Rethinking Bitcoins

[RHorning]

Unless I'm badly mistaken there is no reason 95% of people agreeing to accept generates of 50BTC forever requires the remaining 5% to do so. Smart merchants will insist on the limited chain and those finite coins will hold value while the others will decay. Some people will change their mind and use the limited gen chain and as the value diverges the new chain people will probably decide they aren't generating fast enough and increase to 1000/block and beyond. And this fireball of stupidity will probably last less than a month since there won't be an army and swat teams to enforce acceptance of the dummy chain.

If this happens, which it likely won't, it'll look like the collapse of any fiat currency played out in extreme speed.

edit: I'm not say the bad chain is fiat, only that their collapses will look similar. I think it would happen faster because it isn't fiat, it's just straight inferior with no force propping it up.

I don't see how the currency would collapse if 50 BTC keep being created "forever".  It is a matter of sinks and sources, just like you find in most MMORPGs.  Coin sinks in this case would be people who are sitting on coins and not spending them, "lost" coins due to people losing their coin wallets, and others ways that coins are essentially pulled out of circulation like members of the bitcoin community dying and people reformatting those computers or throwing those computers into a local landfill.  Over time, the flow of bitcoins would stabilize and the overall bitcoin economy would adjust to whatever scheme or system is set up for creating bitcoins.

Besides, as I've been trying to point out, this is precisely the network model we are currently using at the moment, and the only distinguishing feature between one that has 50 BTC forever and one that has a finite limit in the future with diminishing returns is invoking a part of the code in the current client that has yet to be activated or really tested, and the impact of that change of halving the value of mined coins certainly hasn't worked its way into the value people place upon bitcoins.  In spite of the fact that each new workunit, at the moment, is worth 50 BTC, the value of bitcoins has been steadily increasing based upon the various markets.  The theoretical musing is about how people will react when the total number of new coins is zero.

I don't understand the rest of what you are trying to say here, as the network already limits the number of new work units being created.  If you try to increase the creation rate, the network simply increases the workunit difficulty.  In trying to interpret what you are saying, the presumption is that by having a constant influx of new coins coming into the Bitcoin economy, that at some point in the future the value of a single bitcoin will collapse, presumably from more bitcoins chasing fewer goods and services.  That would be true if there was a shock to the system of a huge number of new bitcoins coming into the economy all at once, but a steady stream of new bitcoins is something that I think would be more than predictable and people would adjust to that happening.

By far and away the one thing that would cause a collapse in the value of Bitcoins would be somebody hoarding a large number of Bitcoins and then dumping them onto the market all at once.  This has been described on other threads and is completely irrelevant in terms of the generation system being used.

[FreeMoney]

I hold coins because I believe a thriving economy will grow up around bitcoin. My actions are telegraphed to the via the market price for coins letting people know that there is a little more interest now and they can plan accordingly in choosing to offer goods or build sites or whatever.

If coins were unlimited I wouldn't want to hold them, I wouldn't expect anyone else to hold many either, I would just wait and get coins once there were more if I needed some, which I probably never would because people, knowing there will be more coins later will wait until they can trade their stuff for more coins, after all there is no hurry, just use the dollar for now. At least with the dollar there is a chance the printing will stop (hahaha, right)

Anyway, it should be really easy to set up BitFlatoCoin now that all the tech is available and open source. New genesis block, new generate rules, tada.

[RHorning]

I hold coins because I believe a thriving economy will grow up around bitcoin. My actions are telegraphed to the via the market price for coins letting people know that there is a little more interest now and they can plan accordingly in choosing to offer goods or build sites or whatever.

If coins were unlimited I wouldn't want to hold them, I wouldn't expect anyone else to hold many either, I would just wait and get coins once there were more if I needed some, which I probably never would because people, knowing there will be more coins later will wait until they can trade their stuff for more coins, after all there is no hurry, just use the dollar for now. At least with the dollar there is a chance the printing will stop (hahaha, right)

Anyway, it should be really easy to set up BitFlatoCoin now that all the tech is available and open source. New genesis block, new generate rules, tada.

Dollars, Euros, Pounds, and other currencies are "unlimited", yet people hold them, value them, and use them for exchange.  Ditto with Linden Dollars and many other "alternative" currencies as well, and for that matter even precious metals like gold and silver.  At some point in the future, a new gold mine or perhaps an asteroid made of pure gold will be discovered which will substantially increase the supply of one of these metals.

I'm simply suggesting that having an open ended currency system doesn't necessarily make it fatal and there are plenty of examples of currencies without a formal limit.  Indeed I am suggesting that every currency system is open ended with possibly the exception of Bitcoins itself.  It is Bitcoins with it being defined as a closed and absolute limit by definition which is new and different, something that I'm not entirely sure how it is going to pan out in the long run.  It may be fun to find out.

I guess another exception as a "closed" currency is the Iraqi Dinar as printed by Saddam Hussein's government.  It also has an interesting history too as it was able to maintain its value and in fact appreciate when the government which established it by fiat no longer existed.  Most people expected the Dinar to collapse in a fashion similar to Confederate Dollars, but ended up becoming even more valuable than they were during Saddam Hussein's presidency.  Closed and limited currencies are by far and away the exception rather than the rule.

As far as forking Bitcoins with a new genesis block an new rules, that is a strawman argument.  There might be a fork or if there are some fatal problems to Bitcoins (the final chapter on Bitcoins hasn't been written yet) there might be a move to fork the project.  In this regard, it is good to at least consider other approaches, which is also the point of this thread, to see what else Bitcoins might have been instead of what it currently is.  What decisions on the part of Bitcoins are essential and which are merely arbitrary choices that simply had to be made?  I consider the decision to gradually reduce the value of Bitcoins as an arbitrary decision which might have even excessively complicated the algorithms for Bitcoins.  We'll see how that works out, which is why this is a fun experiment.

Arguing on behalf of a closed and limited number of Bitcoins overall is that it might lead to a faster adoption of the currency as it is a unique feature.  The limit is being defined as a mathematical algorithm rather than some fiat declaration, which also makes it a bit more interesting still.  It may be that an open ended currency, even with a controlled and limited growth as presuming the 50 BTC per new work unit would be allowed to continue, might reduce the number of people during a rapid growth phase who would be willing to use it.  Perhaps even people like yourself, FreeMoney.  I'm not completely convinced it would be a huge number, but I'm sure there would be some who would be more attracted to a completely closed currency system.  At that point what we are arguing about is the number who would reject an open ended version of Bitcoins.

[MoonShadow]

Dollars, Euros, Pounds, and other currencies are "unlimited", yet people hold them, value them, and use them for exchange. 

Fiat currencies are unlimited in theory, but are limited by practical constraints.  The most important one being time.  Bitcoin is limited in the same way, as the distribution of future coins plays a role in the value of the currency now.  Of course, an unlimited currency is not a fatal flaw, but it is a flaw that must be countered by issuing governments by legal tender laws.  Bitcoin has no such support, and therefore must have other apparent advantages to succeed.  If the protocol permitted perpetual inflation, even at a predictable and unalterable rate, I certainly wouldn't be here to talk about it.  I can only guess at the motivations of others.

[ribuck]

If the protocol permitted perpetual inflation, even at a predictable and unalterable rate, I certainly wouldn't be here to talk about it.  I can only guess at the motivations of others.

Ditto. The fixed coin limit was what got me hooked.

[RHorning]

Dollars, Euros, Pounds, and other currencies are "unlimited", yet people hold them, value them, and use them for exchange. 

Fiat currencies are unlimited in theory, but are limited by practical constraints.  The most important one being time. 

I know this is getting off-topic, but I'm curious what sort of time limitation there is to dollars when the chairman of the Fed can simply type in some number in a desktop computer to create a trillion dollars and send those dollar electronically to buy securities or whatever The Fed cares to buy with them?  It is a bit more complicated than than, but not much more so.  It certainly doesn't require the printing of any physical medium.

If there is a practical limit, it has been the historical reluctance of central banks to do this kind of wild sort of intervention or performing substantial inflation causing actions.  In other words, it is the whimsy of individuals who have the power to inflate the currency, not any sort of actual limit.

The fact that Bernake doesn't seem to have this kind of restraint is something I find especially disturbing, but this is getting very much off topic.

[theymos]

I don't see how the currency would collapse if 50 BTC keep being created "forever".  It is a matter of sinks and sources, just like you find in most MMORPGs.

Reality has limited resources. Video games do not.

[MoonShadow]

Dollars, Euros, Pounds, and other currencies are "unlimited", yet people hold them, value them, and use them for exchange. 

Fiat currencies are unlimited in theory, but are limited by practical constraints.  The most important one being time. 

I know this is getting off-topic, but I'm curious what sort of time limitation there is to dollars when the chairman of the Fed can simply type in some number in a desktop computer to create a trillion dollars and send those dollar electronically to buy securities or whatever The Fed cares to buy with them?  It is a bit more complicated than than, but not much more so.  It certainly doesn't require the printing of any physical medium.

If there is a practical limit, it has been the historical reluctance of central banks to do this kind of wild sort of intervention or performing substantial inflation causing actions.  In other words, it is the whimsy of individuals who have the power to inflate the currency, not any sort of actual limit.

The fact that Bernake doesn't seem to have this kind of restraint is something I find especially disturbing, but this is getting very much off topic.

Time is restrictive upon both the actual inflation of the monetary base and the effects upon the market due to it's sheer size.  The former is a political resistance, the later simply a propagation delay.  The latter is also regularly manipulated by masters of finance to benefit from 'time arbitrage'.  Basicly, if they know that inflation is going to hit the mindshare of the public in the future (usually due to announcements) they can 'front run' by buying up whatever is expected to be most directly affected by said inflation and then 'selling on the news' once the cat is out of the bag.  This effect was prominant leading up to the Fed's most recent announcement on Nov. 3rd with regard to treasury bonds; but in retrospect can be found in many commodities markets since about July.  It is this anticipation of monetary base inflation that has led to the actual price inflation in cotton & corn, as well as others.  This is speculation by it's definition, but it's speculation based entirely upon the future faith & purchasing power of the Federal Reserve Note.  All fiat currencies suffer from the threat of hyperinflation, and puts them all at a disadvantage to Bitcoin or gold or silver, but all fiat currencies are at the advantage of the implicit and explict support of governments; which includes both the support of an army as well as the artificial demand created by the payment of taxes in only the fiat currency in question.  If the US FRN were to lose it's monopoly status with regard to payment of taxes, the currency would crash today.

[RHorning]

In your initial post RHorning you raised a number of interesting issues and I did not give them an adequate response in my immediate reply.

You think that people should be rewarded for participating in the network by providing network bandwidth for example. This is a perfectly reasonable position and I agree with you. Unfortunately there's no way that I can think of to implement this in the current Bitcoin system without being scammed or having some other negative consequences. If you were to think of a way to implement it and specify it in some detail then I'm sure the proposal would be examined in considerable detail.

It's hard to imagine how network participation would be rewarded because Bitcoin is not good at micropayments. Every payment is sent to each client and gets recorded in the block chain on each client's hard disk. The number of fee free payments per block is relatively low. Let's say you can get 50k of transaction data in a block before you have to pay. Let's say the minimum size of a transaction is 100 bytes (it's actually more) so that's 500 transactions in about 10 minutes or less than one transaction per second and everyone's hard disk fills up at 2.628G bytes per year. Even if one lets the micropayments accumulate on account and you settle it relatively infrequently, it's still going to be a significant proportion of transactions.

The second problem is that any reward that creates coins from thin air has to be mutually agreeable and verifiable. It would be hard to verify that all this network participation was not just falsified to get the money.

The third issue is satoshi's de-facto control over all aspects of Bitcoin. I don't have an opinion about whether this is good or bad, it just is and has to be taken into account. In another thread, gavinandresen opined that it's way too early to start asking for commitments to adhere to a particular interface or functionality. Upon reflection I believe he is right. If you look at the amount of generally useful code written to further the project, essentially all of it has been written and tested by satoshi. Note that I'm not counting GPU miners as useful! Thanks to him, we all have a nice reference implementation of Bitcoin that we can examine and play with and a wonderful forum to share our thoughts. If he discontinued development for whatever reason the project would rapidly grind to a halt. People disagree on what exactly Bitcoin is and how much would have to change before it wasn't Bitcoin anymore. The real answer is that Bitcoin is whatever satoshi implements for the forseeable future. At the moment and for the forseeable future there are a lot of features of the current system that need to be discovered and addressed before an improved system can be designed intelligently. If the current scheme were substantially changed then a lot of the momentum would be lost and it would take quite a while for the new system to reach even the current low level of maturity.

ByteCoin

Getting onto another topic that I initially tried to raise, I've been trying to think about even perhaps how you could "earn" bitcoins for network bandwidth, as a way to encourage participation in the network.  A few basic ground rules I'd like to put into this discussion however.

• This is something that would have to be put on top of the existing rules.  In other words, if this were to be done it would have to be completely compatible with the existing network rules, and more importantly it would have to be something that could work with earlier versions of the network client so it would have to be forward compatible with the current version of the client.
• Axiomatically, based upon the the premise of the previous requirement, the actual "mining" of Bitcoins themselves would have to be from the generation of the hashes themselves and the creation of new blocks.  This isn't something that would be a way to create new bitcoins, but merely a way to pay for the service itself
• Charging for bandwidth would have to be something that is voluntary, in part because not everybody would agree to this at least in the beginning.  It limits the options perhaps on what you can do, but it also forces you to think of different opportunities as a result.
• The advantages for moving in direction would have to be beneficial to the network as a whole and likely be adopted by Satochi even in the reference application, aka the main Bitcoin client.

My idea that I've considered is essentially where some system could be set up where data sent from one peer to another has some kind of payment arrangement based upon bandwidth delivered.  A trust metric of some sort would have to be worked out here and perhaps even a "leap of faith" of some sort too, but I'm suggesting something sort of like the following:

Alice connects to Bob, where Bob claims to have blocks in the network chain that Alice doesn't have

Alice has some experience with Bob, or Bob has established some sort of trust with Charlie, who Alice trusts.  Note, this is something that still could be worked out, but at some level there is some modest level of trust.  Not hard trust, but that things may work out.  Blacklisting and Whitelisting is possible here.  Bob can similarly establish trust with Alice on the same premise or rules.

Bob lists the price for the blocks (yes, a microtransaction) with payment address, Alice agrees to pay that price or reject the fee.  If the fee is rejected, nothing happens.  Alice sends the coins, possibly to a trusted escrow.

Bob transmits new blocks in the chain.

Alice receives blocks, scans blocks as valid, and releases escrow (if in place).

If everything works out, trust metric is strengthened, or if things don't work out, trust metric is weakened and "reported" to the network as a troll or bad relationship.

In this case Bob could be altruistic and transmit the blocks for no fee at all (aka the current system), be greedy charging a high fee for the blocks (likely to be rejected) or charge a competitive fee (and get lots and lots of Bitcoins from "customers"... well, perhaps some at least).  The advantage somebody gets from "buying" blocks in this system is that they can perhaps get blocks from high speed connections or at least get them from users who are willing to open up their connections.  In the long run, you would be more "connected" if you are paying for blocks as opposed to those who aren't.  You might even "win" in terms of tie breakers between who creates (mines) the next block by paying for the connections to the core miners on the network.  For those with high bandwidth, they have an incentive to offer more network connections and become a network "core" that is distributing blocks to other users.  The more connections they have, it gives them many more opportunities to earn Bitcoins.

-------

Now to problems I see in this scheme:

This really does make the network a whole lot more complex, and substantially increases the number of transactions in the network.  If nearly every node in the network is going to be receiving at least a couple transactions, it pushes the bandwidth requirements up and out of sight.  There are a few ways this might be taken care of including perhaps setting up "accounts" with other Bitcoin users where you agree to ship so much bandwidth off of a single payment transaction.  In other words, you could send 0.01 BTC to a "friend" or at least a trusted member of the network, and the "charges" would be deducted between the two users until it is time to send another 0.01 BTC for another batch, which might be enough for a few hours, days, or even weeks of block transferes.  Some kind of credit between clients would happen in this fashion and thus minimize the transactions for a specific block being transferred.  The presumption here is if coins are transferred between users, that there would also be incentives in place to connect to each other and continue the relationship.

There is the potential of scaming going on here, where false blocks could be transmitted.  This would be an attack by Bob on the network, claiming that he has lots of blocks, and thus extracting payment from lots of users, and then fails to deliver.  This kind of attack would be identified quickly where the actual data would be shown to be bogus using the existing rules.  "Proof of work" would be shown as not really being proof, or being duplicates of previous blocks.  Verification could also happen (with bandwidth being paid for from other clients), but again Bob would be shown to be untrustworthy.  "News" of this lack of trust with Bob could spread through the network quickly where Bob could even be effectively kicked from the network and possibly even have payment rejected as a transaction before it gets into the next block.

Alice could attack too, spreading false rumors of lack of trust in an attempt to damage Bob's reputation.  On the other hand, depending on how the trust metric system is set up, Charlie and others could show they they trust Bob and possibly start to reject Alice as a false rumor.  As a result, Alice would be kicked off the network instead.

If Alice and Bob are starting out with no trust relationship at all (one or both of them are new to the network) a "leap of faith" could happen where a few freebee blocks could be sent by Bob or some minor amount of Bitcoins could be sent by Alice to start the trust metric.  Perhaps both, but it would be an establishment relationship.  Some users may not want to get into a leap of faith, which is an individual choice.

Still, there are wheels in wheels here where undoubtedly there will be somebody who will figure out how to turn this into a scam.  The whole thing works only if a super-majority is "honest".  My experience is that that more than likely would be the case.  A couple of bad users would be weeded out quickly, but it isn't a guarantee.  I'm also not completely certain that this sort of system would work.

I also see that potentially with these webs of relationships that perhaps you might even get isolated Bitcoin networks due to trust relationships creating an "island" network.  That may or may not be a problem depending on how it is set up, but it would be important to know if you are on the "main" network in some fashion.  Certainly blocks created on the isolated island would not be recognized by the rest of the network.

Perhaps this is making something overly complicated, but it would be a way to "pay" for something that at the moment is a free good, namely network bandwidth.  It would provide another way for even new users to Bitcoins to make a little bit of money on the side simply for running the software, as people who stay connected to the network would over time earn more Bitcoins than those who connect for a brief while and then disconnect frequently.

As a separate note, the issue of microtransactions is something I thought was an overall goal of Bitcoins.  If microtransactions aren't working out very well, perhaps that too is something that needs revisiting.

[Anonymous]

Bitcoin would be perfect to drive adoption of a mesh network where people could earn bitcoins for sharing bandwidth. Want to pay for the coffee you just bought at starbucks? Share your connection over wifi direct and earn bitcoins to do so.