The deflationary problem

[Sweft]

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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[MoonShadow]

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?

[gollum]

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.

[myrkul]

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.

[TerryHyden]

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.

[myrkul]

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?

[JoelKatz]

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.

[MoonShadow]

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. 

[JoelKatz]

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.)

[molecular]

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?

[Sweft]

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.

[myrkul]

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?

[Sweft]

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.

[justusranvier]

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.

[myrkul]

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.

[jtimon]

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?

[Sweft]

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.

[myrkul]

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?

[Impaler]

Sweft:  I think you over estimate the depth of thought of your opposition, the argument I hear is simple "Inflation is THEFT!!!" and fractional reserve is just attacked as "Making money from nothing" without really connecting the two as you have done.

That said I don't think your logic is correct in that a commodity money solves a problem with fractional reserve lending.  The key distinction is that their are TWO kinds of money, cash money and debt money.  Cash money is the real thing that acts as a medium of exchange, it is fungible, every unit is identical and once it passes from one person to another its 'history' is forgotten, aka its a bearer bond.  Debt money is not fungible, it is always the debt OF someone and is owed to some else and that WHO always matters, the only relation it bears to cash money is the unit of account which it takes from cash.  But debt money as the name implies CAN be used as money, if I have some IOUs from a reliable person I can trade these to anyone well aware of the debtors credit worthiness at very near face value.

Banks can create debt money and yes they do 'create it from thin air' but their ability to do this is independent of the nature of cash money, it's instead built upon the networks of credit worthiness monitoring, law enforcement etc that makes sure we pay our debts or pay a high price for not doing so.  This gives the would be buyer of the debt a high degree of confidence that it will be re-payed, the higher the confidence the higher the debt trades as a percentage of face value.  Now regardless of if you believe this is good, bad or ugly the amount of this debt money created is going to be determined by repayment confidence and leverage limits (which ever is lower) and not at all on the nature of the underlying cash money.

When you say that monetizing dept by printing money makes them indistinguishable this is not entirely correct, the unit of account is decreased in value and because they share that both debt and cash decline in value.  But the non fungible nature of debt means repayment confidence is always a factor and by reducing the unit of account your making repayment easier and more likely, after a crisis when repayment confidence has crashed it may be possible for lenders to gain by this trade off, they would prefer 80% of dept to be re-payed with money that has lost half its value then for 10% to be payed in undiminished value money.  In general we can always expect a lender to suffer a smaller loss under inflation then dose a cash money holder, because some of the lenders inflation loss will be compensated for by higher repayment rates.

[MoonShadow]

Sweft:  I think you over estimate the depth of thought of your opposition

If anything, he under estimates it.  For the most part, his opposition isn't interested in convincing him of anythin, most who post here are just trolling him.  In the long run, not only are we all dead, our grandchildren will receive the benefits of our foresights.  If Sweft is correct, and he actually does something about it beyond arguing about it with people on the Internet, then his grandchildren will benefit and they will be thankful for it.  If we are correct, our grandchildren will be thankful.  In the near term; however, there is no point in us arguing about it, since Bitcoin is presently, and will continue to be for long after my natural life span, a rather inflationary currency.