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Author Topic: Would a permanent 50BTC block reward have changed the discussion?  (Read 4358 times)
DataPlumber
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April 25, 2013, 10:05:24 PM
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There's a lot of talk about the limited supply and "deflationary" model of Bitcoin.

My thought exercise is: what if the block reward were (originally) permanently set to 50BTC?  How would the conversation have changed?  It appears that a lot of people (particularly Keynesian economists) see "stable currency supply" and run screaming from the room.  It would have been nice to have them actually take a good hard look, instead of dismissing all other aspects of Bitcoin out-of-hand like a single-issue voter.  (On the other hand, many of those same people seem believe the Bitcoin network has no value.  At least, that's the implication, when they say there's no value backing the Bitcoin currency.)

The net result of a fixed 50BTC inflation rate is basically the same: over time, the inflation *percentage* asymptotically approaches zero.  But perhaps we could have avoided a lot of the red-herring (imo) discussions about deflation being the most horrible thing since Jersey Shore.

It occurs to me (and may have occurred to Satoshi) that as the value of BTC shoots up, consistent block rewards may become fantastically valuable, thereby creating an incentive for people to go insane with power consumption while chasing that mega-reward.  Once the block rewards go away in the present system, the transaction fees will automatically stabilize to being in range of the value actually being transacted (assuming miners automatically adjust transaction fees down or up as the value of BTC changes.)

Another possibility, I suppose, would have been to fix the inflation rate at a percentage; say, 2%.  But I don't have the imagination to see a method that would somehow react to market demands but wouldn't be externally manipulatable, *and* immune to differences of opinion, ala the infamous "BFL shipping before 1Apr" bet adjudication drama.

Anyone care to join me in this thought exercise?

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April 25, 2013, 10:23:26 PM
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If the block reward was forever 50, it would have radically changed the long-term calculations of all the early miners.

For example, I probably wouldn't have stopped mining and started buying instead, in August of last year.  I would almost certainly have taken a hard look at what would have been a serious first-mover advantage, and bought more hashing power.

As it is, with the block reward constantly dropping every four years or so, that first-mover advantage goes away.  Equipment costs go up.*  Different people who calculate things differently get involved.

The fact is - as I see it - the whining about 'early adopters' (no different than early miners, really) is probably less today than it would be if the block reward was immutable.

*n.b.:  I'm reasonably certain that sooner or later equipment and electrical costs will become a very tiny part of the mining calculation.  Probably sooner.  Technology marches on, and as Bitcoin gains market share smarter and better equipment designers will enter the fray.  I expect massive - and I mean massive - hashing power to be available within the next two or three years, for the cost of a decent desktop computer.

In the mid-term, I'm convinced that the most expensive part of mining will be space/property costs.

Dankedan: price seems low, time to sell I think...
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April 25, 2013, 10:35:40 PM
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Would a permanent 50BTC block reward have changed the discussion?

Yes, I would not be part of it.

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April 25, 2013, 10:58:41 PM
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http://blockchain.info/charts/network-deficit

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April 25, 2013, 11:09:06 PM
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*n.b.:  I'm reasonably certain that sooner or later equipment and electrical costs will become a very tiny part of the mining calculation.  Probably sooner.  Technology marches on, and as Bitcoin gains market share smarter and better equipment designers will enter the fray.  I expect massive - and I mean massive - hashing power to be available within the next two or three years, for the cost of a decent desktop computer.

In the mid-term, I'm convinced that the most expensive part of mining will be space/property costs.

Honestly, I don't see that as an argument against a fixed block reward.
It is true that hashing power will go up massively (moore's law and all that, plus there is the specialization using ASICs), but the reward is fixed (50 BTC every x minutes). It doesn't matter how much or how little hashing power is added to the network, the rate of coin generation and therefore its effect on the global market would still be capped.

I'd say the main benefit is that it would remove some of the uncertainty around transaction fees being enough. Now we are left to wonder if transaction fees will be enough to compensate for the declining block rewards. If not, it will cause hashing power to drop (because of the cost of electricity, et cetera) and if it drops too much a 51% attack might become feasible and more profitable.
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April 25, 2013, 11:14:33 PM
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*n.b.:  I'm reasonably certain that sooner or later equipment and electrical costs will become a very tiny part of the mining calculation.  Probably sooner.  Technology marches on, and as Bitcoin gains market share smarter and better equipment designers will enter the fray.  I expect massive - and I mean massive - hashing power to be available within the next two or three years, for the cost of a decent desktop computer.

In the mid-term, I'm convinced that the most expensive part of mining will be space/property costs.

Honestly, I don't see that as an argument against a fixed block reward.


It wasn't intended to be.  That's why I foot-noted it

And I wasn't arguing either for or against a fixed reward - personally, I'm with hazek:  I wouldn't be here if it was immutable.  I was only addressing the question of how I thought the conversation might be different, given that circumstance.


Dankedan: price seems low, time to sell I think...
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April 25, 2013, 11:20:32 PM
 #7

In the long run even if Bitcoin kept a continual 50 BTC block subsidy the inflation would fall to ~0%.  It would be effectively deflationary.   It wouldn't attract Keynesian.  Sadly Keynesian honestly believe it is absolutely essential for central banks to do what the Federal Reserve is right now.  Magic trillions upon trillions of new dollars and flood them into the economy to end the recession.  They don't think the fed is doing a bad job.  So unless you have a crypto-currency where an elected board of miners can arbitrarily add as much coins as they see fit they wouldn't be happy.  If the fed oversaw bitcoin right now seeing massive price increase of BTC:USD exchange rate they wouldn't bump the block reward to a pathetic 50 BTC?  Are you kidding me?  Maybe 500 BTC or maybe even a brief period of 50,000 BTC per block.


If the supply is "fixed" (as in the money supply can't be manipulated by those who "know best") it isn't ever going to be attractive to Keynesians.  Monetary policy (which is a nice way of saying manipulation) is a cornerstone of that school of thought.  
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April 25, 2013, 11:25:57 PM
 #8

There's a lot of talk about the limited supply and "deflationary" model of Bitcoin.

My thought exercise is: what if the block reward were (originally) permanently set to 50BTC?  How would the conversation have changed?  It appears that a lot of people (particularly Keynesian economists) see "stable currency supply" and run screaming from the room.  It would have been nice to have them actually take a good hard look, instead of dismissing all other aspects of Bitcoin out-of-hand like a single-issue voter.  (On the other hand, many of those same people seem believe the Bitcoin network has no value.  At least, that's the implication, when they say there's no value backing the Bitcoin currency.)

The net result of a fixed 50BTC inflation rate is basically the same: over time, the inflation *percentage* asymptotically approaches zero.  But perhaps we could have avoided a lot of the red-herring (imo) discussions about deflation being the most horrible thing since Jersey Shore.

It occurs to me (and may have occurred to Satoshi) that as the value of BTC shoots up, consistent block rewards may become fantastically valuable, thereby creating an incentive for people to go insane with power consumption while chasing that mega-reward.  Once the block rewards go away in the present system, the transaction fees will automatically stabilize to being in range of the value actually being transacted (assuming miners automatically adjust transaction fees down or up as the value of BTC changes.)

Another possibility, I suppose, would have been to fix the inflation rate at a percentage; say, 2%.  But I don't have the imagination to see a method that would somehow react to market demands but wouldn't be externally manipulatable, *and* immune to differences of opinion, ala the infamous "BFL shipping before 1Apr" bet adjudication drama.

Anyone care to join me in this thought exercise?

i think it would have been a great idea. It would have actually led to a stable money supply, as opposed to what we have now which is a decreasing money supply (at some point in the future). Think about it, if we continue to mint new blocks infinitely eventually the total supply of currency would become so great that the marginal value of coins would decrease to the point that people became less careful not to lose them resulting in more lost coins over all. As the supply contracted people would become more careful with their coins and there would be fewer losses. These two forces would balance out at some point in the future leading to a relatively stable money supply.

with bitcoins current model, at some point in the future we will have the total money supply shrinking by the day.

of course this would have scared away libertarians, which would have hindered its adoption, so when you think about it in this context i think satoshi made the right choice.

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April 26, 2013, 12:09:37 AM
 #9

If I would design a new crypto currency, i would have this requirements:
-encourages usage of the currency and discourages hoarding (long term)
-reward early miners, but prevent early miners to get too much of the long term coin supply
-prevent price bubble in the beginning with help of high inflation which cools down the potential price bubble (in dollars)
-create a long term real inflation of 2%, which will require a higher nominal inflation than 2% because of lost wallets, hoarding and other factors. Long term nominal inflation of 3% is required.

Result:
period 0 (year 0) 1 million coins pre mined
period 1 (year 1...5) increasing inflation each year
period 2 (year 6...30) falling inflation each year down to 3%
period 3 (year 31...infinity) steady state of 3% inflation per year for infinity

The chart of the yearly inflation rate would resemble a bell curve with a long steady tail in the end


(This chart shows peak oil, my idea is that the yearly inflation rate should resemble the bell curve)
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April 26, 2013, 12:53:03 AM
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I believe some of the altcoins have properties similar to what you are saying. Freicoin comes to mind for discouraging hoarding, but I don't remember the curve on block rewards. So many altcoins, so hard to keep track!

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April 26, 2013, 01:13:05 AM
 #11

When I explain Bitcoins to people for the very first time the one thing that always gets them interested, the one hook that gets them into Bitcoins above and beyond any other statement is:

Noobs know nothing about preminers, hoarders and lost wallets (destroyed coins)
We need a small nominal inflation of 1-5% just to keep the real inflation to 0% in the bitcoin world.
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April 26, 2013, 01:16:59 AM
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The deflationary nature of BTC really makes it interesting from an economic perspective and one of the reasons why I am here. I enjoy this experiment as written and it will be a lot of fun to discover what long term impact occurs from having a hard threshold on supply.

Quote
Noobs know nothing about preminers, hoarders and lost wallets (destroyed coins)
We need a small nominal inflation of 1-5% just to keep the real inflation to 0% in the bitcoin world.

I do mention these factors in my course and I also have started a discussion to design a metric for the amount of "dead" coins in the supply pool. The primary concern however is that demand will always dramatically outpace supply resulting in sharp value increases per coin. I understand the divisibility argument; however, we do not have enough good transaction data to address these issues yet. It is an experiment in monetary policy.

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April 26, 2013, 01:48:01 AM
 #13

I don't believe that any altcoins are going to make it.   Bitcoin is too big in crypo-currency space, and too small in the overall scope of the economy to fragment it.

Whatever changes you want,  you most likely are going to have to make them within bitcoin... good luck with that.

I do wish Bitcoin tied it's current mining reward to it's current trading figure with a basket of currencies,  example :

100 Euros,  150 Dollars =  Reward of 25
200 Euros, 250 Dollars = Reward of 50
50 Euros, 75 Dollars = Reward of 12

so when the price increases it automatically starts "printing more bitcoins"  to stabilize the price.   If the price drops, it "stops printing" them to increase scarcity.

That eventually would even out the price swings...  but I doubt people would jump on this as it changes the core of bitcoin.  

I still support the hard limit of 21 million bitcoins,  it's just that using my method you wouldn't know exactly when we'll reach that point (could be in a single year rather than 100 years if bitcoins jumped to 100,000 a bitcoin) or it could be 1000 years from now if it suddenly dropped to 4 dollars a bitcoin.

The end result is doing what I said above would most likely stabilize the price to about where we are today.











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April 26, 2013, 02:23:23 AM
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so when the price increases it automatically starts "printing more bitcoins"  to stabilize the price.   If the price drops, it "stops printing" them to increase scarcity.

An alt-coin that was reliably pegged to a different currency (let's call it DollarCoin) would be a really useful thing to have. It would probably be quite useful addition to the Bitcoin ecosystem, because it would provide an intermediary step between Bitcoin and regular money.

The practical problem is how the program would get reliable information about its own exchange rate in a way that couldn't be gamed. The best way I can think of would be to have a list of public keys of trusted exchanges in the client, and have (multiple) exchanges confirm (sign) any operation that needed exchange rate information. (There wouldn't be many of these operations - you'd only need them when you wanted to create or destroy coins.) But there would be a risk that exchanges would misreport prices, and you'd have to rely on people updating their list of trusted exchanges to remove the dodgy ones. In practice this would probably mean a bit more power than we'd like for the people who maintained the client software, although the users would be able to rebel if they seemed to be abusing it.
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April 26, 2013, 02:54:10 AM
Last edit: April 26, 2013, 03:05:13 AM by gollum
 #15

Addendum to the GollumCoin:

-Designed to resemble golds annual real inflation rate: 2%
-Designed to have a parity of 1:1000 in the number of coins vs Gold oz mined (there is almost 1 oz/human today)
-Total number of coins shall reach 10^10 * 10^3 = 10^13 in 2100 when human population reaches 10 billion, that means 1 oz gold per human and 1000 coins per human.
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April 26, 2013, 03:22:33 AM
 #16

Yes, I would have never participated.

In fact, I think almost every early miner would not have participated, meaning there would have been no scarcity and thus, no value. Ever.

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April 26, 2013, 03:29:20 AM
 #17

Addendum to the GollumCoin:

-Designed to resemble golds annual real inflation rate: 2%
-Designed to have a parity of 1:1000 in the number of coins vs Gold oz mined (there is almost 1 oz/human today)
-Total number of coins shall reach 10^10 * 10^3 = 10^13 in 2100 when human population reaches 10 billion, that means 1 oz gold per human and 1000 coins per human.

Note that even gold has a bit of built-in flexibility to adapt the money supply to demand, because if the price of gold rises compared to things in the real world like the cost of a day's labour, people will dig more gold out of the ground.

If you're trying to make a currency work like gold you should probably let changes in the hash rate feed back, at least partially, into the rate of new money creation. Bitcoin cancels all this stuff out by adjusting the difficulty of solving a block to keep the average time between blocks and the block reward constant, but instead you should only do that partially, or make the adjustment (to keep the time between blocks constant) but then tweak the block reward to compensate.
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April 26, 2013, 03:39:00 AM
 #18

Yes, I would have never participated.

In fact, I think almost every early miner would not have participated, meaning there would have been no scarcity and thus, no value. Ever.

To be realistic I think governments will create crypto currencies, and their crypto currencies will be something between gold and fiat when it comes to inflation. They don't need any miners to participate in their scheme since they have enough resources to create a secure currency with high hashrate. And they dont need to attract users, users are forced to use their coin since it is the currency where taxes can be paid and government employees get salaries.
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April 26, 2013, 04:48:54 AM
 #19

What is wrong with deflation?

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April 26, 2013, 04:50:19 AM
 #20

Nothing, but it makes loans more difficult and also its hard for economists who like a consumer economy to accept a money with an incentive to save built in.

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