A Debate on the Usefulness of "donating" Miners

[Matt Corallo]

A Debate on the Usefulness of "Donating" Miners and their part in Bitcoin's long term outlook and uptake

I recently had a debate (mostly) with Blitzboom on the matter on #bitcoin-otc and decided I would post some of what was said here to open the discussion.  It is mostly in reference to theymos's quote below (which was on the thread related to disabling the built-in miner, so I decided to not respond to it there):

I was thinking about that too but won't someone who essentially never solves a block have a near 0 effect on the network?
I'd guess that if you solve a block every 6 months on average (or worse) you won't speed it up / affect other miners you'll just waste energy. Is there any benefit to it at all? Assuming you're not in a pool of course.

If the idea spreads that mining helps the Bitcoin network, then tens of thousands of people might turn on generation. Many of these people won't ever win a block, but if some do, then the network will be affected. Every time an unprofitable miner wins a block (or whenever they contribute to a pool), the difficulty will go up.

When the difficulty goes up, the least efficient miners are pushed out of the market unless they are volunteers. Volunteers therefore take up a greater and greater portion of the network's total CPU. This is bad for at least two reasons:

• The network becomes less efficient, using more energy than it needs to.
• "Amateur" miners are not able to respond to threats as quickly as professional miners. They're probably not running the most recent version of Bitcoin, and even if they are, professional miners can make changes to Bitcoin without a new release. The situation is better when the amateur miner is part of a pool, but if the pool goes rogue, the amateur miner will probably not know about it.

It's also really going to irritate me if I see propaganda saying, "Do your part: mine Bitcoins!" or something like that, when the network is perfectly capable of running without volunteers.

My objection to this is mostly due to its infeasibility in the long term in the current model of bitcoin adoption.  In theymos' proposed model of the bitcoin economy, miners only exist where it is profitable for them, ie the price of bitcoin is higher than the price of electricity.  This means that there will be relatively few high-power miners making up some large percent of the mining power (for the sake of argument, lets assume the rest of the miner's total power is negligible).  Because bitcoin mining is profitable, those who have high end cards will bring them online and sell for their costs, making the price drop and leaving only the few most efficient miners.  (Problem 1)  This creates a system in which bitcoin's price is equal to the price of electricity.  If this is how the bitcoin network always will be, there will always be a very small number of efficient miners who have some large percent of the total value of bitcoin.  (Problem 2)

Problem 1: In order for the network to function the way it was designed, we need as many miners as possible.  If mining is controlled by a few, slarge miners, it will always be succeptible to a double-spend attack by someone with considerable resources.  Take, for example, ArtForz.  Even if he were to triple his capacity, he would still not be nearly capable of defending the entire network against an attack by someone with the resources of the recent Mysterious Miner.  If several others, like ArtForz, brought similar scale miners online (as would happen in theymos' model), even them together would not be able to defend against an attack by a very large botnet or the use of a supercomputer by a well-connected attacker (say, an attacker who works at a university and is willing to take the risk to take over the entire computer for a couple hours). 

Problem 2: This is one of the largest issues with the perception of bitcoin by the average person, and is one of the largest complaints I see whenever someone posts about bitcoin.  "It is a ponzi scheme".  And as long as most new generation happens between a small community of large-power miners, it effectively is.  New users pay the miners when they join (as miners are the largest sellers), but if many of them want out, there is no support there.  As long as there exists miners which can crash the bitcoin market overnight (which would be very easy for some of the current large-scale miners such as ArtForz), the bitcoin economy carries with it many of the traits of a ponzi scheme (albeit a very open one) which makes MANY people very wary of investing.

If bitcoin is to be used by any medium to large size organizations, there needs to be very strong confidence in its ability to continue with some amount of value and with a secure network.  IMHO this idea that mining is not good for the network is ridiculous, as currently, miners are making such large profits that the first thing people see in bitcoin is a ponzi scheme and this needs to disappear on the back of more mining power.

Feel free to tear this apart.

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[fornit]

i think your model misses the fact that the most profitable kind of mining is gpu mining with already purchased gfx cards and computers. you dont lose all the amateurs when you switch off the coin generation in the client but only those who dont have such a gfx card or are not tech-savvy enough to use it.
i also think that cpu mining is rather useless. you need something like 50-100 cpus to get the mining performance of one gpu.

[Matt Corallo]

Part of the reason that the Bitcoin economic model was designed as such was to leverage economic incentive to drive the overall efficiency of the system. By system efficiency I mean a given system capacity versus the expenditure of real-world resources to achieve that capacity. If you decouple economic incentive from system efficiency then you would create a less efficient system that is effectively operating on a subsidy.

I know it is stated in wikis and such that the price of Bitcoin would fall to the cost of electricity, but this is not entirely true. There are other business costs for running a mining operation which add to overhead. Quite naturally then, those mining operations which minimize these overheads will become more profitable. This results in a balancing of capital costs and operating costs which can benefit everybody. The reason for this is that there is not one best way to run a mining operation, but when conditions are optimized for different environments best practices are discovered that can be used by others in new and different ways.

I think it's great that there are volunteer miners, but overall the system in its current incarnation will ultimately be driven by commercial interests. It may yet be possible to create a Bitcoin which is more focused on operating on a subsidy from volunteers, but I think the economic model would look quite different form the one used by the current Bitcoin.

I guess I didn't make my goal clear.  The goal of the post was to argue against the idea that "donation" miners are bad as it makes it harder for profit miners to make a profit and profit miners is what we should target.

I completely agree that the cost of bitcoin is not tied to electricity (and IMHO not even really effected by unless there is a huge change, currently the price is determined almost entirely by speculation and price of electricity isn't really effecting it at all).

I agree that the non-volunteer miners will always make up a large chunk of the total mining power, however I think that continuing to have the top miners controlling some large percentage of the mining power still leaves my points on the creation of a ponzi-like system valid.  I'm not saying that mining profits are in any way bad, in fact they are a good thing for the reasons you just stated, but that mining profits is not something we have to defend. 

[Matt Corallo]

I do agree that mining profit is not something that must be defended, but not for reasons having to do with an agenda like actively discouraging volunteer mining. Rather, that is something I expect will take care of itself, either by volunteer miners discovering how profitable it can be, or dropping out of mining because of returns that are not attractive to them.

I agree that many volunteer miners will discover how profitable it can be, but I disagree that volunteer miners will drop out just because they are losing money.  After all the whole point of volunteering is that you take a loss to donate to someone else.  I think you are underestimating the power of "feeling good".  If you haven't seen it, the "Drive" video by the RSA is well worth watching (not the one that just got hacked but the Royal Society for the Arts). 

The notion of Bitcoin as a Ponzi scheme will also take care of itself because this is a patently false equivalence. The essential element of a Ponzi scheme is that new investments are used to pay returns to earlier investors, but without any real assets. As I understand it there is a fear that Bitcoin may fail leaving late-comers without the same opportunity for profit like early adopters did, but this can be said of any business, that doesn't make them Ponzi schemes, because real assets are involved. The 'investment' that the early miners have made is actually to build and operate the network, which arguably is healthier today than it was two years ago as a direct result of those efforts. The real assets in this case consist of a not insubstantial computing network and connections to real, though developing, markets.

Although I agree that bitcoin is not in any way a Ponzi scheme, the way it currently functions for new users effectively is.  Thus, the common "why would I invest in a Ponzi scheme like that?" question that is seen when a post about bitcoin is made outside of the community.  I agree that there is some amount of investment into bitcoin, but the investment of miner's hardware is such a tiny fraction of the total value of all bitcoin, that it becomes negligible (especially when you consider that the vast majority of miner's hardware is not an investment in bitcoin, and was purchased for other reasons).  The argument that bitcoin has "developing markets" falls into the same category IMHO.  Although it exists, its total size in comparison to the amount of bitcoin in the world makes it completely useless for argument.  In the end, the adding of more businesses to the bitcoin market can make my argument completely invalid as you state, but IMHO that is still a lot of hard work on the part of the community away. 

There may be a case for full disclosure to new miners given that it is simply unwise to 'invest' in something one does not understand. Such disclosure may as well include dipping a toe in the water with a 'volunteer' rig just to get a good idea of how it all works before building a big rack farm. This is all still essentially experimental after all.

When I say 'volunteer' I mean someone who is taking a loss, not someone who has a small amount of resources.  People who have small resources can still be profitable (especially if you dont count the cost of the initial hardware as many people already have high-end hardware for other reasons).  To your point: I agree, but that is fairly OT.

[theymos]

Problem 1: In order for the network to function the way it was designed, we need as many miners as possible.  If mining is controlled by a few, slarge miners, it will always be succeptible to a double-spend attack by someone with considerable resources.

Professional miners will have much more computing power than a network of volunteers. Professional miners need to compete against each other to stay in business: as soon as one of them finds a more efficient way to mine (software, hardware, or electricity), the network becomes stronger. This competition does not exist among a network of volunteers, and a large number of volunteers prevents this competitive environment from being established.

I think that professional miners will eventually develop such great custom hardware that even the largest botnets will be unable to attack Bitcoin.

New users pay the miners when they join (as miners are the largest sellers), but if many of them want out, there is no support there.  As long as there exists miners which can crash the bitcoin market overnight (which would be very easy for some of the current large-scale miners such as ArtForz), the bitcoin economy carries with it many of the traits of a ponzi scheme (albeit a very open one) which makes MANY people very wary of investing.

How is any of this specific to mining? I could also have bought 400,000 BTC in the beginning for around the same price as mining it, and many people would then buy from me now at higher prices.

[Matt Corallo]

Professional miners will have much more computing power than a network of volunteers. Professional miners need to compete against each other to stay in business: as soon as one of them finds a more efficient way to mine (software, hardware, or electricity), the network becomes stronger. This competition does not exist among a network of volunteers, and a large number of volunteers prevents this competitive environment from being established.

I think that professional miners will eventually develop such great custom hardware that even the largest botnets will be unable to attack Bitcoin.

If you continue reading the post, I said that the problem with your model of bitcoin miners is that if miners have to compete so much with each other, mining will become unprofitable for most of them, leaving us with less mining power than we had to begin with.  Although many "professional" miners can have huge hardware resources, this leaves us with only a set of "large" resources, which is much less than a very large botnet or well-funded attacker can amass.  The processing power of a bunch of "volunteers" (with medium-sized miners, ie one or two GPUs) adds up much quicker than a set of ArtForzs.

How is any of this specific to mining? I could also have bought 400,000 BTC in the beginning for around the same price as mining it, and many people would then buy from me now at higher prices.

Not directly, my point was simply that under the idea that mining will be done by a small number of "professional" miners, this problem will always exist and this leaves a lot of people uneasy. 

[Matt Corallo]

How is any of this specific to mining? I could also have bought 400,000 BTC in the beginning for around the same price as mining it, and many people would then buy from me now at higher prices.

Not directly, my point was simply that under the idea that mining will be done by a small number of "professional" miners, this problem will always exist and this leaves a lot of people uneasy. 

I don't see why this should leave a lot of people uneasy. In general I would expect the ratio of large mining outfits versus smaller operations to follow the Pareto Principle, or the 80/20 rule: http://en.wikipedia.org/wiki/Pareto_principle

That is, about 20% of the miners will end up with about 80% of the network hashing capacity. I don't know how this can be precisely measured given the metric tools built into Bitcoin though... It seems that there is not really a precise way to determine how many nodes there are and who is operating them.

I agree that, in reality, there will most likely be a set of miners which control some large percent of the market.  However, there is a difference between 20%, and a very small set of very large, for-profit miners (as theymos suggests).  Currently, over 50% of the mining power is locked up in pools (according to Bitcoin Watch) which means there is some distribution of mining power among a large group of people.  IMHO, in order for bitcoin to be perceived very positively by the general public, we need some large amount of distribution (for the reasons previously discussed).  Whether it should make people uneasy or not is a completely different question, but as it stands, it does.