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Author Topic: The deflationary problem  (Read 30783 times)
Sweft
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April 30, 2013, 10:05:07 PM
 #261

Network hash must grow at least at the rate of Moore's Law.  This is also known as Sweft's Law.  If Bitcoin fails to satisfy this condition, then it will be prone to attack.

Why wouldn't hashrate grow according to Moore's law. If hardware performance increases in hashrate per $, everything else being equal, why wouldn't the bitcoin network hashrate increase accordingly and Sweft's Law be satisfied?

There will always be new miners entering the game with new up-to-date hardware (or existing miners upgrading) and old rigs will drop out, keeping bitcoin hashing equipment up-to-speed with moore's law.


An explanation of Sweft's Law for those having trouble understanding it.

Moore's Law states that the number of transistors doubles every two years.

This means two years from now, the cost of the network (hash / ($ / hash)), given equivalent hash, will be half.

And half in another two years. And half in another 4 years.

That means in 6 years it will take 1/8th the amount of capital to replicate the original hash.

Thus, the network must grow at the rate of Moore's Law to sustain the value of its hash so that the value to replicate the original hash does not decrease.

That means that the network must double its hash every two years.

Every two years there has to be a capital investment equivalent to the cost of network hash / 2 to double the hash in accordance with Sweft's Law.


But then we also have to calculate electricity costs, which i will do later.
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MoonShadow
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April 30, 2013, 10:23:22 PM
 #262

This is a good point.  Block reward is fixed, tx fees are not.  Thus, someone can solve blocks at negative cost and bankrupt all other miners, since he can reduce his tx fee to 0.

This is a nonsense statement.  It's impossible for any entity to bankrupt all other miners, no matter his transaction fees.  Not only would any such miner have to aquire the capital investment in order to build his network to beyond 51%, an uphill battle considering the vast majority of the current running network (now or at any other time) is a sunk cost already paid for; he would also have to compete with the hobbyist miners who benefit from co-generation of waste heat.

I have a GPU based mining rig that I choose not to use, that I can use for space heating in my garage at will.  No miner can bankrupt me.

Therefore your "law" is invalid.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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April 30, 2013, 10:26:25 PM
 #263

This is a good point.  Block reward is fixed, tx fees are not.  Thus, someone can solve blocks at negative cost and bankrupt all other miners, since he can reduce his tx fee to 0.

This is a nonsense statement.  It's impossible for any entity to bankrupt all other miners, no matter his transaction fees.  Not only would any such miner have to aquire the capital investment in order to build his network to beyond 51%, an uphill battle considering the vast majority of the current running network (now or at any other time) is a sunk cost already paid for; he would also have to compete with the hobbyist miners who benefit from co-generation of waste heat.

I have a GPU based mining rig that I choose not to use, that I can use for space heating in my garage at will.  No miner can bankrupt me.

Therefore your "law" is invalid.

That has nothing to do with my Law.  That specific vulnerability was something that someone else posted, not me.

If you believe you can use your mining to convert electricity into heat, i hope you live in a very cold climate.
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April 30, 2013, 10:49:26 PM
 #264

This is a good point.  Block reward is fixed, tx fees are not.  Thus, someone can solve blocks at negative cost and bankrupt all other miners, since he can reduce his tx fee to 0.

This is a nonsense statement.  It's impossible for any entity to bankrupt all other miners, no matter his transaction fees.  Not only would any such miner have to aquire the capital investment in order to build his network to beyond 51%, an uphill battle considering the vast majority of the current running network (now or at any other time) is a sunk cost already paid for; he would also have to compete with the hobbyist miners who benefit from co-generation of waste heat.

I have a GPU based mining rig that I choose not to use, that I can use for space heating in my garage at will.  No miner can bankrupt me.

Therefore your "law" is invalid.

That has nothing to do with my Law.  That was what someone else posted, not me.

If you believe you can use your mining to convert electricity into heat, i hope you live in a very cold climate.

I don't, personally.  Yet, for this exact reasoning, I have long ago predicted that Reykjavík, Iceland will likely become a mining hub due to the confluence of factors including a relatively low electric rate (due to geothermal resources), a high demand for space heating and a high degree of international Internet connectivity, along with other more minor factors.  I also predict that asic mining chips will eventually be included into electric "heat trace" cabling intended to produce spot heating to protect public and private infrastructure from extreme cold.  I've personally been involved in many such projects, and the cable currently in use, although really just a continuous resistor, is already very expensive.  A co-mining method would simply represent an alternative income source to counterbalance the capital costs of such infrastructure.  Oil and gas pipelines in the arctic require quite powerful heat cabling across their entire length.  Imagne the hashrate of a strip of asic chips along a linier network and power line, with each chip placed one per foot along it's length AND circumference, in order to achieve a targeted watts per foot.  In my own mild climate, the watts per foot range is 3-7 watts per liner foot for insullated pipes of less than 3" in diameter and 7 watts per square foot of insulated surface.  I have not even seen a project that was les than 3 watts per square foot.  Every public parking garage in the US built since 1985 (in regions that freeze in winter) has pressurized sprinkler systems required by code & insurance, and every linier foot of insulated pipe you might see when you look up has at least 3 watts per foot of heating cable that must energize whenever the local temp drops below 33 degrees (and usually much warmer due to insurance worries).  What do you suspect woudl happen once Bitcoin is as big an economy as many of us believe it will be?  Do you honestly think that Bitcoin wise engineers will not incorporate spot heat co-mining in such infrastructure?

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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May 01, 2013, 03:12:24 PM
 #265

Gresham's law is an economic principle that states: "When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good". http://en.wikipedia.org/wiki/Gresham's_law

Applying Gresham's law to crypto currencies: some inflationary crypto currency will eventually be widely accepted and drive out BitCoin that is deflationary in nature.
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May 01, 2013, 03:26:40 PM
 #266

Gresham's law is an economic principle that states: "When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good". http://en.wikipedia.org/wiki/Gresham's_law

Applying Gresham's law to crypto currencies: some inflationary crypto currency will eventually be widely accepted and drive out BitCoin that is deflationary in nature.

That would require a government to enforce an exchange rate. Since that's not happening, nor will it, the opposite of Gresham's law applies, and good money drives out bad.

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May 01, 2013, 05:57:50 PM
 #267

What do you suspect woudl happen once Bitcoin is as big an economy as many of us believe it will be?  Do you honestly think that Bitcoin wise engineers will not incorporate spot heat co-mining in such infrastructure?

Some bitcoins will always be lost but the effect will be astonishingly small; people are not going to accidentally lose several percent of their money per year. The real issue is growth deflation. As the economy grows the same amount of money can buy more stuff than before simply because the stuff is cheaper to produce. That is cheaper measured in real resources such as labor, electricity or steel.

This kind of deflation is very beneficial because it is interest on a loan, the return of a real investment. The money consumes no resources and is entirely useless until it is spent. The seller hopes to regain the value lost in the sale in the future, by spending the money. In effect, the seller has lent out a real resource with hopes of getting paid back in the future.
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May 01, 2013, 06:06:46 PM
 #268

What do you suspect woudl happen once Bitcoin is as big an economy as many of us believe it will be?  Do you honestly think that Bitcoin wise engineers will not incorporate spot heat co-mining in such infrastructure?

Some bitcoins will always be lost but the effect will be astonishingly small; people are not going to accidentally lose several percent of their money per year. The real issue is growth deflation. As the economy grows the same amount of money can buy more stuff than before simply because the stuff is cheaper to produce. That is cheaper measured in real resources such as labor, electricity or steel.

This kind of deflation is very beneficial because it is interest on a loan, the return of a real investment. The money consumes no resources and is entirely useless until it is spent. The seller hopes to regain the value lost in the sale in the future, by spending the money. In effect, the seller has lent out a real resource with hopes of getting paid back in the future.

While everything you say is true, It isn't really a reply to MoonShadow's post. He's talking about using bitcoin mining waste heat to keep pipes from freezing. If you're going to be throwing watts away to keep the pipes warm, might as well include a little revenue stream while you're at it, right?

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May 01, 2013, 06:10:39 PM
 #269

I do know what a 51% attack is.  Even then, it would be limited to whomever had recently sold the attackers something of value.  A 51% attacker cannot steal coins that he has never legitimately possessed.
A 51% attacker can do almost anything except steal coins that have not moved recently.

Consider, for example, a 51% attacker who follows this model:

1) He buys a large number of Bitcoins.

2) He starts building his own block chain with the first block containing a transaction moving all his Bitcoins to another of his own accounts and no other blocks containing any transactions.

3) He starts depositing his Bitcoins at online wallets and exchanges. He also withdraws them, depositing them in other services, and then withdrawing them from those. He gradually begins to turn his Bitcoins into Litecoins, Liberty Reserve, and the like, using as many Bitcoin transactions from as many services as possible.

4) Many Bitcoin wallets and services begin to hold large amounts of Bitcoins that trace back to his Bitcoins. Other people who withdraw from online wallets and exchanges get Bitcoins the attacker deposited.

5) The attacker now releases his longer chain with no transactions but the one that invalidates all of his deposits to the public. Now, a significant fraction of Bitcoin withdrawals and exchanges find themselves undone. Whoever held anything traceable to his original Bitcoins, now widely distributed through the Bitcoin ecosystem, finds their balances drop.

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May 01, 2013, 06:55:47 PM
 #270

A 51% attacker can do almost anything, except steal bitcoins that he has never legitimately possessed.  It is impossible for any attacker to steal my coins in cold storage, even if he sold them to me a couple of months ago, due to checkpointing. 

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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Democracy is vulnerable to a 51% attack.


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May 01, 2013, 09:55:57 PM
 #271

A 51% attacker can do almost anything, except steal bitcoins that he has never legitimately possessed.
The problem is that he can fairly easily set things up so that he has legitimately possessed a significant fraction of the coins in circulation, far more than the number of Bitcoins he holds. He can do this by "churning" his Bitcoins through online wallets and exchanges.

Exchanges are actually at the highest risk. I can't see any excuse they could make for not making good on any withdrawal that was subsequently undone. And they could find a significant fraction of the Bitcoins they think they hold disappear from their wallet. I'm not sure they could justify debiting customer accounts for deposits they had accepted that were subsequently undone either.

Long-term holders of Bitcoins are safe, assuming they don't try to move their Bitcoins during the attack. (Which nobody would know until it was too late.)

I am an employee of Ripple.
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May 02, 2013, 02:53:58 PM
 #272

Network hash must grow at least at the rate of Moore's Law.  This is also known as Sweft's Law.  If Bitcoin fails to satisfy this condition, then it will be prone to attack.

Why wouldn't hashrate grow according to Moore's law. If hardware performance increases in hashrate per $, everything else being equal, why wouldn't the bitcoin network hashrate increase accordingly and Sweft's Law be satisfied?

There will always be new miners entering the game with new up-to-date hardware (or existing miners upgrading) and old rigs will drop out, keeping bitcoin hashing equipment up-to-speed with moore's law.


An explanation of Sweft's Law for those having trouble understanding it.

Moore's Law states that the number of transistors doubles every two years.

This means two years from now, the cost of the network (hash / ($ / hash)), given equivalent hash, will be half.

And half in another two years. And half in another 4 years.

That means in 6 years it will take 1/8th the amount of capital to replicate the original hash.

Thus, the network must grow at the rate of Moore's Law to sustain the value of its hash so that the value to replicate the original hash does not decrease.

That means that the network must double its hash every two years.

Every two years there has to be a capital investment equivalent to the cost of network hash / 2 to double the hash in accordance with Sweft's Law.


But then we also have to calculate electricity costs, which i will do later.

I don't get it... bitcon network hashrate could just increase forever. what's the problem with that?

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May 02, 2013, 08:06:31 PM
 #273


I don't get it... bitcon network hashrate could just increase forever. what's the problem with that?
Of course anything can happen.  But that isn't a rational argument in favor of a deflationary cryptocurrency.  The whole point of this thread is to argue in favor of an inflationary cryptocurrency.

The less inflationary the cryptocurrency becomes, the more it depends on tx fees for revenue rather than block reward.  Why do you remove a stream of revenue from the the profits of miners when it is their job to create a secure network?

I'm not sure you even read anything in this thread.

As I explained above:

The network must increase hash at a rate of total cost of network hash / 2 every 2 years.

If the network must double in present size of hashrate, then the cost of doubling the hashrate in 2 years will be the value of half the network hashrate in the present.

For example.

If the network is valued at 30b in the future (30b is a minor barrier to entry, which i don't think will be enough, perhaps 300b), but let us use 30.  In 2 years the cost of that hash will be 15b.  Thus every two years, for the network to grow at the rate of Moore's rate, the network must invest 15b for the cost to replicate network hash not to decrease.  Otherwise, if the network does not invest half of its cost every two years, the barrier to replicate the original hash will decrease to 0 over time.

As I explained previously.

Given 1% inflation, the value of the cryptocurrency must be at least 25x the cost of network hash for miners to profit + electricity costs.
Given 2% inflation, the value of the cryptocurrency must be at least 12.5x the cost of network hash for miners to profit  + electricity costs.
Given 3% inflation, the value of the cryptocurrency must be at least 8.3x the cost of network hash for miners to profit + electricity costs.

Given 0% inflation, for us to mimic 2% inflation:
If tx fees is 1%, then velocity of bitcoins has 2.
If tx fees is .5%, then the velocity of bitcoins has be to 4.  That the total bitcoins sent every year must be equivalent to 4 times the amount of bitcoins in circulation.
if tx fees is 0%, then there is no mining profit and we have a problem where it's possible that mining cartels are actively undermining the system.  This is not possible with an inflationary cryptocurrency.

But transaction fees cannot mimic inflation for revenue because inflation will naturally also have the same revenue stream of tx fees.

There really is absolutely no benefit for this type of a cryptocurrency not to be inflationary.
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May 02, 2013, 08:32:43 PM
 #274

There really is absolutely no benefit for this type of a cryptocurrency not to be inflationary.

Then why are you still using it? Why aren't you using one of the inflationary altcoins? More to the point, why are you still bugging us about it?

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May 02, 2013, 08:43:52 PM
 #275

There really is absolutely no benefit for this type of a cryptocurrency not to be inflationary.

Then why are you still using it? Why aren't you using one of the inflationary altcoins? More to the point, why are you still bugging us about it?
This is a discussion about the ramifications of inflation and deflation and I'm sure many people have benefited in their understanding of cryptocurrency economics from my theories.  How am i bugging you?

There isn't an inflationary coin with the properties that i like.
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May 02, 2013, 08:46:00 PM
 #276

There isn't an inflationary coin with the properties that i like.
Then make one and post all about it in the alt cryptocurrencies section.
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May 02, 2013, 08:49:33 PM
 #277

There isn't an inflationary coin with the properties that i like.
Then make one. When Bitcoin "inevitably" fails due to the causes you've outlined here, and everyone switches, you'll be rich.

Satoshi made a currency that fixes the problems he saw in the current monetary system, and if you see problems with his, you're free to follow suit. I wish you luck.

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May 02, 2013, 10:03:39 PM
 #278

The money consumes no resources and is entirely useless until it is spent.

Money is useless to its possessor until it is spent?
Yeah, and a wildcard is completely useless within a game until you show it, right?

The seller hopes to regain the value lost in the sale in the future, by spending the money. In effect, the seller has lent out a real resource with hopes of getting paid back in the future.

Who is the counterparty in this loan?
If it is the economy and thus the society as a whole, why the society as a whole should be forced to accept such conditions?
Why if many people "lend money" like this at the same time they get apparently get all rich by the very deflation their hoarding has created, even if the drop in prices doesn't translates in more investment?
Where is that growth for the hoarders-at-the-same-time comes from?


2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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May 02, 2013, 10:23:48 PM
 #279

I think the inflation people have a trouble with is fiat fractional reserve lending.

Why?

Because if you fractionally lend money, that original money that was lent should in theory be distinguished from debt by having some essence.  The issue is with fiat the original money and the debt become indistinguishable when they monetize the debt by printing money.

If you lend based on gold, that original loan is still owed to you, so by default every loan that was fractionally created from gold is still the very same original gold. Therefore the money is distinguished from the debt because it must be returned to the lender since you cannot counterfeit it (print).

The same applies with bitcoin fractional lending as does with gold.  Pre-programmed inflation in bitcoin should behave nothing like fiat inflation, because the debt cannot be monetized.  The debt must be returned to the lender.

And if you notice throughout history gold has inflated and will continue to inflate, but since gold mining requires energy, as bitcoin mining does, the inflation is beneficial to its value because it allows for a larger adoption base and solves the first adopter problem.  

Inflation is not the enemy of bitcoin.
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May 02, 2013, 11:01:19 PM
 #280

And if you notice throughout history gold has inflated and will continue to inflate, but since gold mining requires energy, as bitcoin mining does, the inflation is beneficial to its value because it allows for a larger adoption base and solves the first adopter problem.
Do you consider the world's gold supply to be infinite?

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