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Author Topic: [reddit] The real cost of bitcoin? - Breaking Down the Math  (Read 9090 times)
indio007
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August 12, 2011, 04:40:15 PM
 #21

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.
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August 12, 2011, 05:12:01 PM
 #22

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
 #23

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.
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August 12, 2011, 05:52:12 PM
 #24

- 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.
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August 12, 2011, 06:42:35 PM
 #25

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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August 12, 2011, 06:48:53 PM
 #26

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
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August 12, 2011, 06:56:14 PM
 #27

- 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.
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August 12, 2011, 06:56:49 PM
 #28

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.

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August 12, 2011, 07:01:35 PM
 #29

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?

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August 12, 2011, 07:05:16 PM
 #30

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.
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August 12, 2011, 08:25:13 PM
 #31

- 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.
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August 12, 2011, 08:35:05 PM
 #32

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
 #33

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.
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August 12, 2011, 09:23:21 PM
 #34

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.
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August 12, 2011, 09:46:06 PM
 #35

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?
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August 13, 2011, 01:16:11 AM
 #36

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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August 13, 2011, 01:40:33 AM
 #37

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
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rbc2012
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August 13, 2011, 02:43:55 AM
 #38

>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
 #39

>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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zby
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August 13, 2011, 06:18:09 AM
 #40

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.
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