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Author Topic: [If tx limit is removed] Disturbingly low future difficulty equilibrium  (Read 34427 times)
jtimon
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July 22, 2011, 08:47:25 AM
 #141

I see, it would be 150 for a 21 M base.
I have to take a deeper look at the proof-of-stake thing, I'm not sure I have understand it.

But I don't understand why so much people here thinks demurrage is the same as inflation.
In the system I propose the monetary base is fixed, so there's no monetary inflation.
Do you mean that demurrage is factored in the price of the currency and a currency with demurrage would have a lower value than the same currency without it?
I still don't know how that's inflationary.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 22, 2011, 11:37:31 AM
 #142

In the worst case scenario, bitcoin appears doomed. Even in the Best Case Scenario, it is not clear that bitcoin will be competitive with other txn processors. Some people have proposed taxation of hoarded BTC to discourage excessive reliance on bitcoin as a store of value. Such a tax would ensure a 'best case scenario' where BTC is used like VISA/Dwolla rather than a store of value. Unfortunately, the tax on wealth holdings necessary to maintain security is exceptionally large. To generate a 150 BTC per block reward for miners, you would need to tax stored wealth at a rate of 37% per annum. Such a high tax rate is unlikely to be accepted.

Why do miners need 150 btc reward with each block? It depends on the value of BTC, right?
Of course, a 37% annual demurrage rate would be unacceptable. Here you have some calculations assuming 3% demurrage rate for freicoin.
With any demurrage rate and any block reward, the monetary base will eventually converge to a fixed amount. Also lost wallets will automatically be recovered by the network.
With demurrage you can also have tx fees, and there's going to be more transactions with demurrage, as users are discouraged to store the money for long periods of time.




The current network hashing capacity is enough for securing a $100M economy. It is not enough to secure a $1T economy. It can be overrun by anyone with a multi-million dollar incentive to do so, be it double-spending of huge transfers, political sabotage, shorting, whatever. As Bitcoin grows its security requirement will grow, and I'm not sure it will be achievable with trivial transaction fees alone.

This bears repeating. It seems to escape much of the readership.

This bears repeating again, apparently.


The increase from 50 to 150 BTC per block is to accomodate the future tripling in money supply. The incredibly large fees are necessary to maintain a constant security level (e.g. a constant ratio of attack cost to market capitalization). Yes, you could use a mixture of crippling txn fees and extortionate demurrage fees (or equivalently perpetual money creation). Yes, I agree that the inflation with txn fees product is less toxic than the pure inflation or pure txn fee products. Nevertheless, a mixed product is already available here: www.paypal.com. Won't bitcoin will be late to market?

More seriously, shouldn't we be trying to create a proof-of-stake system which potentially solves the security problem without requiring truckloads of money to be distributed every 10 mins.
To get at the problem you need to leverage the money already invested in bitcoin when you motivate the txn verifiers to tell the truth. Under the current txn fee / inflation systems txn verifiers are bribed with money to stay honest. Alternatively, a well-designed proof-of-stake system could threaten the btcs holdings of people if they lie. If you can confiscate money from people who behave dishonestly, you will not need to supply a mandatory participation system with any outside payments. You will already have txn auditors by the balls, so why pay them. If participation is voluntary, you will almost certainly need some outside payments, but I'm pretty sure that you could cut these down on these dramatically. There are probably many ways of organizing this. We should be trying to figure out a system which creates strong incentives to tell the truth (that is to not attack bitcoin) with a minimum investment of outside resources (eg. txn fees / inflation levies). Everyone needs to be a little open-minded during this process because there are probably many ways of doing this (some much better than others). The first step is to agree that there is a problem (like AA). The second step is to admit that txn fees or inflation aka demurrage can't fix this problem.




        Your problem is that you believe that network protection varies directly with monetary reward. And to a large degree your right, but out best protection against 50% attacks is not hashing speed alone, its specialized hardware. When mining was a CPU only matter your argument would have been perfect, because you can buy as many CPU's as you want, they are manufactured in high high volume, so then network security correlated directly to money. In that anyone with the funds could take over the network. But this has already changed, right now, even if you had all the money on earth, you could not preform a 50% attack within the next 3-4 months. Why? Simple hardware specialized, GPU's are many thousands of times more efficient than CPU's and you know what else, they are produced in very small quantities, the current Bitcoin mining community alone has nearly cornered the supply of high end Graphics cards that can hash effectively. And with this specialization comes a barrier to a 50% attack, the attacker can not get enough cards, even if he bough every single high end ATI card (something that would tip us off and give us ample time to prepare) it would take months to receive enough to preform a 50% attack. As the hardware specializes it creates new barriers to 50% attacks, within a year or two we will be switching to dedicated hardware, designed exclusivity for mining and many times more efficient than even GPU's  , being a small industry these dedicated devices will create even more of a hardware acquisition bottle neck than GPU's could, requiring even more of a wait, and an even more obvious warning to create a 50% attack. The more specialized mining hardware gets the less directly monetary rewards relate to network security.   

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July 22, 2011, 11:53:40 AM
 #143

More denial.

1) the bad guys can buy the cards
2) the bad guys can construct malicious pools and use your cards without telling you.
3) if you keep buying cards AMD will make more

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July 22, 2011, 01:42:42 PM
 #144

More denial.

1) the bad guys can buy the cards
2) the bad guys can construct malicious pools and use your cards without telling you.
3) if you keep buying cards AMD will make more


1) Yes they can, simply not in enough quantity within a realistic time span.

2) The only way to use cards without telling us is to have a virus, and i am sorry to say that 99% of the population does not have a graphics card capable of anything more than a couple of M/hashes , so even if they somehow make a virus capable of installing the needed drivers, and then preventing the computer from overheating, all the while having a constant enough supply of hashing power to maintain 51% reliably (difficult to estimate hashing power when your zombie pc's are being turned on and off by their users all the time). If they somehow overcome all those hurdles, your still not going to have enough hashing power to compete with the people running high-end cards with 1000 times the hashing power, and as they tend to be smart enough to not get viruses you cant hope to snag some of them in your pool (they would notice their hashing going to the wrong person nearly immediately even if they did get infected) as such the specialization creates a barrier.


3) Yes they will produce more cards, but they will not scale production to the point where they produce enough to sell enough cards to exceed 51% as the current network speed represents years worth of card production, unless they increase by a factor of 100 they can not buy that many cards in a reasonable time span. And if they did bring production up that much it would be because the miners bough the cards, hence the same situation would repeat it self as the number of cards produced goes up.

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cunicula
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July 22, 2011, 03:14:16 PM
 #145

Say that you purchased enough hashing power to drive up difficulty to a break even or loss making level. Suddenly, huge numbers of cards would become available. Purchase these and you could own the network.

Right now, this kind of attack strategy is to costly given the btc market cap. In the future, if market cap grows, the strategy will offer larger and larger rewards. Essentially the cost-reward profile will increasingly favor attacks on the network rather than legit mining.

Just wait for the block reward to drop. A fall in mining profitability will follow. This will repeat itself until the network is a cheap date.

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July 22, 2011, 04:57:39 PM
 #146

Say that you purchased enough hashing power to drive up difficulty to a break even or loss making level. Suddenly, huge numbers of cards would become available. Purchase these and you could own the network.

Right now, this kind of attack strategy is to costly given the btc market cap. In the future, if market cap grows, the strategy will offer larger and larger rewards. Essentially the cost-reward profile will increasingly favor attacks on the network rather than legit mining.

Just wait for the block reward to drop. A fall in mining profitability will follow. This will repeat itself until the network is a cheap date.


So you think that if the difficulty was pushed up artificially by one group more than 51% of the network would immediately bail and sell their cards to them?

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jtimon
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July 22, 2011, 06:04:49 PM
 #147

Unfortunately, the tax on wealth holdings necessary to maintain security is exceptionally large. To generate a 150 BTC per block reward for miners, you would need to tax stored wealth at a rate of 37% per annum. Such a high tax rate is unlikely to be accepted.

Why do miners need 150 btc reward with each block?

The increase from 50 to 150 BTC per block is to accomodate the future tripling in money supply. The incredibly large fees are necessary to maintain a constant security level (e.g. a constant ratio of attack cost to market capitalization).

I see, it would be 150 for a 21 M base.

Let's see if I'm getting this right.

(150 / 21 000 000) * 100 = 0.000714285714 % of monetary base to miners each block
So, per annum...
365 * 24 * 6 * 0.000714285714 = 37.5428571 % of the money supply.

Now, where did this 0.000714285714 came from ?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
kjj
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July 22, 2011, 07:04:18 PM
 #148

Assumption 1: The 1 MB txn limit is binding for some reason.

Security should be measured by the ratio of the reward per block to the money supply. Currently, "security" is about 50/7,000,000= 7.1 * 10^-6
If there are 21 million instead of 7 million BTC in the money supply, the block reward will need to triple to 150 in order to maintain security, i.e. 150/21,000,000 = 7.1 * 10^-6
1 MB maximum is equivalent to about 4000 transactions per block. In order for 4000 transactions to yield 150 BTC, you would need a per txn fee of 150/4000=0.0375. Currently, 0.0375 BTC is worth about USD$0.50. This seems alright, but it could not last. With growth in the demand for txns, BTC will appreciate, leading to a much larger txn fee. For example, right now I doubt that there are even 500 txn per block.
If the # of txns per block increases by eight fold or more to reach 4000, we should expect at least an eight-fold appreciation of BTC vs. USD.  This would increase the txn fee to USD$4.00.
Such a high txn fee would greatly undermine the usefulness of the technology.

Assumption 2: Assume the txn limit can be increased so as to maximize txn fee revenue. VISA processes about 1 million txn per 10 minutes (i.e. per block).  Suppose Bitcoin makes each block 250 MB and handles the same txn velocity as VISA. Then a 150 BTC per block reward can be maintained with a txn fee of 150 BTC per block / 1 million txn per block = 0.00015 BTC/txn. This doesn't sound sound like much until you think about how much BTC will be worth under this scenario. Particularly important is the ratio of BTC's market cap to its txn volume. The more money is hoarded, the more onerous the txn fees need to be to protect security. I consider two possible BTC valuation scenarios . They are designed to represent upper and lower bounds on BTC market cap.

Your assumptions are invalid.  I'm not talking about your stated assumptions, but your unstated ones.

First invalid unstated assumption:  The ratio of block reward to total BTC supply is meaningful.  You actually do state this assumption, but you do it in a way that makes it look like an established fact, and not the baseless assumption that it is.  Rather than give it a cute and emotionally charged name like security, I prefer to name this ratio cerulean.  Do you have any reasons to believe that anyone should care about this ratio?

Second invalid unstated assumption:  The current value of cerulean, or security as you may still prefer to call it, is the correct value, even though this value is an accident of time.  If you had written this post a day earlier, or even 10 minutes, or for that matter 10 minutes later, the value of the ratio would be different.  Not by much, if the interval is small, but by a lot if we get into months.  What was special about yesterday that make that day's value correct?  How did bitcoin even get this far, since a month ago, the ratio was different by 3%, and a whopping 38% a year ago?

Third invalid unstated assumption:  Bitcoin needs to be the best store of value, or the best medium of transaction.  This is a false dichotomy.  There are other things it can do, and even if it were only used for those two things, it wouldn't need to be the best at either of them to be successful.

I would keep going, but in your second scenario, your thoughts get very non-linear, and I can no longer follow you.  In particular, your sentence "This doesn't sound sound [sic] like much until you think about how much BTC will be worth under this scenario." could be replaced, with no loss of clarity, by "This doesn't sound like much until you think about a unicorn appearing right in front of you.".  I think that we are supposed to assume that the name of the unicorn value of bitcoins is so horrible, in some way, that you can't even speak of it.

Here are some things you should think about.

1)  Bitcoin does not need to replace VISA.  VISA does things that bitcoin cannot do, such as providing a way to roll back a transaction.  In a bitcoin future, VISA will still exist, and still do the same things it does today, just with one more currency.

2)  Even at $4.00, a bitcoin transaction is still far cheaper than several entire classes of financial transfers, like bank wire transfers.  These types of transfers currently do happen today in the real world, even though they cost at least an order of magnitude more than $4.00.

3)  Transaction fees do not cause security any more than ATM fees do.  People with an interest in the security of the system will continue to work on the chain, to at least some extent, even if the reward is zero.

4)  Proof-of-stake is still stupid.  I'm sorry that there is no nice way to say that.  I think that you start to go off the rails when you think of proof-of-work, which is also pretty stupid when looked at in positive terms.  If you think that proof-of-work as something that the network should reward you for, then nothing else in the system makes any sense.  What you need to do is think in terms of proving that someone else has to do an infeasible amount of work to roll back the clock.  We don't care about anything else, really.

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July 23, 2011, 01:36:18 AM
 #149

I'll note that you did not pose any kind of argument to back up your claim that anything I said was stupid.

Generally, wouldn't youink that the probability of a lock being broken is an increasing as a function of the ratio between the value of assets behind the lock and the cost of breaking the lock. This is what I am calling security. Please propose and defend a better metric.

As far as people mining at ass to defend the network. This is ridiculous. A charity vault is not where I would put my money.



As far as bitcoin not needing to be better than VISA. You are right it doesn't need to process VISA's volume of transactions. However the situation gets WORSE not better if you reduce txn volume. I agree that my assumptions were excessively optimistic.

As far as propf of stake being inequitable, i dont care. It can duplicate bitcoin's functions at lower txn costs. Does anything else matter?

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July 23, 2011, 02:41:05 AM
 #150

I'll note that you did not pose any kind of argument to back up your claim that anything I said was stupid.

Actually, yes, I did.  I'll repeat it here for you now.  Listing a few of your invalid assumptions is the polite way to say that your arguments are stupid.

Your assumptions are invalid.  I'm not talking about your stated assumptions, but your unstated ones.

First invalid unstated assumption:  The ratio of block reward to total BTC supply is meaningful.  You actually do state this assumption, but you do it in a way that makes it look like an established fact, and not the baseless assumption that it is.  Rather than give it a cute and emotionally charged name like security, I prefer to name this ratio cerulean.  Do you have any reasons to believe that anyone should care about this ratio?

Second invalid unstated assumption:  The current value of cerulean, or security as you may still prefer to call it, is the correct value, even though this value is an accident of time.  If you had written this post a day earlier, or even 10 minutes, or for that matter 10 minutes later, the value of the ratio would be different.  Not by much, if the interval is small, but by a lot if we get into months.  What was special about yesterday that make that day's value correct?  How did bitcoin even get this far, since a month ago, the ratio was different by 3%, and a whopping 38% a year ago?

Third invalid unstated assumption:  Bitcoin needs to be the best store of value, or the best medium of transaction.  This is a false dichotomy.  There are other things it can do, and even if it were only used for those two things, it wouldn't need to be the best at either of them to be successful.

Generally, wouldn't youink that the probability of a lock being broken is an increasing as a function of the ratio between the value of assets behind the lock and the cost of breaking the lock. This is what I am calling security. Please propose and defend a better metric.

As far as people mining at ass to defend the network. This is ridiculous. A charity vault is not where I would put my money.

A lock, sure.  But bitcoin is not a lock.  The metaphor is not the reality, it is an imaginary construct.   In reality, security is not provided by the block reward.  Security is provided by the network forcing an attacker to accumulate over 15 trillion hashes per second of computing power, and this is for a trivial attack of no consequence.  A meaningful attack would require several times that, and we can trivially extend the margin from a multiplier to an exponent if we ever want to.  The block reward provides an incentive, only.

As far as bitcoin not needing to be better than VISA. You are right it doesn't need to process VISA's volume of transactions. However the situation gets WORSE not better if you reduce txn volume. I agree that my assumptions were excessively optimistic.

This analysis is still based on a ton of assumptions.  Some of these assumptions have been shown to be false, and the rest are at best unproven

As far as propf of stake being inequitable, i dont care. It can duplicate bitcoin's functions at lower txn costs. Does anything else matter?

I never said that it was inequitable, I said that it was stupid.  Stake is meaningless.  Proving it is doubly meaningless.  Basing a system on a meaningless expression of meaninglessness is stupid.

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July 23, 2011, 07:36:00 AM
 #151

Why is stake meaningless? Do you mean that it won't work in theory? If so, why?

When does the block reward get halved? That event will be a good test of my assumptions. If I am right difficulty should fall following the reduction in rewards. Other than that I don't see the point in arguing abput it with you. Explain to me why proof of stake won't work instead, please.

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July 23, 2011, 04:24:02 PM
 #152

can someone fully explain the "stake" idea?

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July 23, 2011, 05:39:59 PM
 #153

can someone fully explain the "stake" idea?
There are more than one stake ideas. Both cunicula and I described our respective stake ideas earlier in this thread (post #113, #116).

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July 23, 2011, 05:43:30 PM
 #154

the proof of steak idea not only would be hard to implement, it also is poorly thought out, introducing more complexity into the system would only make it more difficult to use bitcoin, unless i am missing something?

Meni Rosenfeld
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July 23, 2011, 06:01:33 PM
 #155

the proof of steak idea not only would be hard to implement, it also is poorly thought out, introducing more complexity into the system would only make it more difficult to use bitcoin, unless i am missing something?
What you're missing is that it may be necessary, as in Bitcoin won't be able to work without it. So the fact that it adds complexity (which has no effect on regular users) is moot.

And like I said there's more than one idea and they're all rough sketches, figuring out the optimal solution requires serious discussion.

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July 23, 2011, 06:29:00 PM
 #156

can someone fully explain the "stake" idea?
There are more than one stake ideas. Both cunicula and I described our respective stake ideas earlier in this thread (post #113, #116).

Thank you for the numbers. I will look into these stake ideas.
But first I would like to know why freicoin's eternal reward to miners must be that high.

(150 / 21 000 000) * 100 = 0.000714285714 % of monetary base to miners each block
So, per annum...
365 * 24 * 6 * 0.000714285714 = 37.5428571 % of the money supply.

Now, where did this 0.000714285714 came from ?

Or where the 37.5428571 % annual reward came from?
Why a 3% or 4% of the monetary base annual reward for miners is not enough?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 23, 2011, 08:57:34 PM
 #157

the proof of steak idea not only would be hard to implement, it also is poorly thought out, introducing more complexity into the system would only make it more difficult to use bitcoin, unless i am missing something?

Add to that, some people prefer their proof of steak on the rare side, while other would demand well done.  And then there are all the proof of A1 sauce proponents!  I'll never understand it all!

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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July 23, 2011, 11:29:36 PM
 #158

the proof of steak idea not only would be hard to implement, it also is poorly thought out, introducing more complexity into the system would only make it more difficult to use bitcoin, unless i am missing something?

You are righ that it is poorly thought out, but that doesn't mean it can't work with more thinking. For example, I dismissed Meni's idea, but on further thought i believe that i may be wrong. His idea may be viiable. We need to have more people thinking about the issues.

I would prefer a system ith the following features:
1) the value of your vote is tied to both hashing power and your stake in a pool of voting coins
2) it is possible to destroy txn fees to take reduce the money supply if the aggregate hash rate falls or fails to grow
3) people who participate in voting receive a monetary reward if their votes match those of the majority of votes.
4) disagreement with the majority of votes can result in confiscation of your money
5) there is a significant time lag between acquiring bitcoin and being allowed to vote.
6) there is a significant time lag between ceasing to vote and being able to transfer coins used for voting.
7) money supply growth is pegged at a small fraction of txn fees
Cool txn fees are a very small fraction of the median txn, say 0.1% or less
9) there is no plan to alter the system in the future

You don't need all these features in a proof of stake system, so it can be much simpler than this. However, I think all the features are useful.

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cunicula
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July 23, 2011, 11:35:01 PM
 #159

can someone fully explain the "stake" idea?
There are more than one stake ideas. Both cunicula and I described our respective stake ideas earlier in this thread (post #113, #116).

Thank you for the numbers. I will look into these stake ideas.
But first I would like to know why freicoin's eternal reward to miners must be that high.

(150 / 21 000 000) * 100 = 0.000714285714 % of monetary base to miners each block
So, per annum...
365 * 24 * 6 * 0.000714285714 = 37.5428571 % of the money supply.

Now, where did this 0.000714285714 came from ?

Or where the 37.5428571 % annual reward came from?
Why a 3% or 4% of the monetary base annual reward for miners is not enough


the 37% is just what you need to maintain the current hash rate. It is the current amount issued by bitcoin. 3% or 4% might work, but the aggregate hash rate would probably be at least 10-fold less.
The low aggregate hash rate might be enough or it might not. Because of the "might not" scenario, it makes sense to investigate alternative solutions such as proof of stake.

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July 23, 2011, 11:36:34 PM
 #160

the proof of steak idea not only would be hard to implement, it also is poorly thought out, introducing more complexity into the system would only make it more difficult to use bitcoin, unless i am missing something?

You are righ that it is poorly thought out, but that doesn't mean it can't work with more thinking. For example, I dismissed Meni's idea, but on further thought i believe that i may be wrong. His idea may be viiable. We need to have more people thinking about the issues.

I would prefer a system ith the following features:
1) the value of your vote is tied to both hashing power and your stake in a pool of voting coins
what is vote
2) it is possible to destroy txn fees to take reduce the money supply if the aggregate hash rate falls or fails to grow
what
3) people who participate in voting receive a monetary reward if their votes match those of the majority of votes.
what is voting
4) disagreement with the majority of votes can result in confiscation of your money
5) there is a significant time lag between acquiring bitcoin and being allowed to vote.
6) there is a significant time lag between ceasing to vote and being able to transfer coins used for voting.
7) money supply growth is pegged at a small fraction of txn fees
Cool txn fees are a very small fraction of the median txn, say 0.1% or less
9) there is no plan to alter the system in the future

You don't need all these features in a proof of stake system, so it can be much simpler than this. However, I think all the features are useful.

if i understand proof of stake, its a system to prevent attacks on the bitcoin network. so far there have been almost no successful large scale attacks on the network.

however if you really want proof of stake, feel free to make your own client with it inside and prove us wrong.

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