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Author Topic: Thought Experiment: Is Bitcoin a Ponzi scheme?  (Read 11481 times)
iya
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March 07, 2011, 10:04:13 PM
 #1

Suppose a Bitcoin clone with little to no changes would startup tomorrow. Would miners switch?

I think they would, because early adoptors had (and still have) a big advantage with the current inflation model.
During the first year about half of all currently existing bitcoins were mined, while there were practically no transactions, and almost none of it has been spend.
Why would late comers simply accept this? If you newly learn about Bitcoin, you'll always have an incentive to start from zero.
Unlike gold, bitcoin is not unique and was never intended to be.
I'm not arguing on economic grounds, and do support the austrian school, so please don't restart the old inflation vs. deflation debate.
It's about sustainability of continuous network growth, which seems to need an equal playing ground in time.
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March 07, 2011, 10:15:28 PM
 #2

There would be some incentive for miners to switch but miners only make up half of  price negotiation.

For it to be worthwhile for the miners to switch the difference in amount mined would have to be greater than the difference in value. For that to happen the people using bitcoin to conduct transactions would need to switch and I don't see the incentive for them to switch.

If bitcoin wealth became concentrated enough and the large hoarders began to behave in monopolistic ways in order to increase the value of their own bitcoins you might see people jump ship for a bitcoin clone.

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March 07, 2011, 10:18:59 PM
 #3

It's really a fair question, and honnestly as far as I'm concerned I have no definitive answer to it.   How many other cryptocurrencies will there be?  I don't know.  Will miners start an other block chain when bitcoin reaches the 210,000nd block?  I don't know either.  If so, would that hurt bitcoin's monetary value?  I doubt so but I'm not sure.

Only time will tell.
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March 07, 2011, 10:43:48 PM
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new bitcoin-like currency can emerge only in some niche area. look at social websites as example - it's very easy and straightforward model, but there is only very few ones available and being used a lot. others - are either not used at all, or are niche social networks.

bitcoins - it's about people who uses it. bitcoin protocol is just a protocol.

so correct questions will be: will another group of enthusiast emerge in near feature. I would say - no. Probably, only some very-very niche group.

iya
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March 07, 2011, 10:50:05 PM
 #5

But surely the aim is to keep Bitcoin (or an alternative) attractive for a steadily growing percentage of the population? You don't have a disadvantage if you join facebook or twitter today, just the opposite: they get more attractive with more users.

Of course this is also true for money, so Bitcoins only advantage seems to be its momentum, e.g. the established economy and exchange volume, which is arguably not much.

Here's a starting point for an alternate reward/inflation scheme:

Solved blocks transfer a dynamic amount of money to the finder,
depending on current difficulty, which is adjusted every block, based on a moving average of:
  • storage need, e.g. data per second
    → more blocks are generated during peak hours
    → transactions are cheaper during off hours
  • threat level, e.g. number of blocks in concurrent chains
    → electricity is not wasted on security when not neccessary
    → defense is payed for in small bursts of inflation
→ inflation is infinite and follows adoption level, FLOPS/Watt, the acceptance of transaction fees and the ratio of commercial / free hosts
→ inflation is predictable and will eventually become constant = neglible
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March 07, 2011, 10:55:04 PM
 #6

But surely the aim is to keep Bitcoin (or an alternative) attractive for a steadily growing percentage of the population?

Is it really?  To me if the community is large enough to provide liquidity of exchange to most other currencies, then I think it good enough.

I'm pretty sure that if 1% of World population was made of bitcoin enthusiasts, then the currency would be much efficient enough for pretty much anything we might expect from it.
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March 07, 2011, 10:55:54 PM
 #7

The more complicate you make the system the more chances an exploit could be found.

A competitor to bitcoin could win out but it would have to distinguish its self with more than a fresh block chain.

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March 07, 2011, 11:06:29 PM
 #8

→ more blocks are generated during peak hours

Bitcoin with no changes will eventually do this.

→ transactions are cheaper during off hours

Off peak hours are when free/low fee tx will get in.

→ electricity is not wasted on security when not neccessary
If there is some way to tell when it is necessary then I'm all ears.

 → defense is payed for in small bursts of inflation

I think it's pretty smooth, but this will end eventually anyway.

edit: Bitcoin is pretty freaking clever imo

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iya
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March 07, 2011, 11:13:18 PM
 #9

@FreeMoney
The main point is that payout is proportional to difficulty, i.e. work done.
So, all else equal, it will rise exponentially as long as Moore's-Law holds, and there should be less (no?) incentive to get in early.

Because this would reduce the total hashing power, the point about the defense against attacks: I'm not expert enough, but there should be a way to detect an adversary based on "inconsistent" blocks in the chain? There are probably more ways to automate this.
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March 07, 2011, 11:18:03 PM
 #10

Suppose a Bitcoin clone with little to no changes would startup tomorrow. Would miners switch?

I think they would, because early adoptors had (and still have) a big advantage with the current inflation model.
During the first year about half of all currently existing bitcoins were mined, while there were practically no transactions, and almost none of it has been spend.
Why would late comers simply accept this? If you newly learn about Bitcoin, you'll always have an incentive to start from zero.
Unlike gold, bitcoin is not unique and was never intended to be.
I'm not arguing on economic grounds, and do support the austrian school, so please don't restart the old inflation vs. deflation debate.
It's about sustainability of continuous network growth, which seems to need an equal playing ground in time.


It seems that you are missing one critical thing about Bitcoin. The value of bitcoin does not come directly  from protocol, or from technical details.
It comes from the people who use it.

So it doesn't matter how many clones of bitcoin you make, miners won't switch because the forked coins will have no value, because it won't be possible to convince a lot of people to switch to it. The more people use a currency and exchange it for real goods, the more value and more power it has.

Also, stop comparing Bitcoin to Ponzi scheme. If Bitcoin is ponzi scheme, then gold is ponzi scheme too. If gold is ponzi scheme, then every bullion (and any valuable and scarce thing than can be used as a currency) is ponzi scheme.

Comparing Bitcoin to Ponzi annoys me. That is absurd.

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March 07, 2011, 11:21:09 PM
 #11


Off peak hours are when free/low fee tx will get in.

No-transaction-fee transactions will only get processed when a miner who accepts NTF transactions finds a block. I suspect that all miners will mine 24/7, so I don't think NTF transactions are any more likely to be processed in the middle of the night than they are during peak business hours.

(Plus 'off peak hours' may not mean anything as I suspect Bitcoin will be used all over the world.)

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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March 07, 2011, 11:23:17 PM
 #12

Because this would reduce the total hashing power, the point about the defense against attacks: I'm not expert enough, but there should be a way to detect an adversary based on "inconsistent" blocks in the chain? There are probably more ways to automate this.

No, "inconsistent" blocks are rejected by all honest blocks no matter how much power an attacker has. What power allows you to do is right a new consistent chain that doesn't contain a payment that you previously made. People will know afterwards, but presumably the attacker will have already gotten his merchandise or whatever.

@FreeMoney
The main point is that payout is proportional to difficulty, i.e. work done.
So it will rise exponentially as long as Moore's-Law holds, and there should be less (no?) incentive to get in early.

I don't understand. Do you think there is too much or too little incentive to get in early as Bitcoin is now?

Any difficulty rise that happens due to Moore's law won't affect miners generally, the will need to do more hashes/payday, but they will also have the advantage of being able to hash faster.

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srb123
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March 07, 2011, 11:24:39 PM
 #13

I think they would, because early adoptors had (and still have) a big advantage with the current inflation model.

Yes, thats true. But don't they deserve it?

After all, these people are the ones that:

1. Came up with the idea.
2. Implemented it.
3. Maintained it.
4. Promoted it.

They are IMO, to be thanked, not criticized. It also should be remembered that despite the high value of BTC so far, there is still nothing practical they can be used for day-to-day, so while it appears these guys are hoarding, they are actually sustaining the value of bitcoin by not dumping their coins on the market, and waiting to spend coin on something useful, like helicopters.
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March 07, 2011, 11:25:08 PM
 #14


Off peak hours are when free/low fee tx will get in.

No-transaction-fee transactions will only get processed when a miner who accepts NTF transactions finds a block. I suspect that all miners will mine 24/7, so I don't think NTF transactions are any more likely to be processed in the middle of the night than they are during peak business hours.

(Plus 'off peak hours' may not mean anything as I suspect Bitcoin will be used all over the world.)

Some miners will probably be programed to fill blocks with tx in order of fee size, and include free tx only if there is extra room. Maybe the backlog will be hours, days, years, infinity, but if it ever gets cleared it will probably be when fewer new tx with fees are coming as opposed to when the most are coming in.

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March 07, 2011, 11:33:01 PM
 #15

Suppose a Bitcoin clone with little to no changes would startup tomorrow. Would miners switch?

I think they would, because early adoptors had (and still have) a big advantage with the current inflation model.
During the first year about half of all currently existing bitcoins were mined, while there were practically no transactions, and almost none of it has been spend.
Why would late comers simply accept this? If you newly learn about Bitcoin, you'll always have an incentive to start from zero.
Unlike gold, bitcoin is not unique and was never intended to be.
I'm not arguing on economic grounds, and do support the austrian school, so please don't restart the old inflation vs. deflation debate.
It's about sustainability of continuous network growth, which seems to need an equal playing ground in time.


Definitely not a ponzi even though the original miners accumulated a ton of BitCoins. Why? Because if they wanted to "cash in" they'd crash the price and their BTC would essentially be worthless.

It could put a damper on how fast the BitCoin economy grows though if we experience hoarding which I think we are. I doubt the current price is very realistic and is mainly supported by the unwillingness of the majority of the most wealthy BitCoin owners to sell. If the price stays this high new people will be more reluctant to enter so my hope is those hoarding right now will realize this and will start selling more and lower making the price more appealing and getting more people in.

I doubt miners would switch to an identical cryptocurrency since it's not the easiest thing to have those mined coins actually have some real world value but I could see this happen if perhaps a better much improved cryptocurrency emerged.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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March 08, 2011, 01:14:02 AM
 #16

Has anyone thought the threat of everyone switching to another block chain makes the miners not act in bad ways ?

It is in their best interest to act reasonably.
iya
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March 08, 2011, 02:18:10 AM
 #17

The initial question is kinda moot, if we're talking about an identical clone, but the main point still stands:

Even though the technology is great and has lots of merits, adoption will suffer because rational people will not buy into the existing market.
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March 08, 2011, 02:40:18 AM
 #18

Suppose a Bitcoin clone with little to no changes would startup tomorrow. Would miners switch?

I think they would, because early adoptors had (and still have) a big advantage with the current inflation model.
During the first year about half of all currently existing bitcoins were mined, while there were practically no transactions, and almost none of it has been spend.
Why would late comers simply accept this? If you newly learn about Bitcoin, you'll always have an incentive to start from zero.
Unlike gold, bitcoin is not unique and was never intended to be.
I'm not arguing on economic grounds, and do support the austrian school, so please don't restart the old inflation vs. deflation debate.
It's about sustainability of continuous network growth, which seems to need an equal playing ground in time.


It could put a damper on how fast the BitCoin economy grows though if we experience hoarding which I think we are. I doubt the current price is very realistic and is mainly supported by the unwillingness of the majority of the most wealthy BitCoin owners to sell. If the price stays this high new people will be more reluctant to enter so my hope is those hoarding right now will realize this and will start selling more and lower making the price more appealing and getting more people in.


I disagree, higher prices won't effect trade, in fact it would encourage it. People see what a bitcoin is worth they're more likely to like being paid it.

Not sure how higher prices would effect speculators.

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March 08, 2011, 02:55:00 AM
 #19

Why would late comers simply accept this? If you newly learn about Bitcoin, you'll always have an incentive to start from zero.

That's not true.

Instead, you always have an incentive to buy-in at the most financially-gainful moment.

It's easy for you to assess buy-in behavior when you've seen 1 BTC grow from less than 0.01 to 1.00 USD in 3 years.

Late-comers must also accept that they didn't buy Apple stock a decade ago. Or last year. Or last week. But it certainly doesn't breed a remorse that makes them abstain from investing until a new Apple clone initializes out of the dust so they can invest their life savings. In fact, speculative certainty with a track record (like an ever increasing value) only incentivize newcomers.

There is no incentive to start from zero unless you know the progression of the value. Nothing about a new currency guarantees zero risk for Zero Day investment. In fact, now that Bitcoin is the first to market, a Bitcoin clone is even riskier.

And if you assert that a Bitcoin clone would be guaranteed to increase in value, then let's start about 10 more of them. You and me. I'll refinance my house and draw three more credit cards and invest everything I have because you must be a fucking wizard.  Cheesy




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March 08, 2011, 03:12:46 AM
 #20

I disagree, higher prices won't effect trade, in fact it would encourage it. People see what a bitcoin is worth they're more likely to like being paid it.

You're missing the point. Higher prices will turn off all those who aren't trading them yet. It's like when you look at stocks, everyone wants to find and buy that one super cheap stock that will explode in price when it becomes really popular. Once it's popular and the price already exploded mostly day traders buy it...

With the amount of services and goods being offered and the volume at the exchanges anyone without any screws loose will quickly recognize that $0.90 is just too high of a price and will simply not buy. I know I wont even though I think this is the greatest invention I have ever discovered.

My prediction: the price average might hover at this mark for a while longer despite ever higher hashing difficulty and ever larger network. Then there will either be a shit ton of people entering the market based only on the logic behind bitcoins and them being the great invention that they are and not their actual market value and the price will rise or people will follow common sense, look at the volume, look at the services and goods available for BitCoins and decide against entering the market and the price will stagnate and eventually fall and the hoarders will soon hold worthless BitCoins at which point they'll start selling for cheaper and cheaper until the market will find the price for their actual value.

I think Satoshi made a huge mistake when he was designing the whole thing. If I could have changed one thing it would be the rate of issuing new BitCoins to a really slow start and then double the rate until we reached half of the 21mio limit and then I'd reverse the trend back to ever slower issuing until the limit is reached. This way the first people would still get a head start but not to the extent they did now and the supply of BitCoins would have been much more evenly spread between the economy which would encourage more trade and would keep the price low through competition until they would have actually gained value.

But it is what is now I guess. In the end hoarders will sell and price will drop, it'll just be a longer and more grueling process that's all.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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