Negative externalities of SD: blockchain bloat
Again, it's not the space in the block chain that is the big problem. All transactions take up space, and eventually we will hit the block limit on every block. The problem is that the betting loss confirmations are unprunable. So not only do they take up space in the block chain but they also increase CPU burden because these UXTO need to be kept in fast storage.
SD is different from every other Bitcoin service: it creates economically unspendable outputs, often in response to automation (i.e. bots). And it creates a lot of them.
Is SD bringing in new users in an amount equal to the disproportionate amount of shared resources that it consumes? That's an open question but I suspect that the answer is no. How can a small handful of bots generating thousands of transactions per hour help to grow the Bitcoin network?
Besides, what percentage of SD players were already existing Bitcoin enthusiasts or miners spending coin they already had versus average people who heard about SD from somewhere and decided to purchase Bitcoin from an exchange with the sole purpose of gambling?
SD is saddling the network with permanent ongoing maintenance costs without providing a corresponding benefit. Again, it is different from every other Bitcoin service.
While it's true that the success of SatoshiDICE is definitely putting Bitcoin on the radar as a gambling method, established casinos don't need parlor tricks like directly interacting with the block chain using zero confirmations. Their customers already trust them to manage their account balance centrally.
It would probably be more accurate to say that the major effect of SD's impact is to redistribute Bitcoin wealth away from already-existing Bitcoin users who have an affinity for gambling, over towards the shareholders of S.DICE and in a marginal way the miners. Sure, I'll give you that this enriches a handful of business entities and creates for some exciting news headlines but how many new users does it bring in?
If SD should be punished for the negative externalities, should it be rewarded for the positive ones?
Sure, any positive externalities that SD creates which go significantly above the positive externalities that every normal Bitcoin business creates simply by virtue of operating on the network. Unfortunately, there aren't any. Note that Bitcoin already rewards early adopters who create positive externalities by spending their aged coins: they can be sent without a fee.
http://SatoshiRoulette.com doesn't create economically unspendable outputs, why does SD need to? I've already provided a few workarounds, what did you think about them?
Edit: This whole problem would go away if SD instead of sending 1 satoshi or 5,000 satoshi for a loss confirmation, just send an amount equal to the transaction fee. Sure, SD's costs would go up but that's the ethical thing to do because right now SD is offloading those costs onto the network. Yes I know that this is a problem with the Bitcoin protocol and it needs to be fixed but in the meanwhile, wouldn't it be polite to fix it at the source?
Edit: A second solution is to require a small deposit, equal to the transaction fee, with each bet. The deposit is always refunded on both a win or loss. The deposit takes the place of the 1 satoshi or 5,000 satoshi output. This would save SD a bit of money.
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