A proposed solution to adjust for lost Bitcoins: wallet 'heartbeats'

[tubro]

Why?  Why is it unusable?  You keep saying this, but you offer no reasons why it might be true.

Because when the ratio is near zero, the number of Bitcoins in circulation is small. It is so small, that some discovered dormant wallet can be huge by comparison, which can have a drastic effect on the wealth of all current users of Bitcoins. There is no way to know what might happen, but it is certain that it could happen. Because it is certain that there is extreme uncertainty when the ratio is near zero, there is little inclination to put faith in Bitcoins.

But conversely, when the ratio is much larger than one, as it is now and as it is in the beginning stages of any protocol that does not allow reclaiming of inactive wallets, then we operate with the knowledge that most coins are not lost, and thus can be put into circulation.

This is not difficult, but it is important to understand.

I believe there is some theoretical merit to your argument. Bitcoins are different from gold in that they can actually easily be destroyed. But we will never know if they are.

This means that while we may now argue that bitcoins are more stable than gold because we don't know how much gold there is while we do know that there will never be more than 21 million bitcoins, the argument might be reversed in the far future: If only 1000 bitcoins were in circulation anymore, their value might be enormous. However, it might drop steeply on "rediscovery" of a 10,000 bitcoin wallet, just as today the price of gold would drop steeply were someone to discover a giant new goldmine.

Indeed, this might be seen as a theoretical problem in the concept of bitcoin. However, it is not likely to become a practical problem, because the more valuable bitcoins become (I hope we agree that this could only be a problem if bitcoins become hugely valuable), the more securely will they be guarded in general. This means that even the 1%/year loss ratio assumed by someone above is unrealistic. Indeed, the annual loss RATIO will probably tend towards zero fast enough so that the total number of bitcoins in circulation (or longtime storage) will fall ever more slowly towards a big percentage of the intended amount of 21 million. Which means that your problem will probably never become a problem. Interesting point though.

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[ascent]

Since Bitcoins are (nearly) infinitely divisible this is a moot topic.

Clearly, you have not read my replies if that is your response.

You keep coming in here telling all the pros to listen over and over again, but you never actually ready any of the replies.

How ironic.

[ascent]

The number of coins is totally arbitrary, as they can just be subdivided to the necessary level of precision. Bitcoin could function with any number of coins (even less than one, if the number of decimal places is increased).

Read the replies. Bitcoin divisibility has nothing to do with the matter at hand.

[foggyb]

Assume 1% lost coins per year. Probably, it was a lot higher initially, but we're talking from now on.

That means it'd take 229 (log(0.1)/log(0.99)) years before we lose one decimal of precision.

Assume?

What about malicious attacks, viruses, natural disasters, power failure, & plain old stupidity.

We just had an exchange get hacked, where 7% of all bitcoins in existence were being manipulated by a single attacker.

[je_bailey]

The number of coins is totally arbitrary, as they can just be subdivided to the necessary level of precision. Bitcoin could function with any number of coins (even less than one, if the number of decimal places is increased).

Read the replies. Bitcoin divisibility has nothing to do with the matter at hand.

See, I'm reading the thread and it sounds like this is part of the problem you're stating.

So to restate, there are coins that are lost and coins that are hoarded. Just focusing on lost coins,there shouldn't be an issue. Because the value of the remaining coins would climb and, if necessary, the coins can be bit shifted to increase the overall supply.

The purpose of this heartbeat then, is actually focused around hoarders, early adopters who have a large number of coins and for some reason want to keep them rather then entering them into the system. And to force them into the market, is that it?

[BitterTea]

Assume 1% lost coins per year. Probably, it was a lot higher initially, but we're talking from now on.

That means it'd take 229 (log(0.1)/log(0.99)) years before we lose one decimal of precision.

Assume?

What about malicious attacks, viruses, natural disasters, power failure, & plain old stupidity.

We just had an exchange get hacked, where 7% of all bitcoins in existence were being manipulated by a single attacker.

As the adoption of Bitcoin increases, and the prices rises, the incentive to protect them against loss or theft will increase proportionally. This is something that I don't see people taking into account when they say that loss and theft will be a huge problem.

[ascent]

The purpose of this heartbeat then, is actually focused around hoarders, early adopters who have a large number of coins and for some reason want to keep them rather then entering them into the system. And to force them into the market, is that it?

No, that's not it. I will not keep repeating myself. Read my replies. Especially those that discuss ratios and uncertainty.

[je_bailey]

The purpose of this heartbeat then, is actually focused around hoarders, early adopters who have a large number of coins and for some reason want to keep them rather then entering them into the system. And to force them into the market, is that it?

No, that's not it. I will not keep repeating myself. Read my replies. Especially those that discuss ratios and uncertainty.

If you keep repeating yourself over and over, the problem may not be with the listeners but with how you're stating your answers

Anyways, I read and re-read this and there's a lot of back and forth.

But I'll try this once again:

Your assumptions are:

• Eventually all bitcoins will be lost
• That the uncertainty in the amount of bitcoins that are available will effect the price.
• The reason it will effect the price is that there is a potential of an unknown wallet created back in the dawn of time that will be discovered that, after all this time, will be large enough to dramatically shift the market.
• And that trade will halt because of this potential uncertainty which will only increase with time.

am i closer?

[kjj]

Because when the ratio is near zero, the number of Bitcoins in circulation is small. It is so small, that some discovered dormant wallet can be huge by comparison, which can have a drastic effect on the wealth of all current users of Bitcoins. There is no way to know what might happen, but it is certain that it could happen. Because it is certain that there is extreme uncertainty when the ratio is near zero, there is little inclination to put faith in Bitcoins.

But conversely, when the ratio is much larger than one, as it is now and as it is in the beginning stages of any protocol that does not allow reclaiming of inactive wallets, then we operate with the knowledge that most coins are not lost, and thus can be put into circulation.

This is not difficult, but it is important to understand.

Shit.  I had a whole reply typed out, but the stupid forums limits the posting rate, and I managed to lose it while going back to try again.

The short version is that I now understand your point.

But I don't necessarily agree that instability is inevitable.  Holders of unusually large wallets from days past will have an incentive not to crash the system.  And as coins are actually lost, the increase in value of the remaining coins will give an incentive for people to recover coins that aren't actually lost, but merely hiding, keeping the ratio of "thought lost" to "actually lost" at a reasonably low level.

So, yes, over time, the loss of coins could cause uncertainty, which could cause instability.  But I don't think that those are inevitable.

[foggyb]

As the adoption of Bitcoin increases, and the prices rises, the incentive to protect them against loss or theft will increase proportionally. This is something that I don't see people taking into account when they say that loss and theft will be a huge problem.

This will be an interesting experiment.

[bji]

Because when the ratio is near zero, the number of Bitcoins in circulation is small. It is so small, that some discovered dormant wallet can be huge by comparison, which can have a drastic effect on the wealth of all current users of Bitcoins. There is no way to know what might happen, but it is certain that it could happen. Because it is certain that there is extreme uncertainty when the ratio is near zero, there is little inclination to put faith in Bitcoins.

But conversely, when the ratio is much larger than one, as it is now and as it is in the beginning stages of any protocol that does not allow reclaiming of inactive wallets, then we operate with the knowledge that most coins are not lost, and thus can be put into circulation.

This is not difficult, but it is important to understand.

Shit.  I had a whole reply typed out, but the stupid forums limits the posting rate, and I managed to lose it while going back to try again.

The short version is that I now understand your point.

But I don't necessarily agree that instability is inevitable.  Holders of unusually large wallets from days past will have an incentive not to crash the system.  And as coins are actually lost, the increase in value of the remaining coins will give an incentive for people to recover coins that aren't actually lost, but merely hiding, keeping the ratio of "thought lost" to "actually lost" at a reasonably low level.

So, yes, over time, the loss of coins could cause uncertainty, which could cause instability.  But I don't think that those are inevitable.

Hey I think we're coming to a consensus here!

It all comes down to whether or not you believe that increasing uncertainty over time about the total number of bitcoins in circulation is going to be significant enough to warrant anything being designed into the protocol to fix it.  I do agree with you that in all likelihood, the uncertainty will not be significant during our lifetime, or even our grandchildren's lifetimes, so maybe it's not something worth worry about at all.

On the other hand, I find it intellecually satisfying to have rules built into the system to create the perfect knowledge that there are never any lost bitcoins, only hoarded ones.  And it would give me satisfaction to know that whatever problems that I haven't even thought of yet that would be caused by the increasing uncertainty of lost bitcoins, are not something I have to worry about at all because there is no such problem.

That's why I said that the 20 year rule sound like a great idea to me.  But I can certainly also agree that it comes at a cost - people have to be aware of it and work around it or lose their bitcoins eventually, and also the rule would have to be propogated out into the network (but we'd have 20 years to do that!) - and I can understand the argument that that cost is not worth it for the very small benefit that it brings.

[dayfall]

I like this idea, because I would like to know what coins are lost vs. hoarded and it would compress the block chain slightly.  I dislike this idea for every other reason.

[bji]

That's why I said that the 20 year rule sound like a great idea to me.  But I can certainly also agree that it comes at a cost - people have to be aware of it and work around it or lose their bitcoins eventually, and also the rule would have to be propogated out into the network (but we'd have 20 years to do that!) - and I can understand the argument that that cost is not worth it for the very small benefit that it brings.

Maybe it would be better as a 100 year rule?  If the goal is to prevent the eventual degredation of the bitcoin market due to lost coins, but people are worried about people losing their savings because they didn't re-up their transaction every 20 years, what about making it 100?  Then on the geologic timescales where this problem matters, the solution is still there, but received bitcoins during any one person's lifetime will not be lost due to this rule (any inheriters of the bitcoins will simply have to transfer them to their own account, which they would probably do anyway).  Of course when people start living significantly longer than 100 years ...

[kjj]

Here is another aspect to consider.

Over time, people tend to find ways to break, or at least reduce, the security of hashing functions.  We understand this, and the bitcoin community is capable of replacing the hashing functions used in the bitcoin system.  This will probably need to be done every decade or two until the end of time.

Cryptographers are very conservative, and they have a tendency to declare a hash "completely broken" long before any real attacks are possible in the field.  Typically, the lag time is several years, because attacks are first found against crippled variations of the hashes actually in use, and then extended until they reach the production version.

Protecting the blockchain is easy enough to do in this environment.  An extension is proposed to allow the next great hashing function to be used, starting with some block a year into the future, and the community will agree because the change is in their own interest.  The appropriate block arrives after roughly a year, and the network accepts the newfangled hash as genuine.  Past blocks are still secure, even though the hash used on them is now weak, or even broken, because their information is included in the new hashes.

Transactions are likewise also safe, since the hash of the Merkle tree will be updated at the same time.

But, what about keys in wallets?

The only way to replace them is to send them out onto the network with a transaction that uses the new hashing system.  Old ones can't simply be updated, because they contain scripts that permanently embed the hashing function in use when they were created.  They must be spent between the time that a new hash becomes available to the scripting system and the time that the old hash becomes breakable in practice.

Realistically, this interval will be decades, or more likely centuries.  But, I think that this compares favorably with the time needed to lose enough bitcoins to matter, assuming that they matter at all, which is far from demonstrated.

So, unless we reach a total dead end in cryptanalysis, old coins will gradually become recoverable.  This is unlikely to cause problems for genuine savers, because they will be able to spend their way into the new hashing systems as they become available.  But coins that are really and truly lost today will gradually gain new life, as the effort required to recover the keys to them decreases relative to the value of the coins lost.

Again, this assumes that future progress in cryptography and cryptanalysis follows more or less the same progression that it has so far.  It could turn out that SHA256 really has no weaknesses that allow anything but a total brute force attack.  But that doesn't seem likely, and we have plenty of time to figure it out.

[ascent]

Your assumptions are:

• Eventually all bitcoins will be lost
• That the uncertainty in the amount of bitcoins that are available will effect the price.
• The reason it will effect the price is that there is a potential of an unknown wallet created back in the dawn of time that will be discovered that, after all this time, will be large enough to dramatically shift the market.
• And that trade will halt because of this potential uncertainty which will only increase with time.

am i closer?

Yes. But I would say that the third bullet need not be just one wallet. Collectively, the unknowns becomes greater over time, and that leads to the fourth bullet.

It seems to me that a well designed system would attempt to maintain as relatively constant over time the dynamics of the system. By that, I mean, behavior. I am in no way implying that the valuations should be constant, only that, collectively, valuations made today, or at any point in the future, no matter how far, are made with information that is relatively uniform in quantity. Granted, some noise and fluctuation in the quantity of information is expected. But the system should not be designed with the built in guarantee that uncertainty will increase over time.

[bji]

Here is another aspect to consider.

[...]

So, unless we reach a total dead end in cryptanalysis, old coins will gradually become recoverable.  This is unlikely to cause problems for genuine savers, because they will be able to spend their way into the new hashing systems as they become available.  But coins that are really and truly lost today will gradually gain new life, as the effort required to recover the keys to them decreases relative to the value of the coins lost.

Again, this assumes that future progress in cryptography and cryptanalysis follows more or less the same progression that it has so far.  It could turn out that SHA256 really has no weaknesses that allow anything but a total brute force attack.  But that doesn't seem likely, and we have plenty of time to figure it out.

This is a really great point.  All that someone would need to do to recover lost bitcoins is to have a computer fast enough and/or cyptography good enough to figure out what public key hashes to a bitcoin address, and then what the corresponding private key is for a public key.  While this might not be possible now, maybe it will be in the distant future, and then anybody who didn't re-send their bitcoins to themselves using the better cryptographic methods of the future will simply have their bitcoins taken from them.

So maybe this problem solves itself eventually, although I still wonder how long it will be before SHA256 is easy to hack.  My guess is 40 years or more.

[TECSHARE]

Here is another aspect to consider.

[...]

So, unless we reach a total dead end in cryptanalysis, old coins will gradually become recoverable.  This is unlikely to cause problems for genuine savers, because they will be able to spend their way into the new hashing systems as they become available.  But coins that are really and truly lost today will gradually gain new life, as the effort required to recover the keys to them decreases relative to the value of the coins lost.

Again, this assumes that future progress in cryptography and cryptanalysis follows more or less the same progression that it has so far.  It could turn out that SHA256 really has no weaknesses that allow anything but a total brute force attack.  But that doesn't seem likely, and we have plenty of time to figure it out.

This is a really great point.  All that someone would need to do to recover lost bitcoins is to have a computer fast enough and/or cyptography good enough to figure out what public key hashes to a bitcoin address, and then what the corresponding private key is for a public key.  While this might not be possible now, maybe it will be in the distant future, and then anybody who didn't re-send their bitcoins to themselves using the better cryptographic methods of the future will simply have their bitcoins taken from them.

So maybe this problem solves itself eventually, although I still wonder how long it will be before SHA256 is easy to hack.  My guess is 40 years or more.


[/quote... and by that time we will need a new block chain anyway so the problem of limited quantity is no longer an issue.

[je_bailey]

[...]

Yes. But I would say that the third bullet need not be just one wallet. Collectively, the unknowns becomes greater over time, and that leads to the fourth bullet.

It seems to me that a well designed system would attempt to maintain as relatively constant over time the dynamics of the system. By that, I mean, behavior. I am in no way implying that the valuations should be constant, only that, collectively, valuations made today, or at any point in the future, no matter how far, are made with information that is relatively uniform in quantity. Granted, some noise and fluctuation in the quantity of information is expected. But the system should not be designed with the built in guarantee that uncertainty will increase over time.

The idea is interesting, but I'm not convinced that the uncertainty will ever be large enough to overcome the system.

My reasoning is this. Lets take a thought experiment where someone suddenly appears in the near future with 11 million coins. What would the impact be? Well if he does nothing with it, then there is no impact. If he attempts to sell all of it, inflation occurs and the prices of items will rise as more currency floods the market. If an attempt to flood the market occurs then the currency will spread around until an equilibrium is restored. What happened the other day with mtgox was an aberration of an immature market place. Rapid fluctuations should have placed a freeze on the market so that a reason for the change could be determined. I can only imagine a future where bitcoins are more common that there will be far greater regulation in exchanges and market places over what goes on.

And the further out I extrapolate the greater the discrepancy may be, but I can never see a great enough of a discrepancy to be concerned.  Because I mentally always come back to the thought that the market will adjust.

[tubro]

Wow, this flame-infested thread has grown into some stimulating discussion.

My take:

1. (see above) there will likely be no increase in uncertainty beyond a certain point which lies way above 10m coins IMHO).

2. the degradation of hashes is a very nice idea that will probably strengthen the first point.

3. this makes it unlikely that building any specific "reclaiming" into the protocol will be necessery or desirable. nor would it make the protocol any more "beautiful" or safe, because added complexity leads to unforeseen and mostly undesirable consequences as a rule.

4. still, why don't you start a new coin with this measure in place? because, even if 1-3 were invalid, adding this rule would still violate the trust of everyone invested in (the idea of) bitcoin-as-it-is.

[ascent]

And the further out I extrapolate the greater the discrepancy may be, but I can never see a great enough of a discrepancy to be concerned.  Because I mentally always come back to the thought that the market will adjust.

It is guaranteed that the number of total number of lost Bitcoins tomorrow will be greater than or equal to the total number of lost Bitcoins today, until the end of time, or until there are no more Bitcoins. There is no point in disputing it. We can argue all day long about what the rate of loss will be, but we'd only be guessing.

We also have no idea about what the future holds for methods of saving wealth, but let's assume that there will at least be the following places in which your wealth can be stored:

• Material items: land, gold, products, etc.
  
• Currencies
• Securities

If Bitcoins are successful, then we can assume the following:

• some individuals will store none of their wealth in them
• some individuals will store some of their wealth in them
• some individuals will store most of their wealth in them

Based on the discussion here, it should be clear that the chance of the Bitcoin supply suddenly and rapidly increasing by a huge amount relative to its perceived supply is much greater in the future than it is now. Given that, the repercussions are obvious: if such an event occurred, Bitcoins will be worth much less. In my second bulleted list, it should be obvious which group will be unaffected, and which group will be wiped out.

Given that the third group in the list will be wiped out, logically, they won't exist, if they are prudent. From that, it follows that over time, the notion that Bitcoins are a prudent means of storing wealth will lose traction.