:

I'm a leftist of sorts, but not of the authoritarian variety.

I believe that we could all be better off if we acted more cooperatively and shared more things. But this kind of collectivism should always be voluntary. I believe that people and companies who refuse to act cooperatively should be encouraged through reputation systems, ostracism, education and negotiation, but never through force.


The minimum wage issue is complex. In principle I'm against mandatory minimum wages. But in the real world, governments already forcefully priviledge large corporations over workers, freelancers, and small entrepreneurs.   So in practice, any government force that tips the balance away from large corporations has a positive effect.

Two wrongs don't make a right of course.

Bitcoin has the ability to support non-standard transactions; this has so far been disabled in the official client.

You could for example design a non-standard transaction that must be signed by two people before it makes it into a block.

Then all you have to do is give two trustworthy people in your business a private key each and make sure they keep that key safe.

Using the block chain directly is a much safer option IMO than building another layer of security software on top of Bitcoin.  The more complexity, the more potential security holes.  

shane, you should have a look into Namecoin.

Namecoin has almost the same properties as Bitcoin, on top of that, it solves the issue you are most concerned about: it has "intrinsic value".

No matter what happens to the exchange rate, Namecoins can always be used to purchase .bit domain names.

I foresee that Namecoin will evolve into a major currency in its own right. If your theory is correct, it might overtake Bitcoin.

Not sure if this is true.

I can think of an untamperable distributed timpestamp method that doesn't rely on proof-of-work or  CPU:

Cosmic Radiation

Every node agrees to point a radio dish at predefined sector of the sky and measure the random fluctuations in cosmic radiation in some standardised way.

These measurements are translated into a linear data stream that is permanetly recorded by every node.

Then use the block chain concept, except that the nonce in each block isn't incremented, it's the latest chunk from above data stream.

Distributing newly minted money is harder, but can also be performed with a cosmic radiation proof-of-work.   The target isn't a hash but a set of stars/galaxies in a certain configuration (for example). Nodes scan the sky with high powered telescopes and the first node to find such a configuration digitally signs its exact coordinates.   It is then easy for other nodes to verify the stars on those coordinates.

Somebody could of course open thousands of nodes with a forged data stream, but those blocks would be rejected by the nodes that physically have a dish pointing at the sky.


Maybe I have missed something? Could this type of block chain be forged in some other way?

Demandrel:

Yes, a wealth transfer occurs in Bitcoin, but with time this wealth transfer declines sharply, percetage wise, and tends to zero.    I don't understand why you say that there is an increasing wealth transfer. Perhaps in absolute numbers, but it's the per capita wealth transfer that matters.  Once Bitcoin has matured, deflation is likely to be only a few % a year, reflecting aggregate economic growth.  Is that small amount really enough to put off new users? Also, anyone who holds on to a fixed supply currency for long enough will eventually experience a reversal of wealth transfer, as long as the world economy keeps growing for ever, as it is likely to do, since there are no limits to productivity gains.  

The way I understand it, under Bitcoin there will be a few extremely wealthy early adopters.  Some of these will stop contributing productively to the economy, but still compete for products with all their wealth. This will drive up prices higher than they would have been under InflaCoin*.   But even these super rich will eventually run out of money if they just spend and never produce. The wealth transfer is not a permanent problem of Bitcoin, only a bootstrapping problem.  I'm not even sure if the wealth transfer is detrimental. Maybe one of those super rich early adopters will invest in some awesome new technology that will make all of us 10 times wealthier, who knows?  You are making the assumption that wealth is a static quantity.

Anyhow, under free market competition, it's not the always macroeconomically most optimal system that wins. It's the system that is most optimal for each individual (Bitcoin), not for the collective as a whole (InflaCoin).  
Bitcoin wins over InflaCoin, despite the wealth transfer, because a) merchants prefer to get paid in Bitcoin, and b) customers prefer to buy Bitcoin. Even if they intend to spend them immediately, InflaCoins offer no advantages over bitcoins. In the real world, you always need to store cash for some amount of time before you can spend it. InflaCoins would offer only disadvantages in this case.

Also, it's not clear to me at all how excessive savings would depress the economy. Savings allow people to make sounder investments, which are likely to offer higher returns.  A practical example I can think of is education:  In an economy where people are encouraged to save, more parents will be able to pay for their children's university education, but they may not have the newest gadgets at home. This will eventually lead to a more productive workforce that can afford more gadgets AND an education. And so on...
  

*InflaCoin is what I am calling an inflationary version of Bitcoin.

Their audience demographic confirms the polls on this forum:

Females are greatly under-represented at bitcoin.org

Another reason we should expect further spikes.

Your post doesn't make any sense.

How exactly is the cost of entering the Bitcoin economy determined by the USD/BTC exchange rate? Eventually, merchants adjust prices to reflect the exchange rate, so the cost of buying a Big Mac is more or less the same, whether you pay for it in BTC, USD, EUR, or gold doesn't make any difference.  


The costs of buying BTC are

a) Conversion costs - these are completely independent of exchange rate

b) Risks of your BTC losing value before you spend them - surely these are higher in an inflationary p2p currency??



How exactly would an inflationary p2p currency outcompete Bitcoin?  Any sane person who has the choice to put some of their cash savings into InflaCoin or Bitcoin, will always chose Bitcoin over InflaCoin, provided the two are equal in all other respects.  

It was already happening months ago.  Back then it was much easier for a single player to manipulate the market because it was a fraction of today's size.

Is such a complex system really necessary?

If it is purely a psychological thing, then all we need is an android/iphone client for Joe Average that displays his balance like this by default:

70 USD
(10 BTC)

Client becomes popular, mass psychological issues resolved.  Works because most people can be rather superficial unfortunately.


Anyhow, once Bitcoin has matured its value will eventually stabilise or deflate at a few % per year, to reflect general economic growth.  Such a small amount of deflation will not anger Joe Average, I don't think.

How would you achieve this without making the system vulnerable to corruption?

Who enforces the exchange rate? Who chooses the basket? Who gets to vote? How do you prevent double voting?

In a way, we already have community driven inflation targets, because changes in the bitcoin protocol will only be successful if the majority of users agree with them.  A community-driven target will always be deflationary because people who already own BTC would never "vote" for inflation that decreases the value of their savings.

Your concept of pegging the exchange rate by the community is thus flawed.  Which leaves some central authority to peg the exchange rate (the developers?).  But that would nullify the main advantage of Bitcoin.

I would go as far as saying that it is impossible to make a currency decentralised and fixed to a basket at the same time.  A decentralised currency must be free floating by its very nature.  If you can think of a solution that proves me wrong, please let me know!