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Author Topic: Scenario for the destruction of bitcoin  (Read 1456 times)
conroe64
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February 09, 2012, 08:49:19 AM
 #1

Here is a scenario which would end in the destruction of bitcoin which I haven't seen mentioned before. Please give me your thoughts on it. It's entirely based on the fact there is no minimum transaction fee.

One assumption I'm making is that a certain segment of the population is out for their maximum own profit and will not hesitate to better their own situation to the expense of the entire system (For example, imagine a bunch of fishermen at a lake. It's assumed that certain number of them will catch as many fish as possible causing the fish to run dry.)

First, suppose some bitcoin traders will continually try to reduce their paid out transaction fees. If a bitcoin miner receives a transaction with a lower transaction fee and can still make money while accepting it, they'll do so. Then more traders reduce their fees to keep inline with the going rate. This will cause all the bitcoin miners with processes not efficient enough to still make money to go out of business. Once that happens, the network size will decrease. This will cause each surviving miner to be able to survive on a lower transaction fees because they will have the chance to process more transactions. The process then repeats. This will eventually cause the transaction fees to become practically zero, and the only benefit remaining for the existing miners is the bitcoin bounty.

As the bitcoin bounty decreases, the number of miners that can survive dwindles. This continues until the network becomes so small in size that it's vulnerable to a double spend attack. Once that happens, a group, which is an "enemy of bitcoin" (most likely composed of ex-miners, pissed off governments, etc.) does that very attack, which will destroy all credibility in the currency and that is when it dies (to be replaced by something else which doesn't have this issue, presumably)

I realize that there are many years before the bitcoin bounty decreases to miniscule levels, but I think the endgame of this scenario could happen much earlier. As soon as people start to recognize the downward trend of the network size, they will realize a double spend attack will be closer to reality and start to pull money out. This will cause the network size to reduce further resulting in a downward spiral and final crash of the currency.


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defenestra
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February 09, 2012, 12:32:45 PM
 #2

If Bitcoin doesn't grow to the point where a sizable economy surrounds it, well it will probably fail for any number of reasons.

It would be preferable to have a prospering BTC based economy, obviously. However, Bitcoin as such already had realized an important purpose; it is a successful proof that we can depend on and trust in mathematically fabricated commodity. Monetary use is just the beginning...

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February 09, 2012, 02:10:17 PM
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First, suppose some bitcoin traders will continually try to reduce their paid out transaction fees. If a bitcoin miner receives a transaction with a lower transaction fee and can still make money while accepting it, they'll do so. Then more traders reduce their fees to keep inline with the going rate. This will cause all the bitcoin miners with processes not efficient enough to still make money to go out of business. Once that happens, the network size will decrease. This will cause each surviving miner to be able to survive on a lower transaction fees because they will have the chance to process more transactions.

The above is all fine.  Bear in mind particularly the part I've emphasised.

The process then repeats. This will eventually cause the transaction fees to become practically zero, and the only benefit remaining for the existing miners is the bitcoin bounty.

Ah... here we go off reservation.  Zero fees is not the same as zero profit; and it is profit that approaches zero. I think Adam Smith said that all businesses will asymptotically tend to zero profit, since any profit represents an opportunity for your competitor.  The point I emphasised tells us that the fee cannot drop to zero.

As you say, only the most efficient miners will survive.  Just as in all markets.

Bitcoin is the great leveller.  If you can come up with a way of mining as efficiently, then you can compete with the big boys; and as the number of miners drops the incentive for you to compete increases, putting an upward pressure on mining participation as well as a downward one.  A mining monopoly is impossible in bitcoin because you are rewarded in proportion to your contribution.  The little guy gets exactly what he contributes and he can't be barred from entry.

This is about as fair and level a playing field as exists.

On double spends: don't be too scared.  The network wouldn't collapse, we'd just have to wait longer for confirmations as in the end only one chain can be valid.  We'd also very quickly find a client with a "--filter-out-blocks-from-ip" if one particular miner was found to be the source of all chain forks.

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conroe64
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February 10, 2012, 07:25:51 AM
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Ah... here we go off reservation.  Zero fees is not the same as zero profit; and it is profit that approaches zero. I think Adam Smith said that all businesses will asymptotically tend to zero profit, since any profit represents an opportunity for your competitor.  The point I emphasised tells us that the fee cannot drop to zero.


The problem is that the transaction fee isn't paid to support a large secure market. It's paid in order to add that transaction in the bitcoin block chain and broadcast it. It might be used to add more mining hardware, but the size of the network has no bearing on this function. So, (mark-up cost added to the transaction) + (the bitcoin reward) = (the revenue for the miners) which is proportional to the size of the bitcoin network. Since all miners provide the same service to the trader, the revenue of processing a transaction tends towards just the cost to rebroadcast the transaction data which is practically zero. So leaving that out of the equation, all we have is that the bitcoin reward is proportional to the size of the bitcoin market.

On double spends: don't be too scared.  The network wouldn't collapse, we'd just have to wait longer for confirmations as in the end only one chain can be valid.  We'd also very quickly find a client with a "--filter-out-blocks-from-ip" if one particular miner was found to be the source of all chain forks.

If someone implements a 51% attack, waiting for longer confirmations wouldn't work, because an attacker could always create a longer chain then the rest of the network. And, anonymous proxies would be enough to get around any ip blacklist.
conroe64
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February 10, 2012, 07:37:15 AM
 #5

If Bitcoin grows to the point where a sizable economy surrounds it, those people who profit from that economy will mine for insurance purposes, regardless of profit incurred directly from mining.

If Bitcoin doesn't grow to the point where a sizable economy surrounds it, well it will probably fail for any number of reasons.

If Bitcoin is successful, people will pay a fee to get their transaction included in the next block. The competition for businesses that desire fast transactions will balance with the competition for the most efficient miners attempting to accept the lowest fees.

Again, if there isn't enough transaction fees to keep the miners in operation, Bitcoin has already failed anyway.

Oh, fees and the reduction of the block reward has been discussed extensively in this forum. Maybe try a few different search parameters.


The only entities that would mine for insurance purposes would be those that have a big enough budget to buy the necessary hardware. In the event of bitcoin growing to a sizeable economy, if the landscape of bitcoin users include a large proportion lot of small businesses and individuals, I would guess that most of them wouldn't be buying their own specialized mining rigs for insurance against an attack. Because so the money spent on mining would probably be a lot less compared to today, and therefore would be a lot easier to attack.

Also, even if this was successful, bitcoin would then be in the hands of a few large corporations. It wouldn't be much of a stretch for them to form a consortium and use their muscle to start changing bitcoin to include exorbitant fees for themselves.

conroe64
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February 10, 2012, 05:39:29 PM
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If Bitcoin grows to the sizes I'm imagining, insurance companies may even pop up and sell mining insurance to various other businesses that rely on Bitcoin to profit. And I'm sure many businesses will have in house mining operations as well, even if to verify their own transactions for free.


Verification of the block chain is not the same as mining. All an in in-house mining operation would do is give businesses a chance to receive mining revenue, but this revenue eventually won't be enough to support much mining at all.


I don't think natural monopolies will form in a decentralized system. There are no rules to stop innovators from competing with anyone who decides to form a consortium. The members of the consortium itself would soon realize that one of them could undercut the rest and take the market share away from the consortium.

As I said, competition between getting your transaction into a block and competition between trying to mine that transaction will balance out and keep the network secure.


I think the only revenue received from mining will be from the bounty, because the transaction fee will become practically zero. As I wrote in an earlier post, the transaction fee is paid only to rebroadcast the transaction to the rest of the nodes. The cost of doing that is practically zero. Eventually the mining fee will also drop to practically zero, so there is no direct benefit anymore to mining. So, there is no way to undercut when your paying out more to mine than you're pulling in. Because so, there is no reason to leave a consortium. Why pay for mining without getting the benefit of using your muscle to impose high fees?


Think about it. Consider millions of people attempting to get their transactions processed as quickly as possible. Obviously some won't need instant transactions, Joe sending money to Aunt Rida. But others will, stock brokers transferring Bitcoins to invest in a hot company on the stock exchange. People needing instant transactions can either mine it themselves, or pay someone else. I think the network will be fine.


Mining doesn't affect the speed that a transaction is processed. There could be one lonely miner out there doing 1 Hash / sec, and the speed of transactions through this network would be the same as a network with millions of nodes and 10 Terra Hashes / sec. It would just be a lot less secure against a 51% attack.
conroe64
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February 11, 2012, 01:28:25 AM
 #7

What is the purpose of the block chain?

Why are confirmations important?

I'm not sure what you're getting at here..

The block chain proves the transactions within it are valid given the assumption that over 50% of nodes in the network are honest nodes. Confirmations are important because an attacker with less cpu power than the honest nodes may discover a winning hash through random chance. With each confirmation, the chance that an attacker with less cpu power could do so becomes less and less exponentially.
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February 11, 2012, 01:39:05 AM
 #8

What is the purpose of the block chain?

Why are confirmations important?

I'm not sure what you're getting at here..

The block chain proves the transactions within it are valid given the assumption that over 50% of nodes in the network are honest nodes. Confirmations are important because an attacker with less cpu power than the honest nodes may discover a winning hash through random chance. With each confirmation, the chance that an attacker with less cpu power could do so becomes less and less exponentially.


i think he was being sarcastic  Roll Eyes

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February 11, 2012, 08:11:26 AM
 #9

The block chain establishes a temporal order among the transactions, nothing else. The problems I see with your scenario are:

  • The bitcoins you have to your name (or, rather, public key) are safe. Even if the attacker has 99.99% of network's computing power, he cannot spend someone else's money.
  • The 51% attack will temporarily disrupt the network, but it's not a one-time event. Think of it as a DDoS attack on the bitcoin, it must be continuously maintained. When the attacker inevitably runs out of resources or motivation, people will start using bitcoin again (their money have been safe all along - see p.1)
  • 3) There is an incentive for bitcoin holders to support the network so that their value doesn't evaporate. If you have tens or hundreds of millions USD worth of bitcoins, it is in your best interest to run a mining operation simply to ensure 51% attack doesn't happen.
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February 11, 2012, 08:53:48 AM
 #10

I think conroe64's scenario is interesting, but it requires ideal conditions. There is too much friction in reality for such things to happen. For instance;

There is an incentive for bitcoin holders to support the network so that their value doesn't evaporate.

This. Not only bitcoin holders, but businesses that depend on Bitcoin, so value is just one of the factors here. And all merged chains and people who utilize Bitcoin for notarization purposes, and other side uses of the computing power itself. So if computing power appears to pose a problem, many solutions will pop up. For instance, if the system's integrity is at stake, I would not relay 0-fee transactions myself, nor would most nodes. Or, for instance, all financial entities surrounding Bitcoin would have an incentive to create their own mines, even at the risk of not making enough from the fees to cover expenses. This would in turn delay confirmations of 0-fee transactions, and people would then be more inclined to pay fees. So these financial institutions will be able to cover their expenses just because they were willing to take the risk in the first place. So on and so forth...
conroe64
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February 12, 2012, 11:19:03 PM
 #11

The 51% attack will temporarily disrupt the network, but it's not a one-time event. Think of it as a DDoS attack on the bitcoin, it must be continuously maintained. When the attacker inevitably runs out of resources or motivation, people will start using bitcoin again (their money have been safe all along - see p.1)

I think that a 51% attack would shaken the faith in bitcoin, because once it happens, people would constantly worried that it may happen again. It's unlike a DDoS because merchants would be really losing money.

Furthermore, the FUD would lead to a drop in bitcoin price, making mining less profitable, causing more miners to quit and reducing the size of the network even further, which would make the 51% attack even easier. Seeing success, the attacker would just do it again, until it becomes drilled into peoples heads that bitcoin is unsafe.

A successful chain of attacks like this would greatly reduce the chances of bitcoin, or any variant of it rising again, without a robust solution to this issue

It wouldn't matter that your funds in the system are safe, if the faith in the system has been destroyed.

There is an incentive for bitcoin holders to support the network so that their value doesn't evaporate. If you have tens or hundreds of millions USD worth of bitcoins, it is in your best interest to run a mining operation simply to ensure 51% attack doesn't happen.

Sure, and I'm sure some people will mine just to support the network. Keep in mind though, that as soon as someone starts doing this and makes a large enough impact to make mining unprofitable, then all the miners-for-profit people will have to close up shop.

Suppose this does happen, and many people start working together and mine to keep the bitcoin security high. There are several problems with this:

  • It may simply not work. What people say they'll do and what they do when time, money and effort are required are two different things. There may be a token attempt. There may be the situation where most people don't bother and hope others do enough to support it. Many of those people with millions invested in bitcoin might think that diversifying is a better solution than trying to prop up the network with the will of the willing. Besides, I am guessing it's a poorly understood issue. What is an acceptable network size? How much money needs to be poured in to support that network? I don't think these questions are answerable.
  • A few big players, with knowledge and understanding, and the will to do it, could indeed step up to do the mining. And as I stated before, in this case, those big players would then practically "own" the network. If they decide join up, and then change the rules to block out other players, and impose exorbitant fees, and get most merchants to go along with it, there is not much anyone could do to stop them.
  • Finally, even if it did work and the above problems avoided, if there is even a slight hiccup in size of the network... it could be enough for a 51% attacker to be successful.

I also want to mention that what I would like to see is a minimum transaction fee. Maybe we could tie it to the days that money has been resting in an account, in the same way as bitcoin days destroyed works, so that simply transferring money to different addresses immediately after a transaction would have a much lower or eliminated minimum fee.

The minimum fee could be as low as 0.5% and I think it would be much more secure than the current system. Just a disclaimer, I am not a miner!  Smiley

conroe64
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February 12, 2012, 11:31:34 PM
 #12

What would happen if I have a longer block chain and I connect my client to the rest of the network?
Your block chain would be immediately accepted by the other nodes as the correct one. It's still a mystery to me what you are getting at with this..

No. I want the OP to think about why people mine and why it is important. Winning a block of 50 coins is certainly the motivation for most, but not all. And I believe as bitcoin grows, that 50 coin motivation will become less of a motivation (well obviously, but not only because it is halved again and again), while other motivations will increase (not necessarily transaction fees).

Being paid for your work is quite nice indeed, but are there other reasons we work? How does that apply to Bitcoin? If you have a vested interest in Bitcoin (say 30,000 coins) and Bitcoins are exchanging with the dollar at a rate of $50 per Bitcoin, are you going to sit back and watch the network slowly fall to shit? The network is Bitcoin. (I think I was conservative with the exchange rate, if Bitcoin is a booming success, I think there is a chance it will be several times that amount. Of course the more widely used, the higher the exchange rate, and the more people vested in Bitcoin, the more who will be interested in a strong, robust network.)

Tl;DR Assuming the block reward (which includes fees) is the only reason for mining might be a mistake.

As I mentioned in my previous post, if you have a lot of wealth invested in bitcoin, you may decide to diversify once you notice the network security has gone down too much and/or the apparent interest of would-be attackers has gone up too much.

Setting up and maintaining a big enough mining operation for an ordinary speculator would be a big pain in the ass. Also, due to Moore's Law, it would be have to be an ongoing process of buying and installing the latest hardware to be effective. Why would you go through all this trouble when you could invest your funds directly in something else?
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February 13, 2012, 01:08:09 AM
 #13

It seems like you are saying miners will have 0 pricing power, is that right?

Miners can have pricing power as long as anyone cares about the likelihood of their tx being included within X blocks. If a sender insists on a >95% chance of his tx being included in the block then any pool or miner with 5% or more hashing power can charge whatever they like. If a sender wants a 99% guarantee of getting in the next 2 blocks he must pay more than the cheapest 90% of mining power requires. This is because if he pays less than the fee required by more than 10% of the network he won't get his 100-(p^2) chance.

Besides all of this we've got decades with a non trivial subsidy.

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conroe64
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February 13, 2012, 11:51:21 PM
 #14

It seems like you are saying miners will have 0 pricing power, is that right?

Miners can have pricing power as long as anyone cares about the likelihood of their tx being included within X blocks. If a sender insists on a >95% chance of his tx being included in the block then any pool or miner with 5% or more hashing power can charge whatever they like. If a sender wants a 99% guarantee of getting in the next 2 blocks he must pay more than the cheapest 90% of mining power requires. This is because if he pays less than the fee required by more than 10% of the network he won't get his 100-(p^2) chance.


The problem with that idea is that any miner that requires a minimum fee higher than the others will eventually lose most transaction revenue.

Suppose that miners did start to reject transactions if the fee was too small. Consider the top 1% of miners in this scenario who set the minimum fee to a greater amount than all the others. Only the traders that wanted their transactions to get through as quickly as possible would pay enough for 100% vs 99% of miners to process them. Lets be generous and say that 5% of all transactions are those that are so important they need absolutely top priority. This means that the top 1 percentile are only getting 5% of the fee per block discovered that the rest of miners regularly receive.

If we leave out the subsidy, these miners would be very hard pressed to compete against the rest of the 99% if they're earning 1/20th of the revenue. So, either they would lower their minimum fee amount, or close up shop. Either way, the new highest minimum fee drops by 1%, and the process repeats.


Besides all of this we've got decades with a non trivial subsidy.


I concede this point. But, I do think that fees need to be reworked at some time, since in their current form, they won't be able to replace the subsidy.

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February 14, 2012, 10:40:11 AM
 #15

I don't see why mining is even necessary, we could have a worldwide economy based off of the available bitcoins right now  Smiley
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