Bitcoin's fundamental flaw

[Sazuru]

Who I am is not important. These ideas will be. Bitcoin has a final battle ahead of it to determine whether or not it will ultimately survive. Please read fully and digest before forming knee-jerk opinions based on anything other than presented content. There will be no TLDR for this reason.


Bitcoin fills an important space in the ecosystem of decentralized digital currency as it exists a store of value for eventually all other digital currency use cases to have value measured against. It can exist as a reserve currency for this space. It's function can be compared to gold in this way. We have the saying that built bitcoin's user participation and the narrative of "come for speculation, stay for digital gold" which is incredibly effective marketing and has so far been a brilliant design. There is a fundamental flaw that has been introduced as an attempt to solve a problem in an elegant way. It succeeds in doing so and also introduces a new problem set that we have not seen the effect of yet as we have not reached the point where it will become apparent.

It is important to the life of Bitcoin that this flaw is able to be addressed in a manner that is much faster than the process for implementing change allows so that in the moment where trust in it's system is undermined adaption is fast enough to not be overtaken by development of a new product which would cause trust to have to be rebuilt from the ground up either in bitcoin as it changes or in the new product that addresses this and that would be a battle. It is also important that the process for change not be shortcut or undermined as that is also damaging to trust. Therefor I would begin this process before it is apparent that it has become necessary so the process can be followed through fully and this change still implemented in a manner that is timely relative to the understanding of this issue becoming uniform.

This issue is the twenty-one million coin hard cap on the creation of bitcoin. The cap exists to set inflation rate to zero which presumably and seemingly solves issues around centralization via regulation of supply through adjustment of the rate of inflation. It also provides for a predictable economic model. It is somewhat elegant in this way. It introduces two core issues for the development of bitcoin's ecosystem at scale.

The first is that bitcoin is designed for the mining reward to be an incentive for proper network behavior. What happens when there are no more coins left to mine? Who do we trust to validate blocks with no reward incentive? It is possible that people will continue to do this just to maintain the network because they believe in it's mission. It is better to trust this function to the system than to the whims of people.

The Second is in the comparison to gold. Gold has existed for a very long time and still has not achieved full market penetration. Bitcoin is on this track, and at an accelerated rate, but as it continues to gain market share as a store of value this rate decelerates as it approaches users that are more difficult to acquire. This process takes a long time (for reference from a technology perspective even the internet only has around 50% global penetration as of 2019. The internet is bitcoin's vehicle and it has had a few more decades to mature). The viral loop baked into bitcoin does not last long enough to achieve this and eventually stops being an incentive to new users as well. This is again because of the twenty-one million coin hard cap. Gold has this naturally diminishing supply that does not perceivably ever reach zero and so it's own naturally occurring viral loop as it becomes more difficult to find and mine lasts much longer than bitcoins will. We have not yet seen the result of bitcoin hitting this wall. It may well survive as is (I find this less likely) but it should be ready to adapt if it becomes apparent that it will not. There is good news.

Bitcoin also has a naturally diminishing supply built in and as it turns out the problems that the hard cap is meant to solve are actually naturally solved by the design of the mining protocol itself and the cap is essentially irrelevant thanks to this. The mining difficulty doubling every four years and bitcoin becoming increasingly more difficult to mine based on user acquisition actually provides a natural curve where the limit of inflation approaches zero on it's own so it does not need to be artificially defined to reach zero. It is always heading there. This means a few important things.

Even without the limit, the level of inflation is still completely defined, predictable, and outside the hands of human intervention. It also still always approaches zero as more coins get printed and the rate of mining decreases so the value of bitcoin continues to rise. It solves all of the same problems as the arbitrary twenty-one million cap without having a human define it. This allows bitcoin to compare more directly to gold as the limit constantly approaches zero but is effectively still unknown in gold's case. In bitcoin's case the limit would be defined by human and technological capacity to solve for the difficulty as it increased so it would also effectively be unknown rather than infinite at any given point, while being infinitely scale-able rather than just very large (given our capacity to improve the efficiency of our technology to interact with the protocol over time).

We have not seen how this will play out in any of bitcoin's cycles because it is a fundamentally different thing to become zero than to just decrease. I understand some coins have been created that have made exactly and only this change. Those coins do not compare to bitcoin in many other ways that are outside the hands of their developers so they are largely irrelevant in understanding this. Have we ever communally understood why this change is necessary? I believe it would be best for everyone if it were bitcoin that evolves and not some other coin that eventually forces a reset when we are confronted with this problem (when the mining supply dries up).

I call this the final battle not because it will be the last one on a timeline but because it will be the last one that will be relevant to bitcoin's continued life and health outside of the complete destruction of society as we know it.

[1715361135]

1715361135

[1715361135]

1715361135

[1715361135]

1715361135

[DannyHamilton]

What a load of nonsense.

I generally try to be patient and understanding when people come to this forum misunderstanding things and asking questions.  However, you show up with a subject that declares that Bitcoin has a fatal flaw, and then post a 1100 word declaration that you claim is "important".

What is important is that it is clear to anyone that doesn't know better that they shouldn't take this post seeriously.

It is clear that you've got a significant misunderstanding of how Bitcoin works. Opinions formed based on this misunderstanding are therefore useless and meaningless.

Here are some of the things that I read in your post that are just completely wrong:

The first is that bitcoin is designed for the mining reward to be an incentive for proper network behavior. What happens when there are no more coins left to mine? Who do we trust to validate blocks with no reward incentive? It is possible that people will continue to do this just to maintain the network because they believe in it's mission. It is better to trust this function to the system than to the whims of people.

The mining reward consists of the sum of the current block subsidy PLUS the transaction fees of all the transactions included in the "mined" block.  Therefore, there will never be "no reward incentive" since the transaction fees will remain as the reward incentive indefinitely.  Over the next 150 years as the subsidy shrinks and thee fees grow, the fees will become a larger and larger percentage of the reward until eventually they are 100% of the reward.

The mining difficulty doubling every four years

The mining difficulty does NOT double every 4 years.  The mining difficulty increases AND decreases as a function of hashpower (or more specifically as a function of average time between blocks) to maintain an average rate of 10 minutes between blocks.

and bitcoin becoming increasingly more difficult to mine based on user acquisition

User acquisition has absolutely nothing to do with mining difficulty.  Mining difficulty increases if it takes less than 20160 minutes to mine 2016 blocks, and it decreeases if it takes more than 20160 minutes.

provides a natural curve where the limit of inflation approaches zero on it's own so it does not need to be artificially defined to reach zero. It is always heading there.

No.  The block subsidy drops to zero after exactly 6,929,999 blocks. It isn't "always heading there".

It also still always approaches zero as more coins get printed and the rate of mining decreases so the value of bitcoin continues to rise.

The value (exchange rate) only rises if demand continues to outpace supply.  If demand drops off, then the value (exchange rate) will drop off as well.

It solves all of the same problems as the arbitrary twenty-one million cap without having a human define it.

Except that a human (or humans), aka Satoshi Nakamoto, DID define it, and it is LESS THAN twenty-one million.  The actual limit is 20,999,999.9769.
Actually, due to the destruction of some Bitcoins from some programming bugs early on, the actual total that will exist will be about a hundred or so less than that.

We have not seen how this will play out in any of bitcoin's cycles because it is a fundamentally different thing to become zero than to just decrease.

Fortunately the reward will decrease until the transaction fees are the overwhelming majority of the reward, then it will stabilize at whatever the typical transaction fees are. So, we shouldn't expect that the reward will reasonably ever "become zero".

[Xavofat]

The mining reward consists of the sum of the current block subsidy PLUS the transaction fees of all the transactions included in the "mined" block.  Therefore, there will never be "no reward incentive" since the transaction fees will remain as the reward incentive indefinitely.  Over the next 150 years as the subsidy shrinks and thee fees grow, the fees will become a larger and larger percentage of the reward until eventually they are 100% of the reward.

To expand on this, there is statistics to show the sheer amount of transaction fees currently being paid.  With a current block reward of 6.25BTC and transaction fees averaging around 150 BTC per day, the transaction fees are already worth about 1/6 of the block reward (based on 144 blocks in one day = 900 BTC).  That is more than enough to incentivise miners and prevent a 51% attack.  Further, if Bitcoin is scaled up in the future (e.g. with larger block size or shorter block time, or with upgrades like Taproot and greater SegWit usage), even though there would be less demand for space in a block and therefore lower transaction fees per byte of data, there would still be significant enough transaction fees to incentivise miners.

As Bitcoin stands the mining power directed to it is estimated to be as high as some of the top 30 countries for electricity consumption globally.  A moderate decrease that may occur when miners are more reliant on fees will not stop the Bitcoin network being secure.

[Sazuru]

Thank you for this reply. Transaction fees work as long as they don't become prohibitively expensive to transactions, but this does address a lot of what I was concerned with. I do understand that inflation drops to zero when the last coin is mined. It would always be heading to zero even without this artificial limit is my point here, I am no longer speaking about current protocol at that point. I did misunderstand how transaction fees are allocated and I misspoke on the difficulty. The reward halving was what I think I meant to be talking about which without transaction fees made it continuously more difficult to be rewarded for the effort of mining bitcoins. Anyway, thanks for patience with the nonsense.

What a load of nonsense.

I generally try to be patient and understanding when people come to this forum misunderstanding things and asking questions.  However, you show up with a subject that declares that Bitcoin has a fatal flaw, and then post a 1100 word declaration that you claim is "important".

What is important is that it is clear to anyone that doesn't know better that they shouldn't take this post seeriously.

It is clear that you've got a significant misunderstanding of how Bitcoin works. Opinions formed based on this misunderstanding are therefore useless and meaningless.

Here are some of the things that I read in your post that are just completely wrong:

The first is that bitcoin is designed for the mining reward to be an incentive for proper network behavior. What happens when there are no more coins left to mine? Who do we trust to validate blocks with no reward incentive? It is possible that people will continue to do this just to maintain the network because they believe in it's mission. It is better to trust this function to the system than to the whims of people.

The mining reward consists of the sum of the current block subsidy PLUS the transaction fees of all the transactions included in the "mined" block.  Therefore, there will never be "no reward incentive" since the transaction fees will remain as the reward incentive indefinitely.  Over the next 150 years as the subsidy shrinks and thee fees grow, the fees will become a larger and larger percentage of the reward until eventually they are 100% of the reward.

The mining difficulty doubling every four years

The mining difficulty does NOT double every 4 years.  The mining difficulty increases AND decreases as a function of hashpower (or more specifically as a function of average time between blocks) to maintain an average rate of 10 minutes between blocks.

and bitcoin becoming increasingly more difficult to mine based on user acquisition

User acquisition has absolutely nothing to do with mining difficulty.  Mining difficulty increases if it takes less than 20160 minutes to mine 2016 blocks, and it decreeases if it takes more than 20160 minutes.

provides a natural curve where the limit of inflation approaches zero on it's own so it does not need to be artificially defined to reach zero. It is always heading there.

No.  The block subsidy drops to zero after exactly 6,929,999 blocks. It isn't "always heading there".

It also still always approaches zero as more coins get printed and the rate of mining decreases so the value of bitcoin continues to rise.

The value (exchange rate) only rises if demand continues to outpace supply.  If demand drops off, then the value (exchange rate) will drop off as well.

It solves all of the same problems as the arbitrary twenty-one million cap without having a human define it.

Except that a human (or humans), aka Satoshi Nakamoto, DID define it, and it is LESS THAN twenty-one million.  The actual limit is 20,999,999.9769.
Actually, due to the destruction of some Bitcoins from some programming bugs early on, the actual total that will exist will be about a hundred or so less than that.

We have not seen how this will play out in any of bitcoin's cycles because it is a fundamentally different thing to become zero than to just decrease.

Fortunately the reward will decrease until the transaction fees are the overwhelming majority of the reward, then it will stabilize at whatever the typical transaction fees are. So, we shouldn't expect that the reward will reasonably ever "become zero".

[tbct_mt2]

Bitcoin makes its new all time high many times in the latest months. Flaws, everything in the world has its intrinsic flaws.

If you are considering to invest in bitcoin, you must look at it in pros and cons. If you only look at flaws, you will never invest in bitcoin. For you long posts on bitcoin flaws, it is non sense with what you wrote. It is more non sense when you skip all pros of bitcoin.

Example

The mining difficulty doubling every four years

How do you get this conclusion?

Why do bitcoins have value? (Investopedia.com)

[jamesde]

The debate tends to be very passionate about bitcoin and other cryptography. Supporters of cryptography say economists are just dinosaurs, and economists say supporters of cryptography are just selling a bubble. In price terms, bitcoin and other cryptocurrencies have been volatile.

One of the main reasons for that is that a currency needs to be a stable value store. You have a genuine assurance with the right currency that the basket of goods you can buy today will be the same as the basket of goods you can buy tomorrow.

It's all down to a rather basic crypto flaw. A store of value, supply balance and demand need to be maintained in order to achieve stable spending power.

But if crypto demand goes down, and it does, obliviously, the supply can not go down to maintain balance. so, the value, and the power to spend, collapses immediately.

[Vod]

Who I am is not important.

Correct, but your new account means you don't stand behind your reputation, but only behind this one subject.  You could be sponsored or compensating for posting.  What you say is not important in any relevant discussion. 

[Similificator]

Just sent you 2 merits. This is the tyoe of post that I like to read. As we can see, having that cap is truly both a solution and a problem. I too have been worrying about this for quite some time now. I really want to see poeple behind bitcoin saying what measures they have to take care of this problem to give people a feeling of ease. because unless they publish a good solution that can address this problem, more and more people will find out and more will be hesitant with this industry as a whole and not just with bitcoin since bitcoin clearly is the one carrying all the altcoins in this industry on its back.

[Ucy]

The first is that bitcoin is designed for the mining reward to be an incentive for proper network behavior. What happens when there are no more coins left to mine? Who do we trust to validate blocks with no reward incentive? It is possible that people will continue to do this just to maintain the network because they believe in it's mission. It is better to trust this function to the system than to the whims of people.

Well, I guess the rule is designed to be hard to change. I think the rule should be built around Bitcoin Principles and should be changed through the right Public/Network Consensus when necessary. The changes should not violate Bitcoin Principles.


By the way, if Bitcoin is that hardcoded, I'd suggest that an advanced Bitcoin substitute be created. The substitute should be very compatible with the old Bitcoin and its ideals. You can then make the substitute customizable but bounded by the Bitcoin ideals/principles. I guess for Advanced Bitcoin to become the new/real Bitcoin, all Bitcoin holders, stakeholders and network participants from old Network will retain their assets and positions on the advanced Bitcoin Network.

The Advantage Bitcoin Network should be Network with many chains and other decentralized networks/systems.
You can merge the old chain with the new Multi-chain Network

[Sazuru]

Thanks again everyone for the replies. I want to clarify, I am a fan of bitcoin. I have been lightly following since 2010. I believe in blockchain technology as a big part of the future. My account is new because I do not remember my old one and I was not very active on it anyway. I will stand behind my reputation. I simply do not yet have one of any relevance. This is what I mean when I say I don't matter. I promise (and take this with any skepticism that you must) I'm not sponsored to say anything and I am thrilled that some of these ideas are so readily refuted. I would ask a follow up of how transaction fees grow to account for new growth as the network gets unfathomably large in a way that doesn't adversely effect transfer of value at that point. My understanding is that bitcoin is still small when relative to a global scale.

Who I am is not important.

Correct, but your new account means you don't stand behind your reputation, but only behind this one subject.  You could be sponsored or compensating for posting.  What you say is not important in any relevant discussion. 

Thank you for the Merits, I was looking for ways to show appreciation to others posts before. I think Mr. Hamilton's rebuttals show a promising path for these concerns eventually being resolved even if what I was saying was being misunderstood in some ways I look forward to following the development of transaction fees.

Just sent you 2 merits. This is the tyoe of post that I like to read. As we can see, having that cap is truly both a solution and a problem. I too have been worrying about this for quite some time now. I really want to see poeple behind bitcoin saying what measures they have to take care of this problem to give people a feeling of ease. because unless they publish a good solution that can address this problem, more and more people will find out and more will be hesitant with this industry as a whole and not just with bitcoin since bitcoin clearly is the one carrying all the altcoins in this industry on its back.

Just for clarity, are some new users not also new miners and new miners healthy for the network as it grows? Do new miners not also bring more hash power? Am I fundamentally misunderstanding this?
I was clearly misspeaking on the doubling aspect and struggle to comprehend the sustainability of the transaction fees in the face of the growth that this technology will see and I would like to understand the built in solution or why one isn't needed.

The mining difficulty does NOT double every 4 years.  The mining difficulty increases AND decreases as a function of hashpower (or more specifically as a function of average time between blocks) to maintain an average rate of 10 minutes between blocks.

and bitcoin becoming increasingly more difficult to mine based on user acquisition

User acquisition has absolutely nothing to do with mining difficulty.  Mining difficulty increases if it takes less than 20160 minutes to mine 2016 blocks, and it decreeases if it takes more than 20160 minutes.