Criticism of Bitcoin

[minerva]

I have little programming knowledge. But I am a student of economics, I'm not sure how many of these criticisms have been made before.

I'm not sure, but would it be possible for the number of honest transactions to exceed available bandwidth for most computers (if they engaged in checking as well).

Restricting the total amount of bitcoins that can be mined will become a bottleneck. Supposedly the Winklevossi own 1% of the current bitcoin supply. This doesn't harm it's use as a medium of exchange (except for menu costs of tracking the Mt. Gox exchange rate), but it won't replace the dollar as a medium of transaction.

This is bad for a few reasons.

One, it incentives large mining pools. Small mining operations that generate 2 GHash/s may never generate a bitcoin block, thus they must use pools to net a few bitcoins per week. This probably is a minor issue, as long as the major pools are trustable.

Two, it will simply mean that Bitcoins will be become a means of money laundering, particularly since 90% of bitcoins will be sat upon, and the remaining 10% to be used for whatever purpose. Every so often, there will price bubbles caused by a real world event. Those bubbles will pop because maybe 2% of that 90% will cash out (cash in?). If the value of bitcoin continually increases, the portion of bitcoins that will remain out of circulation will increase, only to decrease slightly whenever a bubble bursts. It's entirely possible that there will be a huge crash at some future point, because there is no possible tracking of the number of bitcoins out of circulation (to my knowledge). Current statistics only show (1) the number of bitcoins generated, (2) the number of bitcoins exchanged. Nothing on the number of bitcoins actually in circulation, or the velocity of the bitcoins in circulation. It is possible the velocity of what few bitcoins are in circulation are very high due to satoshi dice.

Three, if Bitcoins become primarily use as a form of money laundering, a government can and will be able to ban bitcoins through some method. This is not out of some power grab, but because the majority of citizens believe people should not take drugs such as heroin. While it is possible to create an alternate internet using your phone line, this would shut down bitcoins for all intents and purposes. Fortunately, it appears as if most transactions involve Satoshi dice, although it's possible drug dealers use multiple accounts to reduce their "popularity."

Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins,  prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.

Ideally in my opinion, a better bitcoin (cryptodollar?) would set the number of bitcoins per block based not on a preset formula restricting the total money supply at some future date, but by a formula that would exponentially decrease the return of cryptodollars generated per day based upon mining. Something like (hashes/(10^6)*2^(years since creation))^.5 [1]. While the inventor of bitcoin wanted to reward early adopters, like I said, the current system has perverse incentives that prevent using bitcoin like an actual currency. I would prefer a block generation method using diseconomies of scale, but another person could come up with a better method. Hash difficulty should be high enough to prevent hyperinflation, but not too low to prevent deflation.


Unfortunately, you cannot easily conduct trial and error test runs for what the ideal formula is, unless you are immortal and own a time machine.


But it is also too late to see anything created based on my proposal until bitcoin collapses in one final panic. Bitcoin is the household name for cryptocurrencies at the moment, and names do carry inertia. A major institution/government would need to back an any new cryptocurrency for the cryptocurrency to displace bitcoin.

1. The formula is hashes generated in the current time period, divided by one million, multiplied 2 times the years since creation, to the half power (or the whole formula is square rooted). Basically, ceteris paribus (all else being equal), for every doubling of hash production, the total amount of cryptodollars produced will only increase by 40%. Ceteris paribus, for every year after adoption, the total amount of cryptodollars produced will halve. For example, multiplying hash production by 55,000,000 will only multiply cryptodollar production by 7,416. Thus exponentially less hashes will be used. This would also curtail the effects of Moore's laws.


To a certain degree, this is draft, so I might add more to it later.

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[coldguy]

The reason that I choose bitcoin is that I do not believe government's fiat money. The only reason that the fiat money can still exist is because they put a gun on my neck to make me use it, and those officials are sitting behind the banks' server clicking mouse to pump the fiat paper into the computer system to circulate.

I choose to believe in bitcoin. I know every bitcoin I get today will still be one bitcoin tomorrow. If I don't want to spend it, someone else could not copy my coin to spend it.

Also, don't blame bitcoin for trading drugs. Actually, those drug dealers always had quite a lot of cash of US dollars for their trading. As US dollar has helped so many drug trades, should we ban it first?

[minerva]

The reason that I choose bitcoin is that I do not believe government's fiat money. The only reason that the fiat money can still exist is because they put a gun on my neck to make me use it, and those officials are sitting behind the banks' server clicking mouse to pump the fiat paper into the computer system to circulate.

I choose to believe in bitcoin. I know every bitcoin I get today will still be one bitcoin tomorrow. If I don't want to spend it, someone else could not copy my coin to spend it.

Also, don't blame bitcoin for trading drugs. Actually, those drug dealers always had quite a lot of cash of US dollars for their trading. As US dollar has helped so many drug trades, should we ban it first?

...I'm not blaming bitcoin??? You may not be aware, but people do vote. There's isn't a corporate conspiracy to ban drugs. An overwhelming number of US citizens dislike hard drugs, and a law may go to vote banning bitcoin. Whether or not that law passes or is upheld by the courts, bitcoin would die once people panic and dump their bitcoins, increasing the bitcoin supply a thousand percent, potentially. Probably didn't need to respond to your post anyway.


I'm adding an: Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins,  prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.

[coldguy]

...I'm not blaming bitcoin??? You may not be aware, but people do vote. There's isn't a corporate conspiracy to ban drugs. An overwhelming number of US citizens dislike hard drugs, and a law may go to vote banning bitcoin. Whether or not that law passes or is upheld by the courts, bitcoin would die once people panic and dump their bitcoins, increasing the bitcoin supply a thousand percent, potentially. Probably didn't need to respond to your post anyway.

I'm adding an: Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins,  prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.

The supply of bitcoins is increasing at this moment, as miners are mining them by hashing power. After it reaches 21m it stops. I think this is some basic knowledge and the algorithm has already been coded into the network. I know there is possibilities that the network be attacked, but I know how hard it is the attack to be launched. These are all my understanding and I choose to believe this entire system.

As long as I know there is such a thing that its volume is well under controlled, and it can be easily stored, divided, and transferred, it is very well suited for the purpose as a tool of trade. What you are talking about is the ratio of BTC/Fiat, which I think, when more goods and services are provided and evaluated as BTC, that ratio will be irrelevant to the economy.

It is the competence of BTC and fiat money, not the ratio between them. Of course if BTC wants to be successful, should more people are willing to use it to trade. At this time, in BTC economy itself it has only mining/trading platform/gambling stocks are available for investment. It definitely need more kinds of business involved. If, one satoshi can always buy you a pound of cheese, or a bottle of milk, or a can of coke or something else, will you ever mind its ratio with USD?

Although at this moment these seem quite far away, but I truly believe it is the right direction. Any discussion is welcome and I want to hear the thoughts on this topic

[minerva]

You have totally ignored my arguments. So I will only respond with a few equations
if currency in mattress > currency in circulation;
threat to currency = high

[coldguy]

If I do not want to spend my currency nobody can enforce me to spend it.

You want my money? Please produce some good products or provide good services which are attractive to me. Then I will pay you. Otherwise, I don't care if the GDP is increasing or decreasing. It is not my business.

[phr0stbyt3]

The reason that I choose bitcoin is that I do not believe government's fiat money. The only reason that the fiat money can still exist is because they put a gun on my neck to make me use it, and those officials are sitting behind the banks' server clicking mouse to pump the fiat paper into the computer system to circulate.

I choose to believe in bitcoin. I know every bitcoin I get today will still be one bitcoin tomorrow. If I don't want to spend it, someone else could not copy my coin to spend it.

Also, don't blame bitcoin for trading drugs. Actually, those drug dealers always had quite a lot of cash of US dollars for their trading. As US dollar has helped so many drug trades, should we ban it first?

...I'm not blaming bitcoin??? You may not be aware, but people do vote. There's isn't a corporate conspiracy to ban drugs. An overwhelming number of US citizens dislike hard drugs, and a law may go to vote banning bitcoin. Whether or not that law passes or is upheld by the courts, bitcoin would die once people panic and dump their bitcoins, increasing the bitcoin supply a thousand percent, potentially. Probably didn't need to respond to your post anyway.


I'm adding an: Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins,  prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.

I enjoyed your article, it was a good read and a really nice take from someone just coming onto the scene.
I have been thinking that bitcoin may be used for a new gold standard, so to speak, but I don't think it's fit for prime time. At least not yet.
Maybe another currency someday like the cryptodollar will be put in on top of bitcoin.
The exchanges are in such piss-poor condition its not even funny. We finally get more media attention than ever in the last couple of weeks and are at the mercy of greedy,
low tech, amateur exchanges. Epic fail.
There's no way the current system could support daily commercial volume.

On another note, I'm getting really tired of the bitcoin-money-laundering-drug-money thing.
There are many, many more drug transactions happening in fiat than BTC every second.
Colombian drug lords don't accept bitcoin for 20,000KG of cocaine.

Also, the war on drugs goes much further than a simple popular vote.
Specifically, weed/hemp was highly demonized in the media before it was outlawed.

[qbits]

You have totally ignored my arguments. So I will only respond with a few equations
if currency in mattress > currency in circulation;
threat to currency = high

I for one tend to agree with your arguments in this and previous post. However let me point out a few issues where I think you should consider:

1. Take Gold for example. There is lot's of gold under various mattresses or vaults if you will and relatively few gold bars exchange hands each day. However nobody really perceives this to be a real threat to their gold holdings. Namely anyone who owns gold is willing to admit they may loose 50%-60% maybe 80% of their gold investment in the worst case scenario, but no one believes that gold will loose 99% or 100% of it's value. Can we say the same thing for BTC? How about LTC?

2. How is the value measured? Well easiest way would be to measure commodities that a given amount of gold or BTC will buy. $ or € or other currencies are for the time being a good proxy for this measure as their inflation seems to be low. If and when inflation rises then this proxy measurement will fail and we will probably measure value of BTC against the basket of commodities it buys.

3. By that measure BTC is indeed scores poorly as a "store of value". Price of BTC (in terms of commodities it buys) is volatile. The sole reason being that no one is sure it will be worth something in 10 years. How about 20 years. Consequently very few people will put substantial portion of their life savings (assuming people save, which is a stretch) in BTC. Would you rather have 10k BTC or a $500k house for the next 10 years? Some will go for 10k BTC, and all that do, must admit themselves that they are in fact gambling on the future value of BTC. Which again proves my point.

4. Which brings me to another point: BTC is excellent vehicle for speculation as the price is very volatile and exchanges are cheap (0,5%-0,6% per transaction). Plus the fact that BTC generation will one day run out, reinforces that message. Hey you might as well grab some before it's all gone. Mind not that this will happen 100 years from now.

5. Is this what we want BTC to be? To be fair BTC is still in it's infancy and the result of this ongoing experiment is as yet inconclusive. I'm sure vast majority would prefer BTC to be much more stable with respect to what you can buy for it. Probably the preference would be that BTC increases in value, but with no boom&bust cycles like the one we just witnessed. This is especially problematic for those who trade goods for BTC which was the whole point of this exercise right? BTC was not invented for speculation, it was always meant to be a vehicle for trading? Please, this is the crucial point.

6. Because if it is then there needs to be a way to increase BTC commodity price traction. Currently there is only one or two commodities that serve as a fixed point: electricity and computer hardware. But the feedback mechanisms are all wrong. For example: when BTC price rises, more miners will buy equipment and mine BTC as it is more profitable. But when they do difficulty rises, so they earn less BTC per $ spent on electricity and hardware. Less BTC per $ spent means that miners will expect even higher prices for their BTCs not lower ones. Since mining is the only way new BTC are created, as new miner come online, price rises further, and upwards spiral is guaranteed. That is until someone somehow triggers panic sale by dumping large coin holdings. Current ASIC induced boom&bust just proves this point.

I propose that additional methods of issuing coins are introduced it's just that I don't know what precise mechanisms and controls should be in place. Something along the line of Ripple.

Ultimately supply of bitcoins needs to reflect the amount of goods & services traded in a given time frame, not allowing that increase in economic activity causes spike in BTC price. Lack of a sovereign or a central bank calls for some new thinking indeed.

Disclosure: author of this text hold about 5 BTC (cashed out before the "crash"), 20 LTC, some BTC&LTC mining equipment, less than 100g of gold, virtualy no stocks and undisclosed € holdings.

[ManBearPig]

OK here's mine:

Too round.

Apart from Casascius, most Bitcoins will go nowhere near a coin-operated vending machine.

I say make them seven-sided like that classic: the 50 pence piece.



PS: Sorry, it's been a LONG week

[minerva]

You have totally ignored my arguments. So I will only respond with a few equations
if currency in mattress > currency in circulation;
threat to currency = high

I for one tend to agree with your arguments in this and previous post. However let me point out a few issues where I think you should consider:

1. Take Gold for example. There is lot's of gold under various mattresses or vaults if you will and relatively few gold bars exchange hands each day. However nobody really perceives this to be a real threat to their gold holdings. Namely anyone who owns gold is willing to admit they may loose 50%-60% maybe 80% of their gold investment in the worst case scenario, but no one believes that gold will loose 99% or 100% of it's value. Can we say the same thing for BTC? How about LTC?

2. How is the value measured? Well easiest way would be to measure commodities that a given amount of gold or BTC will buy. $ or € or other currencies are for the time being a good proxy for this measure as their inflation seems to be low. If and when inflation rises then this proxy measurement will fail and we will probably measure value of BTC against the basket of commodities it buys.

3. By that measure BTC is indeed scores poorly as a "store of value". Price of BTC (in terms of commodities it buys) is volatile. The sole reason being that no one is sure it will be worth something in 10 years. How about 20 years. Consequently very few people will put substantial portion of their life savings (assuming people save, which is a stretch) in BTC. Would you rather have 10k BTC or a $500k house for the next 10 years? Some will go for 10k BTC, and all that do, must admit themselves that they are in fact gambling on the future value of BTC. Which again proves my point.

4. Which brings me to another point: BTC is excellent vehicle for speculation as the price is very volatile and exchanges are cheap (0,5%-0,6% per transaction). Plus the fact that BTC generation will one day run out, reinforces that message. Hey you might as well grab some before it's all gone. Mind not that this will happen 100 years from now.

5. Is this what we want BTC to be? To be fair BTC is still in it's infancy and the result of this ongoing experiment is as yet inconclusive. I'm sure vast majority would prefer BTC to be much more stable with respect to what you can buy for it. Probably the preference would be that BTC increases in value, but with no boom&bust cycles like the one we just witnessed. This is especially problematic for those who trade goods for BTC which was the whole point of this exercise right? BTC was not invented for speculation, it was always meant to be a vehicle for trading? Please, this is the crucial point.

6. Because if it is then there needs to be a way to increase BTC commodity price traction. Currently there is only one or two commodities that serve as a fixed point: electricity and computer hardware. But the feedback mechanisms are all wrong. For example: when BTC price rises, more miners will buy equipment and mine BTC as it is more profitable. But when they do difficulty rises, so they earn less BTC per $ spent on electricity and hardware. Less BTC per $ spent means that miners will expect even higher prices for their BTCs not lower ones. Since mining is the only way new BTC are created, as new miner come online, price rises further, and upwards spiral is guaranteed. That is until someone somehow triggers panic sale by dumping large coin holdings. Current ASIC induced boom&bust just proves this point.

I propose that additional methods of issuing coins are introduced it's just that I don't know what precise mechanisms and controls should be in place. Something along the line of Ripple.

Ultimately supply of bitcoins needs to reflect the amount of goods & services traded in a given time frame, not allowing that increase in economic activity causes spike in BTC price. Lack of a sovereign or a central bank calls for some new thinking indeed.

Disclosure: author of this text hold about 5 BTC (cashed out before the "crash"), 20 LTC, some BTC&LTC mining equipment, less than 100g of gold, virtualy no stocks and undisclosed € holdings.

1. People don't understand threats. People own a lot of homes, but then they buy another home and expect the home value to still go up. This is how bubbles are started, people think of commodities as investments. Only productive capital is an investment.

2. Irrelevant point. Value is relative. Money is a commodity itself. The original forms of money (gold, rice, seashells), were commodities.

You seem to think my points are different then what they really are. My suggestion for a declining return of investment in mining is key for one reason: it reduces the risk of attacks on a currency that ramp up difficulty, and then cause days for a new block to be generated (not like the NSA has that hashing power). Another key reason: many economic activites have declining returns to scale, and the ideal "mining" currency would have declining returns to scale. Even gold has declining returns to scale, and 4% of all gold ever mined has been mined this year. During the early part of the 20th century, the gold supply expanded by roughly 10% per year.

Ultimately supply of bitcoins needs to reflect the amount of goods & services traded in a given time frame, not allowing that increase in economic activity causes spike in BTC price. Lack of a sovereign or a central bank calls for some new thinking indeed.

Possible. GDP measures the value of "final transactions," as opposed to the Soviet "Net Material Product." You would have neither with a central banking script, it would only be able to measure the total number of transactions. Although it could create a model of who is a primarily a seller, and who is primarily a buyer, it would require some sort of ability to discern which bitcoin addresses are those of bitcoin exchanges (assuming that the exchanges will broadcast publicly over the protocol that they are exchanges, and that non-exchanges that claim to be exchanges could be ignored on the basis of their transaction history), as well as figure out sellers of products that primarily recieve bitcoins and forward bitcoins to other sellers as well as to exchanges. Buyers would need to . Basically there would need to be a distributed AI script that monitors transaction history... it won't be reliable, but who knows?
Also gambling accounts would need to be "discoverable" by the script if it determines that most bitcoins are simply sent back to known "buyer accounts" after the buyer sends bitcoins to the gambler. This is to reduce the number of transactions that aren't to purchase goods of value.

It would also need to know which addresses have been sitting on bitcoins the longest to determine the amount of speculation. There is no ideal response to speculation either, and the speculation component must be ignored long enough to give incentives for early adopters to benefit greatly.

It would also need to keep track of the median transaction value per hour, and calculate a moving average based upon it.

Naturally, the reliability of the script will be low. Such a script could be programmed to monitor the existing bitcoin protocol as well....
Huh, I just proved money laundering can't be done with bitcoin as well.




Edit: It might be useful to integrate the ripple protocol into a cryptocurrency network protocol.

[MatTheCat]

You have totally ignored my arguments. So I will only respond with a few equations
if currency in mattress > currency in circulation;
threat to currency = high

No.

The guy has come on here and made a well thought out and considered post.

You have replied by dribbling dogma and over chewed cliches all over the floor.

[minerva]

You have totally ignored my arguments. So I will only respond with a few equations
if currency in mattress > currency in circulation;
threat to currency = high

No.

The guy has come on here and made a well thought out and considered post.

You have replied by dribbling dogma and over chewed cliches all over the floor.

No, his post wasn't in response to mine, but to some mythical post that may very well exist in another thread.

[qbits]

1. People don't understand threats. People own a lot of homes, but then they buy another home and expect the home value to still go up. This is how bubbles are started, people think of commodities as investments. Only productive capital is an investment.

2. Irrelevant point. Value is relative. Money is a commodity itself. The original forms of money (gold, rice, seashells), were commodities.

3. You seem to think my points are different then what they really are. My suggestion for a declining return of investment in mining is key for one reason: it reduces the risk of attacks on a currency that ramp up difficulty, and then cause days for a new block to be generated (not like the NSA has that hashing power). Another key reason: many economic activites have declining returns to scale, and the ideal "mining" currency would have declining returns to scale. Even gold has declining returns to scale, and 4% of all gold ever mined has been mined this year. During the early part of the 20th century, the gold supply expanded by roughly 10% per year.

ad 1. I have not considered bubbles, my gut instinct is that in the long run commodity bubbles should not matter as long as they are not backed by some government policy (did anyone say QE? no? tarp maybe?).

ad 2. Money today, things like $ or € cannot be considered to be an commodity ihmo, as it is easy for central bank to create arbitrary ammounts of it therefore effectively manipulate it's value arbitrarily. If something can be created at will in any quantity it looses a key characteristic of any commodity: scarsity.

ad 3. I do not have personal preference against declining return of investment. I just pointed that current scheme is riged to produce ocational price spikes. It would be better so simply: compensate miners based on their effort so that people have inscentive to mine, that part is fine, but the compensation should be based on the actual value spent or destroyed in the process.

Bear with me as I'm still stugling with this myself. Let me start like this:
- there is an anegdotal story about someone who accepted 10 BTC to deliver pizza to someone long long time ago thus creating first commercial transaction in BTC and thereby establishing BTC exchange rate.

- So apart from mining the whole bitcoin economy at that time consisted of one consumed pizza. Of course guy eating the pizza had to have gotten BTC somehow and let's assume he wasn't mining. So he had to buy some from some miner.

- Now miner at that time, as today, probably knew how much electricity & computer amortization & maintanance cost he needed to spend to generate 10 BTC. My estimation is that today I need to spend in the order of  $450 to generate 10 BTC (mostly electricity) so today this would be an expensive pizza indeed, but at the time seems, cost of mining 10 BTC was lower and as they say: "money changed hands".

- But the ammount in terms of BTC that miner received is completely decoupled from the ammount of pizza consumed. So if the guy from our story had ordered 10 pizzas instead of 1 he would have had to pay only 1 BTC per pizza thereby increasing the "value" of BTC 10 fold.

Do you see where I'm heading? If the miner compensation was structured so that miners would be compensated say x% of the value of transactions signed then the money supply would approximately match the economic activity in BTC. More activity, more BTC are generated.

...unfortunately I have to run so I will finish this later... but feel free to respond to the text so far...

[minerva]

ad 1. I have not considered bubbles, my gut instinct is that in the long run commodity bubbles should not matter as long as they are not backed by some government policy (did anyone say QE? no? tarp maybe?).

Commodity bubbles aren't caused by government policy, but by inadequate information. Distorted information and incentives caused by government policy can just as easily cause bubbles as limited knowledge about investing.

ad 2. Money today, things like $ or € cannot be considered to be an commodity ihmo, as it is easy for central bank to create arbitrary ammounts of it therefore effectively manipulate it's value arbitrarily. If something can be created at will in any quantity it looses a key characteristic of any commodity: scarsity.

...air is a commodity. Air is not scarce or "srase". I don't quite think you know what you're talking about.

ad 3. I do not have personal preference against declining return of investment. I just pointed that current scheme is riged to produce ocational price spikes. It would be better so simply: compensate miners based on their effort so that people have inscentive to mine, that part is fine, but the compensation should be based on the actual value spent or destroyed in the process.

Bear with me as I'm still stugling with this myself. Let me start like this:
- there is an anegdotal story about someone who accepted 10 BTC to deliver pizza to someone long long time ago thus creating first commercial transaction in BTC and thereby establishing BTC exchange rate.

- So apart from mining the whole bitcoin economy at that time consisted of one consumed pizza. Of course guy eating the pizza had to have gotten BTC somehow and let's assume he wasn't mining. So he had to buy some from some miner.

- Now miner at that time, as today, probably knew how much electricity & computer amortization & maintanance cost he needed to spend to generate 10 BTC. My estimation is that today I need to spend in the order of  $450 to generate 10 BTC (mostly electricity) so today this would be an expensive pizza indeed, but at the time seems, cost of mining 10 BTC was lower and as they say: "money changed hands".

- But the ammount in terms of BTC that miner received is completely decoupled from the ammount of pizza consumed. So if the guy from our story had ordered 10 pizzas instead of 1 he would have had to pay only 1 BTC per pizza thereby increasing the "value" of BTC 10 fold.

Do you see where I'm heading? If the miner compensation was structured so that miners would be compensated say x% of the value of transactions signed then the money supply would approximately match the economic activity in BTC. More activity, more BTC are generated.

...unfortunately I have to run so I will finish this later... but feel free to respond to the text so far...

Before you began an anecdote, what you're saying makes more sense then what you've said before, at least to me.

Transaction fee based economies aren't entirely desirable... since that's what the financial system is built upon.

[Operatr]

I hate to say it, but everything in your post is fundamentally wrong, and it sounds like you're understanding of Bitcoin is limited. The current laws of economics does not apply here, because Bitcoin is not your average customer when it comes to currency. Old world thinking does not apply to it at all. I don't mean to antagonize, but ill informed posts like these only add to the existing pool of misconceptions which confuses people already.

I have little programming knowledge. But I am a student of economics, I'm not sure how many of these criticisms have been made before.

I'm not sure, but would it be possible for the number of honest transactions to exceed available bandwidth for most computers (if they engaged in checking as well).

Restricting the total amount of bitcoins that can be mined will become a bottleneck. Supposedly the Winklevossi own 1% of the current bitcoin supply. This doesn't harm it's use as a medium of exchange (except for menu costs of tracking the Mt. Gox exchange rate), but it won't replace the dollar as a medium of transaction.

You obviously don't know anything about mining, or computers/networking for that matter, as you spent your time studying economics instead   . The design of Bitcoin is built to scale naturally to network power, and also self correct as power is added or removed from the available pool of total mining hashpower to keep the coins flowing at an even rate. Transactions vs bandwidth is an invalid measure, mining (really, transaction processing) is not using a finite pool of "bandwidth", it is all about raw processing power to crunch the cryptography algorithms for forward and backward authentication. The more power there is, the harder it is to mine a whole block of coins.

Bitcoin also is divisible by a magnitude larger than fiat currency. The Winklevii have 1%, even if they held it indefinitely, it would only make the rest more valuable, and divided further down to compensate. BTC needs the support of big Bitcoin spenders, that is $11 Million that now belongs to Bitcoin instead of the United States government.

This is bad for a few reasons.

One, it incentives large mining pools. Small mining operations that generate 2 GHash/s may never generate a bitcoin block, thus they must use pools to net a few bitcoins per week. This probably is a minor issue, as long as the major pools are trustable.

That is a good thing, because it enables more average hobbyists to add power to the network and reap a small reward for it. True, make sure you can trust your pools. Though soon with the arrival of ASIC mining units, these little GPU miners will be obsolete with the vast rise in difficulty, even a 2 GHash/s machine will have a much harder time mining, even in a pooled scenario, and the miner stands to make little profit if any after system overhead is considered. Miners must amp up the hardware to compete, turning it into a new cottage industry on its own. Mining is going pro, there will be no shortage of network power coming online in the coming months.

Two, it will simply mean that Bitcoins will be become a means of money laundering, particularly since 90% of bitcoins will be sat upon, and the remaining 10% to be used for whatever purpose. Every so often, there will price bubbles caused by a real world event. Those bubbles will pop because maybe 2% of that 90% will cash out (cash in?). If the value of bitcoin continually increases, the portion of bitcoins that will remain out of circulation will increase, only to decrease slightly whenever a bubble bursts. It's entirely possible that there will be a huge crash at some future point, because there is no possible tracking of the number of bitcoins out of circulation (to my knowledge). Current statistics only show (1) the number of bitcoins generated, (2) the number of bitcoins exchanged. Nothing on the number of bitcoins actually in circulation, or the velocity of the bitcoins in circulation. It is possible the velocity of what few bitcoins are in circulation are very high due to satoshi dice.

Three, if Bitcoins become primarily use as a form of money laundering, a government can and will be able to ban bitcoins through some method. This is not out of some power grab, but because the majority of citizens believe people should not take drugs such as heroin. While it is possible to create an alternate internet using your phone line, this would shut down bitcoins for all intents and purposes. Fortunately, it appears as if most transactions involve Satoshi dice, although it's possible drug dealers use multiple accounts to reduce their "popularity."

The Dollar is the primary form of laundering today as it always has been, what is the difference if it is Bitcoin instead? It is an invalid point. No one called to ban cash because it happens to be used to buy illegal things (which are only illegal because of the government). Those that call on that point means there isnt anything else bad about Bitcoin they can speak about.

The Government would have to ban the entire internet to stop Bitcoin (I dont put it past them to try), being a freely distributed application that lives on 1000's of computers all over the world. By the time they are done making the first draft of some vague SOPA like bill against Bitcoin it will be far to late to stop it now. Fighting it would just push it underground much like BitTorrent did. After millions of dollars and armies of lawyers, P2P sharing is still alive and well. They cannot attack the core system, they can only attack individuals at the fringe and they cant prosecute all of us.

Bitcoin does not have accounts, it has addresses (aside online wallet's or exchange accounts, about as close to a Bitcoin account you can have). You can use a unique address if you want to for every transaction you make, making it very difficult forensically to track where the payment came from, or from whom. e-Drugdealers already do this unless they are complete idiots (and most are), they only get busted for the same reason they get busted in the real world, because they were careless in other aspects of their business (insecure communications, for example). Bitcoin simply removed the hassle of paying criminals with traceable money and opening their trade to the whole world instead of just their own neighborhood. Overall it changes nothing, it's not like the DEA ha been anywhere near close to winning their ridiculous, expensive, and ultimately useless War on Drugs that we taxpayers must burden (and considering the CIA runs drugs to fund black ops, (they got caught red handed in the 80s) so the DEA is fighting the CIA...and we pay for it). If it is bought with BTC instead of cash, it makes no difference.

Annendum, if bitcoins do have one final crash as the money supply triples or decuples as people unload their stocks of bitcoins,  prices will be permanently lower. Assuming if most merchants don't peg their prices to major exchanges (ignoring any outlier results from an exchange), they would go broke if they don't adjust their prices fast enough before people start making enough orders to well, bankrupt them (assuming their suppliers and employees don't take bitcoins). This is because the price of bitcoins inflated faster then they could react.

Bitcoin's currency supply cannot simply triple by law of the system. The supply is governed by the mining process to only put so many into the system over time. Today you get 25 BTC for mining a whole block, when it reaches the next limit, this will go down by half while total network hashpower goes up as well as overall difficulty in calculating the equations, making each coin harder and harder to mine and ride a logarithmic scale to zero coins per block mined when it hits the max 21 Million. When there are no more coins to mine, these machines will collect transaction fees instead as the network must still process transaction authentication after the last coin is minted sometime in 2140.

Bitcoin has never once crashed to zero, even this latest dip recovered into the $100 range, which was needed to blow off some steam so the price keeps going up overall, which it only has over the whole history of BTC. Transaction volume is only going up despite the USD price. People are way to concerned with the exchange and not the other stats that actually matter, which is use and transactions going up showing adoption by users and businesses alike. 1 Bitcoin is always a Bitcoin, the only variable is its spending power.

BTC is only acting like a "gold" type commodity is because it is new and has speculators foaming at the mouth as a simple investment, and they are gaining value rapidly. However unlike gold, you can spend Bitcoins as well. Unless someone knows a shop you can pay for things with gold bars, though I doubt they would argue if you did  

In a way that is the beauty of the system, is that over time coins will be lost, as they become more rare their buying and trading power increases. If Bitcoin was the only defacto currency in the future, it still appreciates even after every coin has been mined because the supply will naturally decrease (backup that wallet!), but thanks to BTC using an 8 decimal system which could later be expanded if needed dividing the currency further as it increases with value is accounted for indefinitely. If it gets big enough, we might need a smaller denomination than the Satoshi. Bitcoin can be split and reconfigured endlessly which fiat cannot do. 21 Million Bitcoins is 100 Million Satoshies, 1 Satoshi is .0000001 of a whole Bitcoin, and smaller denominations can be created by moving the decimal over a place to divide it further. This is why even with the Winklevii holding a lot of BTC at the moment doesn't really matter.

Because 21 Million (there will already be less than this total because coins have already been lost) will only ever exist, those that do exist get more valuable, but it is easy to divide their spending power further and further. I've read that if the entire worlds market cap was in BTC was converted right this second, each full coin would be worth around $3 Million in spending power, making a Satoshi around $.03 each. If another division was added, the new denomination (we'll call Operatrs to stroke my vanity) would be worth around $.003. And on and on. Seems we wont need any more than Satoshis though, but obviously it is difficult to speculate that far ahead in time. It allows for a very fine tuning when it comes to pricing products.

Ideally in my opinion, a better bitcoin (cryptodollar?) would set the number of bitcoins per block based not on a preset formula restricting the total money supply at some future date, but by a formula that would exponentially decrease the return of cryptodollars generated per day based upon mining. Something like (hashes/(10^6)*2^(years since creation))^.5 [1]. While the inventor of bitcoin wanted to reward early adopters, like I said, the current system has perverse incentives that prevent using bitcoin like an actual currency. I would prefer a block generation method using diseconomies of scale, but another person could come up with a better method. Hash difficulty should be high enough to prevent hyperinflation, but not too low to prevent deflation.


Unfortunately, you cannot easily conduct trial and error test runs for what the ideal formula is, unless you are immortal and own a time machine.


But it is also too late to see anything created based on my proposal until bitcoin collapses in one final panic. Bitcoin is the household name for cryptocurrencies at the moment, and names do carry inertia. A major institution/government would need to back an any new cryptocurrency for the cryptocurrency to displace bitcoin.

Bitcoin is an open standard, you literally could create your own version. Others already have that differ from Bitcoin to fill a certain purpose.

BTC won't collapse in a final flame like that I dont think. It could certainly perish someday, as we really dont know what happens next. This has never been tried before ever, every day is a new day. The only way for Bitcoin to die is if everyone stops using it. Again, old world economics don't apply here. Bitcoin also has something no other currency has right now: believers. These are the ones who don't give a good god damn about the current exchange rate, but simply believe it is the future.

1. The formula is hashes generated in the current time period, divided by one million, multiplied 2 times the years since creation, to the half power (or the whole formula is square rooted). Basically, ceteris paribus (all else being equal), for every doubling of hash production, the total amount of cryptodollars produced will only increase by 40%. Ceteris paribus, for every year after adoption, the total amount of cryptodollars produced will halve. For example, multiplying hash production by 55,000,000 will only multiply cryptodollar production by 7,416. Thus exponentially less hashes will be used. This would also curtail the effects of Moore's laws.


To a certain degree, this is draft, so I might add more to it later.

I look forward to maybe mining CryptoDollars someday  


Again I'm not trying to be an ass, I simply found your post to be more imaginary than factual. Bitcoin is rewriting money from the ground up, we must rewrite economics along with it as it doesn't work like any fiat currency.

Regardless, who really knows where it goes from here.

[Red]

I have little programming knowledge. But I am a student of economics, I'm not sure how many of these criticisms have been made before.

I have no formal economics knowledge. But I have decades of programming knowledge. Most of your criticisms have been made before. They will be made again long after you've given up trying to make the point. :-)

I'm not sure, but would it be possible for the number of honest transactions to exceed available bandwidth for most computers (if they engaged in checking as well).

Yes, that is quite plausible if bitcoin ever gets wide adoption. Think of how many transactions a billion people make in a 20 minute period. Then imagine them all as peers validating every transaction. Each of those transactions has to be transmitted a billion times to be validated.

Which brings me to Red's axiom number 1:
Bitcoin is a peer to peer system. But you are not a peer.

Most mining pool participants don't validate a single transaction. They wouldn't have a clue if others were allowing bogus transactions into the block lists. Even if you try to run your individual node as a peer validating every transaction, you actually have ZERO effect on the bitcoin transaction graph until you actually win the block generation lottery.

Restricting the total amount of bitcoins that can be mined will become a bottleneck...This is bad for a few reasons.

It's bad for a lot more reasons than you mention. But you are correct in pointing out that bitcoin's adoption will be limited by its monetary policy.

Which brings me to Red's axiom number 2:
Few here care that the finite number of Bitcoins is a flaw. They consider it a feature.

There are several good threads on this subject going back four years. Check my post history if you're interested.

One, it incentives large mining pools. Small mining operations that generate 2 GHash/s may never generate a bitcoin block, thus they must use pools to net a few bitcoins per week.

Curiously, from an economic point of view, mining pools are a red herring.
Currently more then half of all total bitcoins (11 mil out of 21 mil) are already generated.
http://blockchain.info/charts/total-bitcoins
If we doubled all existing bitcoins in place today we could be done with all the "mining" once and for all and ABSOLUTELY NOTHING would change. Easier yet, we could just stop generating all new bitcoins and continue on with the coins that currently exist. There is more than enough "satoshi" units in existence then we'll ever need. (According to bitcoin standard logic)

Which brings me to Red's axiom number 3:
Mining is just a needlessly expensive way to generate a random number roughly every 20 minutes.

Yes, I see the beauty of what satoshi did as a promotional mechanism. But other than that it no longer serves a necessary purpose. I can expand on distributed random number generation and distributed clocks if you are interested.

Which brings me to Red's axiom number 4:
Mining pools are not peers either.

If all miners and their peers quit tomorrow, nothing catastrophic would happen. Bitcoin transactions would continue to be validated the block chain would not fork. Bitcoin life would continue as usual.
    11,000,000 BTC * $100/BTC = 1.1 BILLION Dollars!!!
That's a lot of incentive for the ACTUAL PEERS to prevent block chain forking.

Ideally in my opinion, a better bitcoin (cryptodollar?) would ...

You propose generating an unbounded number of coins but you base generation on hashing power. I agree with your unbounded number of coins but the hashing logic is a red herring. I can point you to more threads if you are interested.

----

Oh yeah, before someone asks, "But who will stop the chain from forking without ever expanding hashing power?"
The answer is: Gavin and his coding team in conjunction with the bitcoin exchanges.

Which brings me to Red's axiom number 5:
Bitcoin exchanges are the only true bitcoin peers. Everyone else get over yourselves.

There already exist multiple "bitcoin to fiat" exchanges. Every exchange must always operate on the same bitcoin block chain. They can NEVER be forked apart. It is economically infeasible.

Any exchange that allowed itself to be forked from the others would in reality GIVE AWAY 1.1 billion free dollars in free BTC. Existing BTC owners could cash out their BTC on the forked exchange and while still continuing to own them on the dominant chain. POOF! instant bankrupt exchange. No more forked exchange.

The same holds true for everyone else as well. If a pot dealer on silk road allows himself to be forked from the dominant exchange branch, he in effect GIVES AWAY 1.1 billion free dollars of pot.

Which brings me to Red's final axiom. Number 6:
Bitcoin exchanges are the only entities that MUST check every transaction. Everyone else is redundant.

Exchanges must guarantee transactions EVEN if they don't benefit from "mining" new coins or benefit from collecting "transaction fees". Guaranteeing transactions is their WHOLE BUSINESS! They are public entities. If they allowed external "hashing wars" to unroll previously completed transactions REAL LIFE lawyers and police would round them up.

QED: All exchanges and the bitcoin programmers WILL ALWAYS work together in an orderly fashion to prevent block chain forking. It has happened before. It will happen again.

All the other machinations are just for show.

[coinft]

Curiously, from an economic point of view, mining pools are a red herring.
Currently more then half of all total bitcoins (11 mil out of 21 mil) are already generated.
http://blockchain.info/charts/total-bitcoins
If we doubled all existing bitcoins in place today we could be done with all the "mining" once and for all and ABSOLUTELY NOTHING would change. Easier yet, we could just stop generating all new bitcoins and continue on with the coins that currently exist. There is more than enough "satoshi" units in existence then we'll ever need. (According to bitcoin standard logic)

Which brings me to Red's axiom number 3:
Mining is just a needlessly expensive way to generate a random number roughly every 20 minutes.

Yes, I see the beauty of what satoshi did as a promotional mechanism. But other than that it no longer serves a necessary purpose. I can expand on distributed random number generation and distributed clocks if you are interested.

First the target time is 10 minutes per block. And aside from the initial coin distribution, mining is absolutely essential and critical
to the network. Without it no one ever could be sure if the coins he receives haven't been spent before already.

Which brings me to Red's axiom number 4:
Mining pools are not peers either.

If all miners and their peers quit tomorrow, nothing catastrophic would happen. Bitcoin transactions would continue to be validated the block chain would not fork. Bitcoin life would continue as usual.
    11,000,000 BTC * $100/BTC = 1.1 BILLION Dollars!!!
That's a lot of incentive for the ACTUAL PEERS to prevent block chain forking.

Transaction processing would grind to a sudden halt. No exchanges are accepting zero confirmation deposits. Few merchants accept zero confirmation payments either. Bitcoin would be dead.

You show a total lack of understanding. Without miners there could be no block chain forking as that requires mining. The incentive for the actual peers would be to start mining themself, as otherwise there is no way to spend their stake, contradicting your assumption.

[qbits]

...air is a commodity. Air is not scarce or "srase". I don't quite think you know what you're talking about.
Before you began an anecdote, what you're saying makes more sense then what you've said before, at least to me.

Transaction fee based economies aren't entirely desirable... since that's what the financial system is built upon.

First of all policy decisions like printing money or QE will and do cause bubbles. For example low interest rates in the US from 2001 onwards caused housing bubble that burst in 2008. I'm sure you'll agree on this.

If air is commodity please point me to the exchange where it is traded. Would you buy some from me? Perhaps air is not a good example. There is a finite supply of it, but it cannot be effectively fenced so that my air would stay mine and yours would stay yours. And it we cannot deliver it. This is why you would not buy some from me. This is why it is not traded.

Something is scarce (sorry for the misspelling earlier) when there is finite supply of it (it can be very very large but still finite) and there is effective way for me to prevent you using/enjoying my portion of it.

Let me explain this in another way:

Let's say I forked bitcoin software, and created new coins. we can call them BTC++, and I modified software it in a way so that one particular client which we will call "central bank client"=CBC has a special capability to create BTC++ coins at will. In the same way that ECB can create Euros. Surely BTC++ coins can be traded as € is traded. But there can be arbitrary amount of BTC++ coins created. And therefore exchange rate BTC/BTC++ will drop as a result. ultimately to 0.
Same thing would happen if I created a fork without CBC (so full BTC like system), but with a weak public/private key wallet algorithm so that it would easy for anyone to deduce private key from a public one and could spend someone else's coins.

In fact this is why we differentiate between fiat and commodity money. Implication is that since fiat money, which is what almost all money is today and we call is just "money" (€, $, Yen), is not the same thing as commodity money, therefore it follows money is not commodity.

Anyway this is what I wanted to say, but perhaps did not explain properly.

As to "Transaction fee based economies" not being desirable... I agree completely.

My proposal was along these lines:
- it is desirable that we have price stability in a given currency. It makes life & trading simpler
- price stability implies that there is a balance between goods traded and currency chasing those goods.
- in bitcoin as in $ it is difficult to gauge what amount of currency there should be to preserve price stability.
- On top of that it is always easy to create new currency and it is not so easy to destroy currency.

So miner compensation should somehow reflect this general state of economic activity and not be fixed to some value.

But hey BTC is what it is. I like the concept and am aware of the shortcomings.

p.s. I just read the post in this thread posted by Operatr. Besides lacking tact which is obvious, he is making a point when we seas "Bitcoin has believers". And that's what I like about Bitcoin but is also something that scares me.

[Red]

First the target time is 10 minutes per block.

So it is! Been away too long and typed to late.

And aside from the initial coin distribution, mining is absolutely essential and critical
to the network. Without it no one ever could be sure if the coins he receives haven't been spent before already.

Transaction validation is absolutely essential and critical. However, it has nothing to do with the so-called "mining" calculations. In fact the trial and error process of calculating hashes cannot even begin until each transaction in a trial block has been validated. That is the necessary work to prevent a double spend.

All of these validations are done redundantly by each peer. The individual results are never compared. To avoid the combinatorial explosion of comparing the work process of each peer and arguing over a consensus about which transaction actually took place in a given 10 minute period... Satoshi in his brilliance (not sarcastic! real brilliance!)... chose to just throw dice and pick one of the nodes completely arbitrarily.

This means that each block doesn't actually even try to represent EVERY valid transaction that happened in a 10 minute period. Instead it contains the transactions that were declared by random fiat to have happened. That is why there are "mining-only" blocks in the list that contain zero other transactions even though  every other validating peer knows transactions took place during that period. That is hardly necessary to prevent double spends.

Transaction processing would grind to a sudden halt. No exchanges are accepting zero confirmation deposits. Few merchants accept zero confirmation payments either. Bitcoin would be dead.

If no one did anything the block generation difficulty would fall back to the level that a dozen-ish exchanges were willing to spend hashing. But even that is not necessary.

Things are not as they were in the beginning. Satoshi solved a "philosophical problem." In a world WITHOUT super-peers how do you 1) reach consensus among anonymous peers 2) build a distributed clock 3) allocate initial coins 4) promote bitcoin. He created a brilliant solution to a hard philosophical problem.

Today, bitcoin exists with non-anonymous super-peers. We call them exchanges. Exchanges are already receiving broadcasts of every transaction. They don't have to build blocks to validate transactions, they all get them first-hand in order. Reaching consensus among a dozen non-anonymous peers is technically trivial and requires no advanced philosophy at all!

You show a total lack of understanding. Without miners there could be no block chain forking as that requires mining.

Do I now? Perhaps you should try thinking beyond the press releases.
In the beginning there were no miners. Just peers. Everyone validated every transaction and each hoped that their block be blessed by randomness.

Now people are ordering special ASIC chips that don't even validate transactions. They simply compute hashes. That is superfluous.

[Larynth]

As with most "economists" (I use quotes because clearly he's a student) you operate on some broad assumptions based on principles you learned in macro and took as gospel. For something to be considered a currency rather than a commodity it has to fulfill the three roles that we debate endlessly. That said, it only has to meet the minimum criteria. Some currencies excel at one or more but few are best for all three. Take gold for example: great as a store of value through most of history, not so great as a medium of exchange for the day to day transactions since it's heavy and to ensure it's value it must be tested for purity and weighed, as a standard of value it's without compare. I only bring up that example to outline that all currencies have a weak spot. With gold it's heavy, and hard to divide or merge. With bitcoin it's a bit volatile and in the classical sense has no intrinsic value. So it scores low (at the moment) as a store of value (only on the short run, clearly it's over-all track record is nothing short of amazing) and it scores low as a standard of value due to it's lack of intrinsic value. However, as a medium of exchange it is arguably currency 2.0. Never in the history of the world has a medium of exchange like this ever been placed in the hands of the people free from governmental manipulation.

So to the OP I would say while your arguments are well thought out and well worded, they are invalid because they assume that bitcoin must fit your idea of what a currency should be in order to be taken seriously. Is hoarding a threat to bitcoin as a medium of exchange? Yes in the same way that being counter inflationary is. Yet, without the counter inflationary measures it would have no chance as a store of value and clearly if it's being hoarded it's satisfying that use for currency well indeed.