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 Author Topic: [reddit] The real cost of bitcoin? - Breaking Down the Math  (Read 9575 times)
BitcoinPorn
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 August 12, 2011, 01:58:24 PM

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Hi, I recently read an interesting post on the bit coin forums about the electricity cost of keeping bitcoins secure. I did some of my own calculations base on figures from bitcoinwatch

kilowatts per gigiahash * cost per kilowatt * gigahash per hour = bitcoin running cost per hour
So at 650 watts per gigahash at 15 cents per kilowatt hour.
0.65 * \$0.15 * 13,300 = \$1,297 per hour
Divide that by the number of transactions per hour (309)

1,296.75 / 309 = \$4.20 per transaction. I was unable to find figures, but i can't imagine it costs anywhere near that amount for visa or paypal to process a transaction. When all blocks are mined won't bitcoin transaction fees need to significantly increase to cover these costs?

Or to look at it another way bitcoin miners will spend over \$11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap. In contrast the federal reserve printing budget is ~\$650 million or 0.0812% of USD value.

A first glance this doesn't seem very efficient to me. This money is going straight to the electricity companies and not back into the bitcoin economy. Where does the money come from to pay for this and how is it sustainable in the long run?

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jackjack
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 August 12, 2011, 02:07:39 PM

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on the bit coin forums
Isn't that the guy who is crying on the wiki because his links were removed? bawwwww

Also I don't see the point
It's not the people exchanging money that pay \$4.2 per transaction so why talking about paypal/visa?
If miners can afford \$4.2 par transaction everybody is happy

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hugolp
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 August 12, 2011, 02:20:42 PM

Funny guy.

First the guy deliberately ignores that Bitcoin is money AND a system of transmiting this money. So the price of electricity goes to pay for both things, not only one. To compare Bitcoin you need to do it against the cost of the Federal Reserve printing money, its employees, the cost of the government imposing the monopolly on money, AND all the companies that work in making transactions in the dollar economy, that is VISA, Master Card and part of the banking system.

It is true that this could change in the future and there could be money handeling companies around Bitcoin, but at this moment that is the situation.

And as always he ignores that Bitcoin is young and still does not have a lot of activity. That is one of the reasons why miners get a fixed amount (right now 50 bitcoins) with each block, and its also why this amount will decrease as time goes by expecting that more activity will produce more fees.

I wonder why people is so dishonest in regards to Bitcoin.
cbeast
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Let's talk governance, lipstick, and pigs.

 August 12, 2011, 02:29:19 PM

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
BitcoinPorn
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 August 12, 2011, 02:31:08 PM

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

Meni Rosenfeld
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 August 12, 2011, 02:38:42 PM

Both the post and the comments on reddit ignore the critical distinction between the inflation era and the tx fees era.

Right now, the total cost of mining has nothing to do, quantitatively, with the value of security, and everything to do with the implementation choice of 7200 BTC minted per day. The network has more hashing capacity than is due for protecting the network with its current value. The electricity costs are basically paid for by those wishing to get their hands on the new coins.

In the future, there will be no issuing of new coins, only transaction fees. The total hashrate, hence the network security, will be proportional to the total fees paid. An optimal balance should be sought between the need for security and the cost of transactions (how to reach such an optimum is an open problem). The electricity costs will be paid for by those who wish their transactions to be quickly confirmed against double-spending. And the cost per transaction will be much less than \$4.

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hugolp
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 August 12, 2011, 02:39:17 PM

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

The problem is that solar energy is not (yet?) even comparable in cost to fosil fuel energy. At the beggining solar energy was not even profitable, it costed more energy to produce a panel and the rest of the electronics than the energy it would obtain in its lifetime. Go figure. At the beggininng solar energy was more of a lobbying things than anything else.

But even right now, its infinitevely more profitable to buy fosil fuel created electricity than buying a solar panel. If solar panels increase in efficiency this might change, but that is a big if.
ctoon6
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 August 12, 2011, 02:39:54 PM

right now, solar technology for person, home use is barely worth it. it takes several years to start saving money. wait and it will get cheaper, and produce more power per square inch/cm whatever.

evoorhees
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 August 12, 2011, 02:40:46 PM

His math doesn't work. He is calculating the fixed cost for running the network at a given point in time. That cost isn't variable with the number of transactions.

If the number of Bitcoin transactions doubles tomorrow, the Gigahashes spent in the network will remain roughly the same. So his calculated cost of \$4.2/transaction is cut in half. If Bitcoin transactions increase by 100-fold, the cost per transaction similarly falls by that magnitude.

BubbleBoy
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 August 12, 2011, 02:42:54 PM

The guy has a correct systemic approach. If a large amount of real-world resources are spent to maintain the system operation, it's a really good question on who pays for it all, at least if you believe in thermodynamics, no free lunch and the like.

If I buy one bitcoin I trigger this economic chain:
1. people buy hardware made using scarce resources such as copper and oil
2. said people to run said hardware 24/7 and consume electricity
3. these resources are irreversibly spent for bringing one bitcoin in existence

Therefore a minute quantity of wealth as expressed in natural resources has been irreversibly destroyed in order to give me one shiny bitcoin to play with. Who pays for it ? In the short run, every member of society by higher real commodity prices. In the long run, the investors left holding the currency when the show's over.

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

 ████              ▄▄████▄▄          ▄▄████████████▄▄       ▄██████▀▀▀▀▀▀▀▀██████▄     ▄████▀▀            ▀▀████▄   ▄████▀                  ▀████▄  ▐███▀                      ▀███▌ ▐███▀   ████▄  ████  ▄████   ▀███▌ ████    █████▄ ████ ▄█████    ████▐███▌    ██████▄████▄██████    ▐███▌████     ██████████████████     ████████     ████ ████████ ████     ████████     ████  ██████  ████     ████▐███▌    ████   ████   ████    ▐███▌ ████    ████   ████   ████    ████ ▐███▄   ████   ████   ████   ▄███▌  ▐███▄                      ▄███▌   ▀████▄                  ▄████▀     ▀████▄▄            ▄▄████▀       ▀██████▄▄▄▄▄▄▄▄██████▀          ▀▀████████████▀▀              ▀▀████▀▀                ████ ▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂BLOCKCHAIN BASED FINANCIAL PLATFORM                                # WEB ● ANN + Bounty <
Raoul Duke
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 August 12, 2011, 02:46:41 PM

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

I'm willing to lease my roof top for it I have around 300m2 of roof top to use and I live in a sunny country. So sunny that the 2nd biggest solar field is here, it was the biggest when it was built.

Meni Rosenfeld
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 August 12, 2011, 02:47:50 PM

His math doesn't work. He is calculating the fixed cost for running the network at a given point in time. That cost isn't variable with the number of transactions.

If the number of Bitcoin transactions doubles tomorrow, the Gigahashes spent in the network will remain roughly the same. So his calculated cost of \$4.2/transaction is cut in half. If Bitcoin transactions increase by 100-fold, the cost per transaction similarly falls by that magnitude.
The incentive to attack the network is proportional to the total worth of the Bitcoin economy, and hence to the number of transactions. Therefore, The need for security, and by extension, the cost of mining, also increases with the number of transactions.

So eventually we will reach a point where cost/transaction is more or less constant... But that will be only after the need for security will have relevance to the total mining done.

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hugolp
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 August 12, 2011, 02:57:49 PM

The guy has a correct systemic approach. If a large amount of real-world resources are spent to maintain the system operation, it's a really good question on who pays for it all, at least if you believe in thermodynamics, no free lunch and the like.

If I buy one bitcoin I trigger this economic chain:
1. people buy hardware made using scarce resources such as copper and oil
2. said people to run said hardware 24/7 and consume electricity
3. these resources are irreversibly spent for bringing one bitcoin in existence

Therefore a minute quantity of wealth as expressed in natural resources has been irreversibly destroyed in order to give me one shiny bitcoin to play with. Who pays for it ? In the short run, every member of society by higher real commodity prices. In the long run, the investors left holding the currency when the show's over.

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.
zby
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 August 12, 2011, 02:58:20 PM

Here is the original discussion that I've started: http://bitcointalk.org/index.php?topic=28780.0  My main concern with this is that this cost needs to grow together with the total market cap of the bitcoin system - so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.  This is a kind of arms race situation - the equilibriums are very wasteful.  What is more a system like the one proposed in http://www.links.org/files/distributed-currency.pdf could avoid this cost (and be even more secure).
hugolp
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 August 12, 2011, 03:04:44 PM

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
ctoon6
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 August 12, 2011, 03:08:57 PM

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.

but the cost per transaction changes.

cost of electricity/# of transactions

eletricity changes very slowly, but transactions changes a lot. although you can average it out.

BubbleBoy
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 August 12, 2011, 03:37:41 PM

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

 ████              ▄▄████▄▄          ▄▄████████████▄▄       ▄██████▀▀▀▀▀▀▀▀██████▄     ▄████▀▀            ▀▀████▄   ▄████▀                  ▀████▄  ▐███▀                      ▀███▌ ▐███▀   ████▄  ████  ▄████   ▀███▌ ████    █████▄ ████ ▄█████    ████▐███▌    ██████▄████▄██████    ▐███▌████     ██████████████████     ████████     ████ ████████ ████     ████████     ████  ██████  ████     ████▐███▌    ████   ████   ████    ▐███▌ ████    ████   ████   ████    ████ ▐███▄   ████   ████   ████   ▄███▌  ▐███▄                      ▄███▌   ▀████▄                  ▄████▀     ▀████▄▄            ▄▄████▀       ▀██████▄▄▄▄▄▄▄▄██████▀          ▀▀████████████▀▀              ▀▀████▀▀                ████ ▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂▂BLOCKCHAIN BASED FINANCIAL PLATFORM                                # WEB ● ANN + Bounty <
ctoon6
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 August 12, 2011, 03:40:36 PM

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

its not "useless" work, although i myself would prefer a method where gpu mining would be worthless. overall it would cost less and still maintain a similar level of security (although "supercomputers" would be a threat)

hugolp
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 August 12, 2011, 04:06:39 PM

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Gresham law has nothing to do in this case. Gresham law only applies when there is a fixed artificial rate between two currencies, which is not the case here. Alternative currencies disappear because the government makes it very difficult for them to opperate.

You still have not addressed your mistake regarding the cost of a fiat currency.

Quote
Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

Its not useless, it goes to secure the network. How will you create a distributed currency without securing it somehow?
BubbleBoy
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 August 12, 2011, 04:39:55 PM

Gresham law applies to the 1930 situation I was mentioning: the fixed exchange rate drove the gold dollar out of circulation without any need for making it illegal. The government therefore incurred no cost on maintaining a monopoly on money - it didn't have one (technically, it allowed a single competitor, gold). Pray tell, what is the real cost of issuing fiat ?

The hideous blockchain construction servers two competing purposes: Byzantine fault tolerance for the coin database ("security"), and proof of work as a way to limit coin creation rate and distribute seigniorage. The miners don't care about the security of the network, they mine for seigniorage. Therefore if fault tolerance would be achievable in some other fashion, it would allow directing the seigniorage revenue to other purposes then burning electricity. It's a distinct issue of how to distribute the newly minted coins.

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indio007
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 August 12, 2011, 04:40:15 PM

Didn't you know , the Federal Reserve uses absolutely zero electricity. Neither does visa or any of their merchants!
What a red herring!

Anyhow all this guy did was prove that  bitcoin is backed by WORK performed.
ctoon6
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 August 12, 2011, 05:12:01 PM

Didn't you know , the Federal Reserve uses absolutely zero electricity. Neither does visa or any of their merchants!
What a red herring!

Anyhow all this guy did was prove that  bitcoin is backed by WORK performed.

go figure

hugolp
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 August 12, 2011, 05:39:29 PM

Ive seen you in better times BubbleBoy.

Gresham law applies to the 1930 situation I was mentioning: the fixed exchange rate drove the gold dollar out of circulation without any need for making it illegal. The government therefore incurred no cost on maintaining a monopoly on money - it didn't have one (technically, it allowed a single competitor, gold).

Gold was not a competing currency, it was the backing of the government currency! Rosevelt then prohibited phisical gold to be able to devaluate the dollar 40%, that is reducing the amount of promised gold in the gold certificates it was issuing, the dollar.

In fact, at some point the Federal Reserve had to raise interest rates because it was afraid of a run in the dollar (people demanding gold that they did not have).

Quote
Pray tell, what is the real cost of issuing fiat?

Ive already told you that the costs go beyond the costs of issueing the fiat currency.

Quote
The hideous blockchain construction servers two competing purposes: Byzantine fault tolerance for the coin database ("security"), and proof of work as a way to limit coin creation rate and distribute seigniorage. The miners don't care about the security of the network, they mine for seigniorage. Therefore if fault tolerance would be achievable in some other fashion, it would allow directing the seigniorage revenue to other purposes then burning electricity. It's a distinct issue of how to distribute the newly minted coins.

So the miners dont care if the coins they get are secure or not? Aha, very interesting concept. And as answer to my question you say that:

Quote
fault tolerance would be achievable in some other fashion

Aha, also very interesting concept. It clear all my doubts.
zby
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 August 12, 2011, 05:52:12 PM

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
The amount of electricity needed to create a block depends on difficulty - when the system grows the difficulty needs to grow because incentives to attack the system also grow.
Ten98
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 August 12, 2011, 06:42:35 PM

The main error here, apart from the incorrect kw/h cost quoted, is assuming that 306 transactions per hour is the current network capacity. It isn't. I don't know exactly how many transactions per hour could be processed by the current hash pool, but I'm sure it's many orders of magnitude higher than 306.

The transactions per hour is low at the moment simply because not many people are trading or spending bitcoins right now, mainly because there's not a lot to spend them on... Most people are simply mining and hoarding.

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Steve
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 August 12, 2011, 06:48:53 PM

This is a kind of arms race situation - the equilibriums are very wasteful.  What is more a system like the one proposed in http://www.links.org/files/distributed-currency.pdf could avoid this cost (and be even more secure).
I'm not an expert in Ben Laurie's Lucre, but what he describes in this paper is a centralized system.  Yes, of course it can work, but while the technology involved is quite different from traditional central banks, it suffers from all the same issues of relying on a central authority.  As soon as it becomes too inconvenient for that central authority to maintain discipline in their monetary policy, they will abandon that discipline.

(gasteve on IRC) Does your website accept cash? https://bitpay.com
hugolp
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 August 12, 2011, 06:56:14 PM

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
The amount of electricity needed to create a block depends on difficulty - when the system grows the difficulty needs to grow because incentives to attack the system also grow.

You are confusing growth in the number of transactions with increase on the value of bitcoins.
Rassah
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 August 12, 2011, 06:56:49 PM

Divide it by the number of users instead, since users/holders benefit directly from having their Bitcoin stores secured. Even if we use a very conservative estimate of 60,000 (MtGox registration database from last month, which doesn't include people from China or Poland), 1,297/60,000 comes out to about \$0.02 per person per hour. About \$0.50 a day or less isn't much to secure millions of dollars, and I suspect the actual cost per person is even less.

piuk
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 August 12, 2011, 07:01:35 PM

I thought this was an interesting point.

Quote
If \$400,000 is exchanged today \$31,128 will be spent by miners on electricity, that means 7.7% of the total USD volume goes to the power companies.

So for all bit coin bought today nearly 8% of our money will be spent on keeping bit coin secure. Does this not seem wasteful to anyone else?

hugolp
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 August 12, 2011, 07:05:16 PM

I thought this was an interesting point.

Quote
If \$400,000 is exchanged today \$31,128 will be spent by miners on electricity, that means 7.7% of the total USD volume goes to the power companies.

So for all bit coin bought today nearly 8% of our money will be spent on keeping bit coin secure. Does this not seem wasteful to anyone else?

He is comparing it to the volume of bitcoin transactions in one day, not the total number of bitcoins.

The whole post is playing with numbers, ellaborate trolling if you ask me.
zby
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 August 12, 2011, 08:25:13 PM

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
The amount of electricity needed to create a block depends on difficulty - when the system grows the difficulty needs to grow because incentives to attack the system also grow.

You are confusing growth in the number of transactions with increase on the value of bitcoins.

OK - you lost me here - I cannot imagine what you think my argument was and why it is confused so I'll repeat it.

I wrote that the cost of a new block needs grow together with the overall bitcoin market cap and that you need to take this into account when computing future transaction costs.
zby
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 August 12, 2011, 08:35:05 PM

I thought this was an interesting point.

Quote
If \$400,000 is exchanged today \$31,128 will be spent by miners on electricity, that means 7.7% of the total USD volume goes to the power companies.

So for all bit coin bought today nearly 8% of our money will be spent on keeping bit coin secure. Does this not seem wasteful to anyone else?

He is comparing it to the volume of bitcoin transactions in one day, not the total number of bitcoins.

The whole post is playing with numbers, ellaborate trolling if you ask me.

The thinking goes this way - first you compute the system costs, then you compute the system revenues - then you subtract costs from revenues and you get the overall profit of the system.  For the costs we can take electricity - this is only a fragment of the costs, but at least we can estimate it.  For the revenues we can take the number of transactions made by the system multiplied by the revenue of one transaction - that's pretty arbitrary - but banks charge by money transfers so we can take this as an analogue situation - this is just a first estimation.
hugolp
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 August 12, 2011, 09:05:41 PM

Serious question: do you understand how Bitcoin works exactly?

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
The amount of electricity needed to create a block depends on difficulty - when the system grows the difficulty needs to grow because incentives to attack the system also grow.

You are confusing growth in the number of transactions with increase on the value of bitcoins.

OK - you lost me here - I cannot imagine what you think my argument was and why it is confused so I'll repeat it.

I wrote that the cost of a new block needs grow together with the overall bitcoin market cap and that you need to take this into account when computing future transaction costs.

If, for example, the network today or in the last month had double of transactions the cost for the miners to process those transactions would have been the same (not more as you suggested). The real limit on the number of transactions in the Bitcoin network does not come from electricity costs, in that sense is irrelevant, but in the amount of data that would need to be stored.

The cost of electricity is correlated with the value of bitcoins. If bitcoins are worht more (meaning its purchasing power goes up) it incentivizes more investment in mining. The opposite is true as well. So if the value of bitcoins goes up, more miners will appear and the electricity costs will go up (but probably not in terms of bitcoins).

Quote from: zby
The thinking goes this way - first you compute the system costs, then you compute the system revenues - then you subtract costs from revenues and you get the overall profit of the system.  For the costs we can take electricity - this is only a fragment of the costs, but at least we can estimate it.  For the revenues we can take the number of transactions made by the system multiplied by the revenue of one transaction - that's pretty arbitrary - but banks charge by money transfers so we can take this as an analogue situation - this is just a first estimation.

Your thinking is flawed big time both in costs and revenues. In costs you are missing the cost of hardware which I can tell you is a big part of it, but you already knew this. What you are missing is a part of the revenues, the 50 bitcoins that are created everytime a block is found. That is real income for the miners.

Honestly, your stimation of the balance of Bitcoin mining was very poor. You either dont understand how Bitcoin works or are a troll.
zby
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 August 12, 2011, 09:23:21 PM

Serious question: do you understand how Bitcoin works exactly?

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.
The amount of electricity needed to create a block depends on difficulty - when the system grows the difficulty needs to grow because incentives to attack the system also grow.

You are confusing growth in the number of transactions with increase on the value of bitcoins.

OK - you lost me here - I cannot imagine what you think my argument was and why it is confused so I'll repeat it.

I wrote that the cost of a new block needs grow together with the overall bitcoin market cap and that you need to take this into account when computing future transaction costs.

If, for example, the network today or in the last month had double of transactions the cost for the miners to process those transactions would have been the same (not more as you suggested).
No - this suggestion was only in your imagination - I was talking about the fact that the overall electricity costs of the system will need to grow and that this needs to be taken into account when estimating the cost of one future transaction.

Quote from: zby
The thinking goes this way - first you compute the system costs, then you compute the system revenues - then you subtract costs from revenues and you get the overall profit of the system.  For the costs we can take electricity - this is only a fragment of the costs, but at least we can estimate it.  For the revenues we can take the number of transactions made by the system multiplied by the revenue of one transaction - that's pretty arbitrary - but banks charge by money transfers so we can take this as an analogue situation - this is just a first estimation.

Your thinking is flawed big time both in costs and revenues. In costs you are missing the cost of hardware which I can tell you is a big part of it, but you already knew this. What you are missing is a part of the revenues, the 50 bitcoins that are created everytime a block is found. That is real income for the miners.
Honestly, your stimation of the balance of Bitcoin mining was very poor. You either dont understand how Bitcoin works or are a troll.
The 50 new bitcoins is not a revenue of the system, it does not have any value outside of if.  If you don't understand that - then I don't really care if you think I am a troll.
hugolp
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 August 12, 2011, 09:46:06 PM

No - this suggestion was only in your imagination - I was talking about the fact that the overall electricity costs of the system will need to grow and that this needs to be taken into account when estimating the cost of one future transaction.

and

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

You said it.

Also:

Quote from: zby
For the revenues we can take the number of transactions made by the system multiplied by the revenue of one transaction

Quote from: zby
The 50 new bitcoins is not a revenue of the system, it does not have any value outside of if.  If you don't understand that - then I don't really care if you think I am a troll.

So the bitcoins obtained from the fees are real revenues but the 50 bitcoins obtained are not real revenues. And this is because "it(they, the 50 bitcoins) does not have any value outside of it(the Bitcoin system)", but I guess the bitcoins of the fees are a different type of bitcoins that have value outside of the system?

How do you want me not to think you are either a troll or dont know what you are talking about?
cunicula
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 August 13, 2011, 01:16:11 AM

Gresham law applies to the 1930 situation I was mentioning: the fixed exchange rate drove the gold dollar out of circulation without any need for making it illegal. The government therefore incurred no cost on maintaining a monopoly on money - it didn't have one (technically, it allowed a single competitor, gold). Pray tell, what is the real cost of issuing fiat ?

The hideous blockchain construction servers two competing purposes: Byzantine fault tolerance for the coin database ("security"), and proof of work as a way to limit coin creation rate and distribute seigniorage. The miners don't care about the security of the network, they mine for seigniorage. Therefore if fault tolerance would be achievable in some other fashion, it would allow directing the seigniorage revenue to other purposes then burning electricity. It's a distinct issue of how to distribute the newly minted coins.

+1
There will be a significant tax on txns to pay for fault tolerance. If an alternative can control for fault tolerance more efficiently for example through proof of stake, then that system will allow much cheaper txns. I think that we will see a system like this developed and that it will eventually supplant bitcoin.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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billyjoeallen
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 August 13, 2011, 01:40:33 AM

This is a bogus apples to orchards comparison. How much does the Secret service cost? How much do total anti-counterfeiting efforts cost? How much does legal tender law enforcement cost?

insert coin here:
1Ctd7Na8qE7btyueEshAJF5C7ZqFWH11Wc

Open an exchange account at CampBX: options, lowest commissions, and best security
https://campbx.com/register.php?r=0Y7YxohTV0B
rbc2012
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 August 13, 2011, 02:43:55 AM

>Or to look at it another way bitcoin miners will spend over \$11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap.
>In contrast the federal reserve printing budget is ~\$650 million or 0.0812% of USD value.

The \$11 million is for securing the integrity of the currency not printing.
The Fed may spend ~\$650 million on printing but that doesn't include security costs.

How much is spent on...

Continually developing new measures to make the bills hard to counterfeit.
The Secret Service in their effort to stop counterfeiting.
Prosecuting counterfeiters.

What's the cost of counterfeiting that is successful?

Since mining is a true free market the cost to mine will always be dropping as miners seek to maintain or increase profit.
Eventually all miners will have free or near free electricity, the rest having been driven from the market due to their inefficiency.
cunicula
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 August 13, 2011, 05:29:10 AM

>Or to look at it another way bitcoin miners will spend over \$11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap.
>In contrast the federal reserve printing budget is ~\$650 million or 0.0812% of USD value.

The \$11 million is for securing the integrity of the currency not printing.
The Fed may spend ~\$650 million on printing but that doesn't include security costs.

How much is spent on...

Continually developing new measures to make the bills hard to counterfeit.
The Secret Service in their effort to stop counterfeiting.
Prosecuting counterfeiters.

What's the cost of counterfeiting that is successful?

Since mining is a true free market the cost to mine will always be dropping as miners seek to maintain or increase profit.
Eventually all miners will have free or near free electricity, the rest having been driven from the market due to their inefficiency.

how much is spent on paper currency is irrelevant. Alternatives to bitcoin with similar security, but next to no electricity expenditure seem feasible. This should be enough to squash bitcoin. I'm just waiting for someone with the requisite skills to do it.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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zby
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 August 13, 2011, 06:18:09 AM

No - this suggestion was only in your imagination - I was talking about the fact that the overall electricity costs of the system will need to grow and that this needs to be taken into account when estimating the cost of one future transaction.

and

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

You said it.

I understand - in your imagination you added 'transaction' where I wrote 'cost', but I was writing about the overall cost of the system.

I will not continue the conversation about the mined bitcoins being the revenue of the system - because this is useless.
zby
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 August 13, 2011, 06:29:20 AM

>Or to look at it another way bitcoin miners will spend over \$11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap.
>In contrast the federal reserve printing budget is ~\$650 million or 0.0812% of USD value.

The \$11 million is for securing the integrity of the currency not printing.
The Fed may spend ~\$650 million on printing but that doesn't include security costs.

How much is spent on...

Continually developing new measures to make the bills hard to counterfeit.
The Secret Service in their effort to stop counterfeiting.
Prosecuting counterfeiters.

What's the cost of counterfeiting that is successful?

Since mining is a true free market the cost to mine will always be dropping as miners seek to maintain or increase profit.
Eventually all miners will have free or near free electricity, the rest having been driven from the market due to their inefficiency.

how much is spent on paper currency is irrelevant. Alternatives to bitcoin with similar security, but next to no electricity expenditure seem feasible. This should be enough to squash bitcoin. I'm just waiting for someone with the requisite skills to do it.

This is what Ben Laurie proposed (http://www.links.org/?p=1183).  It is still very vague and has the weak point of needing an 'admission' mechanism, some way for the system to accept new members for the guild of transaction timestamping servers.  Some argue that this can never be done in any secure way.  But it is important to note that the timestamping servers don't need to know what they are timestamping and thus they don't have big chances to manipulate the market.  Their task is very restricted and easy to control.
cunicula
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 August 13, 2011, 06:59:29 AM

I think you would allow any client to stamp transactions and just give it voting power proportional to the number of coins in its wallet. A very small amount of interest would be issued as a reward for exposing coins in the wallet to the internet. Money supply expansion associated with the interest could be mopped up with very small txn fees.

Yes, you could amass a fortune in coins and attempt double spends, but you'd screw yourself by destroying the value of your assets. No one would do this.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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RandyFolds
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 August 13, 2011, 07:36:01 AM

No one would do this.

Wanna bet?
piuk
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 August 13, 2011, 09:24:02 AM

Zby is right, the 50 btc mining reward has no value when paying electricity costs. All that matters is you've got x amount of USD coming into the system and x amount USD going out. Its true that miners are bringing more coins into circulation, increasing the Market cap and on paper creating a USD profit. But There is no guarantee there will be a buyer in future, to me it just sounds like a bubble.

For example even a few months ago when mt.gox was exchanging \$3m per day. Let's say all of that is new income (extremely unlikely as people buy and sell multiple times. - \$31,128 electricity per day is still 1% wasted. On the 28th July the volume was only ~\$60k that means over 50% would be swallowed in electricity costs.

Bitcoin users are supporting this ecosystem of miners (not just electricity also time/hardware costs). Rather like the government I can't help but think a large deficit must be building.

cunicula
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 August 13, 2011, 09:27:06 AM

Yes, but we'll have to wait for the new currency to come out before we have something to bet on. Also the currency has to be worth more than the value of the bet. I'll let you know when I feel this has happened and stake 30 bitcoin when the time comes.

Scratch that, I'll stake 30 bitcoin worth of the new coins. Otherwise, winning the bet will not be beneficial to me.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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Ridi
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 August 13, 2011, 10:31:33 AM

I will not continue the conversation about the mined bitcoins being the revenue of the system - because this is useless.

If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.  Yes the market can cease to exist the next day or years from now.  We see that with every product.  I don't think iPhones (a physical product) will be around in 100 years, or the TurboTax program (a digital product.) That does not mean they are not worth producing today for their real world applications.  As long as BTC are profitable to produce, it is the linking factor between costing electricity and paying for it.

Yes, you could amass a fortune in coins and attempt double spends, but you'd screw yourself by destroying the value of your assets. No one would do this.

That is like asking why someone would counterfeit a deflationary currency like USD, since it's going to be worth less the next day anyways and more so with counterfeiting.  Even if you lower the value of the currency, the cost is distributed throughout everyone who holds the currency, so it ends up profitable at the cost of everybody else.

As for the electric cost/transaction, somebody raised the interesting point that the transactions are no where near the capacity of the system.  From what I've read the system can handle much more that Visa/MasterCard can on a daily basis.  Am I to understand that, if the amount of processing power dedicated to the system remains the same, but the amount of transactions increased 10-fold, the result would be that the cost/per transaction bore by the miners would be reduced to a tenth of it's current cost. In effect, no matter how many transactions go through the system the cost over all is the same, it's the miners who effect the economic cost, and therefore bear the burden, and not the end users?

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BubbleBoy
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 August 13, 2011, 11:38:27 AM

Quote
If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.

Dollar is product too, and it seems sensible to compare the two. As it turns out, if bitcoins were to replace the dollar tomorrow, and deflate to the cover the ~2 trillion dollars in circulation (M1), then mining new bitcoins would profitable enough to command 70% of the current US electricity output for the next 10 years. It seems a world where bitcoins replaced the dollar is much more like Mordor, a shitty society where huge amounts of natural resources are wasted for solving the monetary problem.

Don't get me wrong, the huge office buildings banks build in our current society are also wasteful. But I don't necessarily want them replaced with coal or gas power plants. Don't even bring renewables into discussion until you understand them.

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Ridi
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 August 13, 2011, 12:28:03 PM

Dollar is product too, and it seems sensible to compare the two.

You seem to be arguing my point for me, but I don't think this deflects from the point you were trying to make.

Quote
As it turns out, if bitcoins were to replace the dollar tomorrow, and deflate to the cover the ~2 trillion dollars in circulation (M1), then mining new bitcoins would profitable enough to command 70% of the current US electricity output for the next 10 years. It seems a world where bitcoins replaced the dollar is much more like Mordor, a shitty society where huge amounts of natural resources are wasted for solving the monetary problem.

Don't get me wrong, the huge office buildings banks build in our current society are also wasteful. But I don't necessarily want them replaced with coal or gas power plants. Don't even bring renewables into discussion until you understand them.

The amount of miners in BTC does make it seem to be very wasteful.  At current I feel that it's due to the profitability driving investors to push the capabilities of the system far beyond it's needs.  There seems to be a fault with Supply and Demand here that shows just how artificial the Bitcoin trade market has become.  Miners are screwing themselves into a corner in a similar way bankers did, by ignoring simple economic principles and abusing their control of the market.  Bitcoin is not worth 9.301 (mtGox) that is simply what idiots are willing to pay for it.

Some miners have said the price won't drop below five dollars because mining won't be profitable anymore.  I think it MUST drop below five dollars, because it's not worth that much.  If mining isn't profitable anymore after that then there is a simple explanation, the market is tapped out, nobody needs you.  Stop Mining and let the people who do it better than you take care of it.  You don't have to give up right away, you can give it a good college try, but at the end of the day supply and demand should determine your bottom line.

Unfortunately mining is rewarded whether their contribution is necessary or not.  In fact is rewards those who contribute the most resources the most often.  I think this is how it should be and that the problem is not with the protocol, but the idiots who are feeding the delusion that Bitcoin is as valuable as the artificial market has made it appear.

Enough idiots made a lot of money on the bubble though, so I'm thinking this artificial market is going to last quite a while until the BTC community goes broke from their idiotic spending splurge.

tl;dr  Bitcoin community has given Bitcoins an S&P AAA rating and it's going to burn a hole in our pockets fair and square.

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cunicula
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 August 13, 2011, 12:30:09 PM

The point of proof-of-stake is that you have the fraud or you have the asset value. You can't have one without destroying the other.

Yes, you could buy half the coins out there (or some substantial fraction thereof). Now you could start ripping people off with chargebacks (this is how a double spend works). Everyone receiving coins could no longer tell if the coins were genuine or doublespends. If they could, then your fraud wouldn't have worked in the first place. Now that you've made your fortune completely illiquid, how are you going to convert it to goods and/or currency without taking an enormous loss?

A more or less direct analogy:

Paypal or VISA will start buying goods with paypal dollars / VISA and then charge them back intentionally to resell the goods. Do you think paypal / VISA 's shareholders would approve this?  Even without any legal enforcement whatsoever, the value of paypal / VISA is probably about 2 orders of magnitude larger then the goods that could be received through a temporary fraud operation. Fraud is not compatible with their incentives.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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Ridi
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 August 13, 2011, 12:42:15 PM

Okay that is the second time that Proof of Stake has come up in this conversation.  Made up terms need to be explained.

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 August 13, 2011, 12:49:44 PM

Currently votes on transaction validity are linked to hashing power. This is proof of work. Proof of stake refers to linking votes on transaction validity to the number of coins in your wallet. This is a good idea because it ensures truthful reporting without wasting vast amounts of electricity at the expense of asset holders.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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hugolp
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 August 13, 2011, 12:52:47 PM

The attack of the trolls.

I bet you its only one troll with multiple accounts.
da2ce7
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 August 13, 2011, 12:56:43 PM

who said that the value of the bitcoins is judged by how cheaply (or expensive) they are to transfer between each-other...

Bitcoins value come from the fact that the barriers to disrupting the transactions are huge!   It requires a huge investment in bitcoin mining to start mucking around with other peoples transactions.

One off NP-Hard.
zby
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 August 13, 2011, 01:04:10 PM

I will not continue the conversation about the mined bitcoins being the revenue of the system - because this is useless.

If you are discussing the cost of producing a product (bitcoin), it doesn't seem feasible to ignore the market value of the product.  Even if the market is faith based, so long as the market exists it is a real factor.  Yes the market can cease to exist the next day or years from now.  We see that with every product.  I don't think iPhones (a physical product) will be around in 100 years, or the TurboTax program (a digital product.) That does not mean they are not worth producing today for their real world applications.  As long as BTC are profitable to produce, it is the linking factor between costing electricity and paying for it.

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.
Ridi
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 August 13, 2011, 01:23:08 PM

Currently votes on transaction validity are linked to hashing power. This is proof of work. Proof of stake refers to linking votes on transaction validity to the number of coins in your wallet. This is a good idea because it ensures truthful reporting without wasting vast amounts of electricity at the expense of asset holders.

Except that the amount of coins in your wallet don't actually do anything to improve your computers ability to make a transaction.  I don't understand the mechanics of it, but I can comprehend to an extent how Hashing (or whatever we are calling it that Miners do) is actually used to serve a purpose, even if the available power in the system far exceeds the need.

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

If the Hashes are so useless you should send them to me.

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cunicula
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 August 13, 2011, 01:52:05 PM

Your hashing power allows you to solve a mathematical problem (minimization by trial and error). Solving the problem entitles you to vote on transaction validity. You do not use the hashing power directly to verify txns. The alternative is to use the amount of coins in your wallet to assign votes. It is not entirely clear how this would work in practice, but it seems much more promising to me than the current approach. The big problem, i think, is how to aggregate information coming from many different nodes. It is probably infeasible to use info from all the nodes at once. One approach is to have the verifying node be picked randomly somehow linking the probability of random selection to the amount of coins in that node's wallet. This is analagous to how proof of work functions currently. If someone can make this work, it will be interesting.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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Ridi
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 August 13, 2011, 02:32:07 PM

Your hashing power allows you to solve a mathematical problem (minimization by trial and error). Solving the problem entitles you to vote on transaction validity. You do not use the hashing power directly to verify txns. The alternative is to use the amount of coins in your wallet to assign votes. It is not entirely clear how this would work in practice, but it seems much more promising to me than the current approach. The big problem, i think, is how to aggregate information coming from many different nodes. It is probably infeasible to use info from all the nodes at once. One approach is to have the verifying node be picked randomly somehow linking the probability of random selection to the amount of coins in that node's wallet. This is analagous to how proof of work functions currently. If someone can make this work, it will be interesting.

Okay, I get it now.  The part I didn't understand is the part that nobody has worked out yet.  I think any possible solution would either be just as taxing on the ecosystem as the bitcoin system, or would be so efficient that bitcoin would adopt it to replace the inefficient hashing in it's own system.  I don't see a change in Proof of Stake except to move shift the responsibility for mining/transacting costs off of the miners and onto the End Users.

I'm making a separate post regarding the gouged prices in the bitcoin market.

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 August 13, 2011, 03:02:55 PM

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

This is true, there is some difference though. If I purchase Windows i'm not expecting to my get anything back from it, as long as i'm able to use it for a certain length of time i will be happy. However with bitcoin people who purchase it are expecting to receive their investment back (whether that be by purchasing services/goods or exchanging back for USD).

- If a miner produces 1 BTC at the cost of \$1.
- \$1 production cost goes to the power company, leaving the system.
- I buy the coin for \$1.10, believing that i will be able to purchase goods/services worth that value.

How can the coin be worth \$1.10 when \$1 has already left the system? The system is insolvent.

zby
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 August 13, 2011, 05:54:54 PM

bitcoins are not the product of the bitcoin system - they are it's internal part.  The purpose of the bitcoin system is to make cheap value transfers and storage - not to produce some useless hashes.

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

If the Hashes are so useless you should send them to me.
Let's say you wanted to compute if the computer industry is profitable for humanity.  You'd need to count the costs - and the revenue. What you'd need to count on the costs side is the work of the programmers, the electricity, the natural resources used in computers etc, and on the revenue side you'd need to count how computers help people with their work, how they let us communicate, etc. - all the value that we get from computers (all the things that 'computers do for us').  The price of a Windows installation that someone bought would not be counted on any side because this money gets from one member of humanity to another member of humanity - it does not vanish in this process, it is not spent.

As to sending the hashes - they are all public, available for anyone to grab, go and copy the current blockchain if you want them.
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 August 13, 2011, 06:36:51 PM

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

This is true, there is some difference though. If I purchase Windows i'm not expecting to my get anything back from it, as long as i'm able to use it for a certain length of time i will be happy. However with bitcoin people who purchase it are expecting to receive their investment back (whether that be by purchasing services/goods or exchanging back for USD).

- If a miner produces 1 BTC at the cost of \$1.
- \$1 production cost goes to the power company, leaving the system.
- I buy the coin for \$1.10, believing that i will be able to purchase goods/services worth that value.

How can the coin be worth \$1.10 when \$1 has already left the system? The system is insolvent.

Except I do expect a return on investment on my Windows OS.  It depends on how I utilize it, but I expect at the very least for it to fulfill the terms of it's warranty.  Since Windows is a versatile product used to create and use other products, it's return on investment is a longer calculation that for currency which is a value placeholder.

The rest of your point is regular economics that seems to argue my point for me. Miner's have extended are use of resources beyond the need and it is hemorrhaging value out of the system, while also forcing investors to pay more for devalued currency.

ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

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enmaku
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 August 13, 2011, 06:48:34 PM

People don't purchase the system on MtGox, they purchase Bitcoin.  You accurately describe bitcoin (the system) but not bitcoin (the bitcoin.)  True that bitcoin cannot exist apart from the system, neither can any program, including the bitcoin system, exist separate from a computer.  Windows is still a product though (even though it's just some useless 1's and 0's), I can buy the OS, it's my copy, it belongs to me.  The same appears to apply to bitcoin.

This is true, there is some difference though. If I purchase Windows i'm not expecting to my get anything back from it, as long as i'm able to use it for a certain length of time i will be happy. However with bitcoin people who purchase it are expecting to receive their investment back (whether that be by purchasing services/goods or exchanging back for USD).

- If a miner produces 1 BTC at the cost of \$1.
- \$1 production cost goes to the power company, leaving the system.
- I buy the coin for \$1.10, believing that i will be able to purchase goods/services worth that value.

How can the coin be worth \$1.10 when \$1 has already left the system? The system is insolvent.

So you're saying that if a manufacturer spends \$10 to make a t-shirt and then I buy it for \$11 that my t-shirt only has \$1 worth of value because \$10 already "left the system" at the manufacturer? You have no idea what you're talking about... Think of it less like a currency and more like a commodity: As a miner I spend about \$4 on electricity to create one bitcoin, which I then sell for a marked-up price. I turn a profit on the act of creating the coin, just like a manufacturer printing t-shirts. People then use these coins I've created to barter with. If you had a pile of t-shirts worth \$150 and you had a video card worth \$150, that would be a fair trade.

In short, mining bitcoins is a business with costs and markup while bitcoins themselves are a barter instrument used to facilitate trade. The one has little to do with the other except for the slight inflation caused by the ~7200 new BTC mined each day.

Gold, for example, has a market value and it has a cost to mine. If the cost to mine gold is less than the selling price, people will mine it. The greater the disparity between cost and resale value the more people will mine for it. Let's say it costs \$600 in overhead to mine 1 oz of gold and that gold sells for \$1,600 per oz. The cost of production doesn't remove money from the system, the only effect the miner has is the slight inflation of gold stockpiles created by the new gold entering the system.
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 August 13, 2011, 07:03:05 PM

Thank you Enmaku, for saying a thousand things that should have been said earlier in this thread.  I blame myself.

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zby
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 August 13, 2011, 08:00:49 PM

ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer \$10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

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 August 13, 2011, 08:56:54 PM

Once cold fusion reactors are here, electricity will be limitless and unmetered anyway, so what's the problem?

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 August 13, 2011, 11:15:23 PM

ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer \$10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

*feeds ZBY some troll chows and scratches behind it's ear* Night bro.

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makomk
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 August 13, 2011, 11:41:25 PM

The main error here, apart from the incorrect kw/h cost quoted, is assuming that 306 transactions per hour is the current network capacity. It isn't. I don't know exactly how many transactions per hour could be processed by the current hash pool, but I'm sure it's many orders of magnitude higher than 306.
The transaction rate can't grow more than two orders of magnitude before we hit the artificial cap on the block size. In practice I'm not sure if the pools could even scale up that far; if I'm reading the code correctly the cost to pools of generating work scales linearly with both the number of miners and with the number of transactions per block, and they're struggling a bit as it is.

Quad XC6SLX150 Board: 860 MHash/s or so.
zby
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 August 14, 2011, 06:09:20 AM

ZBY, what are you smoking, seriously.  How does 1) Computers being profitable relate to whether or not you can hold Bitcoin purchases up to ethical standards as a product; 2) Money transferring from one human to another not qualify as spent?  (Spent money only vanishes in video games, bro.)  I don't mind existentialism in it's place, but I'm gonna stick with the dictionary on this one.

Ad 2. If you transfer \$10 from one of your accounts to another one - do you count this as your revenue?

Ad 1. - please expand on this I don't see how it relates to what I wrote.

*feeds ZBY some troll chows and scratches behind it's ear* Night bro.

I take this that you do understand that transferring money between your own accounts does not count as revenue.  Next step is to realize that if you count the revenue of two companies treated together - you also would not count the money transfers between them.  Think more about the problem at hand and less about inventing this stupid troll accusations - just say - explain this or I don't get it here.
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 August 14, 2011, 06:21:24 AM

Except I do not see why you would account for two separate companies together, unless you owned both of them, which would still be transferring money between two accounts you own.

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zby
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 August 14, 2011, 06:42:29 AM

Except I do not see why you would account for two separate companies together, unless you owned both of them, which would still be transferring money between two accounts you own.

The point is that if we compute the revenue of the bitcoin system as a whole - we treat humanity as the bitcoin owner also as a whole.  The question is is bitcoin profitable for humanity?  And to answer this we need to treat the humanity as it was one person.  It is as if one person did something - like planting a seed - will that be profitable for him?  You count on one side the work he puts into the endeavour, the cost of his tools etc. on the other hand you count the benefits he gets from the plant after it grows, the nutrition from the fruits.  You don't count the fruits twice if when picking them he takes them from one hand to the other.
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 August 14, 2011, 10:52:06 AM

So you're saying that if a manufacturer spends \$10 to make a t-shirt and then I buy it for \$11 that my t-shirt only has \$1 worth of value because \$10 already "left the system" at the manufacturer?

Ok bad analogy, "worth" was the wrong word. However if I buy a t-shirt which costs \$10 not because I want it or have any use for it then yes I am in deficit \$10 until i manage to find a buyer. However people buy t-shirts because they have a purpose, to wear, they have a a fundamental use as a product. If at anytime the t-shirt "system" closed the manufactures have their money and the customers have their t-shirt, nobody looses. However the bitcoin "product" does not have a use outside the system, so if at anytime the bitcoin system closed the miners would have their money, but the holders would be left with a bunch of worthless hashes. The bitcoin system is insolvent, requiring a constant injection of new cash which means eventually someone has to loose out.

What if everyone in the bitcoin economy was using a shared pot of money. In the current bitcoin system anytime a person buys a coin a small profit goes to the miners (staying in the pot) but the majority goes to the power companies (leaving the pot). When the system closes the miners can take their small profit but the the majority has been spent on electricity, leaving the pot looking decidedly empty. If bitcoin was of negligible cost to manufacture when an investor bought a coin all the money would go to the miners, staying in the pot. When the system closed the holders still loose out but the miners have made significantly more, there is a redistribution of wealth, but as a whole the group breaks even.

Until 2014 miners will be producing some 7200 blocks / day which at a market price of \$10 requires an input of \$72,000 / day to pay them. At \$30 it is \$216,000 / day (or nearly \$80 million dollars a year). The miners are parasites feeding off the collective bitcoin system, but not even they will be the real winners, as a collective group we are throwing our money away. Sure, while the system is running we get some use out of bitcoin as currency but the cost of this dwarves all other types of money and the bigger the system grows the more and more people that will suffer.

Anonymous
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 August 14, 2011, 01:05:52 PM

Once cold fusion reactors are here, electricity will be limitless and unmetered anyway, so what's the problem?

The laws of physics?
PatrickHarnett
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 August 15, 2011, 01:07:50 AM

kilowatts per gigiahash * cost per kilowatt * gigahash per hour = bitcoin running cost per hour
So at 650 watts per gigahash at 15 cents per kilowatt hour.
0.65 * \$0.15 * 13,300 = \$1,297 per hour

Sorry to bring up the OP, but there were some interesting points missed in the discussion.

\$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash (\$30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.
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 August 15, 2011, 08:20:14 AM

Sorry to bring up the OP, but there were some interesting points missed in the discussion.

\$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash (\$30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.

New advancements in hardware efficiency only effect energy consumption briefly. Once all miners are using the new technology they now have lower costs and competition forces difficulty to increase until their profit margins are the same. If GPU's are twice as cheap to run then miner can afford to run double the amount.

Quote
If bitcoin replaced visa.
Some various scenarios on energy consumption:

• At the current bitcoin minimum transaction fee of 0.5 cent (low priority) BTC miners would consume 2 million MW-h/yr. Enough electricity supply pa for 400,000 Europeans.
• If miners charged a similar 2% transaction fee they would consume more electricity than the whole of Japan. If this electricity was provided by solar panels it would require an area the size of the Bahamas (13,333k km2).
• If the security bitcoin miners provide at present was to scale up linearly to Visa's volume miners would consume enough electricity to power Spain (43 million people).
• Disregarding transaction fees, if the price of bitcoin rose to \$50 before 2014 miners would consume 1,314,000 MW-h/yr, enough to power the Virgin Islands. If the price were to skyrocket to \$1000 miners would consume 26,280,000 MW-h/yr, enough to power Ireland.

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 August 15, 2011, 08:30:01 AM

Okay, I get it now.  The part I didn't understand is the part that nobody has worked out yet.  I think any possible solution would either be just as taxing on the ecosystem as the bitcoin system, or would be so efficient that bitcoin would adopt it to replace the inefficient hashing in it's own system.  I don't see a change in Proof of Stake except to move shift the responsibility for mining/transacting costs off of the miners and onto the End Users.

Yeah, the idea is to shift responsibility on to end users, that is, the people who are harmed by declines in security should be the people responsible for maintaining security.
The beauty of that you can get away with making very small payments to the security guards, whereas hiring third parties (miners) requires large payments.

Sure it might be copied by bitcoin. For society that is a good outcome. True, that possibility is is not attractive to the potential innovators. Meh, I was relying on someone else to do the dirty work of innovation anyways.

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 August 15, 2011, 08:38:40 AM

Sorry to bring up the OP, but there were some interesting points missed in the discussion.

\$31,000 for electricity for 13,300 Ghash is one value, but remember a short time ago (June) it was 1/3 of that, and a mere 12 months ago was 1 Ghash (\$30/day world wide electricity!!)

The cost per transaction appears driven by more than just the transactions.  Given the right numbers, you can prove almost anything.

New advancements in hardware efficiency only effect energy consumption briefly. Once all miners are using the new technology they now have lower costs and competition forces difficulty to increase until their profit margins are the same. If GPU's are twice as cheap to run then miner can afford to run double the amount.

Quote

Ooops, missed the point I was making.  Having another go - even if GPUs were 10 times more efficient, the original math was that for a given X Ghash it cost Y dollars of electricity meaning it is currently expensive (relatively).  But if you did the same calculation a short time ago, the answer is quite different.
piuk
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 August 15, 2011, 08:47:03 AM

Ooops, missed the point I was making.  Having another go - even if GPUs were 10 times more efficient, the original math was that for a given X Ghash it cost Y dollars of electricity meaning it is currently expensive (relatively).  But if you did the same calculation a short time ago, the answer is quite different.

Sure things were different bitcoin is now much more popular and can support a larger ecosystem of miners. Also a few months ago we were still going through the "gold rush" e.g. the cost of producing a bitcoin was significantly lower than the market price. Things are now starting to reach their natural equilibrium where the electricity cost of producing 1 bitcoin is close to the market price (not quite there yet).

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 August 15, 2011, 09:12:27 AM

One more thing to add. Consider these scenarios:

We have approx. 14 million coins left to mine.

1) If the price of bitcoin stayed at \$10 tomorrow then by the time all bitcoins are mined we will have spent in the region of \$140 million dollars on electricity.

2) If the price of bitcoin rose and held at \$100 tomorrow as a collective group we would spend \$1.4 billion dollars.

What is gained in the 2nd scenario? The security provided is surplus to requirements and cannot exist at that level when the 50 BTC block rewards stop. We are paying to distribute wealth but using that wealth in the process.

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 August 15, 2011, 10:15:11 AM

It will be interesting when the reward drops to 25btc.... I think all these get rich quick dweebs with 20+ rigs could be the first to shut up shop and take their Gh/s with them

 ▄▄▄████████▄▄▄    ▄████████████████▄   ████████████████████▄    ▀████████████████████▐      ▀▀▀▀██████████████▌██▄▄         ▀▀▀████████████████▄▄          ▀▀▀███████████████▄▄           ▀▀█▐██████████████▄▄▄▄▄ █████████████████████▄  ▀████████████████████    ▀████████████████▀      ▀▀▀████████▀▀▀ SPINDLE  Your Life is Yours █████████████ █ █ ██████ CREATING A WORLDwhere people are free to live for themselves █████████████ ▄▄▄▄█████████▄▄▄▄  ▄███████████████████▄ ███████████████████████▐██████████████▀▀ ▐█████▌███████████▀▀     ███████████████▀▀       ▐████████████▀▀          █████████████▄▄▄▄▄▄     ▐████████████████████    █████████▐███████████▌  ▐████████▌ ███████████████████████  ▀███████████████████▀    ▀▀▀▀█████████▀▀▀▀ ▄████████████████████████▄██▀                      ▀███▌                    ▄▄  ▐██▌         ▄▄▄▄▄▄    ████ ▐██▌       ▄█▀    ▀█▄   ▀▀  ▐██▌      ▐█        █▌      ▐██▌      █▌        ▐█      ▐██▌      ▐█        █▌      ▐██▌       ▀█▄    ▄█▀       ▐██▌         ▀▀▀▀▀▀         ▐██▌                        ▐███▄                      ▄██ ▀████████████████████████▀ ▄█████▄▄  ██▄          ████████████▀  ████▄▄       ███████████▄   ▀██████▄▄▄▄▄███████████  ██▄████████████████████▌   ▀████████████████████▌    ▀███████████████████   ▀███████████████████      ▀▀██████████████      ▄█████████████▀   ▀████████████▀▀
cbeast
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Let's talk governance, lipstick, and pigs.

 August 15, 2011, 11:25:08 AM

It will be interesting when the reward drops to 25btc.... I think all these get rich quick dweebs with 20+ rigs could be the first to shut up shop and take their Gh/s with them
If/when people actually start using bitcoins universally, the income from transaction fees will make these rigs profitable for those with the cheapest electricity. We will be talking about Ghz/s/Kw.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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 August 15, 2011, 01:14:44 PM

true.... will still be an interesting time though.... either bitcoin has to be much more valuable or there needs to be many more transactions to cover the network's elecy bill

 ▄▄▄████████▄▄▄    ▄████████████████▄   ████████████████████▄    ▀████████████████████▐      ▀▀▀▀██████████████▌██▄▄         ▀▀▀████████████████▄▄          ▀▀▀███████████████▄▄           ▀▀█▐██████████████▄▄▄▄▄ █████████████████████▄  ▀████████████████████    ▀████████████████▀      ▀▀▀████████▀▀▀ SPINDLE  Your Life is Yours █████████████ █ █ ██████ CREATING A WORLDwhere people are free to live for themselves █████████████ ▄▄▄▄█████████▄▄▄▄  ▄███████████████████▄ ███████████████████████▐██████████████▀▀ ▐█████▌███████████▀▀     ███████████████▀▀       ▐████████████▀▀          █████████████▄▄▄▄▄▄     ▐████████████████████    █████████▐███████████▌  ▐████████▌ ███████████████████████  ▀███████████████████▀    ▀▀▀▀█████████▀▀▀▀ ▄████████████████████████▄██▀                      ▀███▌                    ▄▄  ▐██▌         ▄▄▄▄▄▄    ████ ▐██▌       ▄█▀    ▀█▄   ▀▀  ▐██▌      ▐█        █▌      ▐██▌      █▌        ▐█      ▐██▌      ▐█        █▌      ▐██▌       ▀█▄    ▄█▀       ▐██▌         ▀▀▀▀▀▀         ▐██▌                        ▐███▄                      ▄██ ▀████████████████████████▀ ▄█████▄▄  ██▄          ████████████▀  ████▄▄       ███████████▄   ▀██████▄▄▄▄▄███████████  ██▄████████████████████▌   ▀████████████████████▌    ▀███████████████████   ▀███████████████████      ▀▀██████████████      ▄█████████████▀   ▀████████████▀▀
zby
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 August 15, 2011, 03:41:21 PM

One more thing to add. Consider these scenarios:

We have approx. 14 million coins left to mine.

1) If the price of bitcoin stayed at \$10 tomorrow then by the time all bitcoins are mined we will have spent in the region of \$140 million dollars on electricity.

2) If the price of bitcoin rose and held at \$100 tomorrow as a collective group we would spend \$1.4 billion dollars.

What is gained in the 2nd scenario? The security provided is surplus to requirements and cannot exist at that level when the 50 BTC block rewards stop. We are paying to distribute wealth but using that wealth in the process.

The need for security grows together with the overall market cap of the system which grows with the price of bitcoin - so this is actually a correct result, this additional security is needed even if the number of transactions stays the same.  I've argued that if the system grows and has more transactions then probably the market cap will also grow - but this is not direct relation.
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 August 15, 2011, 06:25:01 PM

One more thing to add. Consider these scenarios:

We have approx. 14 million coins left to mine.

1) If the price of bitcoin stayed at \$10 tomorrow then by the time all bitcoins are mined we will have spent in the region of \$140 million dollars on electricity.

2) If the price of bitcoin rose and held at \$100 tomorrow as a collective group we would spend \$1.4 billion dollars.

What is gained in the 2nd scenario? The security provided is surplus to requirements and cannot exist at that level when the 50 BTC block rewards stop. We are paying to distribute wealth but using that wealth in the process.

The need for security grows together with the overall market cap of the system which grows with the price of bitcoin - so this is actually a correct result, this additional security is needed even if the number of transactions stays the same.  I've argued that if the system grows and has more transactions then probably the market cap will also grow - but this is not direct relation.

Interesting, i had only thought of increased transaction volume requiring increased security, but I guess the amount available to steal i.e. the market cap is the real driving factor.

\$1.4 billion dollars on security seems like an expensive requirement for something only worth \$2.1 billion. The point still stands, as the block rewards decrease the security of the system will fall, so at least some must be surplus. Really its better for the collective group to not push up the market price until enough transactional volume is being processed, else we are just wasting extortionate amounts of money on not much.

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 August 16, 2011, 09:39:05 AM

I've made a small script that collects data from blockexplorer to generate some statistics about bitcoin's running costs.

http://rainydayapps.com/bitcoin-efficiency/

It updates every 24 hours. When I have enough data I'll add some graphs and stuff, should be interesting to see how things change over time.

cunicula
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 August 16, 2011, 09:51:15 AM

I've made a small script that collects data from blockexplorer to generate some statistics about bitcoin's running costs.

http://rainydayapps.com/bitcoin-efficiency/

It updates every 24 hours. When I have enough data I'll add some graphs and stuff, should be interesting to see how things change over time.

That's awesome puik.

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Quickseller is a scammer and sockpuppet of OGdynasty        [/glow][/size]
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 August 16, 2011, 10:18:49 AM

The guy has a correct systemic approach. If a large amount of real-world resources are spent to maintain the system operation, it's a really good question on who pays for it all, at least if you believe in thermodynamics, no free lunch and the like.

If I buy one bitcoin I trigger this economic chain:
1. people buy hardware made using scarce resources such as copper and oil
2. said people to run said hardware 24/7 and consume electricity
3. these resources are irreversibly spent for bringing one bitcoin in existence

Therefore a minute quantity of wealth as expressed in natural resources has been irreversibly destroyed in order to give me one shiny bitcoin to play with. Who pays for it ? In the short run, every member of society by higher real commodity prices. In the long run, the investors left holding the currency when the show's over.

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

What is the cost of all the wars they waged in last 100 years or to distract the population from all the money they have stolen using their fiat money invention? Or is it they invented the process of stealing money from population using fiat money and inflation to fund all those wars? Damn! I got completely lost here.

-
PatrickHarnett
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 August 16, 2011, 09:13:52 PM

I've made a small script that collects data from blockexplorer to generate some statistics about bitcoin's running costs.

http://rainydayapps.com/bitcoin-efficiency/

It updates every 24 hours. When I have enough data I'll add some graphs and stuff, should be interesting to see how things change over time.

That's awesome puik.

+1, that's some really interesting metrics - thanks.
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