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Author Topic: What happens to mining with a sudden drop in value?  (Read 5230 times)
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May 30, 2011, 09:03:33 PM
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So I just thought of something. Assume that we have reached some sort of equilibrium in the economy. Miners earn just slightly more than their cost of electricity. Then assume that we have a sudden decrease in value for whatever plausible and unforseen reason. As I have understood bitcoin, the difficulty will only change every 2016 blocks. Isn't it possible that we get a situation where mining could actually be unprofitable for everyone except those with free energy until the next difficulty change? This would create a prisoners dilemma situation where basically no one has an incentive to mine, but everyone gains from other people mining (since the new difficulty would come sooner).

Thoughts?
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May 30, 2011, 09:48:12 PM
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Miners would continue mining, but only accept the people who pay large transaction fees.
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May 30, 2011, 10:19:15 PM
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Well, that should dampen the effect at least. But I don't think there is any doubt that a lower exchange rate means lower profit for miners. So if the fall in value is big enough, the scenario in OP is still feasible I think.

Also, there is no guarantee that such transactions would exist in every block and there's no point wasting energy on unprofitable blocks. So the miners incentives would actually be to wait for the fees to pile up until it gets profitable enough to mine, but then the next block would be unprofitable again.
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May 30, 2011, 10:27:22 PM
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Well, that should dampen the effect at least. But I don't think there is any doubt that a lower exchange rate means lower profit for miners. So if the fall in value is big enough, the scenario in OP is still feasible I think.

Also, there is no guarantee that such transactions would exist in every block and there's no point wasting energy on unprofitable blocks. So the miners incentives would actually be to wait for the fees to pile up until it gets profitable enough to mine, but then the next block would be unprofitable again.

This also assumes that miners are directly converting their bitcoins to USD.  In all probability, with the volatility of the market, by the time we reach some kind of equilibrium (become a "sticky" currency (http://en.wikipedia.org/wiki/Sticky_%28economics%29), then miners will be dealing directly with bitcoins themselves to pay for most of their expenses, rather than having to convert them to some other currency.

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May 30, 2011, 10:37:30 PM
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Miners would continue mining, but only accept the people who pay large transaction fees.

Won't they make less since they are turning away fees they used to get?

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May 30, 2011, 10:49:00 PM
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This also assumes that miners are directly converting their bitcoins to USD.  In all probability, with the volatility of the market, by the time we reach some kind of equilibrium (become a "sticky" currency (http://en.wikipedia.org/wiki/Sticky_%28economics%29), then miners will be dealing directly with bitcoins themselves to pay for most of their expenses, rather than having to convert them to some other currency.
I think it just assumes that miners have no reason to believe the value will go up. It doesn't matter if they sell in the future if what they recieve in the future is worth less than what the spend in the present (it actually gets worse if they sell in the future because of time preferences). Anyone who believes the value of bitcoins should go up could and should mine at an unprofitable rate even today. Any nonspeculative miner would lose their incentive to mine though. Sure, the miners still have a strong incentive to keep the network going, but this still creates the prisoners dilemma scenario where everyone gains by simply letting everyone else do the work.

And I don't think the economy needs to get that big for this scenario. Lets say the economy is backed by internet gambling and drugs and we get a government crackdown on one part of the economy like gambling.
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May 30, 2011, 11:09:16 PM
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It may be even worse. When most miners stop, transactions will take a long time to confirm. That makes Bitcoin less useful which will lower the exchange rate which will make even more miners unprofitable in a vicious spiral stopping the whole Bitcoin system forever.

An ugly patch would be to set up a fund that can pay for mining for a while when this happens.

Is difficulty automatically halved when the block reward halves? If not, that could be a problem.
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May 31, 2011, 05:31:16 PM
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Doesn't anyone else think that this is worth some more discussion? It seems to me that the possibility of multiple weeks of a weak network and unprofitable mining is a pretty bad combination. And what if someone that really wanted bitcoin to fail would take an opportunity like this and time an attack on the network. It seems really bad.

Someone please disprove me.
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May 31, 2011, 05:51:38 PM
 #9

I think the exchange rate would need to drop quite a ways to scare off most miners.  In my case it'd have to go below $1.94 at the current difficulty to make mining unprofitable.
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May 31, 2011, 05:59:13 PM
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Honestly, I think we should implement a maximum difficulty readjustment time period.  A difficulty increase or decrease could happen between 0 and 14 days, depending on how much of an increase is projected, but should take no longer than 14 days.  I see no logical reason that this shouldn't be implemented, aside from the inconvenience of not being able to know exactly when difficulty changes took place based on a block number and some calculation involving 2016.

The threat posted about by the OP is very real.  If we had a sudden drop to $0.25, however unlikely that may be, nearly all mining activity would cease, and it could be a year before the next difficulty change.
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June 01, 2011, 06:33:31 AM
 #11

Also, once the difficulty change came it could be too small. I think the maximum change is up 4x or down to 1/4?

Still if this happened clients would be modified in a hurry and 51% propagation would be quick. Nobody wants transactions to stall.

Changing difficulty by time would be hard because to verify the chain people would have to know and agree on the amount of time between blocks.

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June 01, 2011, 08:21:27 AM
 #12

BTW, this could be turned into a potential (but difficult to pull off) attack: get a large mining capacity, make the difficulty go up, then, all of a sudden, stop mining.
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June 01, 2011, 08:32:26 AM
 #13

Well, I will be mining even if its not profitable.  I'm in this system for good.  As long as I don't lose that much on electricity! Wink
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June 01, 2011, 08:49:37 AM
 #14

Doesn't anyone else think that this is worth some more discussion? It seems to me that the possibility of multiple weeks of a weak network and unprofitable mining is a pretty bad combination. And what if someone that really wanted bitcoin to fail would take an opportunity like this and time an attack on the network. It seems really bad.

Someone please disprove me.
This isn't really a big problem. In the rare case that such an extreme drop happens, we can discuss (here on the forum, for example) and agree to decrease the difficulty manually to an appropriate level. The same people who would panic-stop their miners will also be eager to seek a quick resolution.

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June 01, 2011, 02:34:50 PM
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Well, I will be mining even if its not profitable.  I'm in this system for good.  As long as I don't lose that much on electricity! Wink
Sure, a few die-hards would mine at an unprofitable rate. But most miners probably wouldn't. And the intention with bitcoin as I understand it, is to not have to rely on altruism and the goodness of people's heart to get the system working.

This isn't really a big problem. In the rare case that such an extreme drop happens, we can discuss (here on the forum, for example) and agree to decrease the difficulty manually to an appropriate level. The same people who would panic-stop their miners will also be eager to seek a quick resolution.
I don't think it's safe to rely on a quick protocol change at the time of a potential panic with unprofitable mining and transaction hold-ups. We can't even be sure that the current community has that much influence when this happens. What if someone proposes to increase mining reward instead? That could solve the same problem and would certainly sound good to a lot of miners. But then we have set the precedent to turn bitcoin into an inflationary currency with increasing block rewards. Bitcoin relies on trust, and if this ever becomes real that trust will be severely damaged.

Also, I don't think it's enough to just say that this is unlikely. If bitcoin truly is the Napster of banking I believe the road ahead will be far bumpier than it has been so far. The network really needs to be prepared for these bumps, not just figure them out as they come.

Changing difficulty by time would be hard because to verify the chain people would have to know and agree on the amount of time between blocks.
I'm not in to the details of difficulty changes. Surely the network has to have some way of agreeing of the time it takes to solve an entire difficulty right now? How does the network come to an agreement?
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June 01, 2011, 06:08:04 PM
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Sure, a few die-hards would mine at an unprofitable rate. But most miners probably wouldn't. And the intention with bitcoin as I understand it, is to not have to rely on altruism and the goodness of people's heart to get the system working.

I don't think it's safe to rely on a quick protocol change at the time of a potential panic with unprofitable mining and transaction hold-ups. We can't even be sure that the current community has that much influence when this happens. What if someone proposes to increase mining reward instead? That could solve the same problem and would certainly sound good to a lot of miners. But then we have set the precedent to turn bitcoin into an inflationary currency with increasing block rewards. Bitcoin relies on trust, and if this ever becomes real that trust will be severely damaged.

Also, I don't think it's enough to just say that this is unlikely. If bitcoin truly is the Napster of banking I believe the road ahead will be far bumpier than it has been so far. The network really needs to be prepared for these bumps, not just figure them out as they come.


+1

People mining or investing in bitcoins need to always keep in mind that this is HIGH RISK.
BTC/USD may fall as fast as they rose in case of a downward spiral. We have seen -50% to -70% corrections all the time in the past 12 months

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June 01, 2011, 06:30:42 PM
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But then we have set the precedent to turn bitcoin into an inflationary currency with increasing block rewards. Bitcoin relies on trust, and if this ever becomes real that trust will be severely damaged.
Exactly, no one in his right mind would agree to change the block rewards. But changing the difficulty is a perfectly valid measure to deal with emergencies.

+1

People mining or investing in bitcoins need to always keep in mind that this is HIGH RISK.
BTC/USD may fall as fast as they rose in case of a downward spiral. We have seen -50% to -70% corrections all the time in the past 12 months

A -70% drop won't cause the effect discussed here (not in the near future anyway).

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June 01, 2011, 06:59:02 PM
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Exactly, no one in his right mind would agree to change the block rewards.
Unfortunately, I believe that the general  public would say the same of a deflationary currency. The libertarians and austrian economists are the ones who are looked upon as kooks. But sure, if the scenario I layed out were to happen right now, I do believe this community still has enough influence to make sure that the right adjustments are made. The point I tried to make to you was that in the future, the influence over bitcoin of this community may be next to nil. If that is the case, we can't be sure that the majority of miners won't settle for some other solution that sounds plausible/has better marketing.

But changing the difficulty is a perfectly valid measure to deal with emergencies.
But the cost of this would surely be a massive loss of confidence in the very concept of cryptocurrencies. I don't see how that would benefit any of us. Preventing emergencies is always better than dealing with them. If the scenario I have layed out is plausible, then I am of the belief that measures should be taken to prevent it, not to deal with it.
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June 01, 2011, 07:14:53 PM
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Way too many variables to state opinions as precise as the ones I read, so I better keep reading. Cheesy
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June 01, 2011, 07:25:10 PM
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Exactly, no one in his right mind would agree to change the block rewards.
Unfortunately, I believe that the general  public would say the same of a deflationary currency. The libertarians and austrian economists are the ones who are looked upon as kooks. But sure, if the scenario I layed out were to happen right now, I do believe this community still has enough influence to make sure that the right adjustments are made. The point I tried to make to you was that in the future, the influence over bitcoin of this community may be next to nil. If that is the case, we can't be sure that the majority of miners won't settle for some other solution that sounds plausible/has better marketing.

Indeed, the general public will gladly do whatever they are told, and they will be told inflation is good and savings are bad.

Luckily, the miners are not the general public but a specialised subgroup with much stronger incentives to preserve the value of the currency even in the face of possible short term gains from higher block rewards (as they are demonstrating every day right now).

The non-mining general public will just run software such as MyBitcoin.com or thin clients and not have any say at all in the 51% CPU vote.

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