The current Bitcoin economic model doesn't work

[NewLibertyStandard]

I'm actually not in a hurry to implement Democracy Dollars. I might look into it further at the end of this year or the beginning of next year. Perhaps I can come up with an even more fantastic name before then.

[nandnor]

But that's not it, there's yet another catastrophe: The very fact that the BTCs creation will virtually cease within 16 (now almost 15) years while its user base continues to grow (hopefully) will inevitably lead to deflation. Deflation is bad because nobody spends their money, they only save it because it gains value over time. Can you imagine what would have happened if, say, the Japanese government haven't printed any Yens during the last century while the population exploded? One 1910 Yen would have been more than enough to buy a house today. Who would have spent their Yens in 1910, then? Why, noone of course!

People need to buy food and goods right? And more savings leads to lower interest rates, which incentivise people to borrow more and move toward interest rate equilibrium

We would all be way richer and more developed in the present, had the inflationary meddling taken place in the last century. You see, high savings rates decrease real interest rates, which makes high order capital industry investments profitable, which otherwise wouldnt be due to their low return. These high order capital industries in turn make lower order industry and consumer goods cheaper, and lead to increased productivity.

Also note that this will not lead to inflation in the foreseeable future, because the user base of bitcoin will continue to grow for years to come, let alone natural economic and population growth (unless the Mayans turn out to be right, of course)

There will be monetary inflation and, monetary inflation causes interest rates to be below their market level, thus creating speculative bubbles and malinvestments as the resulting capital industri invesments arent supported by actual time preferences.MONETARY INFLATION = BUSINESS CYCLES

The amount of dollars awarded for generating a block would not decrease every 4 years like with Bitcoin.

Bad idea mate, monetary inflation causes business cycles.


Overall, a lotta ya'll would do good to brush up on some real economics, that is Austrian Economics. Rothbard's MES is a and thorough good start.

http://mises.org/rothbard/mespm.PDF

[Suggester]

I already explained why is this different than purchasing food and why banks and loaning aren't realistic when it comes to Bitcoin. Please refer to the previous posts under this thread and comment on them if you find them unreasonable.

I rethought about my model and found that if we adjusted the constant difficulty so that we need a month (or more) to generate a block, not many folks will be generating, so the network wouldn't be overcrowded for propagation purposes; people would prefer to buy from professional generators instead (who'll make a small profit margin). But then again we then have a problem that the proof-of-work wouldn't be as strong, although that's surely better than the current situation.

I hope Satoshi or Sirius would take these suggestions seriously and provide some feedback on them, but I think they've totally 'programmed' themselves that the current model works best to the extent that they don't welcome different recommendations very much.

[NewLibertyStandard]

Your proposed changes to bitcoin WILL NOT WORK with the current implementation of Bitcoin. Absolutely everything about the program would have to be completely and fundamentally redesigned from the ground up in order to implement your suggestions. That is why I don't take your suggestions very seriously. Although I think that such a currency is probably possible, your current suggestions on how to implement it WILL NOT WORK.

[Suggester]

Your proposed changes to bitcoin WILL NOT WORK with the current implementation of Bitcoin. Absolutely everything about the program would have to be completely and fundamentally redesigned from the ground up in order to implement your suggestions.

Why do you say that? Apart from some aesthetic features like reducing the block size to about 3 coins (if difficulty was set to 1 block/month/CPU) in order to have the approximate value of ฿1=$1, all what's needed is to simplify the code by removing the automatic proof-of-work difficulty increases. "Want $3 worth of coins? Go ahead and spend $3 worth of electricity to generate a PoW block, or buy from someone who'd done so".

It ain't gonna double in 4 years, so you can spend it today with no worries. It ain't gonna double in two weeks either if the number of nodes doubled in two weeks. It's pretty stable as long as the lowest global cost of electricity is. We're not gonna run of out it because people constantly lose their virtual wallets. And after 15 years, anybody could still join in and create some coins or buy from generators. How can you claim that the current model beats that one?!

[NewLibertyStandard]

Your economic model is fine. But not adjusting the difficulty of block verification leads to problems of scale. Having all transaction clear once a month is unusable and unacceptable for a currency and if it did happen to become a huge hit, clearing blocks very much faster than once every 10 minutes does not work. The whole system would get stuck. Not to mention, what can be done in a month right now, will be able to be done in a much shorter amount of time in the future as computers become capable of running more processing threads concurrently.

Bitcoin is great because it works well on a small scale and a large scale and the value can adjust dynamically. While there is demand, the value goes up and while there is not demand the value goes down. A currency tied tightly to the cheapest price of electricity AND with all the other benefits of Bitcoin would work fine, but such a currency has not yet been invented and your suggestions on how to invent such a currency would not work from a practical perspective.

[Suggester]

Your economic model is fine. But not adjusting the difficulty of block verification leads to problems of scale. Having all transaction clear once a month is unusable and unacceptable for a currency and if it did happen to become a huge hit, clearing blocks very much faster than once every 10 minutes does not work. The whole system would get stuck.

You misunderstood me. And we've gone through this before. Nobody's going to wait for a month for their block, because that assumes only one node is generating coins. If 30 nodes were generating simultaneously, we'll wait only for a day. 90 nodes and we've got it down to 8 hours, etc.

Not to mention, what can be done in a month right now, will be able to be done in a much shorter amount of time in the future as computers become capable of running more processing threads concurrently.

But would cost the same amount of electricity in this much shorter amount of time. You'll be able to rise your electricity bill to $3 within two weeks instead of a month that's all (for eg. via using a quad-core 3.2 GHz machine in 2013).

Bitcoin is great because it works well on a small scale and a large scale and the value can adjust dynamically. While there is demand, the value goes up and while there is not demand the value goes down. A currency tied tightly to the cheapest price of electricity AND with all the other benefits of Bitcoin would work fine, but such a currency has not yet been invented and your suggestions on how to invent such a currency would not work from a practical perspective.

I rest my case :-/

[NewLibertyStandard]

30 Days in a Month * 24 Hours in a Day * 60 Minutes in an Hour * 60 Seconds in a Minute = 2,592,000 Seconds
In a few years there are 1,000,000 users with the average computer having two 16 core processors with hyper threading.
1,000,000 * 2 * 16 * 2 = 64,000,000 Threads
The current 30 day estimation is based on a dual core processor, so 64,000,000 / 2 = 32,000,000 blocs per month.
2,592,000 / 32,000,000 = On average, each block needs to be spread among 1,000,000 peers every 0.081 seconds.
Now imagine even more users and thousands of cores per processor.
FAIL!

[Suggester]

30 Days in a Month * 24 Hours in a Day * 60 Minutes in an Hour * 60 Seconds in a Minute = 2,592,000 Seconds
In a few years there are 1,000,000 users with the average computer having two 16 core processors with hyper threading.

A million wth?? That's extremely unlikely to happen. To compare, Tor which is virtually indispensable for anonymous surfing (something more important than, and a prerequisite for anonymous currency) has been around for 7+ years now and its users are about 250,000 AFAIK. Remember that we're speaking about users not nodes here. Nodes are about 2000 or less. To compare, we can reasonably estimate that in 7 years we'll have 250,000 casual Bitcoin users, and 2000 dedicated nodes working on creating new coins. I know we shouldn't be comparing that simply, but I'm trying to tell you how fast these projects spread. You don't get a million users in two years for a very specialized service like this.

1,000,000 * 2 * 16 * 2 = 64,000,000 Threads
The current 30 day estimation is based on a dual core processor, so 64,000,000 / 2 = 32,000,000 blocs per month.
2,592,000 / 32,000,000 = On average, each block needs to be spread among 1,000,000 peers every 0.081 seconds.
Now imagine even more users and thousands of cores per processor.

You further forgot that internet speeds and computer efficiency would be much better by the time we reach the impossible figure of a million nodes. It would be like comparing today's internet speeds with 1995's. By the time we have a million nodes (maybe by 2050 or something?), the network would be able to propagate new blocks almost immediately. Under the proposed amendment (1 block/month/machine), the system will need 4320+ nodes to reduce the average propagating time to less than 10 minutes. In other words, until we have 4320 nodes, it will be "less congested" than the current build, with an average of 1 new block every 10+ minutes. I think we can easily live with 10k nodes TODAY with the proposed 1 block/month/machine, and by the time they exceed 10k permanent generators (if they ever do), there would be great leaps in both technology and bitcoin's design.

FAIL!

The current model is DEFINITELY a fail. With one or ten nodes, the coin isn't spendable and supply in circulation will dwindle over time due to losses and hoardings. If you don't like my model try to offer something better, but stop advocating something which obviously won't work just because you've put effort into it!

[NewLibertyStandard]

PayPal has 184 million accounts after 10 years. Bitcoins can be spent on dollars right now. There are physical limits to how much latency can be improved. It will always take multiple milliseconds to send information around the world.

[Bitcoiner]

Hi Suggester,

Let's take a look at the two main issues that you raise:

1) "Because bitcoins get harder to produce every year, it is the same as receiving 19% annual interest for free."

Yes, the marginal cost of a bitcoin increases by 19% per year, as posited by you. However,  note that this is the cost of making *one more bitcoin*. This phenomena does not confer 19% free interest to all existing bitcoins. Here's an example:

Mickey Mouse opens a mine which mines gold. His is the only gold mine in the world. The first year he mines 5000 ounces of gold. In the second year, the gold is harder to find, so he is only able to mine 2500 ounces of gold. The gold becomes harder and harder to find, and he must spend an increasing amount of money to mine the next ounce. Eventually, he can never mine out that last ounce of gold, so its cost rises to infinity.

Now, let's say you bought an ounce in the first year, back when he mined 5000 ounces. In the second year, the supply of ounces rises to 7500, in the third year, it rises to 8750. Now, given that the supply of gold increased rather than decreased, why would the value of gold increase? There is more gold on the market now than there was before, so from the supply side, the pressure should be on the price to lower, not increase.

Let's say a few more years pass, and the price of mining gold is now astronomical. Let's say it takes $1 million dollars to mine the next ounce. Are you honestly going to tell me that the value of EVERY gold ounce in existence suddenly goes to $1 million? No. On the demand side, the mining would simply stop, because at some point, people would refuse to pay more than X for another ounce of gold. Mining would no longer be profitable, which technically makes the cost of one more unit infinity. The mistake you make here is in believing that the marginal cost of the next unit somehow imparts its value onto ALL existing units. It does not.

2) "Again, because bitcoins become harder to produce, everyone will hoard, so there will be massive deflation. Deflation is bad!"

There are a couple of problems with this. First of al, there would not be monetary deflation, there would be price deflation. In terms of price/performance, computers have been decreasing in price at quite a fast rate. Are you honestly going to tell me that this is a bad thing?

Your next argument is that price deflation encourages people to hold on to dollars. Yes, it does, but understand that when people withdraw money out of the market like this, it has several effects. One is that less money in circulation means that prices drop faster, thus encouraging more people to use these hoarded dollars to buy something. I believe someone on the forum also said: ""Even after bitcoins can no longer be created, in a deflationary environment all bitcoins equally appropriate increased purchasing power.  In an inflationary environment (i.e. USD), on the other hand, purchasing power is redistributed from all dollar holders to those first receiving the newly created dollars - generally government and government-connected institutions." This is a strong advantage for a monetary-fixed and price-deflationary environment as opposed to a monetary inflationary environment.

You will not be able to perfectly control who creates the new dollars. In the current system, the scope of inflation is limited in time and limited to contributing users.

The second is that the flood of hoarded dollars increases competition for lending money, which causes interest rates to drop, thus increasing the attractiveness of borrowing dollars and reducing the attractiveness of saving dollars.

Finally, bitcoins do not exist in a vacuum. If hoarding goes too far and bitcoins cease to be useful as a medium of exchange, then their value will actually start to go down. People will start using other currencies, and people will actually start demanding more bitcoins for goods as their perceived value will decline.

Finally, the value of anything in this world is solely the subjective opinion of the person doing the valuation. I can pay a gang of workers a million dollars to dig a big hole in the ground. By your logic, that hole must be worth at least 1 million dollars. However, if the hole isn't worth anything to anyone, then its value is zero, regardless of what it cost to produce.

A hole is a stupid example you say? Then I can produce a wooden horse using wood manually dragged in from 1000 miles away, paying my workers $10,000 for the job. Are you honestly going to tell me the value of the wooden horse is $10,000 simply because it cost me that much to make? Nope, that might be what I personally value it at, but if nobody else wants to buy it, then it is actually worthless as far as other people are concerned.

Two lessons:

cost != value
money is a good, and like all other goods, its price is determined solely by supply and demand; i.e., how much the market will bear (and how much it won't bear)

I believe that the fatal flaw, finally, is with your critique of bitcoin's economic model, and not with bitcoin's economic model itself. If you truly believe bitcoin's model to be flawed, then why not start your own client? If it truly is better, you will be competiive. There is room for more than one currency in our digital future, and I am sure there will be competition, and the consumers will choose the currency they prefer.

I also recommend you spend some time reading up on the subjective theory of value and Austrian economics; it might help to clear up some of these misconceptions.


TO THE CREATORS AND MAINTAINERS OF BITCOIN:

Thank you for creating this project and bringing sound money to the digital realm. Please, do not listen to the criticism directed at you by Suggester and others; it is misplaced and not well-founded in economics. You guys are doing the world a great service, and I commend you for that.

[dwdollar]

Welcome to the forum Bitcoiner!  That is an excellent rebuttal.  I couldn't agree more.  Maybe Suggester likes playing devil's advocate?  I don't know.

[buck]

But what would stop anyone with a large enough botnet, or even a company such as Google, Microsoft or Amazon with a big cloud, generating the bulk of the coins for themselves and leaving very little for everyone else?

[Bitcoiner]

But what would stop anyone with a large enough botnet, or even a company such as Google, Microsoft or Amazon with a big cloud, generating the bulk of the coins for themselves and leaving very little for everyone else?

It doesn't really hurt anyone else if they do. If they never spend the coins, it's as if they don't exist, which means everyone else's coins are worth more. Coins can be fractionated to 8 decimal places, so transmitting small value isn't a problem.

The danger would be if the big cloud attempted to undermine the network by screwing around with the block chain, instead of simply generating coins.

[Vasili Sviridov]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

[NewLibertyStandard]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

[Bitcoiner]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)"

http://freedom-school.com/money/how-an-economy-grows.pdf

[Babylon]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)"

http://freedom-school.com/money/how-an-economy-grows.pdf

A very entertaining libertarian cartoon.  It has some major flaws, but it is certainly an entertaining read.  Not sure what it has to do with bitcoins though.  Bitcoins are kind of the opposite of fish.

[Bitcoiner]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)"

http://freedom-school.com/money/how-an-economy-grows.pdf

A very entertaining libertarian cartoon.  It has some major flaws, but it is certainly an entertaining read.  Not sure what it has to do with bitcoins though.  Bitcoins are kind of the opposite of fish.

It does have its flaws, but it's still a good introduction. It's biggest flaw lies perhaps in the presentation of inflation in the form of steadily shrinking fish; surely people would have noticed

Still, it's relevant to the idea of fractional reserve and how banking can both become dishonest and stay dishonest for long periods of time. The first chapter about loans and capital accumulation are also good as a primer if you don't want to read something like economics in one lesson.

[Bitcoiner]

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)"

http://freedom-school.com/money/how-an-economy-grows.pdf

A very entertaining libertarian cartoon.  It has some major flaws, but it is certainly an entertaining read.  Not sure what it has to do with bitcoins though.  Bitcoins are kind of the opposite of fish.

It does have its flaws, but it's still a good introduction. It's biggest flaw lies perhaps in the presentation of inflation in the form of steadily shrinking fish; surely people would have noticed

Still, it's relevant to the idea of fractional reserve and how banking can both become dishonest and stay dishonest for long periods of time. The first chapter about loans and capital accumulation are also good as a primer if you don't want to read something like economics in one lesson.

I also like the part about why you shouldn't lend people money to spend it on consumption, i.e. to go on vacation. I happen to know some people that behave exactly like how the two jokers behaved when they "wanted to go on their vacation NOW!"