Bitcoin: Some Issues

[xavier]

I just spent some time considering whether to invest more in bitcoin. I spent a lot of time thinking about it , was on the point of transacting, and decided not to. I thought I'd post my reasons here for general information. No doubt they will get hounded down by all those people who have an interest in more buying of bitcoin , well who cares. I think the 1 or 2 posts by people who can make useful comments on this post is worth 100 posts of angry speculators. I'm going to spare the reasons to invest because they are widely circulated here. I'm also declaring that I have an existing holding in bitcoins.

* Scalability. The block chain limit is 1MB per block. Until this limit is removed, there is a limit on the number of transactions that can be made per second. Right now it seems we are at an average transaction usage of 0.2MB per 1MB block. When this approaches 1MB , there will be problems on the network - transactions will take a long time to be moved into blocks, leading to increasing slippage, loss of transactions. At the current growth rate in usage, assuming a 10% monthly growth rate in transaction volume, this will happen at the end of 2014.

* Encryption. Yes its a long way off, but the SHA256 and other algorithms required for bitcoin will be broken at some time. If bitcoin ever survives this long, when any of these algorithms are broken it could cause irreversable problems.

* Community. These issues (mainly scalability) are being discussed at length on the technical forums. Yet no solution has been found. Or rather *agreed on* - at least as far as I can see in these forums. Assuming the issue with scalability can be addressed in the form of maybe expanding the block size limit, then good for bitcoin. However this just brings up a further issue of an ever increasing block chain size. However let's ignore this for the moment and assume that the (exponential) past increases in bandwidth and storage along with time will make continue into the future making this a non issue. There seem to be multiple technical issues that may/will arrive in the future that as far as I can see have not been addressed. AFAIK there is the Bitcoin Foundation, a collection of those people who are most invested in bitcoin, who will work towards addressing these issues. However if they are not addressed, bitcoin will not continue working. So a bet on bitcoin is betting that these issues will be solved and therefore the effectiveness of the Bitcoin Foundation. Well I'm not sure of how this Foundation works - Im sure that they will make good decisions regarding the architecture given that they are all involved in it so heavily. However the question is, will their decision making be good for them and the ordinary bitcoin investor who holds bitcoins, or just good for them.

Sorry to post this, I know its a negative outlook. I welcome your comments.

[gaston909]

I just spent some time considering whether to invest more in bitcoin. I spent a lot of time thinking about it , was on the point of transacting, and decided not to. I thought I'd post my reasons here for general information. No doubt they will get hounded down by all those people who have an interest in more buying of bitcoin , well who cares. I think the 1 or 2 posts by people who can make useful comments on this post is worth 100 posts of angry speculators. I'm going to spare the reasons to invest because they are widely circulated here. I'm also declaring that I have an existing holding in bitcoins.

* Scalability. The block chain limit is 1MB per block. Until this limit is removed, there is a limit on the number of transactions that can be made per second. Right now it seems we are at an average transaction usage of 0.2MB per 1MB block. When this approaches 1MB , there will be problems on the network - transactions will take a long time to be moved into blocks, leading to increasing slippage, loss of transactions. At the current growth rate in usage, assuming a 10% monthly growth rate in transaction volume, this will happen at the end of 2014.

* Encryption. Yes its a long way off, but the SHA256 and other algorithms required for bitcoin will be broken at some time. If bitcoin ever survives this long, when any of these algorithms are broken it could cause irreversable problems.

* Community. These issues (mainly scalability) are being discussed at length on the technical forums. Yet no solution has been found. Or rather *agreed on* - at least as far as I can see in these forums. Assuming the issue with scalability can be addressed in the form of maybe expanding the block size limit, then good for bitcoin. However this just brings up a further issue of an ever increasing block chain size. However let's ignore this for the moment and assume that the (exponential) past increases in bandwidth and storage along with time will make continue into the future making this a non issue. There seem to be multiple technical issues that may/will arrive in the future that as far as I can see have not been addressed. AFAIK there is the Bitcoin Foundation, a collection of those people who are most invested in bitcoin, who will work towards addressing these issues. However if they are not addressed, bitcoin will not continue working. So a bet on bitcoin is betting that these issues will be solved and therefore the effectiveness of the Bitcoin Foundation. Well I'm not sure of how this Foundation works - Im sure that they will make good decisions regarding the architecture given that they are all involved in it so heavily. However the question is, will their decision making be good for them and the ordinary bitcoin investor who holds bitcoins, or just good for them.

Sorry to post this, I know its a negative outlook. I welcome your comments.

Interesting points which are beyond me.... anyone have anything to offer?

[Timo Y]

* Encryption. Yes its a long way off, but the SHA256 and other algorithms required for bitcoin will be broken at some time. If bitcoin ever survives this long, when any of these algorithms are broken it could cause irreversable problems.

These algorithms can be substituted for better algorithms in a hard fork.

We already have empirical evidence that bitcoin is able to survive a hard fork as long as there is broad consensus about it.

If these functions are broken, it's likely that they will be broken gradually and there will be enough time to react.

How long is your investment timescale? 30 years?

[WinVery.com]

Nothing says good investment like high demand and fixed supply.

[Mike Christ]

Nothing says good investment like high demand and fixed supply.

[Elwar]

Please do not invest in Bitcoin. I still have more money to put in and would rather the price stay low while I do so.

When it comes time to move into Bitcoin when it is necessary or much more convenient/cost efficient, you will at least have some understanding of how it works.

Enjoy the fiat.

[WinVery.com]

Enjoy the fiat.

vroom vroom

[amincd]

We already have empirical evidence that bitcoin is able to survive a hard fork as long as there is broad consensus about it.

What empirical evidence? Bitcoin hasn't had a hard fork since 2010 when the network was much smaller than now.

Bitcoin will have to survive a hard fork, and I think it can, but there's no precedent.

[alexeft]

Enjoy the fiat.

vroom vroom

 

[justusranvier]

What empirical evidence? Bitcoin hasn't had a hard fork since 2010 when the network was much smaller than now.

Only true if by "2010" you mean "earlier this week".

[amincd]

That wasn't a hard fork as only miners had to upgrade. A change in the protocol would require every one running a full client to upgrade or else not be able to use their coins in the main network.

[justusranvier]

That wasn't a hard fork as only miners had to upgrade.

Not quite. All non-mining full nodes had to learn about version 2 blocks first, and the rules about when version 1 blocks would no longer be valid before the miners were required to change.

The hard fork started when clients which understood the changes were released and finished earlier this week when the 95% threshold was reached. Sufficiently old clients which might still be operating either can't see the most current branch of the blockchain or else can be fooled into accepting an invalid block.

[xavier]

These algorithms can be substituted for better algorithms in a hard fork.

We already have empirical evidence that bitcoin is able to survive a hard fork as long as there is broad consensus about it.

If these functions are broken, it's likely that they will be broken gradually and there will be enough time to react.

How long is your investment timescale? 30 years?

IMO - some of these issues will arise alot sooner than 30 years, I think in just the next year or 2 years.

For example - there is going to have to be something done about the block size limit. However miners will not want to increase this limit, because it means less profit for them (because larger block size = less blocks mined). So maybe Bitcoin Foundation will decide to change some other aspect of the protocol to compensate for the miners - for example, they could allow the miners to 'mine' more coins. This would be good for the miners and resolve any conflict over loss of profit for the miners hence solving the block size issue, but would be bad for all private investors in bitcoin (because it would mean more coins issued above the 21m limit - which is after all just a convention in the software - therefore reducing value per coin).

I'm of course speculating, but its clear that the protocol is going to have to be changed and the people who have the most influence in changing it are not the individual investors who (Im assuming) are buying and using the currency - it's the big miners and bitcoin companies who are hugely represented in and by the Bitcoin Foundation board.

[kjj]

That wasn't a hard fork as only miners had to upgrade.

Not quite. All non-mining full nodes had to learn about version 2 blocks first, and the rules about when version 1 blocks would no longer be valid before the miners were required to change.

The hard fork started when clients which understood the changes were released and finished earlier this week when the 95% threshold was reached. Sufficiently old clients which might still be operating either can't see the most current branch of the blockchain or else can be fooled into accepting an invalid block.

Uh, no.  You are confusing two completely different things.  The network is on v2 blocks right now, but those blocks are fully compatible with old nodes, as long as those nodes are not providing work to miners.  v2 blocks look totally normal to pre-v2 nodes, but non-v2 blocks look different to v2 nodes.

For example, I still have a pre-0.4 node running.  It had no problems with the v2 transition.

The recent fork was something totally different.

[justusranvier]

The network is on v2 blocks right now, but those blocks are fully compatible with old nodes, as long as those nodes are not providing work to miners.  v2 blocks look totally normal to pre-v2 nodes, but non-v2 blocks look different to v2 nodes.

Not true. An old node that doesn't know about the 95% changeover rule won't realize that any v1 blocks it sees now are invalid. In principle this can be the basis for an attack.

[kjj]

The network is on v2 blocks right now, but those blocks are fully compatible with old nodes, as long as those nodes are not providing work to miners.  v2 blocks look totally normal to pre-v2 nodes, but non-v2 blocks look different to v2 nodes.

Not true. An old node that doesn't know about the 95% changeover rule won't realize that any v1 blocks it sees now are invalid. In principle this can be the basis for an attack.

Yes, but someone has to generate non-v2 blocks faster than the network is generating v2 blocks.  Translation: same attack has existed since day 1.

[justusranvier]

The point is that the transition to v2 blocks is a hard fork because old and new clients disagree about which blocks are valid.

It was handled gracefully in a controlled manner, unlike the unexpected one resulting from the BDB bug, but a hard fork none the less.

The only difference seems to be that few people were opposed to the change, so the non-pejorative term "mandatory upgrade" was used to describe it instead of calling it a "hard fork".

[jubalix]

That wasn't a hard fork as only miners had to upgrade. A change in the protocol would require every one running a full client to upgrade or else not be able to use their coins in the main network.

but that's not hard....upgrade xp/7, osx lepoard.snow.lion.mt....people do this and still access their old email accounts

[amencon]

If you don't mind me asking, is there something else you will choose instead, or were you going to be swapping one of your other investments in favor of Bitcoin?

I ask, because I'm genuinely interested in what people who are considering investing in Bitcoin are currently doing.

Nothing doing then? Guess I'll stick with what I know.

Relatively cheap high cash-flowing multi-unit rental properties.  The viablility of this is of course highly dependent on the housing market in your area.

I'm already invested in some bitcoins so I don't really fit the target of your question though.

[mjc]

These algorithms can be substituted for better algorithms in a hard fork.

We already have empirical evidence that bitcoin is able to survive a hard fork as long as there is broad consensus about it.

If these functions are broken, it's likely that they will be broken gradually and there will be enough time to react.

How long is your investment timescale? 30 years?

IMO - some of these issues will arise alot sooner than 30 years, I think in just the next year or 2 years.

For example - there is going to have to be something done about the block size limit. However miners will not want to increase this limit, because it means less profit for them (because larger block size = less blocks mined). So maybe Bitcoin Foundation will decide to change some other aspect of the protocol to compensate for the miners - for example, they could allow the miners to 'mine' more coins. This would be good for the miners and resolve any conflict over loss of profit for the miners hence solving the block size issue, but would be bad for all private investors in bitcoin (because it would mean more coins issued above the 21m limit - which is after all just a convention in the software - therefore reducing value per coin).

I'm of course speculating, but its clear that the protocol is going to have to be changed and the people who have the most influence in changing it are not the individual investors who (Im assuming) are buying and using the currency - it's the big miners and bitcoin companies who are hugely represented in and by the Bitcoin Foundation board.

It's interesting how these things keep resurfacing : https://bitcointalk.org/index.php?topic=7769.0

What worries me is that many people not capable of actually doing the research, or understanding the math, will tend to side with the xavier "Better to be safe than sorry", not realizing they are more likely to see a single person will a Mega Million lottery jackpot 1,000 times.  I didn't perform the math to quantify that so it might actually that they would have to win it many magnitude more than that, I went low since even that number makes the point.

In order to break a hash you'll need to create a precomputed hash table which changes every time the difficulty changes.  Since it'll take years to finish, and the difficulty changes every two weeks, it is not very likely to occur.  The computational power to complete it in a few years is greater than the power of the current bitcoin network.  Seems to me the money would be better spent trying to acquire 51% of the network.

Consider this, at the current difficulty we will only find 2016, of the 21,000,000 potential blocks with the current network hash rate.  you would have to possess 10,416.6666 times the current network hash rate in order to build such a precomputed table.  This is precisely why the higher the network hash rises the safer the network.