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ripper234
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March 08, 2012, 06:13:15 PM
 #1

Bitcoin & Tragedy of the Commons

This is perhaps the biggest risk to Bitcoin's future. Does anyone have a convincing argument why this won't happen, or proposals on how to combat it?

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March 08, 2012, 07:02:49 PM
 #2

while its quite possible that tx fees rise to self sustain mining activities by individuals i think it is also helpful to think of Bitcoin as digital gold.

as the central banks try to print more and more fiat to compensate for the financial crises caused by bad debt, a portion of this will flow to the only workable currency which has a fixed supply; Bitcoin.  in that sense, one can expect the price of one Bitcoin to rise over the many coming years which is plenty of incentive by itself for individuals to mine.  this is why i mine.

why do gold mining companies mine?  there in fact are no tx fees for them.  its based purely on price speculation.  and despite the fact that many ppl hoard gold, why is the dollar amount of gold futures traded on the LBMA equivalent to that of fiat currencies and far outpaces that of ordinary commodities?  its b/c gold, like Bitcoin and other fiat, is considered money.  Bitcoins will always be traded on mtgox or other exchanges b/c there will always be ppl who think the price has topped out and wish to sell.  as the price rises liquidity will increase further allowing miners to cash out.

this will be self sustaining.
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March 08, 2012, 07:03:40 PM
 #3

If Bitcoin is still around in 40 years it should be pretty big and well-established.
In that case I'm sure some people will see the benefit on contined mining of Bitcoin somehow even without block rewards.
A possible source of income for a miner could be block chain services for light clients, since the block chain will probably be so huge by then that most people won't run a full client anymore.

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March 08, 2012, 07:13:33 PM
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i agree that tx fees will play a big part in miner profit.  even now, i often will add a tx fee to ensure that my tx doesn't get stuck.  i have an economic incentive to make sure my tx's go thru smoothly thus i don't mind paying it.  the market will force those transacting in Bitcoin in the future to pay the fee otherwise they will not be allowed to participate.  the idealogic principles upon which Bitcoin is based is clearly making ppl WANT to participate.
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March 08, 2012, 07:18:12 PM
 #5

think about it in terms of the 99.99% vs. the 0.01%.

Bitcoin is the system that favors the 99.99%.  Central banks issuing fiat favors the 0.01%.

whose team do you want to play on? 

btw, you're not allowed to play with the 0.01%.
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March 08, 2012, 07:21:01 PM
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If bitcoin will be still there in 20 year not 40, probably there will be hundreds of transactions per blocks, so the rewards will be of tens of bitcoins per blocks.
And probably the value of the bitcoin will be raised to hundred of $, and mining them will cost only a fraction of today.
And the increased power of CPU could allow all the people that use bitcoin to mine them at high MHash/sec mantaing a high level of security.
40 years in economy is a very long time: 40 years ago there's no Euro, $ and other fiat currencies are bonded to gold. In IT 40 years are like a geological era: 40 years ago there were no personal computer, and the computational power was of few kilo ops for second.

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March 08, 2012, 07:22:20 PM
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The block chain is a time stamping service for which the providers of that service are compensated in bitcoin.  It does not matter that this compensation currently comes in the form of bitcoin inflation or that it will eventually have to come solely from the things being timestamped (bitcoin transactions).  It just so happens that you can use the block chain to timestamp arbitrary things, not just bitcoin transactions (as CommitCoin has shown) and there are plenty of compelling uses for that.  In the future, I think we'll see plenty of demand for this time stamping service for bitcoin transactions as well as other things.  All that you need to sustain a healthy network is healthy demand.  If the pricing structure isn't currently quite right for these services, it will be fixed.

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March 08, 2012, 09:36:56 PM
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There is no Tragedy of the Commons.  What there is, is an underprovision of a Public Good. The public good in this case being security, not bandwidth or storage space for the block chain (which really does suffer from tragedy of the commons, but storage is so cheap that this is inconsequential).

Underprovision of public goods is a well studied topic and several market-based solutions have been suggested.  Assurance contracts for example.  These could be hard coded into the protocol in the far future. Or something.

But even if they are not, this does not automatically mean the death of Bitcoin.  Even if total hashrate is underprovided, it will never fall to zero.  Hash rate is a positive externality of a transaction fee, which some people will always pay for faster processing.

Historically, there are many examples of public goods that are produced in a suboptimal quantity, but they are produced nonetheless.

Just because bitcoin is suboptimal doesn't mean it will fail.  

Look at bittorrent for an analogy. There are a lot of leechers who take more than their fair share and there is a shortage of seeders. But the technology still does its job.

    


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March 08, 2012, 10:31:55 PM
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Merged mining might help too, maybe hundreds or thousands of blockchains that in these early years were helped along by Bitcoin possibly more, in some estimations/opinions, than they in these early years help bitcoin, will get a chance to return the favour by continuing to retain bitcoin as the primary chain that nearly everyone merged-mining, no matter which other chains they choose to merged-mine, has in common?

That could be a useful commons to all of them!

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March 08, 2012, 10:55:22 PM
 #10

Tell me if I'm addressing the wrong issue.

You are worried that all miners will accept all transactions with fees resulting in everyone paying the minimum fee which will cause very low difficultly resulting in easy 51% attacks.

First, empirically, not everyone is accepting all tx with fees now. I don't have data to cite, but I've seen it.

Second, there is a solid game theory reason to decline some tx with fees. Assume you are a miner with 1% of total hashing power and everyone else is currently accepting all tx that have fees. If you raise your min accepted fee to say .001 anyone who requires their tx to be included in the next block with probability higher than 99% must pay at least .001. Even if you lose out on countless .00000001 fees the tiny fraction of people willing to pay to increase their chance of getting in the next block will increase your profits.

This might seem to imply that bigger miners (1% say) have an advantage over insignificant miners, but this is not the case. While the smallest have no pricing power whatsoever they benefit from those who do. They will also be able to collect the .001 fees that were attached with the 1%er in mind.

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March 08, 2012, 11:04:49 PM
 #11

Also people keep quoting "40 years", nothing special happens then. It's closer to 140 years when the reward is rounded to zero.

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March 08, 2012, 11:17:06 PM
 #12

I do not see this as a tragedy of the commons problem.

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March 09, 2012, 05:33:11 AM
 #13

Also people keep quoting "40 years", nothing special happens then. It's closer to 140 years when the reward is rounded to zero.

In 20 years reward will be near 1BTC per block, in 40 will be some 0.048BTC, so it's considered 0 at current prices.

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March 09, 2012, 05:58:56 AM
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Bitcoin developers are constantly adding and improving the code.  I'm sure they will figure out a solution "40 years" from now to keep us all mining.  I mean, if the value of 1 BTC was $10,000 in 2033, wouldn't you keep your miners going if you could get a 0.01 transaction fee?  0.01 BTC @ $10,000/BTC = $100.  We have many years to speculate.  The block rewards get smaller and smaller as the years go by, and by the very end of bitcoin generation, people will be so hard up for the tiny shards of bitcoin that they will be much more valuable.  I hope so anyway.

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March 09, 2012, 06:12:15 AM
 #15

There is no Tragedy of the Commons.  What there is, is an underprovision of a Public Good.
    

[edit] I meant to begin by pointing out what an idiot the quoted poster is. Timo Y, you are confused. Please consult wikipedia.

The stable long-run equilibira are:

a) fully monopolized mining under a benevolent 51%er
b) fully monopolized mining under a malicious entity (perhaps a competitor like paypal)

An additional unstable equilibrium is:
c) competitive mining

The equilibria (a) and (b) are absorbing states. The equilibrium (c) is unstable because it is profit-maximizing for one miner to buy out all the other miners and organize a monopoly.

Here are some rank orderings of the equilibria along different dimesnions.

In terms of supply of security (higher is better):
a>c>b

In terms of txn fees (higher is worse):
b>a>c

In terms of incentives of the monopolist to invest in complementary technologies (higher is better):
a>c>b

In terms of incentives of other actors to invest in complementary technologies (higher is better):
c>a>b

It is ambiguous whether c or a is the first-best outcome for bitcoin. In any case, we are likely to end up with a.
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March 09, 2012, 06:15:53 AM
 #16

A possible scenario to a future 51% attack.
http://rt.com/news/pentagon-report-hackers-retaliation-481/
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"When warranted, we will respond to hostile attacks in cyberspace as we would to any other threat to our country," the report said as cited by Reuters. "We reserve the right to use all necessary means – diplomatic, informational, military and economic – to defend our nation, our allies, our partners and our interests."

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March 09, 2012, 06:41:12 AM
 #17

 Undecided Basically it says they will attack us in any possible way  to defend THEIR interests

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March 09, 2012, 06:52:05 AM
 #18

There is no Tragedy of the Commons.  What there is, is an underprovision of a Public Good.
    

[edit] I meant to begin by pointing out what an idiot the quoted poster is. Timo Y, you are confused. Please consult wikipedia.

The stable long-run equilibira are:

a) fully monopolized mining under a benevolent 51%er
b) fully monopolized mining under a malicious entity (perhaps a competitor like paypal)

An additional unstable equilibrium is:
c) competitive mining

The equilibria (a) and (b) are absorbing states. The equilibrium (c) is unstable because it is profit-maximizing for one miner to buy out all the other miners and organize a monopoly.

Here are some rank orderings of the equilibria along different dimesnions.

In terms of supply of security (higher is better):
a>c>b

In terms of txn fees (higher is worse):
b>a>c

In terms of incentives of the monopolist to invest in complementary technologies (higher is better):
a>c>b

In terms of incentives of other actors to invest in complementary technologies (higher is better):
c>a>b

It is ambiguous whether c or a is the first-best outcome for bitcoin. In any case, we are likely to end up with a.

Thanks for illustrating the problem. Picture this scenario:

tl;dr - if I'm right, then the total cost of mounting a 51% attack in the "stable steady state future" is negatively affected by added competition between honest miners ... so someone trying to mount a 51% attack can just build/acquire more mining corps (at 0 net cost) in order to lower the cost of attack). Please read onward and tell me where I made a mistake:

 - Assumptions: In 40 year(or 140, doesn't matter), block reward is essentially zero, and the major income of miners is from transactions fees.
 - There are N different non-monopolistic competing mining cooperation (this is the situation most beneficial to users - c).
 - For sake of simplicity, assume that all mining corps are equal in size, and neglect any freelance miners.
 - This is a steady state - the margins that these cooperation make are very close to zero, and there are almost no fluctuation in the price of BTC (compared to say the Consumer Price Index).

Now, every block (10 minutes) there is some average amount of transactions, for which the sum of the market price for the transactions fees is T. So, every block, a mining corp will make T/N in gross income, and so his expenses are very close to T/N per 10 minutes. We can see that the market worth of such a mining corp will be proportional to T (some constant times T), assuming N is fixed, because the amount of net revenue for a mining corp is proportional to T, and it's not economical to be mining if your net worth (or cost of construction of the corp) is many times higher than T X constant_multiplier.

Note that this is unlike the situation today, where a miner or mining corp's "cost of construction" or net worth is roughly proportional to the changing block reward (soon 25) and the fluctuating rate of BTC ... besides we're far from any kind of steady state. But in this theoretical future, I don't see any reason why the economical cost to construct a mining corp will be very different than T X constant.


Now let's say some rich entity wants to gain 51% of the hash power in order to perform double spend attacks. The cost of building N+1 mining corps is T X constant X (N+1). These don't just have to be built, parts or full existing mining corps can be taken over by roughly the same cost expenditure.

Now here is the potential problem. From the above calculations, the cost to performing a 51% attack is proportional to the average market price of transaction fees in a block, times some constant. If a lot of transactions are not conducted on the blockchain, but instead move to 2nd level networks, this number drops ... Note that miners are competative (our assumption), so as N gets larger, the TX fees drop ... and the cost of mounting a 51% attack drops. A new honest mining corp has incentive to start mining if it can get efficient electricity, good mining gear, and other reasons, all unrelated to the fact that the very act of opening a new mining corp lowers the transaction fees and lowers the cost of 51% attacks.

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March 09, 2012, 07:15:52 AM
 #19

I meant to begin by pointing out what an idiot the quoted poster is.

Your posts would be so much better if you stopped insulting people.

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March 09, 2012, 07:21:10 AM
 #20

Undecided Basically it says they will attack us in any possible way  to defend THEIR interests
And so it behooves us to make OUR interests THEIR interests as well.  Smiley

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March 09, 2012, 10:11:50 AM
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Yeah, ripper that is basically it. That is why we are very likely to end up in the monopolistic scenario eventually. But I think the incentives for it are already in place and it could actually happen much sooner than this. Miners would be better off forming a 51% cartel and shutting out competition. Operating independently just wastes profit. In the future, organizing a monopoly or cartel will get easier, but it isn't even that hard right now. Why doesn't a group of miners organize to take control and double their earnings?

The incentives for a monopolist or a cartel aren't that bad though. A monopolist will likely pursue socially beneficial activities that atomistic private actors aren't motivated to undertake. There is a market for control in the sense that if another potential monopolist thinks they can do a better job, they can acquire more hashing power and take over. The market for control will discipline the monopolist to a degree.

One concern is the monopolist's potential to try to stifle innovation. The monopolist will likely be able to extract rents from people who develop technologies that complement bitcoin. This will discourage developers from contributing new ideas. The market for control will help to some degree in the sense that anyone with a really big innovation can consider taking over. It doesn't help if the innovations are small and incremental.

However, what I am most concerned about is irrationality and stupidity among the user base. When the monopolist takes over, the idiots who populate the community will likely react irrationally and panic even if the monopolist has completely benevolent intentions towards users. This is quite unfortunate.

Of course the monopolist will be hostile towards competing miners, but I don't see any reason why that matters.
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March 09, 2012, 10:25:57 AM
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Yeah, ripper that is basically it. That is why we are very likely to end up in the monopolistic scenario eventually. But I think the incentives for it are already in place and it could actually happen much sooner than this. Miners would be better off forming a 51% cartel and shutting out competition. Operating independently just wastes profit. In the future, organizing a monopoly or cartel will get easier, but it isn't even that hard right now. Why doesn't a group of miners organize to take control and double their earnings?

The incentives for a monopolist or a cartel aren't that bad though. A monopolist will likely pursue socially beneficial activities that atomistic private actors aren't motivated to undertake. There is a market for control in the sense that if another potential monopolist thinks they can do a better job, they can acquire more hashing power and take over. The market for control will discipline the monopolist to a degree.

One concern is the monopolist's potential to try to stifle innovation. The monopolist will likely be able to extract rents from people who develop technologies that complement bitcoin. This will discourage developers from contributing new ideas. The market for control will help to some degree in the sense that anyone with a really big innovation can consider taking over. It doesn't help if the innovations are small and incremental.

However, what I am most concerned about is irrationality and stupidity among the user base. When the monopolist takes over, the idiots who populate the community will likely react irrationally and panic even if the monopolist has completely benevolent intentions towards users. This is quite unfortunate.

Of course the monopolist will be hostile towards competing miners, but I don't see any reason why that matters.

I am one of those "irrational and stupid users" that would hate to see a mining monopoly form, and would prefer some sort of protocol change to combat that ... the problem is that I have no idea right now if such a change is even possible or beneficial. I wouldn't want to rely on a single organization to handle the world's payments. Even if such an organization starts out benevolent, it would be too easy to corrupt it. It would constitute a single point of failure ... would be Too Big to Fail.

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March 09, 2012, 11:07:40 AM
 #23

Here is a previous discussion about this, thanks to Meni for pointing it out.
Also check out his answer on Stack Exchange.

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March 09, 2012, 12:14:20 PM
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I am one of those "irrational and stupid users" that would hate to see a mining monopoly form, and would prefer some sort of protocol change to combat that ... the problem is that I have no idea right now if such a change is even possible or beneficial. I wouldn't want to rely on a single organization to handle the world's payments. Even if such an organization starts out benevolent, it would be too easy to corrupt it. It would constitute a single point of failure ... would be Too Big to Fail.
Keep in mind that the mining monopoly can always be replaced by someone else with more hashing power. If it fails, well other people will start up mining again. No biggie. If the organization's intent is to destroy bitcoin and it controls the majority of hashing resources, well, there is no known way of stopping this..

If you want to make the system more costly for a malevolent attacker to destroy, then proof-of-stake is pretty much the only option. It is still subject to the same monopoly concerns, but it would be much more expensive/risky to establish the monopoly. Moreover, the monopoly organization would have much stronger incentives to safeguard bitcoin. An organization holding the majority of bitcoin would face large financial losses if it decided to destroy the network. For a mining monopoly, there would also be losses, but they would be much less severe, particularly if the hardware could be sold off for other purposes.
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March 09, 2012, 12:19:39 PM
 #25

Here is a previous discussion about this, thanks to Meni for pointing it out.
Also check out his answer on Stack Exchange.

Yeah, thanks for the reference, Meni!
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March 09, 2012, 01:31:10 PM
 #26

- Assumptions: In 40 year(or 140, doesn't matter) ... the major income of miners is from transactions fees
One potentially lucrative source of income is to facilitate instant point-of-sale transactions. Here's how it works. When a customer makes a Bitcoin transaction at the checkout, the retailer forwards the transaction to 51% or more of the major mining pools with an increased fee. In return, the mining pools validate the transaction immediately and guarantee that they will include it in the blocks that they mine.

The retailer willingly pays the fee to avoid the need to wait for six confirmations.
I doubt this will work. I assume you mean that the confirming pools will also reject any blocks that contain a conflicting transaction. Which means that for every block and any pool, it's likely that at least one of its transactions will be rejected. Which means most blocks will be rejected, which is a vulnerability.

If it's the same 51% hashrate used by everyone this won't happen, but then it's just a mining cartel, which is only one step removed from a central mint.

The reduction of block reward is a total non-issue, even without considering that there will always be plenty of people with reasons to mine for free.
Reduction in block reward is arguably the second biggest challenge Bitcoin is facing (the first is legal attacks).

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March 09, 2012, 01:48:51 PM
 #27

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.

I don't forsee a mining monopoly or a failure due to game theory any time in the forseeable future.
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March 09, 2012, 02:37:37 PM
 #28

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.

I don't forsee a mining monopoly or a failure due to game theory any time in the forseeable future.

I want to make sure I understand, is this right: ?

Anyone with an interest in a high hash rate (basically, anyone holding a large amount of coins), can initiate or cooperate on SIGHASH_ANYONECANPAY transactions. Those are an effective way for people to say stuff "I pledge 10 BTC for the next miner to mine a block, provided 100 total BTC is donated in this transaction ... otherwise, I'll get my money back in 5 blocks"?

So, if people or organizations holding a large amount of BTC see that the security is too low for their standard, they can chip in ... provided others do so as well.

One question: If a miner decides to contribute the reamaining 90 BTC just to collect the 100 BTC reward ... I assume he can't do it on the block that mines the ANYONECANPAY tx, right? So, such a miner would have to contribute his 90 BTC some time before the target block number, and the transaction will only be readamable in that target block number, and not before? In this case, the miner will not be able to exploit this and "steal" the 10 BTC.

This is interesting.

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March 09, 2012, 02:47:59 PM
 #29

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.

I don't forsee a mining monopoly or a failure due to game theory any time in the forseeable future.

Game theory clearly predicts a mining monopoly as the outcome. Assurance contracts don't solve anything.
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March 09, 2012, 02:57:41 PM
 #30

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.

I don't forsee a mining monopoly or a failure due to game theory any time in the forseeable future.

Game theory clearly predicts a mining monopoly as the outcome. Assurance contracts don't solve anything.

Explainations required. Mike's got me pretty convinced.

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March 09, 2012, 02:57:53 PM
 #31

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.

I don't forsee a mining monopoly or a failure due to game theory any time in the forseeable future.
Agreed. While this scheme helps protect the network integrity, I'm not sure this addresses the "Tragedy of the Commons " fallacy. They claim a conspiracy will form and that people will choose the side of the conspiracy because it human nature to exploit any public works to the point of failure. They will argue that people will not use network assurance contracts enough to counter a monopolistic attack because it is "someone else's problem to worry about." Game theory helps us find problems to address, but the real world isn't the zero-sum game that some folks want to believe it is.  They are simply naive.

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March 09, 2012, 03:27:15 PM
Last edit: March 09, 2012, 03:44:09 PM by cunicula
 #32

Ignore the security/public good issue for a moment and focus on the issue of whether or not a monopoly is likely to emerge.  

Accumulating 51% of hashing power is profitable. With currency generation, a 51% mining monopoly initially produces almost doubles the number bitcoin per unit of hashing power. With txn fees, a 51% mining monopoly will more than double the number of fees per unit of hashing power (there are both price and quantity effects rather than just qty effects). Later on, as other miners exit, the monopolist could idle most of his capacity.He would then produce way many than double the amount of bitcoin per unit of hashing power (ten fold might be realistic).

The underlying assumption that mining can be protected from monopoly is that bitcoins are somehow more valuable when mining is not monopolized. This assumption is flawed. Fundamentally, users should care more about the behavior of the person signing their txns and not about their identity. It is not obvious why the system will become less reliable under a single head. I think people believe this will lead to gov't intervention. However, governments can easily intervene to shutdown bitcoin in any case. The existence of a single (but replacable) monopolist does not make this any easier or more difficult.


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March 09, 2012, 03:38:43 PM
 #33

Ignore the security/public good issue for a moment and focus on the issue of whether or not a monopoly is likely to emerge. 

Accumulating 51% of hashing power is profitable. With currency generation, a 51% mining monopoly produces almost doubles the number bitcoin per unit of hashing power. With txn fees, a 51% mining monopoly will more than double the number of fees per unit of hashing power (there are both price and quantity effects rather than just qty effects).

How will assurance contracts make monopoly less attractive?

Attractive is not a sufficient condition.  You also need to have a mechanism whereby the monopoly/oligopoly seekers are able to bar entry into the field.

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March 09, 2012, 03:39:52 PM
 #34

Ignore the security/public good issue for a moment and focus on the issue of whether or not a monopoly is likely to emerge.  

i believe the pool owners entered Bitcoin understanding fully the principles of a p2p currency.  they believe in a decentralized, fixed supply monetary system.  in other words their heads are in the right places.  they also understand that their pools are no more than a group of similar minded individuals who are not bound in anyway to staying with that pool.  if the owners were to try and collude for financial benefit, the individuals would vanish immediately since they understand that this would be bad for Bitcoin in the end.

Quote

Accumulating 51% of hashing power is profitable. With currency generation, a 51% mining monopoly produces almost doubles the number bitcoin per unit of hashing power. With txn fees, a 51% mining monopoly will more than double the number of fees per unit of hashing power (there are both price and quantity effects rather than just qty effects).

its not profitable.  all of us are in this thing b/c of the distributed nature of the system.  any move that tries to distort or take advantage of the mining or pool situation would destroy Bitcoin and the value therein.   they would end up destroying themselves along with the huge investments they've made already.

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How will assurance contracts make monopoly less attractive?
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March 09, 2012, 03:45:04 PM
 #35


Attractive is not a sufficient condition.  You also need to have a mechanism whereby the monopoly/oligopoly seekers are able to bar entry into the field.

By rejecting any new blocks generated by anyone else.
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March 09, 2012, 03:47:13 PM
 #36

Ignore the security/public good issue for a moment and focus on the issue of whether or not a monopoly is likely to emerge. 

Accumulating 51% of hashing power is profitable. With currency generation, a 51% mining monopoly produces almost doubles the number bitcoin per unit of hashing power. With txn fees, a 51% mining monopoly will more than double the number of fees per unit of hashing power (there are both price and quantity effects rather than just qty effects).

How will assurance contracts make monopoly less attractive?
What does bitcoin/hashrate have to do anything? Electricity costs will not be the big issue that people claim it will. It will be engineered away. Unless you are saying that everyone should join one pool with trust abounding, then yes someday that could happen, but not in my lifetime. Assurance contracts are a clever scheme that will target critical hashrate levels, but it's not a cure-all. Societies depend on engineering solution for social issues. The efficiency of monopolies can only benefit the greater good if they are highly regulated by the society they serve. I would like to see a scheme that regulates a 51% attack to insure that it does not exploit the ledger.

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March 09, 2012, 03:53:36 PM
 #37

its not profitable.  all of us are in this thing b/c of the distributed nature of the system.  any move that tries to distort or take advantage of the mining or pool situation would destroy Bitcoin and the value therein.   they would end up destroying themselves along with the huge investments they've made already.

So if mining comes under control of a single entity, everyone will sell out of principle. I don't believe it. Even if they do, it won't be a lasting phenomenon. Confidence will be restored once everyone realizes that the fundamentals haven't changed. At any rate, even if value persistently  crashes to say 33% of its original value, the monopolist would still profit handsomely from the venture.  
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March 09, 2012, 03:54:31 PM
 #38


Attractive is not a sufficient condition.  You also need to have a mechanism whereby the monopoly/oligopoly seekers are able to bar entry into the field.

By rejecting any new blocks generated by anyone else.

Ok, that will work after they've achieved majority, as long as they hold majority, but will not help them become the majority.

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March 09, 2012, 03:54:55 PM
 #39

Ignore the security/public good issue for a moment and focus on the issue of whether or not a monopoly is likely to emerge. 

Accumulating 51% of hashing power is profitable. With currency generation, a 51% mining monopoly produces almost doubles the number bitcoin per unit of hashing power. With txn fees, a 51% mining monopoly will more than double the number of fees per unit of hashing power (there are both price and quantity effects rather than just qty effects).

How will assurance contracts make monopoly less attractive?
What does bitcoin/hashrate have to do anything? Electricity costs will not be the big issue that people claim it will. It will be engineered away. Unless you are saying that everyone should join one pool with trust abounding, then yes someday that could happen, but not in my lifetime. Assurance contracts are a clever scheme that will target critical hashrate levels, but it's not a cure-all. Societies depend on engineering solution for social issues. The efficiency of monopolies can only benefit the greater good if they are highly regulated by the society they serve. I would like to see a scheme that regulates a 51% attack to insure that it does not exploit the ledger.

It seems extremely improbable to me that the monopolist could profit from exploiting the ledger. That is regulation enough in my view.
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March 09, 2012, 03:57:24 PM
 #40


Attractive is not a sufficient condition.  You also need to have a mechanism whereby the monopoly/oligopoly seekers are able to bar entry into the field.

By rejecting any new blocks generated by anyone else.

Ok, that will work after they've achieved majority, as long as they hold majority, but will not help them become the majority.

The other mechanism is simply the competitive market mechanism. The monopolist would be willing to mine at a loss temporarily in order to achieve dominance. Other miners who are not trying for monopoly would not be willing to mine at a loss. This would help clear the field for a successful takeover. That is the actual amount of hashing power you need to achieve 51% is far less than the hashing power currently at work.

Competition does not help in winner take all games like this. The equilibrium is always one winner. Everyone else gives up.
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March 09, 2012, 03:58:35 PM
 #41

It seems extremely improbable to me that the monopolist could profit from exploiting the ledger. That is regulation enough in my view.
Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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March 09, 2012, 03:59:06 PM
 #42

But even if they are not, this does not automatically mean the death of Bitcoin.  Even if total hashrate is underprovided, it will never fall to zero.  Hash rate is a positive externality of a transaction fee, which some people will always pay for faster processing.

Historically, there are many examples of public goods that are produced in a suboptimal quantity, but they are produced nonetheless.

Just because bitcoin is suboptimal doesn't mean it will fail.   

Look at bittorrent for an analogy. There are a lot of leechers who take more than their fair share and there is a shortage of seeders. But the technology still does its job.

There is a tragedy of the commons you just don't see it.

Nobody is saying hashrate will go to 0.0 MH/s.  Obviously it won't but compensation is what keeps the network strong.  Currently the network costs about $1M annually per TH/s.  If revenue to miners falls then for profit miner hashing power will also fall.  It is possible non-profit and indirect "public benefit" miners may pickup the slack but $10M+ is a lot of slack to pick up.

If hashrate of Bitcoin falls significantly it becomes more vulnerable to a 51% attack and a more tempting target. 

If a single bittorrent seed fails the entire protocol is never at risk.  There is also nothing "lost" except oppertunity.  If seeder/leecher ratio gets out of wack it will fall out of favor among leechers and will reach a new equilibrium.  No "attack" is possible.

Bitcoin will also reach equilibrium but if that equilibrium point is too low and it is successfully attack tens of millions of dollars and millions of hours of work are destroyed.
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March 09, 2012, 04:00:42 PM
 #43

its not profitable.  all of us are in this thing b/c of the distributed nature of the system.  any move that tries to distort or take advantage of the mining or pool situation would destroy Bitcoin and the value therein.   they would end up destroying themselves along with the huge investments they've made already.

So if mining comes under control of a single entity, everyone will sell out of principle. I don't believe it. Even if they do, it won't be a lasting phenomenon. Confidence will be restored once everyone realizes that the fundamentals haven't changed. At any rate, even if value persistently  crashes to say 33% of its original value, the monopolist would still profit handsomely from the venture.  

i think bittorrent is a useful example.  why don't all the distributed components band together and create an entity called MegaUpload or Napster so they could create a large entity that can force out all the individual nodes and profit off song distribution?

oh, you mean they've tried this already?
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March 09, 2012, 04:01:00 PM
 #44


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
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March 09, 2012, 04:12:56 PM
 #45

If anyone succeeded in monopolizing mining power, the price of bitcoin will plummet, thus eliminating the very incentive for obtaining that monopoly (unless your incentive is to destroy bitcoin).

If anything, I see mining becoming more decentralized in the near term, not less.  There is simply too much opportunity for people to find electricity that is subsidized in one form or another.  Such subsidies would not be available to a large, centralized miner.  And with dedicated hardware eventually making it as simple as buying a box and plugging it into the wall, chances are that we're going to see an explosion in mining activity (of course, the prospects of such an explosion will have a natural governing effect on the number of people getting into mining).  At $600 & 80w for the butterfly labs box, it's hard not to want to become a miner just for the fun of it.

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March 09, 2012, 04:14:02 PM
Last edit: March 09, 2012, 10:02:58 PM by cypherdoc
 #46

Other miners who are not trying for monopoly would not be willing to mine at a loss.

there are many reasons why miners mine:

1.  the traditional income/expense analysis.
2.  out of principle to support a belief (even if they lose money)
3.  the hope for price appreciation of their Bitcoins no matter if they are making or losing money based on income/expense.

this creates all sorts of unpredictable human behavior.  a traditional argument around here is that ppl will stop mining if the price drops below cost; lets say $4.  i would argue that some ppl are more apt to mine when the price drops to below 4  b/c they're able to more easily mine coins that have a potential increase in value.

its analogous to a buy the dip mentality.  some ppl like to buy dips and some ppl like to buy at the top.
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March 09, 2012, 04:15:05 PM
 #47

If anyone succeeded in monopolizing mining power, the price of bitcoin will plummet,
Why?
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March 09, 2012, 04:16:25 PM
 #48

There is simply too much opportunity for people to find electricity that is subsidized in one form or another.  

The subsidized miner will only temporarily need to operate the vast majority of his rigs. Electricity expenses are minimal compared to revenue. I covered this already.
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March 09, 2012, 04:18:15 PM
 #49

Other miners who are not trying for monopoly would not be willing to mine at a loss.

there are many reasons why miners mine:

1.  the traditional income/expense analysis.
2.  out of principle to support a belief (even if they lose money)
3.  the hope for price appreciation of their Bitcoins no matter if they are making or losing money based on income/expense.

this creates all sorts of unpredictable human behavior.  a traditional argument around here is that ppl will stop mining if the price drops below cost; lets say $4.  i would argue that some ppl are more apt to mine when the price drops to below zero b/c they're able to more easily mine coins that have a potential increase in value.

its analogous to a buy the dip mentality.  some ppl like to buy dips and some ppl like to buy at the top.

Okay, price fell and difficulty declined. So we have tested your hypothesis already. It has been rejected.
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March 09, 2012, 04:20:15 PM
 #50


Attractive is not a sufficient condition.  You also need to have a mechanism whereby the monopoly/oligopoly seekers are able to bar entry into the field.

By rejecting any new blocks generated by anyone else.

Ok, that will work after they've achieved majority, as long as they hold majority, but will not help them become the majority.

The other mechanism is simply the competitive market mechanism. The monopolist would be willing to mine at a loss temporarily in order to achieve dominance. Other miners who are not trying for monopoly would not be willing to mine at a loss. This would help clear the field for a successful takeover. That is the actual amount of hashing power you need to achieve 51% is far less than the hashing power currently at work.

Competition does not help in winner take all games like this. The equilibrium is always one winner. Everyone else gives up.

Mine at a loss?  I thought that was what we were all doing already.

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March 09, 2012, 04:26:34 PM
 #51


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
Somehow, I almost think you are serious. Nah.

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March 09, 2012, 04:55:46 PM
 #52

I am serious. Completely.
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March 09, 2012, 05:07:05 PM
 #53


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
Somehow, I almost think you are serious. Nah.

There is no economic value to a 51% attack.  The cost of running 51% of the network will always be more than the profit one could make via double spending.  The window is also very short as the double spend will cause a loss of value in Bitcoin undermining the attacker's revenue.

Bitcoin faces 51% attack from a NON-ECONOMIC attacker.  An entity looking to damage/destroy and gaining 51% of hashing power is far more plausible attack scenario then someone trying to profit directly from 51% attack.

To gain 10TH/s right now even w/ a capital cost of $1 per MH would be $10 million.  What possible spending could one do to recoup that cost.  The real cost is even higher when you consider electrical transmission cost, building, labor, security (you going to leave $10 mil in a warehouse unguarded), etc.

How long of a window do you imagine an attacker would have to "profit" before Bitcoin falls 99%?  An hour? a day? a week?  Could you buy $20 million worth of goods with Bitcoin right now in an hour? a day?
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March 09, 2012, 06:33:59 PM
 #54

Is there any incentive for the monopolist to reveal even the existence of a monopoly let alone who/where/which people and/or rigs and/or sites constitute the monopoly?

If there is any truth in the suggestion(s) that people would not like knowing there is a monopoly, why tell them?

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March 09, 2012, 09:57:13 PM
 #55

All the miners and those that hold bitcoins have a vested interest in making Bitcoin successful.
If this really is an issue, I believe it will become apparent to all before hitting a critical point of failure.
In that atmosphere, a general consensus on a good way to go will be reached.....and we'll move on.

There have been so many proposals for different peer-to-peer currencies and p2p currency improvements, but I believe Bitcoin already has all the best ingenuity that any system of this nature could ever have: it's decentralized and changes are made in democratic way. Everyone has their vote with fiat, bitcoins, and/or mining power. There will be issues, and when they arise then the time will be right for a fix and I believe a consensus will be reached rather quickly.

Bitcoin is successful now and I'm very confident in its future.
It may still be a niche currency, but it will still function as it was designed too... as a currency.


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March 09, 2012, 10:56:44 PM
 #56

This conversation has become convoluted. The tragedy of the commons argument addresses a drop in hashrate. This in turn leads to a threat that someone will easily take over control of the blockchain. You can't argue that it is a good thing because it would not be worthwhile to double spend due to the mining requirements when you already said the hashrate is low. You can't have it both ways. If a  monopoly takes over the blockchain who would eve know if double spends are made by the cartel? Seems to me this scenario is much like the current bankster system.

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March 09, 2012, 11:00:27 PM
 #57

(applicable to this thread as well)

The argument that difficulty will tend toward zero in the absence of a block reward is something I've brought up in the past.

One thing that I had not considered at the time was the effect of merged mining, since I was spouting off this line before merged mining ever existed.

I think that to understand this issue, it's significant to consider that if Bitcoin really does end up in a situation where its difficulty tends to zero due to a lack of economic incentive to mine, something somewhere else is likely to not have that problem (inflatacoin? litecoin?).  Someone's always going to be mining something.  Bitcoin can be secured with merged mining the same way Namecoin benefits from Bitcoin mining.

Of course, it would be a huge OUCH to Bitcoin (specifically, the legitimacy of the main chain as we know it) for it to have to take a back seat to some other alt chain just to survive.  But at least it would remain secure.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
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March 10, 2012, 08:27:09 AM
 #58

(applicable to this thread as well)

The argument that difficulty will tend toward zero in the absence of a block reward is something I've brought up in the past.

One thing that I had not considered at the time was the effect of merged mining, since I was spouting off this line before merged mining ever existed.

I think that to understand this issue, it's significant to consider that if Bitcoin really does end up in a situation where its difficulty tends to zero due to a lack of economic incentive to mine, something somewhere else is likely to not have that problem (inflatacoin? litecoin?).  Someone's always going to be mining something.  Bitcoin can be secured with merged mining the same way Namecoin benefits from Bitcoin mining.

Of course, it would be a huge OUCH to Bitcoin (specifically, the legitimacy of the main chain as we know it) for it to have to take a back seat to some other alt chain just to survive.  But at least it would remain secure.

I can't imagine Bitcoin becoming a second fiddle to an alt chain far into the future ...

I think the process of discovering whether Bitcoin should be the world's virtual currency, or whether some alt chain is better equipped for this, will take a handful of years, not 40. We will discover "the best" crypto currency, and just go with that.

One of the key selling points of Bitcoins, at least these days, is its fixed money supply.
If the best argument we can find about why Bitcoin can survive well into the future is merged mining, then this undermines this argument, and makes investing into Bitcoin right now now viable. (Why would people mine the alt chain ... it will too become dependent upon yet another alt chain later on). This is sort of equivalent to removing the limit of 21,000,000 coins (which might not be such a terrible idea, when you stop to think about it). If this is the case, a Bitcoin2 without this limit can be started right away, and if it's really a better idea than the market (miners + users + shop owners) will flock there ... if it's not needed, it will dwindle like all the other alts.

Nah, I think other methods can be devised to keep Bitcoin alive, perhaps with some protocol modifications as suggested by Mike Hearn.

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March 10, 2012, 09:26:32 AM
 #59

I have several reasons for doubting that assurance contracts will be useful. In order of perceived importance:

1) [lack of proven usefulness] assurance contracts are not widely used to fund public good production. If they were effective, we would see them operating more frequently in the wild. Instead, the vast majority of public goods are funded by large, centralized entities such as governments, churches, and corporations.

2) [amount of money necessary] the amount of donations necessary to sustain a hash rate-currency valuation ratio like the current one is extremely large (maybe 10% of all extant bitcoin need to be donated each year). I am extremely skeptical that assurance contracts could muster this type of support.


3) [uncertainty about security need, boy who cried wolf] it will only be apparent to people that security is necessary if a successful attack takes place. People will quickly weary of contributing to some cause which has no proven usefulness. Once you are able to prove to people that the contract is necessary, it will already be too late. After an attack has occurred, assurance contracts cannot be enforced.

4) [entrepreneurship] establishing assurance contracts is costly for the initiator. Some private individual has to gather information about blockchain security and decide when a contract is necessary. If he initiates a contract when it is not necessary, then he has wasted his money. The incentives for atomistic individuals to perform this entrepreneurial function are extremely weak. They are much more likely to default to not doing anything.

5) [dynamic waiting problem] Under an  assurance contract, there is a marginal contributor whose contribution puts the contract into effect. If you are considering making a contribution, it is always better to wait to the last minute to try to avoid being the marginal contributor. If the contract is fulfilled before the last minute, then you will benefit from withholding your contribution. Thus the contract is unlikely to motivate many contributions until very nearits deadline. Even though incentives to contribute improve at the very end, I doubt that everyone will be able to coordinate at the last minute to fulfill the contract. Last minute coordination is difficult.


On another note: Ripper, you asked about proof-of-stake. I provide some more details about my ideas for proof-of-stake in this thread: https://bitcointalk.org/index.php?topic=55184.20
There are ideological objections (read FUD) to proof-of-stake, but I am not aware of any logical flaws. I think the ideological concerns would fall away in the face of a proof-of-concept. After all, most people have ideological objections to bitcoin when they first hear about it.
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March 10, 2012, 10:14:19 AM
 #60

I like this discussion.

I have several reasons for doubting that assurance contracts will be useful. In order of perceived importance:

1) [lack of proven usefulness] assurance contracts are not widely used to fund public good production. If they were effective, we would see them operating more frequently in the wild. Instead, the vast majority of public goods are funded by large, centralized entities such as governments, churches, and corporations.

It is possible that the lack of real world examples of assurance contracts is because of the overhead and inefficiency. With Bitcoin, they can be very efficient and simple to use, and this might make the difference. Lack of existing prior cases is not a disproof of the method's effectiveness.

2) [amount of money necessary] the amount of donations necessary to sustain a hash rate-currency valuation ratio like the current one is extremely large (maybe 10% of all extant bitcoin need to be donated each year). I am extremely skeptical that assurance contracts could muster this type of support.

You speak with high confidence ... I just don't know yet. If Bitcoin's valuation becomes significantly larger than it is today, then a relatively minor portion of it will suffice to incentive miners.

3) [uncertainty about security need, boy who cried wolf] it will only be apparent to people that security is necessary if a successful attack takes place. People will quickly weary of contributing to some cause which has no proven usefulness. Once you are able to prove to people that the contract is necessary, it will already be too late. After an attack has occurred, assurance contracts cannot be enforced.

Large Bitcoin stakeholders are likely to be well informed of its mechanics. Remember, this is a good few years into the future ... this is ample time for plenty of detailed economics studies to be conducted, and for the "correct" security requirements to be very well known. Institutionl investors will understand the value of security ... the knowledge will "seep in" and ample warning will be given when hash rate approaches critical levels. The key thing here is that (I believe) BTC holders will really understand this aspect, and will known it's in their best interest to fund security.

4) [entrepreneurship] establishing assurance contracts is costly for the initiator. Some private individual has to gather information about blockchain security and decide when a contract is necessary. If he initiates a contract when it is not necessary, then he has wasted his money. The incentives for atomistic individuals to perform this entrepreneurial function are extremely weak. They are much more likely to default to not doing anything.

There are many people with a large stake in Bitcoin. Those people will devote the ample time and resource to initiate assurance contracts and educate others about them. I believe we'll actually see a strong "non-profit" Bitcoin Foundation form pretty soon.


5) [dynamic waiting problem] Under an  assurance contract, there is a marginal contributor whose contribution puts the contract into effect. If you are considering making a contribution, it is always better to wait to the last minute to try to avoid being the marginal contributor. If the contract is fulfilled before the last minute, then you will benefit from withholding your contribution. Thus the contract is unlikely to motivate many contributions until very nearits deadline. Even though incentives to contribute improve at the very end, I doubt that everyone will be able to coordinate at the last minute to fulfill the contract. Last minute coordination is difficult.

This is an iterated game (compare it to iterated prisoners dilemma vs single round). In an iterated game of assurance contracts, people will understand it's really in their best interest to get a mutual buy in, and will not necessarily do the short term selfish thing of withholding from investing. Also, we could blur the line with "vague contracts" - some amount of BTC and a deadline are chosen in advance, but the exact numbers are not published beforeahand, but rather only some estimates. "I donate 10 BTC, provided X amount of BTC, between 1000 and 1500 is gathered up by block Y, between 2,000,000 and 2,150,000". This vagueness might reduce the possibility of knowing whether you are the marginal contributor, and might solve this problem completely. This is like in prisoner's dilemma, if the number of rounds is known in advance, the rational analysis suggests you should betray at round 1, while if the exact number of rounds is not known, this is not the case. Also, as Mike and others have commented, game theory is just a model of real people's behavior, and is often very very wrong, as numerous studies have shown.

On another note: Ripper, you asked about proof-of-stake. I provide some more details about my ideas for proof-of-stake in this thread: https://bitcointalk.org/index.php?topic=55184.20
There are ideological objections (read FUD) to proof-of-stake, but I am not aware of any logical flaws. I think the ideological concerns would fall away in the face of a proof-of-concept. After all, most people have ideological objections to bitcoin when they first hear about it.

Thanks, I'll take a look at that thread.

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March 10, 2012, 11:59:12 AM
 #61



This is an iterated game (compare it to iterated prisoners dilemma vs single round). In an iterated game of assurance contracts, people will understand it's really in their best interest to get a mutual buy in, and will not necessarily do the short term selfish thing of withholding from investing. Also, we could blur the line with "vague contracts" - some amount of BTC and a deadline are chosen in advance, but the exact numbers are not published beforeahand, but rather only some estimates. "I donate 10 BTC, provided X amount of BTC, between 1000 and 1500 is gathered up by block Y, between 2,000,000 and 2,150,000". This vagueness might reduce the possibility of knowing whether you are the marginal contributor, and might solve this problem completely. This is like in prisoner's dilemma, if the number of rounds is known in advance, the rational analysis suggests you should betray at round 1, while if the exact number of rounds is not known, this is not the case. Also, as Mike and others have commented, game theory is just a model of real people's behavior, and is often very very wrong, as numerous studies have shown.



No, it is not a repeated game. The participants are anonymous, so there is no way conditioning strategies on the actions of past players. Moreover, even if the game were not anonymous, improved outcomes in repeated games rely on punishments that can be inflicted on players who behave poorly. There is no strong punishment that can be meted out here, so even the repeated setting wouldn't help that much.

As far as your other responses go, I can't refute them with a logical argument. In some sense they are empirical questions rather than theoretical questions. Nevertheless, I remain extremely skeptical and see assurance contracts as a dead-end/red herring. It will be interesting to see the assurance contracts implemented because I am curious as to what will be the primary mechanisms of failure.
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March 10, 2012, 12:03:41 PM
 #62

I don't understand the assumption that you have to keep network speeds at the current level (argument 2). It seems to me very likely that network speeds are too high currently and could fall a lot without reversal attacks becoming overly problematic.

By the way, some people believe that a single transaction reversal, ever, will kill Bitcoin. I don't agree with that perspective, but there's only one way to find out, and that's for network speeds to drop to the point where we see one.
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March 10, 2012, 12:43:12 PM
 #63

I don't understand the assumption that you have to keep network speeds at the current level (argument 2). It seems to me very likely that network speeds are too high currently and could fall a lot without reversal attacks becoming overly problematic.

By the way, some people believe that a single transaction reversal, ever, will kill Bitcoin. I don't agree with that perspective, but there's only one way to find out, and that's for network speeds to drop to the point where we see one.

What you need out of the network speed depends on what you are trying to secure the network against. I'm not concerned about double spends either. However, I think it will become relatively easy for a single miner to acquire 51% and exclude all other miners. This will be profitable because:

a) he will be able to acquire 100% of block generations as opposed to 51%
b) he will be able to acquire 100% of txn fees as opposed to 51%
c) he will be able to charge higher txn fees than would occur in under competition.

This is already pretty feasible for a wealthy individual or group of individuals. Later, it will become easy vis-a-vis the potential rewards. I think you will need something like the current block reward to prevent a monopoly from forming. It is worth nothing that because of (c), fee-based rewards are more conducive to monopoly than currency generation. I don't think bitcoin will fail when mining becomes a monopoly. In my view, the profits of an honest monopoly likely greatly exceed those due to double spending. This is a good thing because it means that there is no reason to fear a monopoly.

Despite all this, I believe proof-of stake is much better than proof-of-work because it results in a lower marginal cost of txn verification and therefore lower fees under both monopoly and competition.
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March 10, 2012, 01:24:46 PM
 #64

Not fully utilising the full merged-mining capacity seems like a tragedy too, maybe it is not technically exactly a tragedy of the commons per se, but all that open potential being dog-in-the-manger fenced away from the commoners instead of being expansive and accomodating as many chains as it can seems not unlike some steps in how commons got fenced off.

We're lucky we even still have rights of way along rivers and beaches in some juridictions let alone any actual commons.

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March 10, 2012, 04:09:46 PM
 #65

If there's not enough interests in bitcoin,
and the difficulty falls,
and it's easy to make a 51% attack,
then it raise two questions:

1.  Are you sure there will be any interests in attacking it ?
2.  Why do you even care ?

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March 10, 2012, 04:24:21 PM
 #66

If there's not enough interests in bitcoin,
and the difficulty falls,
and it's easy to make a 51% attack,
then it raise two questions:

1.  Are you sure there will be any interests in attacking it ?
2.  Why do you even care ?


That isn't the issue.

Say instead:
There IS a lot of interest in Bitcoin but the reward system is borked so difficulty falls.
Entrenched interests see this as an easy opportunity to kill a competitor and make a 51% attack.
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March 10, 2012, 04:36:33 PM
 #67

I prefer to call an attack a takeover. Attack suggests a hostile intent towards the technology. I expect that when someone or some group takes over that they will do their best to foster broad use of bitcoin. In fact, if anything I expect the technology to benefit from a takeover. They will only want to 'attack' competing miners.



1.  Are you sure there will be any interests in attacking it ?
2.  Why do you even care ?


1) A takeover will be profitable. A monopolist will be able to increase his bitcoin earnings per unit of mining expenditure by several-fold. This is motivation enough.

2a) I'm concerned that an irrational fear of monopoly could lead to a destructive panic in the event of takeover. I would prefer a smooth transition because I like bitcoin and want it to succeed. People need to get prepared to accept the coming monopoly. Right now everyone is prepped to respond like Chicken-little.
 
2b) I would like to promote a mixed proof-of-stake and proof-of-work system. The system will lead to lower equilibrium txn fees and make cryptocurrency technology more competitive with other payment platforms. Lower fees with proof-of-stake occur under both monopoly and competition.

2bi) The case for proof-of-stake becomes stronger if you believe that a takeover is likely to occur.

2bia)If you fear takeover, then proof-of-stake makes takeover much more difficult (perhaps an order of magnitude).

2bib) If you are willing to accept takeover, then you will likely feel more comfortable with proof-of-stake. The monopolist will have even stronger incentives to behave benevolently if he is required to hold a near majority of the bitcoin money supply in order to retain his position.
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March 10, 2012, 04:43:43 PM
 #68

Hmm I guess SolidCoin's take-away from your proposals was proof of stake.

Somehow I don't think he quite got it right, though.

This 0.8 / 0.2 you propose doesn't sound particularly difficult to code, but if yet another altcoin is to be launched to implement the concept the coin or chain should have a name...

-MarkM- (I hesitate to suggest CUNcoin, though maybe it is kind of an easy one to arrive at...)


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March 10, 2012, 04:56:10 PM
Last edit: March 10, 2012, 06:17:08 PM by Meni Rosenfeld
 #69

... I assume you mean that the confirming pools will also reject any blocks that contain a conflicting transaction.
Yes, if by "a conflicting transaction" you mean a fraudulent double-spending attempt. That's not a bug, it's a feature.
The protocol doesn't say that if there are two conflicting transactions (whether a fraudulent double-spend attempt or something else) you have to reject both and reject any block that contains either. It says you go with the one you encountered first, unless a block is found that contains the other and then you go with that. In your scenario (especially if there is a dedicated denial-of-service attack), every block will be rejected by every miner because it contains some transaction the miner committed to reject.

Reduction in block reward is arguably the second biggest challenge Bitcoin is facing (the first is legal attacks).
In my opinion, the first challenge is legal attacks. The second challenge is wallet security. Reduction in block reward doesn't feature as a problem at all. We'll know after December anyway.
In December the block reward will be 25 BTC. The problem is when block reward is close to 0. We're no going to have any empirical evidence for a long time.

I'm not saying the problem isn't solvable; I'm saying it's silly to think of it as "not a problem" when it was never tested, and when the proposed ideas of how the ecosystem will work depart completely from how Bitcoin works now and from its design principles.


Agreed. While this scheme helps protect the network integrity, I'm not sure this addresses the "Tragedy of the Commons " fallacy. They claim a conspiracy will form and that people will choose the side of the conspiracy because it human nature to exploit any public works to the point of failure. They will argue that people will not use network assurance contracts enough to counter a monopolistic attack because it is "someone else's problem to worry about." Game theory helps us find problems to address, but the real world isn't the zero-sum game that some folks want to believe it is.  They are simply naive.
Yes, people will contribute more than what the immediate incentives can account for, due to altruism, fear of a snowball effect, superrationality, etc. But they will only do so by a small amount, not enough to sustain the expenditure that will be required. If you really want to be future-proof, you need to align the immediate incentives properly.


If anyone succeeded in monopolizing mining power, the price of bitcoin will plummet, thus eliminating the very incentive for obtaining that monopoly (unless your incentive is to destroy bitcoin).
A big unless. You'd want to attack the network either for profiting from double-spending, or for harming Bitcoin (political agenda, destroying competition, short-selling bitcoins). There's a tradeoff, some things you can do to protect against the former makes you more vulnerable to the latter.


I don't understand the assumption that you have to keep network speeds at the current level (argument 2). It seems to me very likely that network speeds are too high currently and could fall a lot without reversal attacks becoming overly problematic.
They are (arguably) too high now for the current value of Bitcoin. As the impact of Bitcoin rises, so will the incentives to attack it. Since the attack incentive is more or less proportional to the purchase power of a bitcoin, it is safe to assume that the BTC reward per block is the invariant security factor. 50 BTC is high, but 1 BTC - which may very well be the future equlibrium - is not.

I believe Bitcoin already has everything required to handle this situation by having players who benefit from high network speeds automatically create and broadcast network assurance contracts:

  https://bitcointalk.org/index.php?topic=67255.msg785122#msg785122

I think this correctly solves the problem by allowing co-operation amongst competing players to fund network security in such a way that one player doesn't end up carrying the rest.
This will certainly help. Decoupling compensation from individual transactions is a positive direction. But I think the fundamental problem remains. Someone would want to pledge his own funds only if he thinks there's a good chance he will tip the scale to passing the threshold. Which means the network will always walk on the edge in which there's a chance for everything to crumble.


Also, as Mike and others have commented, game theory is just a model of real people's behavior, and is often very very wrong, as numerous studies have shown.
Game theory isn't a model of what people do. It's a model of what people should do. Even if 99% of people do "better" than what game theory prescribes, there can still be 1% who are selfish and rational and exploit the system. Having a system that is secure in theory can go a long way to preventing unpleasant surprises in practice.

By the way, "failures of game theory predictions" are commonly not problems with the theory, but with the game that was chosen to model the specific real-world situation.


I am still of the opinion that all the ideas proposed could account for some level of hashing, but not enough for proof-of-work to completely secure the network. Which is why proof-of-stake will need to augment it to pick up the slack.

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March 10, 2012, 06:38:31 PM
 #70

I am still of the opinion that all the ideas proposed could account for some level of hashing, but not enough for proof-of-work to completely secure the network. Which is why proof-of-stake will need to augment it to pick up the slack.

Thanks! So then maybe we call it CMRcoin or MRCcoin? (Cunicula/Meni Rosenfeld or vice versa; I know normally it'd be just one initial for each of you but I have this bias for three-letter currency-symbols...)

-MarkM-

EDIT: Oh wait, duh, CRCoin or RCCoin (Cunicula-Rosenfeld Coin or Rosenfeld-Cunicula Coin).

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March 10, 2012, 06:46:08 PM
 #71

I am still of the opinion that all the ideas proposed could account for some level of hashing, but not enough for proof-of-work to completely secure the network. Which is why proof-of-stake will need to augment it to pick up the slack.
Thanks! So then maybe we call it CMRcoin or MRCcoin? (Cunicula/Meni Rosenfeld or vice versa; I know normally it'd be just one initial for each of you but I have this bias for three-letter currency-symbols...)
Thanks, but I'd much rather see this change implemented while keeping the Bitcoin name and the current blockchain.

PS. AFAIK, the first mention of using proof-of-stake in Bitcoin was by QuantumMechanic, in this appropriately named post.

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March 10, 2012, 06:53:19 PM
 #72

Thanks, but I'd much rather see this change implemented while keeping the Bitcoin name and the current blockchain.

Ha ha, good luck with that without proof of concept.

So, back to proof of concept... I do not want to detract from bitcoin with altchains, so we can maybe make sure it is clear from the outset that if it takes off too darn well Bitcoin itself is free to set some block number at which it adopts a similar system.

But to drive Bitcoin to do so, we really should demonstrate that failing to do so could indeed prove a competitive threat to Bitcoin's value rather than being a harmless companion-coin or hanger-on or, indeed, merely yet another of the many currencies used by various civilisations of the Galactic Milieu.

I am losing track, are you both in favour of making such a change to Bitcoin on purely theoretical grounds, or is at least one of you at least a little more empirically oriented than that?

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March 10, 2012, 07:30:12 PM
 #73

Thanks, but I'd much rather see this change implemented while keeping the Bitcoin name and the current blockchain.

So, back to proof of concept... I do not want to detract from bitcoin with altchains, so we can maybe make sure it is clear from the outset that if it takes off too darn well Bitcoin itself is free to set some block number at which it adopts a similar system.

But to drive Bitcoin to do so, we really should demonstrate that failing to do so could indeed prove a competitive threat to Bitcoin's value rather than being a harmless companion-coin or hanger-on or, indeed, merely yet another of the many currencies used by various civilisations of the Galactic Milieu.
I can certainly imagine a scenario where Bitcoin fails due to this problem, and an alt proof-of-stake coin will be there to pick up the pieces. But I fear that people will attribute the failure to the concept of cryptocurrency itself, rather than to solvable problems that were foreseen in advance.

I don't expect an alt to rise to prominence before Bitcoin failing, so by the time people will be convinced to make the change, it will arguably be too late.

Which is why I hope people will give more weight to theoretical considerations. Empirical testing is great but it's not always feasible.

This needn't be an immediate all-or-nothing change. You could start by collecting people's signatures and ignoring them. Then you could try reasoning what would happen if we used these signatures in branch selection.

I am losing track, are you both in favour of making such a change to Bitcoin on purely theoretical grounds, or is at least one of you at least a little more empirically oriented than that?
I'm not going to be writing code to implement this anytime soon, if that's what you mean. But I'm putting a lot of personal resources into Bitcoin on the hope that its challenges will eventually be overcome, so it's not "purely theoretical" to me.

Anyway, this problem probably won't manifest for a long time. Discussion of the problem and solutions should be out there, but as long as uncertainty of the future prospects isn't holding back adoption, there's no rush to implement anything.

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March 10, 2012, 07:47:52 PM
 #74

Actually there has already been a rush to implement pretty much "anything", ha ha.

I want to push merged mining further, it seems to me I could mine at least a few more chains than I am currently mining, so given a choice between this or just a bunch of boring old identical clones this concept might be worth trying.

We have a bunch of pennystock-like chains already, lets see if a penny-CRCoin can beat out the other penny-chains.

If it can emerge a clear leader "in its class" then that should lend at least a couple of pennyweights to the theory, yes?

I don't expect you to write code, I don't expect Cunicula to write code. It was a very very pleasant surprise to me that Unthinkingbit does write code, in fact a whole lot more of DeVCoin's code than I wrote. (Heh "than I hacked a little" is more like it, I didn't really "write" anything, I just hacked away some at what was already written, enough to get it to at least look like it runs.)

So don't worry about coding. We can bribe codemonkeys with DeVCoins, or just make up the code, it doesn't sound real hard. And it sounds like an interesting idea.

-MarkM-

P.S. Hey maybe we should also accelerate the decay of the block-rewards in it so we can get to the juicy bits sooner? Smiley

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March 10, 2012, 08:34:38 PM
 #75

... I assume you mean that the confirming pools will also reject any blocks that contain a conflicting transaction.
Yes, if by "a conflicting transaction" you mean a fraudulent double-spending attempt. That's not a bug, it's a feature.
The protocol doesn't say that if there are two conflicting transactions (whether a fraudulent double-spend attempt or something else) you have to reject both and reject any block that contains either. It says you go with the one you encountered first, unless a block is found that contains the other and then you go with that. In your scenario (especially if there is a dedicated denial-of-service attack), every block will be rejected by every miner because it contains some transaction the miner committed to reject.
I've obviously not explained myself clearly enough, because that's not what I'm suggesting. The miner does not commit to reject any block that it would not reject anyway.

Suppose WalMart sells a widget to Joe for 2 BTC. Joe is at the checkout and sends 2 BTC to WalMart's receiving address.

WalMart doesn't expect Joe to wait for 6 confirmations before departing with his newly-purchased widget. So WalMart pays DeepBit 0.01 BTC to validate the transaction and promise that DeepBit will include that transaction in the next block mined IF DeepBit is the miner of the next block. Neither WalMart nor DeepBit objects if some other miner includes the transaction first, so there's no need to reject from some other miner for this reason.

In practice, WalMart might have a similar arrangement with DeepBit, Slush, Eligius and a couple of other pools, to obtain sufficient certainty that the transaction will make it into the block chain.

WalMart is not paying these miners to reject anything. WalMart is paying these miners for advance knowledge that WalMart's transaction will be included in the next block, IF that next block is mined by one of those miners. And that service is valuable enough that mining will be plenty profitable even with a block reward of zero.
I assumed the participating pools would reject conflicting blocks, because if not, the weakness is even clearer. Joe makes a double-spend, one to Walmart and one to himself. Walmart pays 51% of the pools to commit to the transaction to Walmart. Meanwhile Joes pays the other 49% (or 20%, or whatever) to commit to the send-back. Walmart thinks the transaction is safe and gives the product to Joe, when in fact there's a 49% chance that the next block found will have the payment to Joe, and Walmart will lose the money.


Actually there has already been a rush to implement pretty much "anything", ha ha.
I am a critic of the majority of existing alt coins. Alts have their place but they really need to be thought out and have a reason to exist, I'm not eager to rush an alt of my own.

We have a bunch of pennystock-like chains already, lets see if a penny-CRCoin can beat out the other penny-chains.

If it can emerge a clear leader "in its class" then that should lend at least a couple of pennyweights to the theory, yes?

I don't expect you to write code, I don't expect Cunicula to write code. It was a very very pleasant surprise to me that Unthinkingbit does write code, in fact a whole lot more of DeVCoin's code than I wrote. (Heh "than I hacked a little" is more like it, I didn't really "write" anything, I just hacked away some at what was already written, enough to get it to at least look like it runs.)

So don't worry about coding. We can bribe codemonkeys with DeVCoins, or just make up the code, it doesn't sound real hard. And it sounds like an interesting idea.

-MarkM-
There's still some work to be done with the design. The design I currently have should work against double-spending, but not necessarily against denial of service.

I can work on the design from a high-level perspective, but I don't think I'll be able to lead the development and promotion efforts in the near future. Someone would have to volunteer for that (and to create a new thread for further discussion).

P.S. Hey maybe we should also accelerate the decay of the block-rewards in it so we can get to the juicy bits sooner? Smiley
Possibly, but that's not strictly necessary, test attacks should work well for testing resilience.

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March 10, 2012, 08:50:19 PM
 #76

There's still some work to be done with the design. The design I currently have should work against double-spending, but not necessarily against denial of service.

I can work on the design from a high-level perspective, but I don't think I'll be able to lead the development and promotion efforts in the near future. Someone would have to volunteer for that (and to create a new thread for further discussion).

No problem, it is CRCoin not RCCoin I am thinking of first off anyway, since the 0.8 & 0.2 proposal seems concrete enough and simple enough, gosh knows how complicated whatever you want to "collect signatures" for will turn out to be. I was thinking of going really simple, the address the reward is to go to either contains enough stake or it doesn't, no licensed miner / licensed mining, just put the reward where the stake is if there is enough stake already there or invalidate the block.  Maybe make sure at least stake plus reward is still there 120 blocks later or don't mature the reward.

-MarkM-

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March 10, 2012, 09:16:31 PM
 #77

There's still some work to be done with the design. The design I currently have should work against double-spending, but not necessarily against denial of service.

I can work on the design from a high-level perspective, but I don't think I'll be able to lead the development and promotion efforts in the near future. Someone would have to volunteer for that (and to create a new thread for further discussion).

No problem, it is CRCoin not RCCoin I am thinking of first off anyway, since the 0.8 & 0.2 proposal seems concrete enough and simple enough, gosh knows how complicated whatever you want to "collect signatures" for will turn out to be. I was thinking of going really simple, the address the reward is to go to either contains enough stake or it doesn't, no licensed miner / licensed mining, just put the reward where the stake is if there is enough stake already there or invalidate the block.  Maybe make sure at least stake plus reward is still there 120 blocks later or don't mature the reward.

-MarkM-
Can you link to the 0.8 & 0.2 proposal? My current design is described here, I think it's not complicated at all.

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March 10, 2012, 09:49:14 PM
 #78

I thought the 80% / 20% proposal was in this thread or the other, certainly I read it in this span of being awake. But I cannot find it.

Thanks for the link, I will go check that out.

Things I saw while looking for the 80% / 20% thing though made me realise there probably are a bunch of complications that will pop up in actually trying to code though. Not in the code itself initially but in all kinds of sneaky problems that need to be thought out.

One thing I liked about the proposal though was it scaled so that pooling together basically ended up increasing the stake you'd need, so you might as well solo mine with a tiny stake or maybe even no stak in coin form (hashes count) instead of ganging up with others to pile up a stake between the lot of you. It seemed that might actually even potentially be able to be tuned to address the LiTeCoin people's concern that the little guy keeps losing the ability to make a few pennies at home over and above electricity costs.

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March 10, 2012, 11:20:32 PM
 #79

FYI, I added these two entries to the wiki, you're all invited to edit:

https://en.bitcoin.it/wiki/Tragedy_of_the_Commons
https://en.bitcoin.it/wiki/Proof_of_Stake

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March 11, 2012, 01:36:24 AM
Last edit: March 11, 2012, 04:03:29 AM by cunicula
 #80

I would be tremendously excited to see a proof-of-concept, but please don't name anything after my handle. The coder will deserve most of the credit for doing the actual work.

Thanks for the wiki entry Ripper. I will edit the wiki, eventually including my conception of how proof-of-stake would work. I will also allot separate space for criticism of this conception. I'm not the best communicator so anyone can feel free to edit what I write for clarity.

I'm not going to describe my own idea or Meni's idea in detail here, but here is an overview of three important differences.

My system aggregates information about stake and work to generate a composite vote about block validity. Validity is determined by whoever can muster the most composite votes. My system distributes the majority of fees and generations to people who already have a lot of coins. An advantage of this is that it is associated with lower txn fees in equilibrium.

Meni's system polls stake and work separately. I believe validity requires concurrence of votes by miners and votes by stakeholders (but am not sure, Meni?).  Meni's system distributes most (maybe all) fees and generations to miners. Advantages of this are increased economic mobility and reduced inequality.

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March 11, 2012, 05:51:26 AM
 #81

Meni's system polls stake and work separately. I believe validity requires concurrence of votes by miners and votes by stakeholders (but am not sure, Meni?).
Stakeholders will only validate a block if it currently enjoys acceptance among miners. But once they do, their validation overrides anything miners have to say on the matter.

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March 11, 2012, 08:56:27 AM
 #82

Joe makes a double-spend, one to Walmart and one to himself. Walmart pays 51% of the pools to commit to the transaction to Walmart. Meanwhile Joes pays the other 49% (or 20%, or whatever) to commit to the send-back. Walmart thinks the transaction is safe and gives the product to Joe, when in fact there's a 49% chance that the next block found will have the payment to Joe, and Walmart will lose the money.
If Walmart pays deepbit (and arguably other pools) to include his block he could also ask to be notified to detect double spends, or simply to ignore other tentative double spendings.
So Joe has to double spend his money to other pools, but if walmart is able to have contracts with a majority of pools (of hashing rate) he can be sure enough.

If the transaction is big enough walmart could decide to change policy as waiting for confirmations, having contracts with more pools (thus paying more) etc.

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March 11, 2012, 09:07:11 AM
 #83

Joe makes a double-spend, one to Walmart and one to himself. Walmart pays 51% of the pools to commit to the transaction to Walmart. Meanwhile Joes pays the other 49% (or 20%, or whatever) to commit to the send-back. Walmart thinks the transaction is safe and gives the product to Joe, when in fact there's a 49% chance that the next block found will have the payment to Joe, and Walmart will lose the money.
If Walmart pays deepbit (and arguably other pools) to include his block he could also ask to be notified to detect double spends, or simply to ignore other tentative double spendings.
Then this reduces to waiting to see if there is any conflicting transaction, which is a service which can be provided by any node, it needn't be a miner. In fact waiting a few seconds and querying nodes gives superior security to contracts with miners, so this fails as an extra revenue source for miners.

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March 11, 2012, 12:09:50 PM
 #84

Meni's system polls stake and work separately. I believe validity requires concurrence of votes by miners and votes by stakeholders (but am not sure, Meni?).
Stakeholders will only validate a block if it currently enjoys acceptance among miners. But once they do, their validation overrides anything miners have to say on the matter.

Are there incentives for stakeholders to participate actively? If not, isn't there another tragedy of the commons problem [most stakeholders will passively sign off on whatever the miners send to them]?
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March 11, 2012, 12:19:03 PM
 #85

Meni's system polls stake and work separately. I believe validity requires concurrence of votes by miners and votes by stakeholders (but am not sure, Meni?).
Stakeholders will only validate a block if it currently enjoys acceptance among miners. But once they do, their validation overrides anything miners have to say on the matter.

Are there incentives for stakeholders to participate actively? If not, isn't there another tragedy of the commons problem [most stakeholders will passively sign off on whatever the miners send to them]?

The incentive for stakeholders is to keep the Bitcoin network working well and decentralized. Most people (including I believe most Bitcoin stakeholders) believe a centralized/monopolistic network is not a huge improvement over current Fiat money, and prefer a true decentralized network. Most people believe this means no double spends or monopolies. So, if a clear (public) mining monopoly emerges, stake holders can reject some of the blocks it signs, especially if they deem that this monopoly is not signing blocks mined by other miners.

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March 11, 2012, 12:20:52 PM
 #86

Meni's system polls stake and work separately. I believe validity requires concurrence of votes by miners and votes by stakeholders (but am not sure, Meni?).
Stakeholders will only validate a block if it currently enjoys acceptance among miners. But once they do, their validation overrides anything miners have to say on the matter.
Are there incentives for stakeholders to participate actively? If not, isn't there another tragedy of the commons problem [most stakeholders will passively sign off on whatever the miners send to them]?
You can include signature fees in transactions and in assurance contracts. Since the cost of signing is low, the token incentives that can be obtained from assurance contracts, quid-pro-quo, direct interest and so on should be sufficient.

For the purpose of preventing double-spending, stakeholders aren't supposed to make any judgment about which block is better. As long as enough of them sign, and they never sign more than one block in a given height, the system should work. Preventing other attacks may require a more sophisticated system.

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March 11, 2012, 06:30:50 PM
 #87

It seems that this thread overlooks the fact that merchant acceptance  is what determines success or failure of just any currency, including bitcoin.

If bitcoin is accepted by major retailers or by a large number of retailers, certainly third party services (like bitcoin-central merchant API) will add value by mitigating the exchange rate risk or the double-spend risk.

In other words, transactions fees in the future will be made of bitcoin network transaction fees (very low fees, hypothetically zero fees) and value add service fees (more competitive than today bank card fees but non zero fees).

Those who will collect the value add fees have a strong incentive to mine even for zero bitcoin network fees and zero block reward.

Just a sanity check: in France today, 1% of the bank card transactions amounts to 65 000 € in 2000 transactions per block (every ten minutes).

If I command just a 1% share of that market with my bitcoin payment app and charge merchants 0.5%, I am making 325 € per block (with zero reward and zero tx fees, whether I mine the block or not), roughly the same as all the miners combined today.
If I charge mechants 25 cts per transactions (ŕ la Dwolla), I am making 500 € per block.

Hence I am afraid this thread is addressing a dilemma that wo'nt exist.

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March 11, 2012, 06:37:43 PM
 #88

It seems that this thread overlooks the fact that merchant acceptance  is what determines success or failure of just any currency, including bitcoin.

If bitcoin is accepted by major retailers or by a large number of retailers, certainly third party services (like bitcoin-central merchant API) will add value by mitigating the exchange rate risk or the double-spend risk.

In other words, transactions fees in the future will be made of bitcoin network transaction fees (very low fees, hypothetically zero fees) and value add service fees (more competitive than today bank card fees but non zero fees).

Those who will collect the value add fees have a strong incentive to mine even for zero bitcoin network fees and zero block reward.

Just a sanity check: in France today, 1% of the bank card transactions amounts to 65 000 € in 2000 transactions per block (every ten minutes).

If I command just a 1% share of that market with my bitcoin payment app and charge merchants 0.5%, I am making 325 € per block (with zero reward and zero tx fees, whether I mine the block or not), roughly the same as all the miners combined today.
If I charge mechants 25 cts per transactions (ŕ la Dwolla), I am making 500 € per block.

Hence I am afraid this thread is addressing a dilemma that wo'nt exist.
You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.

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March 11, 2012, 06:45:07 PM
 #89

Huh
A miner IS a payment processor

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March 11, 2012, 06:48:50 PM
 #90

Huh
A miner IS a payment processor
I meant a payment processor like Bit-pay.

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March 11, 2012, 07:39:11 PM
 #91

You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

He's going to have to pay the others. Maybe a tiny miner will include all those tx for a small fee, but the tiny miner won't likely get a block soon so if the payment processor wants high assurance of getting in a block before X time he needs to pay what the most expensive miners are demanding.


Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.

Not really. There might be thousands or more banks and payment processors and there will be no central body keeping anyone out. All you need to get in is to be competitive with the existing services in some way no artificial gatekeeper.

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March 11, 2012, 07:41:04 PM
 #92


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).

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March 11, 2012, 08:00:28 PM
 #93


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).

This is not a complete answer. If the network is healthy the payment proc will just mooch, if it is too weak there isn't anything he can do anyway without spending more than all of his profits (unless his actual mining power will bring him profit, which is what is in question).

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March 11, 2012, 09:06:44 PM
 #94

The payment processors will have incentive to pay fees and maybe also to hold very rapidly exercisable "latest top of the line ASIC mining rig" options.

The latter in order to be ready to rapidly jump to the support of the chain in case of attack or just to enter the mining biz. (Merely paying higher fees might not suffice if a monopolist is secretly setting up top of the line ASIC rigs in co-hosting sites all over the world as you'd be paying the monopolist more and more the closer they got to taking control of the network.)

If you can make over 300 dollars a block just processing payments, a current top of the line ASIC rig would only take what, half a day or less to pay for?

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March 11, 2012, 09:36:52 PM
 #95

The payment processors will have incentive to pay fees and maybe also to hold very rapidly exercisable "latest top of the line ASIC mining rig" options.

The latter in order to be ready to rapidly jump to the support of the chain in case of attack or just to enter the mining biz. (Merely paying higher fees might not suffice if a monopolist is secretly setting up top of the line ASIC rigs in co-hosting sites all over the world as you'd be paying the monopolist more and more the closer they got to taking control of the network.)

If you can make over 300 dollars a block just processing payments, a current top of the line ASIC rig would only take what, half a day or less to pay for?

-MarkM-



But when a small player can make 300 dollars a block for processing payments an ASIC will get you virtually no chance of solving a block anyway.

I don't think guessing numbers is really helpful since there there are so many unknown variables. There needs to be a good theoretical game theory type reason why it will work. And I'm pretty sure I know it.

Miners are all different sizes, this gives some of them pricing power in terms of selling "get my txs into a block soon". If all miners are very small and all use the "accept all with fee rule" many may indeed drop out lowering overall power and difficulty. This will make it easier and more likely for someone to gain a pricing power ability. The existence of someone with pricing power ability raises the profitability of all miners causing more small players to enter the mining biz and reducing the possibility/ease with which one party can get >50% (which may not be disastrous anyway, but still makes me uncomfortable).

For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.

Interestingly this means that an individual mining at DeepBit will want to leave for solo or a smaller pool when DeepBit makes this change.

I don't claim to completely understand the equilibrium. Some very interesting things can and will happen. Suppose DeepBit wasn't a pool but one entity with a lot of hashing power. Would they "split off" some of their power? This would be the same as using a probabilistic method of determining which tx to include in order to give users incentive to add more fee for better chance, but not completely give up the small fees. I think the right strategy depends heavily on the "willingness to pay distribution". If it is a smooth curve a many tiered solution is probably most profitable. If it's pretty binary then the profit maximizing solution is probably simpler.

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March 11, 2012, 09:51:18 PM
 #96

Tragedy of the Commons is a debunked argument. This fallacy was refuted by Nobel laureate Elinor Ostrom. The problem facing Bitcoin is better labeled "Tragedy of the Unmanaged Commons." There are many more reasons than mere financial incentives to keep the Bitcoin network healthy.
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Columbia University economist Joseph Stiglitz, also a Nobel winner, commented, “Conservatives used the Tragedy of the Commons to argue for property rights, and that efficiency was achieved as people were thrown off the commons…What Ostrom has demonstrated is the existence of social control mechanisms that regulate the use of the commons without having to resort to property rights.”
When folks use Tragedy of the Commons, it sets up a red flag. Then there's the Proof-of-Stake. I am genuinely interested in better management solutions, but overtly promoting monopolies belies ulterior motives even further. In democratic societies, monopolies usually exist at the pleasure of governmental regulation. Offering a Price Auction as an experiment in monopoly control is at best highly experimental. I would like to see this attempted with a cryptocurrency, but not Bitcoin. At least not until it is thoroughly tested.

I still think technological advancement will offer more than enough solutions in the far future.

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March 11, 2012, 11:19:12 PM
 #97


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
If the network is healthy the payment proc will just mooch, if it is too weak there isn't anything he can do anyway without spending more than all of his profits (unless his actual mining power will bring him profit, which is what is in question).
That is exactly why I am predicting that miners in the zero-block-reward future will be of two kinds
1/payment processors
2/bitcoin hoarders and supporters
I just don't know in what proprotions (equilibrium point has yet to be figured out).
I'd be interested if anyone has a math model for gold usage because it has a nice stable 40%-60% balance between hoarding (investment gold) and industrial applications (jewelry, mint, electronics, etc..) i.e circulating gold.

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March 11, 2012, 11:25:46 PM
 #98


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
If the network is healthy the payment proc will just mooch, if it is too weak there isn't anything he can do anyway without spending more than all of his profits (unless his actual mining power will bring him profit, which is what is in question).
That is exactly why I am predicting that miners in the zero-block-reward future will be of two kinds
1/payment processors
2/bitcoin hoarders and supporters
I just don't know in what proprotions (equilibrium point has yet to be figured out).
I'd be interested if anyone has a math model for gold usage because it has a nice stable 40%-60% balance between hoarding (investment gold) and industrial applications (jewelry, mint, electronics, etc..) i.e circulating gold.


Jeffrey Christian has stated many times that the main investment category for gold is from speculation.  can't give you exact figures but it should be easily obtained.
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March 11, 2012, 11:52:47 PM
 #99

It doesn't really matter if payment processors mine themselves or buy mining services. It would be like if someone said "In the future no one will make cloth" and someone responded "Yes clothing makers will make cloth because they need it to make clothes". The fact that people demand cloth to make clothes is the reason that cloth will still be produced, but there isn't any particular reason why cloth and clothes makers will be one in the same. And it doesn't matter weather there is many or few clothes makers.

What we do know is that there will be demand for blocks, maybe a lot, maybe not, depends on a lot of things.

Here is another angle, I'm not sure how relevant. Another party that wants there to be a lot of honest mining power: Miners. If you make a block, you only get paid if it is still in the longest chain 120 blocks from now. Issuing a tx from your coinbase (can you even do this?) with a high fee will give more incentive to an honest miner to quickly mine off of your block before someone comes along rewriting yours in order to collect the fees from the transactions you included or just to remove them for some nefarious purpose.


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March 12, 2012, 04:25:50 AM
 #100


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
Somehow, I almost think you are serious. Nah.
I am serious. Completely.

https://en.bitcoin.it/w/index.php?title=Proof_of_Stake&action=view#The_Monopoly_Problem
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Potentially, the monopolist could choose to do this in malicious ways, such as double spending or denying service.

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March 12, 2012, 04:33:09 AM
 #101


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
Somehow, I almost think you are serious. Nah.
I am serious. Completely.

https://en.bitcoin.it/w/index.php?title=Proof_of_Stake&action=view#The_Monopoly_Problem
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Potentially, the monopolist could choose to do this in malicious ways, such as double spending or denying service.
Cbeast, I'm sorry but you are going back on my ignore list.
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March 12, 2012, 04:46:18 AM
Last edit: March 12, 2012, 05:30:33 AM by Ciphercoin (cbeast)
 #102


Let me rephrase that.  I would like to see a scheme that regulates a 51% attacker to insure that it does not double-spend.

It seems extremely improbable to me that the monopolist could profit from double-spending. That is regulation enough in my view.
Somehow, I almost think you are serious. Nah.
I am serious. Completely.

https://en.bitcoin.it/w/index.php?title=Proof_of_Stake&action=view#The_Monopoly_Problem
Quote
Potentially, the monopolist could choose to do this in malicious ways, such as double spending or denying service.
Cbeast, I'm sorry but you are going back on my ignore list.

I'm just pointing out a minor contradiction in your logic. Denying a problem won't make it go away. Besides, I only took you off my ignore list because you seemed to have conviction regarding proof-of-stake. I will await a fully fleshed out hypothesis without contradictory statements. I'll keep an eye on the wiki. It will be especially interesting to see how you refute the arguments of Nobel winning economists based on the premise of Tragedy of the Commons.

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March 12, 2012, 07:26:42 AM
 #103


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
I'm sorry, but you are. The contribution of the payment processor's own mining to network functionality is negligible, since he's only a small part of it. It's in everyone's best interest that everyone will mine/pay for mining. But then it's also in everyone's interest to personally cease mining, since the network will be just fine with everyone else mining. The contribution of a miner / mining sponsor is shared by everyone, but the cost is all his own. I can't explain this any clearer, I can only direct you to Wikipedia.

Miners are all different sizes, this gives some of them pricing power in terms of selling "get my txs into a block soon". If all miners are very small and all use the "accept all with fee rule" many may indeed drop out lowering overall power and difficulty. This will make it easier and more likely for someone to gain a pricing power ability. The existence of someone with pricing power ability raises the profitability of all miners causing more small players to enter the mining biz and reducing the possibility/ease with which one party can get >50% (which may not be disastrous anyway, but still makes me uncomfortable).

For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
This makes sense, but I think that quantitatively it will only be enough if power is concentrated with a few (where "few" could be 100) strong players.

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March 12, 2012, 08:05:21 AM
 #104

This makes sense, but I think that quantitatively it will only be enough if power is concentrated with a few (where "few" could be 100) strong players.

Empirical work indicates that market power for undifferentiated goods is extremely limited unless you have very few market participants (approximately less than 5).
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March 12, 2012, 08:35:00 AM
 #105

[...]
For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
[...]
I thought this was the whole point of the tragedy of the commons: that each miner for himself has no benefit from dropping tx with very low fees. So all tx fees would go towards one satoshi.

There sure are solutions to this problem.

Like a network enforced minimum fee determined by a somehow balanced vote.






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March 12, 2012, 09:05:38 AM
 #106

[...]
For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
[...]
I thought this was the whole point of the tragedy of the commons: that each miner for himself has no benefit from dropping tx with very low fees. So all tx fees would go towards one satoshi.

There sure are solutions to this problem.

Like a network enforced minimum fee determined by a somehow balanced vote.



Increasing fees is not a good solution. Proof-of-stake makes large fees unnecessary.
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March 12, 2012, 09:26:20 AM
 #107

[...]
For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
[...]
I thought this was the whole point of the tragedy of the commons: that each miner for himself has no benefit from dropping tx with very low fees. So all tx fees would go towards one satoshi.

There sure are solutions to this problem.

Like a network enforced minimum fee determined by a somehow balanced vote.
Of course there are manageable solutions to the problem. Tragedy of the Commons implies that there will not be outside factors influencing the commons and they will be exploited to the point of failure. American manufacturing is an example. Exploitation of health insurance has caused insurance premiums to skyrocket. The high cost of health insurance has in turn caused goods to become overpriced because the labor pool demands higher compensation. When labor compensation is reduced, manufacturing slows due to a lower labor pool. Manufacturers in countries that provide well managed NHC like Japan, Korea, and now even China are able to produce goods with lower labor costs and thus be more competitive. (This is not an argument for or against NHC, just an example of Tragedy of the Commons and a solution.)

If we further this analogy and apply PoS theory to health care and manufacturing, then the solution would be to allow manufacturers with the large bank accounts to dictate healthcare policy for workers. This is where the US is currently. See how well it works?

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March 12, 2012, 12:44:31 PM
 #108

[...]
For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
[...]
I thought this was the whole point of the tragedy of the commons: that each miner for himself has no benefit from dropping tx with very low fees. So all tx fees would go towards one satoshi.
Yes, but FreeMoney's point is that if the miner is big enough, his own impact on the equilibrium by playing hard-ball is enough to justify his costs.

There sure are solutions to this problem.

Like a network enforced minimum fee determined by a somehow balanced vote.
That's certainly a possible solution, but deciding on the minimum fee is not trivial. Alternatively you could limit the block size, but again there's no clear way to decide on the limit.

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March 12, 2012, 01:01:42 PM
 #109


That's certainly a possible solution, but deciding on the minimum fee is not trivial. Alternatively you could limit the block size, but again there's no clear way to decide on the limit.

Enforcing a large, unnecessary fee is a solution,  but it is grossly inferior one. Why add significant fees in when they are not needed?
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March 12, 2012, 01:36:11 PM
 #110


That's certainly a possible solution, but deciding on the minimum fee is not trivial. Alternatively you could limit the block size, but again there's no clear way to decide on the limit.

Enforcing a large, unnecessary fee is a solution,  but it is grossly inferior one. Why add significant fees in when they are not needed?
it may be much easier to implement and not require a fork. and fees would still be low.

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March 12, 2012, 02:30:09 PM
 #111


That's certainly a possible solution, but deciding on the minimum fee is not trivial. Alternatively you could limit the block size, but again there's no clear way to decide on the limit.

Enforcing a large, unnecessary fee is a solution,  but it is grossly inferior one. Why add significant fees in when they are not needed?
it may be much easier to implement and not require a fork. and fees would still be low.

How much would they be? I believe that the fees would need to be similar to or greater than those for credit cards or paypal in order for them to credibly discourage a monopolist. A monopolist might lower fees somewhat because he wouldn't need to use much electricity, but how much could we trust a proof-of-work monopolist?

Right now, the current difficulty level is supported by an implicit inflation tax on all bitcoin holdings of around 30% per annum. The amount sent per annum is not known, but let's say that (largely voluntary) donations currently occur at a rate of 0.01% per send. I believe I am already low-balling here, but even if you believe that 0.001% is the true donation rate, we still need significant fees. Gross Txn fee revenue is currently around 0.03 BTC per block. To match block generation revenue, the fee submission rate needs to increase by 50/0.03 = 1666-fold. That is we need to move fees on sends from 0.01% (my guess of donation rates) to 16%. Volume of sends will decline in response, so even 16% won't actually generate this much revenue. In fact, I expect it is impossible to support current block rewards using txn fees.

What is all this fear of a fork? Better to fork sooner rather than wait for the walls to crumble around you, no? I thought we were revolutionizing currency. Obvious flaws need to be fixed by bitcoin or they will get fixed by some other coin. A tradeoff between no security to speak of and onerous fees is not a quibble. It is a core issue.
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March 12, 2012, 03:48:54 PM
 #112

I've read a lot about monopoly here, as if they are guaranteed, but no real mention of why. Monopolies generally happen only because of economies of scale (http://en.wikipedia.org/wiki/Economies_of_scale, http://en.wikipedia.org/wiki/Natural_monopoly) In short, where the average cost of an extra unit of production falls as you add more units. I'm not convinced that applies to Bitcoin.

At the risk of possibly making this sound stupid, I'm going to keep this simple:
Bitcoin mining is direct Electricity Cost -> BTC profit. You can't make your electricity cost per miner go down by adding more miners.
Sunk costs (infrastructure) play a part, but I don't think it's a large part.
Barrier to entry is low. Buy a GPU or wherever new tech comes out, and you'll get a fraction of overall profits. Just join a pool or P2Pool to reduce variance.
So, I'm not convinced that monopoly is inevitable, and I think the most likely outcome will resemble that of agriculture, where anyone can grow crops, and buy from large corporate farms or locally grown, except even less monopolistic than agriculture due to lack of government incentives (subsidies, import tariffs). In Bitcoin terms, that will mean we will have a combination of large pools and individual miners, just as we have now, but will only rely on increased value of bitcoins in transaction fees for security.
I also wouldn't be surprised if those with large personal Bitcoin holdings will buy their own mining hardware as well. It's a switch from paying $200 a month to your bankers to keep your money/gold/whatever safe, to paying $200 a month in electricity to run your personal rig to help keep yourself safe.

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March 12, 2012, 04:02:53 PM
 #113

I've read a lot about monopoly here, as if they are guaranteed, but no real mention of why. Monopolies generally happen only because of economies of scale (http://en.wikipedia.org/wiki/Economies_of_scale, http://en.wikipedia.org/wiki/Natural_monopoly) In short, where the average cost of an extra unit of production falls as you add more units. I'm not convinced that applies to Bitcoin.

At the risk of possibly making this sound stupid, I'm going to keep this simple:
Bitcoin mining is direct Electricity Cost -> BTC profit. You can't make your electricity cost per miner go down by adding more miners.
Sunk costs (infrastructure) play a part, but I don't think it's a large part.
Barrier to entry is low. Buy a GPU or wherever new tech comes out, and you'll get a fraction of overall profits. Just join a pool or P2Pool to reduce variance.
So, I'm not convinced that monopoly is inevitable, and I think the most likely outcome will resemble that of agriculture, where anyone can grow crops, and buy from large corporate farms or locally grown, except even less monopolistic than agriculture due to lack of government incentives (subsidies, import tariffs). In Bitcoin terms, that will mean we will have a combination of large pools and individual miners, just as we have now, but will only rely on increased value of bitcoins in transaction fees for security.
I also wouldn't be surprised if those with large personal Bitcoin holdings will buy their own mining hardware as well. It's a switch from paying $200 a month to your bankers to keep your money/gold/whatever safe, to paying $200 a month in electricity to run your personal rig to help keep yourself safe.

Added to ignore list.
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March 12, 2012, 04:41:26 PM
 #114

I've read a lot about monopoly here, as if they are guaranteed, but no real mention of why. Monopolies generally happen only because of economies of scale (http://en.wikipedia.org/wiki/Economies_of_scale, http://en.wikipedia.org/wiki/Natural_monopoly) In short, where the average cost of an extra unit of production falls as you add more units. I'm not convinced that applies to Bitcoin.
Monopolies form because when you're the only one selling a product, you can demand whatever price you want. In Bitcoin mining, if you're a monopoly you can require high transaction fees, and you can keep difficulty artificially low thus lowering your cost.

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March 12, 2012, 04:48:32 PM
 #115

Added to ignore list.

Thank you! Saves one of us the hassle.

I've read a lot about monopoly here, as if they are guaranteed, but no real mention of why. Monopolies generally happen only because of economies of scale (http://en.wikipedia.org/wiki/Economies_of_scale, http://en.wikipedia.org/wiki/Natural_monopoly) In short, where the average cost of an extra unit of production falls as you add more units. I'm not convinced that applies to Bitcoin.
Monopolies form because when you're the only one selling a product, you can demand whatever price you want. In Bitcoin mining, if you're a monopoly you can require high transaction fees, and you can keep difficulty artificially low thus lowering your cost.

If you manage to get 51% and force a protocol change that makes only your blocks valid, yeah. If you capture 75% of the mining market, there is still nothing to prevent a small mining business from entering and mining all fees, including ones the monopoly doesn't take. As those unaccepted small fee transactions add up, mining for them becomes profitable as well. If there is something that can give a miner monopoly power and prevent new entrants, I'm not aware of it. Also, how can mining difficulty be kept artificially low?

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March 12, 2012, 05:16:19 PM
 #116


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
I'm sorry, but you are. The contribution of the payment processor's own mining to network functionality is negligible, since he's only a small part of it. It's in everyone's best interest that everyone will mine/pay for mining.

The assumption that bitcoin payment processors would rely on volatile, thrid party, volunteer mining and take the risk of losing their business is just plain wrong.
They will mine the hell out of the network because they will want to keep it secure.
At equilibrium, processing 1% of the bitcoin tx will entail x% of the hashing power. With more bitcoin tx (in 40 years ?), the value of processing 1% of the bitcoin tx will exceed the cost of x% of the hashing power.

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March 12, 2012, 05:21:41 PM
 #117

On a similar note, does anyone know if MtGox owns any mining hardware or contracts?

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March 12, 2012, 05:41:46 PM
 #118

On a similar note, does anyone know if MtGox owns any mining hardware or contracts?

they pay for eligius' server so eligius includes their feeless transactions
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March 12, 2012, 06:50:38 PM
 #119

volunteer mining
That's my point, mining should be incentivized rather than volunteer work.

The assumption that bitcoin payment processors would rely on volatile, thrid party, volunteer mining and take the risk of losing their business is just plain wrong.
They will mine the hell out of the network because they will want to keep it secure.
At equilibrium, processing 1% of the bitcoin tx will entail x% of the hashing power. With more bitcoin tx (in 40 years ?), the value of processing 1% of the bitcoin tx will exceed the cost of x% of the hashing power.
I give up.

I've read a lot about monopoly here, as if they are guaranteed, but no real mention of why. Monopolies generally happen only because of economies of scale (http://en.wikipedia.org/wiki/Economies_of_scale, http://en.wikipedia.org/wiki/Natural_monopoly) In short, where the average cost of an extra unit of production falls as you add more units. I'm not convinced that applies to Bitcoin.
Monopolies form because when you're the only one selling a product, you can demand whatever price you want. In Bitcoin mining, if you're a monopoly you can require high transaction fees, and you can keep difficulty artificially low thus lowering your cost.

If you manage to get 51% and force a protocol change that makes only your blocks valid, yeah. If you capture 75% of the mining market, there is still nothing to prevent a small mining business from entering and mining all fees, including ones the monopoly doesn't take. As those unaccepted small fee transactions add up, mining for them becomes profitable as well. If there is something that can give a miner monopoly power and prevent new entrants, I'm not aware of it. Also, how can mining difficulty be kept artificially low?
It depends on how well we can identify the monopoly's blocks and whether we choose to penalize it if it misbehaves. But in principle, as long as the monopoly is in power, it can simply reject any blocks by competitors. Therefore, nobody will try to mine. Which also means the total network hashrate (and hence the difficulty) is its own hashrate, which is as low as it pleases - as long as it's not so low a single entity can easily overthrow it.

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March 12, 2012, 07:35:56 PM
 #120

It depends on how well we can identify the monopoly's blocks and whether we choose to penalize it if it misbehaves. But in principle, as long as the monopoly is in power, it can simply reject any blocks by competitors. Therefore, nobody will try to mine. Which also means the total network hashrate (and hence the difficulty) is its own hashrate, which is as low as it pleases - as long as it's not so low a single entity can easily overthrow it.

But... with a 51% attack..... Fuuuuuuu!!!...  Undecided
Is this really how this works? 51%, reject any blocks but your own, and the whole network is screwed??

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March 12, 2012, 08:20:15 PM
 #121

It depends on how well we can identify the monopoly's blocks and whether we choose to penalize it if it misbehaves. But in principle, as long as the monopoly is in power, it can simply reject any blocks by competitors. Therefore, nobody will try to mine. Which also means the total network hashrate (and hence the difficulty) is its own hashrate, which is as low as it pleases - as long as it's not so low a single entity can easily overthrow it.

But... with a 51% attack..... Fuuuuuuu!!!...  Undecided
Is this really how this works? 51%, reject any blocks but your own, and the whole network is screwed??
Pretty much. You could argue for some heuristics to detect which blocks are the attacker's and reject them, but those are unreliable and go against the spirit of the blockchain.

Of course, the network is screwed only if the monopolist is an attacker, rather than a benevolent, ruthless dictator. But the latter isn't too good either.

Which is why I think overtaking the network should be harder than obtaining 51% of the hashrate. It should require obtaining 51% of the bitcoins. (And, I recently had an idea how in a proof-of-stake system, even someone with a majority of coins can't overtake the network. I'll need to think about it).

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March 13, 2012, 12:30:24 AM
 #122

If you capture 75% of the mining market, there is still nothing to prevent a small mining business from entering and mining all fees, including ones the monopoly doesn't take.

If I have 75% I can refuse to build on the small companies blocks and they will never stay in the longest chain.


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March 13, 2012, 01:32:44 AM
 #123

There is a solution to this (that is fully compatible with the current chain!), but it would permanently lock-in the protocol, requiring 100% of miners and users to agree on and upgrade for any changes:

Ophan blocks can be absorbed into the main chain, adding their proof-of-work to the block including them, all while REQUIRING the block that absorbs the orphan to include any transactions that haven't already been confirmed on the main chain (blocks with conflicting transactions can't be absorbed).

More info:
https://bitcointalk.org/index.php?topic=57647.0

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March 13, 2012, 02:01:01 AM
 #124


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
I'm sorry, but you are. The contribution of the payment processor's own mining to network functionality is negligible, since he's only a small part of it. It's in everyone's best interest that everyone will mine/pay for mining. But then it's also in everyone's interest to personally cease mining, since the network will be just fine with everyone else mining. The contribution of a miner / mining sponsor is shared by everyone, but the cost is all his own. I can't explain this any clearer, I can only direct you to Wikipedia.

Miners are all different sizes, this gives some of them pricing power in terms of selling "get my txs into a block soon". If all miners are very small and all use the "accept all with fee rule" many may indeed drop out lowering overall power and difficulty. This will make it easier and more likely for someone to gain a pricing power ability. The existence of someone with pricing power ability raises the profitability of all miners causing more small players to enter the mining biz and reducing the possibility/ease with which one party can get >50% (which may not be disastrous anyway, but still makes me uncomfortable).

For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
This makes sense, but I think that quantitatively it will only be enough if power is concentrated with a few (where "few" could be 100) strong players.

Suppose power is not concentrated enough for the effect I describe. Miners will fall out for lack of profitability leaving few miners each having more pricing power until there is enough pricing power to charge higher than minimum fees in at least some cases. Now more negligible miners are enticed to (re)enter taking advantage of the fact that there are now higher tx fees floating around and they can also take the smaller ones. This keeps us away from complete centralization.

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March 13, 2012, 07:20:28 PM
 #125


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
I'm sorry, but you are. The contribution of the payment processor's own mining to network functionality is negligible, since he's only a small part of it. It's in everyone's best interest that everyone will mine/pay for mining. But then it's also in everyone's interest to personally cease mining, since the network will be just fine with everyone else mining. The contribution of a miner / mining sponsor is shared by everyone, but the cost is all his own. I can't explain this any clearer, I can only direct you to Wikipedia.

Miners are all different sizes, this gives some of them pricing power in terms of selling "get my txs into a block soon". If all miners are very small and all use the "accept all with fee rule" many may indeed drop out lowering overall power and difficulty. This will make it easier and more likely for someone to gain a pricing power ability. The existence of someone with pricing power ability raises the profitability of all miners causing more small players to enter the mining biz and reducing the possibility/ease with which one party can get >50% (which may not be disastrous anyway, but still makes me uncomfortable).

For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
This makes sense, but I think that quantitatively it will only be enough if power is concentrated with a few (where "few" could be 100) strong players.

Suppose power is not concentrated enough for the effect I describe. Miners will fall out for lack of profitability leaving few miners each having more pricing power until there is enough pricing power to charge higher than minimum fees in at least some cases. Now more negligible miners are enticed to (re)enter taking advantage of the fact that there are now higher tx fees floating around and they can also take the smaller ones. This keeps us away from complete centralization.


this is not enough. we need to do better.

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March 13, 2012, 07:30:11 PM
 #126


That's certainly a possible solution, but deciding on the minimum fee is not trivial. Alternatively you could limit the block size, but again there's no clear way to decide on the limit.

Enforcing a large, unnecessary fee is a solution,  but it is grossly inferior one. Why add significant fees in when they are not needed?
it may be much easier to implement and not require a fork. and fees would still be low.

How much would they be? I believe that the fees would need to be similar to or greater than those for credit cards or paypal in order for them to credibly discourage a monopolist. A monopolist might lower fees somewhat because he wouldn't need to use much electricity, but how much could we trust a proof-of-work monopolist?

Right now, the current difficulty level is supported by an implicit inflation tax on all bitcoin holdings of around 30% per annum. The amount sent per annum is not known, but let's say that (largely voluntary) donations currently occur at a rate of 0.01% per send. I believe I am already low-balling here, but even if you believe that 0.001% is the true donation rate, we still need significant fees. Gross Txn fee revenue is currently around 0.03 BTC per block. To match block generation revenue, the fee submission rate needs to increase by 50/0.03 = 1666-fold. That is we need to move fees on sends from 0.01% (my guess of donation rates) to 16%. Volume of sends will decline in response, so even 16% won't actually generate this much revenue. In fact, I expect it is impossible to support current block rewards using txn fees.

the main argument pro fees is that they are an efficient way to protect the network from spam.

I expect the number of transactions to rise by the time block reward gets dangerously low.

this chart is related:
http://blockchain.info/charts/cost-per-transaction


Quote
What is all this fear of a fork? Better to fork sooner rather than wait for the walls to crumble around you, no? I thought we were revolutionizing currency. Obvious flaws need to be fixed by bitcoin or they will get fixed by some other coin. A tradeoff between no security to speak of and onerous fees is not a quibble. It is a core issue.
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March 13, 2012, 08:53:51 PM
 #127

There is no Tragedy of the Commons.  What there is, is an underprovision of a Public Good.
    

[edit] I meant to begin by pointing out what an idiot the quoted poster is. Timo Y, you are confused. Please consult wikipedia.


There is no need to be so abrasive.  If none of us had anything left to learn about Bitcoin, there would be no point in visiting this forum in the first place.

Anyhow, I couldn't find anything in Wikipedia or elsewhere that proves me wrong.

This is why I don't see total hashrate as a Tragedy of the Commons:

In a Tragedy of the Commons, each additional sheep grazing the field has a negative effect on the supply of the public good.  The long term result is total depletion of grass, ie. supply drops to zero.

In the Bitcoin network, each additional transaction has a positive or at least neutral effect on the supply of the public good (hashrate).  In the long term, hashrate might decline but it's unlikely that it will ever drop to zero.

In my opinion, a better analogy than a public grazing field is lighthouse construction.  This is the key difference:  Even if a fraction of altruistic shepherds refrain from sending their sheep to the field so that the grass can recuperate, it will still be depleted  because the remaining selfish shepherds will take as much as they can.  In the lighthouse case, a fraction of altruistic lighthouse builders will ensure a non-zero supply of lighthouses, even if everyone else leeches.

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March 13, 2012, 10:23:56 PM
 #128

Bitcoin & Tragedy of the Commons

This is perhaps the biggest risk to Bitcoin's future. Does anyone have a convincing argument why this won't happen, or proposals on how to combat it?

Consider the increase in efficiency of production and the effects of maturation of open source / creative commons licensed technologies over the next 40 years (eg. 3D printers, nanotechnology, artificial intelligent automation, quantum computing). Contributions to open source / creative commons licensed technologies will increase as more people receive education and are lifted out of poverty. Money have no use in a society that doesn't have scarcity. So eventually Bitcoin will be less relevant.

I'll address the counter argument that resources will always be scarce. As a resource that has a fundamental value become more scarce, the incentive to develop a replacement resource also increases since the price of the existing resource goes up. At some point recycling used resources becomes cheaper than digging resources out of the Earth. Because of the high efficiency of production of existing resources (due to technological maturity) that aren't scarce, producers will flock into the new market, which will drive the price of the replacements resources down.

Capitalism has a built in self-destruct mechanism: Efficiency.


I do hope we'll see the day where people are not forced to work in order to have decent food, shelter, and iPads ... I'm really excited at the future. Still, I feel that we'll always have money, even if lots of stuff will be available to "everyone", at least in modern countries.

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March 14, 2012, 03:56:33 AM
 #129

I didn't catch this right away, but due to this poster's obnoxious "you are all idiots" attitude just want to point this out (because, hey, with that attitude, you deserve to be scrutinized)

Gross Txn fee revenue is currently around 0.03 BTC per block. To match block generation revenue, the fee submission rate needs to increase by 50/0.03 = 1666-fold. That is we need to move fees on sends from 0.01% (my guess of donation rates) to 16%.

Fee revenue is 0.03 BTC per block.
Fee submission rate is 0.001%.
Fee submission rate needs to increase 1666-fold.
OK, so far so good, but then "we need to move fees on sends from 0.01% to 16%?"
*face palm* You just said Fee per block = Submission rate * Fee rate. Why the hell would you propose increasing the fee rate instead of just increasing the submission rate? Or rather, allow it to grow on its own as Bitcoin gets adopted? Having Bitcoin use increase 2000-fold isn't much of a stretch considering how limited its use is now.

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March 14, 2012, 05:55:32 AM
 #130


You're overlooking what "tragedy of the commons" means. As you said yourself, the payment processor will make 325 € per block whether he mines or not, so he has no incentive to mine himself - he would much rather have others mine instead.

Besides, if payment processors and banks are the only ones doing mining, it means Bitcoin has become fairly centralized.
You are missing the point: the payment porcessor will make 325€ ONLY if the network is functionnal and secure. So the value add fees are his/her incentive to mine (not the bitcoin mining fees).
I'm sorry, but you are. The contribution of the payment processor's own mining to network functionality is negligible, since he's only a small part of it. It's in everyone's best interest that everyone will mine/pay for mining. But then it's also in everyone's interest to personally cease mining, since the network will be just fine with everyone else mining. The contribution of a miner / mining sponsor is shared by everyone, but the cost is all his own. I can't explain this any clearer, I can only direct you to Wikipedia.

Miners are all different sizes, this gives some of them pricing power in terms of selling "get my txs into a block soon". If all miners are very small and all use the "accept all with fee rule" many may indeed drop out lowering overall power and difficulty. This will make it easier and more likely for someone to gain a pricing power ability. The existence of someone with pricing power ability raises the profitability of all miners causing more small players to enter the mining biz and reducing the possibility/ease with which one party can get >50% (which may not be disastrous anyway, but still makes me uncomfortable).

For example, suppose DeepBit changed policy to only include tx that had fee >= .01BTC. Some people will not care because they can with high likelihood get in a block within 10 blocks anyway. But the few people who need near certainty of getting in within an hour now attach a .01 fee. All miners profit from this in proportion to their hashing power except DeepBit. DeepBit profits (or maybe not if they pick the wrong price) by less depending on how many of the .0005 fees they no longer get.
This makes sense, but I think that quantitatively it will only be enough if power is concentrated with a few (where "few" could be 100) strong players.

Suppose power is not concentrated enough for the effect I describe. Miners will fall out for lack of profitability leaving few miners each having more pricing power until there is enough pricing power to charge higher than minimum fees in at least some cases. Now more negligible miners are enticed to (re)enter taking advantage of the fact that there are now higher tx fees floating around and they can also take the smaller ones. This keeps us away from complete centralization.


this is not enough. we need to do better.


There are financial incentives to small timers getting in on mining whenever anyone has any pricing power. That's pretty damn good. I understand that magic could probably do better.

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March 14, 2012, 07:20:39 AM
Last edit: March 14, 2012, 07:33:39 AM by cunicula
 #131


There are financial incentives to small timers getting in on mining whenever anyone has any pricing power. That's pretty damn good. I understand that magic could probably do better.

I don't know exactly what technology will look like in the future, so I can't say precisely how you are confused. But I know you are confused. Current hashing technology is constant returns to scale with extremely low entry costs. Under constant returns to scale and low entry costs, any temporary build up of pricing power will lead to rapid entry and rapid dissipation of pricing power.

You need high entry costs to maintain oligopoly (i.e. market power) in a long-run equilibrium. What is the potential source of large barriers to entry? Barriers to entry would require fundamental changes in technology (for example, mining occurs only within a handful of companies using proprietary chips that are not marketed for external use). Even if this happened to be the technological outcome, a closed technological setting like this is highly likely to degenerate into monopoly.

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March 14, 2012, 07:31:59 PM
 #132


There are financial incentives to small timers getting in on mining whenever anyone has any pricing power. That's pretty damn good. I understand that magic could probably do better.

I don't know exactly what technology will look like in the future, so I can't say precisely how you are confused. But I know you are confused. Current hashing technology is constant returns to scale with extremely low entry costs. Under constant returns to scale and low entry costs, any temporary build up of pricing power will lead to rapid entry and rapid dissipation of pricing power.

You need high entry costs to maintain oligopoly (i.e. market power) in a long-run equilibrium. What is the potential source of large barriers to entry? Barriers to entry would require fundamental changes in technology (for example, mining occurs only within a handful of companies using proprietary chips that are not marketed for external use). Even if this happened to be the technological outcome, a closed technological setting like this is highly likely to degenerate into monopoly.


I'm not at all sure that there will be pricing power in the bitcoin mining market in the future.

What I am saying is that if low block reward and low tx fees make people start abandoning mining then the remaining miners will start to pick up some pricing power. This will allow them to raise prices on people who are very concerned about getting into the next block or two. The now higher tx fees and the low barrier to entry you mention then brings in more miners reducing the pricing power from running away.

The only part I disagree with is the constant returns to scale. In order to exercise their pricing power the bigger percentage miners have to decline low tx fees. Small miners get to take the large and small fees.

Brief example. Suppose one 10% miner and countless tiny miners. The 10% miner guesses/experiments to determine that if they refuse to include tx with less than .01 fee 8% of people will pay it to keep their chance of getting in the next block near 100% instead of near 90%. This costs the 10% miner all the small .0005 fees, but the make much more this way because 100 times .0005 is less than 8 times .01. But the small miners still get all the .0005 and they get the .01 fees.

The big miner does it because they would get more than otherwise and the small miners get a free lunch out of it.

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March 14, 2012, 09:13:49 PM
Last edit: March 14, 2012, 09:30:29 PM by Technomage
 #133

I simply don't see what the big problem is regarding this issue. First of all, Bitcoin has plenty of time to grow and mature before the lowering block rewards could be a serious problem. The most relevant indicator here is the amount of transactions in the network. If we're still at 6000 per day in 2020, we could have a problem. However in that case nobody cares, Bitcoin has not gone anywhere and is even more insignificant than it is now. So it really doesn't matter if Bitcoin is extremely secure at 6000 transactions per day or not, it matters if it's extremely secure at 600 000 transactions per day.

I claim that it will be secure at 600 000 transactions per day and it doesn't matter at all when we reach that target. At high transaction counts and low block rewards there will form a market where transaction fees are everything. Users can choose to add their transaction to the next block by paying what everyone accepts or if the user wants to go cheap and slow, then pay what at least someone accepts. Overall transaction fees will be much higher than they are now, although still much cheaper compared to banks, paypal, visa or anything like that.

I will not comment on the proof of stake thread separately because that is somewhat related to this. Proof of stake and the variations of it are interesting thought exercises and should be experimented on. Bitcoin should not be mixed into that, arguing about proof of work is pretty much the same as arguing about Bitcoin's gold-imitating monetary model. Some think they will work, some don't. Cryptocurrencies will be very competitive in the future so if you can make a better one, be my guest.

I see very low likelihood of Bitcoin having problems with 51% attack, especially now that mining is becoming more decentralized, not less. Executing a 51% attack first of all requires matching 100% of the current hashing power and beyond, if the current hashing power is decentralized enough and not very vulnerable to ddos attacks. However, the most important thing to understand is that Bitcoin hashing power is closely related to how much it's used and that will continue to be the case.

Some may think that the current Bitcoin hashing power is a lot but this is just the very beginning. We already have more hashing power than the top 500 super computers combined and we're running a network with just over 6000 transactions per day. And the hashing power seems to be growing, even now.

Imagine a network with 600 000 transactions per day. The price would be on another level and thus our hashing power as well. Bitcoin might be weak to a strong well-planned attack from certain entities on this planet right now but at 600 000 transactions per day I bet that there is no one on this planet that can do anything to Bitcoin even if he/they wanted to. It would be easier to shut down the Internet, or all electricity grids for that matter.

Bitcoin hashing power has been well ahead of the interest/motivation to attack the network. Major players don't really see Bitcoin as a threat right now and when they do, I imagine it will be too late to do anything about it. I could be wrong though and that's why I agree that Bitcoin needs competing forks. Putting all our eggs in one basked wouldn't be smart.

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March 14, 2012, 09:28:37 PM
 #134

This is why I don't see total hashrate as a Tragedy of the Commons:

In a Tragedy of the Commons, each additional sheep grazing the field has a negative effect on the supply of the public good.  The long term result is total depletion of grass, ie. supply drops to zero.

In the Bitcoin network, each additional transaction has a positive or at least neutral effect on the supply of the public good (hashrate).  In the long term, hashrate might decline but it's unlikely that it will ever drop to zero.

In my opinion, a better analogy than a public grazing field is lighthouse construction.  This is the key difference:  Even if a fraction of altruistic shepherds refrain from sending their sheep to the field so that the grass can recuperate, it will still be depleted  because the remaining selfish shepherds will take as much as they can.  In the lighthouse case, a fraction of altruistic lighthouse builders will ensure a non-zero supply of lighthouses, even if everyone else leeches.
There is an aspect of this which is textbook tragedy of the commons, but it's kind of abstract. The scarce public good being consumed is the bargaining power of miners. As long as miners have that power, they can demand enough fees to fund the mining required to secure the network. If a miner accepts low-fee transactions, he consumes this bargaining power (since then senders will have no reason to include fees) for his own benefit, making everyone worse off (miners who are now unable to collect fees, and Bitcoin users who will now not have a secure network).

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March 14, 2012, 09:44:47 PM
 #135

There is an aspect of this which is textbook tragedy of the commons, but it's kind of abstract. The scarce public good being consumed is the bargaining power of miners. As long as miners have that power, they can demand enough fees to fund the mining required to secure the network. If a miner accepts low-fee transactions, he consumes this bargaining power (since then senders will have no reason to include fees) for his own benefit, making everyone worse off (miners who are now unable to collect fees, and Bitcoin users who will now not have a secure network).
I don't think you quite grasp the way markets work. What you're describing makes no sense to me. The mining network will form a near-perfect market environment where some will have a business based on volume and some will base their business on higher prices and faster transactions. Miners won't just quit in the same way as they do now, if the fee they are accepting suddenly becomes unprofitable, they can simply change their fee threshold to find a more optimal level. A more optimal level could just as well be higher, not necessarily lower.

If the mining community is too crowded compared to Bitcoin transaction counts (and to an extent price and difficulty as well, just like now), then some will quit mining and thus difficulty goes down meaning more blocks and thus more reward for everyone else (not as block rewards, but as transaction fees).

The only real change this involves for Bitcoin users is that transactions will not be as cheap as they are now. Other than that Bitcoin will be much safer than it is now (assuming transaction count keeps growing long term). It will require some changes to the way bitcoins are sent though, clients need to be able to find out how much speed (on average) a certain fee gives you at any moment in time, so you can choose accurately how much fees you want to pay.

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March 14, 2012, 09:58:14 PM
Last edit: March 15, 2012, 10:30:02 PM by Meni Rosenfeld
 #136

There is an aspect of this which is textbook tragedy of the commons, but it's kind of abstract. The scarce public good being consumed is the bargaining power of miners. As long as miners have that power, they can demand enough fees to fund the mining required to secure the network. If a miner accepts low-fee transactions, he consumes this bargaining power (since then senders will have no reason to include fees) for his own benefit, making everyone worse off (miners who are now unable to collect fees, and Bitcoin users who will now not have a secure network).
I don't think you quite grasp the way markets work. What you're describing makes no sense to me. The mining network will form a near-perfect market environment where some will have a business based on volume and some will base their business on higher prices and faster transactions. Miners won't just quit in the same way as they do now, if the fee they are accepting suddenly becomes unprofitable, they can simply change their fees to find a more optimal level. A more optimal level could just as well be higher, not necessarily lower.
A miner can try to demand high fees, but if 99% of miners accept low fees, nobody will be willing to pay these high fees.

You are forgetting that (unless limitations are placed), space for transactions is an abundant resource. It does not work like a market where participants manufacture a scarce product. The only thing to lose by including a transaction is bargaining power - which is everyone's, not just the individual miner's.

If the mining community is too crowded compared to Bitcoin transaction counts (and to an extent price and difficulty as well, just like now), then some will quit mining and thus difficulty goes down meaning more blocks and thus more reward for everyone else (not as block rewards, but as transaction fees).
That's exactly the problem, miners will quit and the network will be less secure.

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March 14, 2012, 10:03:52 PM
 #137

I propose that somebody go and do the following, which should increase the security of the network regardless of whether we have a "tragedy of the commons" situation.  This is essentially a boil-down of something proposed in the Stanford paper, and something I have proposed in the past.

  • Create a patched Bitcoin node that automatically rejects (ignores) any reorganization of 6 blocks or more.  (To use the Stanford paper terminology, this means automatically checkpointing any block that's 6 blocks old.)
  • Run it on good hosting resources and have it accept incoming connections, and have it connect to a larger-than-usual number of nodes, so as to maximize the likelihood that it will be on the "good" (popular) side of any major blockchain conflict.

Why?  If and when we ever get attacked by a replacement chain, a few trusted people running nodes like this will save the day.  The Bitcoin community will say "oh shit", but soon, word will get out that the recovery procedure (for the typical user) is as follows:

  • Delete your block chain
  • Start up your bitcoind, using the -connect parameter to only allow connections to these specific nodes that ignored the unwanted blocks, and refuse all incoming connections.
  • Enjoy business as usual, while the devs and everyone else dance around and figure out how to go back to a decentralized system that also excludes the efforts of the attacker.

What this amounts to is an increased form of democratic trust.  Yes, I understand it is centralized - its purpose is temporary.  Proof of work is the primary decider of valid blocks, but in the case where the community at large sees that the blockchain has been thwarted in an obvious manner, users reserve the right to "vote" for some particular view of the block chain by connecting only to nodes known to be espousing it, without having to worry about modifying their clients beyond their abilities.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
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March 14, 2012, 10:13:11 PM
 #138

To put it simply what will happen is this:

We will have a large number of pools and most likely many different p2pools as well. I will pull some numbers out of my ass to illustrate this, in reality the market will decide these numbers.

Pool x has a fee threshold of 0.1, meaning that they only accept transactions that have at least 0.1 bitcoins as a fee. This is the "high speed, high prices, low volumes" pool.

Pool y has a fee threshold of 0.05, which is "if you want decent speed but don't want to pay a premium" type pool.

Pool z has a fee threshold of 0.001, this is the "cheaper than the competitors, but slow as fuck" type pool.

These are just a few examples, in reality there will be a large number of different fee thresholds and there might even be pools that accept basically everything. These could be a "donate your computing power to the Bitcoin project" type pool.

From the user's perspective this will look like this:

Bitcoin client tells a user that at this moment in time, the average speed for a transaction with a 0.1 fee is 10 minutes (because in this example this is the fee that basically everyone accepts). With a 0.05 fee you'll get it through in 60 minutes on average. With a 0.001 fee it will go through in 10 hours. A fee of 0.0005 is not recommended but it will go through in a day or two.

Now keep in mind that the actual numbers are meaningless here, they are just an example. Fees valued in bitcoins could actually go down significantly if Bitcoin value skyrockets but one thing is for sure, fees will go up significantly when valued in dollars/euros. It is difficult to predict how much higher the fees will be but most certainly lower than any competitive technology or method of money transfer that has been developed so far.

This will actually form a brilliant market where miners will change which pool they support because they are constantly tracking which transaction fee class is most profitable. Yet at the same time it will vary how much users are willing to pay for certain speeds and if too many miners switch too fast to a lower threshold it can suddenly become unprofitable for them because a higher class is forced to lower their threshold and thus a lot of users will switch to faster transactions because they now seem cheaper.

I could go on for much more on this but this is good enough for now.

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March 14, 2012, 10:25:22 PM
 #139

A miner can try to demand high fees, but if 99% of miners accept low fees, nobody will be willing to pay these high fees.

You are forgetting that (unless limitations are placed), space for transactions is an abundant resource. It does not work like a market where participants manufacture a scarce product. The only thing to lose by including a transaction is bargaining power - which is everyone's, not just the individual miners.
You must understand that this will in fact work just like any market, fundamentally. If 99% of miners accept low fees and get enough profit by doing that, then everything is completely fine. But I don't see this happening once Bitcoin starts the shift to transaction fee rewards. What happens is that when miner or mining pool x starts to get unprofitable, they will not just quit, they will raise the fee threshold first. Most likely there are other miners in this 99% that feel the same way and they also raise their fee threshold.

Now what happens from the user's perspective is that suddenly 50% (just thrown out there) of the mining network doesn't accept low fee transactions anymore, because it's not profitable! Users suddenly need to choose either to pay more to get their transactions through in 10 minutes average or continue to pay low fees and get them through in 20 minutes average. I bet that a good portion of users will agree to pay slightly more to get faster transactions.

This is where everything changes. We don't have this scenario yet because regular block reward is all that counts. Bitcoin price and difficulty is all that matters. In the future the main thing that matters is the amount of transactions and how much users are willing to pay for faster transactions.

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March 14, 2012, 10:32:41 PM
 #140

There is an aspect of this which is textbook tragedy of the commons, but it's kind of abstract. The scarce public good being consumed is the bargaining power of miners. As long as miners have that power, they can demand enough fees to fund the mining required to secure the network. If a miner accepts low-fee transactions, he consumes this bargaining power (since then senders will have no reason to include fees) for his own benefit, making everyone worse off (miners who are now unable to collect fees, and Bitcoin users who will now not have a secure network).
I don't think you quite grasp the way markets work. What you're describing makes no sense to me. The mining network will form a near-perfect market environment where some will have a business based on volume and some will base their business on higher prices and faster transactions. Miners won't just quit in the same way as they do now, if the fee they are accepting suddenly becomes unprofitable, they can simply change their fees to find a more optimal level. A more optimal level could just as well be higher, not necessarily lower.
A miner can try to demand high fees, but if 99% of miners accept low fees, nobody will be willing to pay these high fees.

You are forgetting that (unless limitations are placed), space for transactions is an abundant resource. It does not work like a market where participants manufacture a scarce product. The only thing to lose by including a transaction is bargaining power - which is everyone's, not just the individual miners.

If the mining community is too crowded compared to Bitcoin transaction counts (and to an extent price and difficulty as well, just like now), then some will quit mining and thus difficulty goes down meaning more blocks and thus more reward for everyone else (not as block rewards, but as transaction fees).
That's exactly the problem, miners will quit and the network will be less secure.

Block space is limited, as is the computing power to validate the signatures in the transactions.  Right at the moment neither of these is really scarce, as understood by laymen, but they aren't unlimited either.

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March 14, 2012, 10:44:37 PM
 #141

Block space is limited, as is the computing power to validate the signatures in the transactions.  Right at the moment neither of these is really scarce, as understood by laymen, but they aren't unlimited either.
This is a good point. That is a real issue that actually requires some effort from Bitcoin developers in the next couple of years. Bitcoin still has some room to grow, a lot of room actually, but it doesn't scale very well after a certain point. This is one of the bigger priorities but I'm not too worried about that. Bitcoin has very smart people working on it and it seems that the majority of Bitcoin use will move toward client-server wallets which buys us a good amount of time to come up with real solutions.

Another important issue is how do we actually make the shift to the transaction fee market scenario that I'm talking about. It would probably go smoother if Bitcoin developers co-ordinate with all the big pool operators so it is a smooth experience to Bitcoin users. It will take time for Bitcoin users to get used to the fact that transactions will cost something and that the speed of their transactions will depend on how much they pay. From an UI and usability perspective this needs to be clear and easy to understand. The clients also need to be constantly up-to-date on how long it takes on average for a transaction to be included in a block at a certain fee.

However that issue is probably even less of a priority than the scaling issue. It will still take many years until there is real pressure to raise transaction fees. Even a block reward of 25 BTC is still quite adequate to not worry about this. Scaling could become a real issue before we have to worry about miners' rewards.

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March 14, 2012, 11:39:19 PM
 #142

There is a whole 'nother dimension to this that you guys are ignoring, and that's time. In addition to only accepting transactions with a certain fee, miners might not even attempt to mine a block at all until it has enough in fees to be profitable. Alone, this may be bad. However, there are several interesting dynamics to consider, even if you assume miners are completely logical:

1) Plenty of people have reasons to get their transaction fully confirmed ASAP. For example, MtGox users. So, users will include a large transaction fee in hopes of convincing more miners to turn on to mine the block. They'd then likely send fee-only transactions in the next 5 blocks to make sure that the mining keeps up.
2) Many people will need to do this several times per day, however they won't know when they'd be able to "freeride" off of someone else until the transaction is on the network. Besides, if you need something to clear right now, you didn't plan ahead in the first place, and it's impossible to guess if someone else might shortly cover the cost of running a large amount of miners for you.
3) Different miners have different profitability points. Even if someone else already paid to have several miners running, there are always several more miners that can run if you pay just a bit more in fees. Currently, all active miners are mining at 100% anyway, so this is an effect that you can't yet see.
4) Businesses will contract out to certain miners to ensure that low priority transactions (such as low-value POS transactions where the person also provided their ID) get included in a semi-timely manner for a monthly rate (businesses love stability). MtGox already does this.
5) A certain amount of people will mine no matter what, likely including every transaction they safely can (remember, the larger a block is, the longer it takes to validate, the more likely it is that someone else will find another block that orphans yours).
6) After a miner successfully mines a (particularly profitable) block, they will either mine at full power for a few blocks to protect their block, send fee-only transactions using stored up funds that will hopefully be reimbursed out of their profits from the block to entice other miners to mine the block (this is where a protocol change would be nice so that this can actually come directly out of the mined funds or at least be dependent on them), or likely a combination of both. This will help smooth block times a bit.
7) Miners will have invested a good deal of money in specialized hardware to mine bitcoins. As a result, any attack that could potentially undermine Bitcoin would likely be met with the FULL force of ALL specialized mining hardware which will have been programmed by their owners to reverse the attack in order to protect their investment. As an added plus, we gain a huge security through obscurity benefit here since it'd be impossible for an attacker to predict how much mining power the whole network actually has until they've tried attacking it.

Altogether, this will come together in such way that Bitcoin will remain secure and block times will be fairly stable. There are so many variables in play here that it's really quite brilliant. At this point, the only thing I would be concerned about is a 51% miner that rejects everyone else's blocks. Any other attack, economic or not, will fail miserably.

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March 15, 2012, 06:38:29 AM
 #143


Altogether, this will come together in such way that Bitcoin will remain secure and block times will be fairly stable. There are so many variables in play here that it's really quite brilliant. At this point, the only thing I would be concerned about is a 51% miner that rejects everyone else's blocks. Any other attack, economic or not, will fail miserably.

This is a completely ridiculous argument. Are you braindead or just fucking with us?

Let me paraphrase you:

Sally and Harry might be convinced to mine some.
That proves that people can be convinced.
Therefore, it will be possible to convince enough people to mine.
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March 15, 2012, 09:48:03 AM
 #144

[...]'nother dimension[...]
+1, good post

really hope it will work like this

edit: this will cause quite some thermal stress for the mining hardware


[...]I will pull some numbers out of my ass to illustrate this[...]
Cheesy

Quote
[...]
Pool x has a fee threshold of 0.1, meaning that they only accept transactions that have at least 0.1 bitcoins as a fee. This is the "high speed, high prices, low volumes" pool.

Pool y has a fee threshold of 0.05, which is "if you want decent speed but don't want to pay a premium" type pool.

Pool z has a fee threshold of 0.001, this is the "cheaper than the competitors, but slow as fuck" type pool.
[...]

this is hard to imagine working as most of the time it will be more profitable for pool x to also include all the low fees.


I can see mining guilds forming that ddos pools accepting low fees.



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March 15, 2012, 10:19:48 AM
Last edit: March 15, 2012, 10:31:39 PM by Meni Rosenfeld
 #145

Block space is limited, as is the computing power to validate the signatures in the transactions.  Right at the moment neither of these is really scarce, as understood by laymen, but they aren't unlimited either.
Block size currently has an arbitrary limit of 1MB. It is generally understood that when there are too many transactions it will be lifted or relaxed, so actually there is no real limit. (If a sufficiently tight permanent limit is set, we will not have this problem. But this of course could hurt scalability). The cost of validating signatures is negligible.


To put it simply what will happen is this:

We will have a large number of pools and most likely many different p2pools as well. I will pull some numbers out of my ass to illustrate this, in reality the market will decide these numbers.

Pool x has a fee threshold of 0.1, meaning that they only accept transactions that have at least 0.1 bitcoins as a fee. This is the "high speed, high prices, low volumes" pool.

Pool y has a fee threshold of 0.05, which is "if you want decent speed but don't want to pay a premium" type pool.

Pool z has a fee threshold of 0.001, this is the "cheaper than the competitors, but slow as fuck" type pool.
Pool z will include all transactions with a fee above 0.001, which includes all transactions included by pool y, which in turn includes all transactions included by pool x. The total block reward in a block found by pool z will be higher than in pool x. The expected payout for mining at pool z is higher than in pool x. Nobody will mine at pool x.

Once again - including transactions is cheap. You can include all of them (that is, those with fee higher than the tiny cost) and increase your profits. Everybody will do that, unless he is big enough to individually (or as part of a cartel) have a real bargaining power, which itself would be a problem.

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March 15, 2012, 10:27:21 AM
 #146

I think you guys totally underestimate the desire of the marketplace to disintermediate the banks:

 http://www.telegraph.co.uk/finance/economics/9143581/Technology-could-take-the-bankers-out-of-banking-says-BoE-policmaker-Andy-Haldane.html
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March 15, 2012, 10:34:36 AM
 #147

In addition to only accepting transactions with a certain fee, miners might not even attempt to mine a block at all until it has enough in fees to be profitable.
Unless something else can be done with the hardware, it's quite possible miners will keep mining to avoid thermal cycles. Whether this will happen is TBD.

1) Plenty of people have reasons to get their transaction fully confirmed ASAP. For example, MtGox users. So, users will include a large transaction fee in hopes of convincing more miners to turn on to mine the block.
Tragedy of the commons, the contribution of a sender to confirmation time is everyone's, the cost of the included transaction fee is all his own. ie, the personal effect on paying a fee for the confirmation of your own transaction is negligible.

They'd then likely send fee-only transactions in the next 5 blocks to make sure that the mining keeps up.
Even more tragedy of the commons, since they don't even get any preferential treatment for fees paid this way. But it would be interesting to find an incentivization scheme which does incentivezes the miners of the next blocks.

4) Businesses will contract out to certain miners to ensure that low priority transactions (such as low-value POS transactions where the person also provided their ID) get included in a semi-timely manner for a monthly rate (businesses love stability). MtGox already does this.
Explanation required.

7) Miners will have invested a good deal of money in specialized hardware to mine bitcoins. As a result, any attack that could potentially undermine Bitcoin would likely be met with the FULL force of ALL specialized mining hardware which will have been programmed by their owners to reverse the attack in order to protect their investment. As an added plus, we gain a huge security through obscurity benefit here since it'd be impossible for an attacker to predict how much mining power the whole network actually has until they've tried attacking it.
See also this thread.

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March 15, 2012, 11:01:19 AM
 #148

this is hard to imagine working as most of the time it will be more profitable for pool x to also include all the low fees.
Care to explain this further? The miners who decide to accept only high fee transactions have incentive to not include any low fee transactions. If they did, users wouldn't have any incentive to pay for higher fees. For higher fees to work, a significant amount of hashing power need to set a higher fee threshold. If they just accept whatever, then users have no incentive to ever pay more than the minimum. This is the way it is now but I can guarantee it won't be like this forever.

Quote
I can see mining guilds forming that ddos pools accepting low fees.
This is a valid point but it's not that big of a problem. I imagine p2pool type solutions will become more common in the years to come and they are very ddos resistant.

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March 15, 2012, 11:22:03 AM
 #149

Pool z will include all transactions with a fee above 0.001, which includes all transactions included by pool y, which in turn includes all transactions included by pool x. The total block reward in a block find by pool z will be higher than in pool x. The expected payout for mining at pool z is higher than in pool x. Nobody will mine at pool x.
It's not that simple. The calculations for this gets a little complex at this point but first it's important to understand that a scenario where there is only pool z is already discarded.

Everyone mining at pool z, which basically represents the way mining works now, is not profitable anymore because traditional block rewards have all but disappeared. This is the scenario which we start with and start to work on. I have to add that it would of course always be profitable to a certain amount of people, difficulty would adjust. But a network based only on the actual cost of sending and verifying transactions is out of the question, Bitcoin will require more than that.

What happens is that major mining businesses who don't want to just quit, start raising their fee thresholds. This eventually creates a situation where you might only have 10% of total hashing power in pool z and everyone else has moved on to either the high fee pools or the medium fee pools. It's true that pool z gets the fees for everything but they only find 1/10 of the blocks. All users that appreciate speedy transactions will pay more than the minimum and 90% of those blocks do not benefit pool z in any way.

I find it perfectly possible that all of the different pool classes can be profitable, except perhaps the one that only accepts minimum transactions. I'd imagine that at this stage a very large majority of users want to pay more than the minimum to make sure their transaction is at least in the next couple of blocks. Pool z gets a small share of that action.

There would of course be constant changes in the hash power of different fee classes. Miners would change based on what users are paying and users would change what they're willing to pay for certain speed. I feel this really could work and it would create a very interesting market overall.

Quote
Once again - including transactions is cheap. You can include all of them (that is, those with fee higher than the tiny cost) and increase your profits. Everybody will do that, unless he is big enough to individually (or as part of a cartel) have a real bargaining power, which itself would be a problem.
Including transactions is cheap, that is true. What is also true is that in the future miners have more bargaining power than they do now. Mining pools will start raising their fee thresholds at some point, I see this as pretty much inevitable. It makes a lot sense and I hope Bitcoin devs are aware of this. It's not a priority issue right now but eventually we will be in a situation where the fees must be higher to sustain a mining network that secures Bitcoin. The best way to do it is enabling a market between miners and users, similarly to what I've been explaining.

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March 15, 2012, 11:31:19 AM
 #150

I would like to add that it's difficult for a cartel/monopoly to happen. Bitcoin mining might get a little more centralized than it is now but it will still be very distributed. Even if someone controlled 20% of hashing power, he simply could not force anything on users. He can demand high fees but if users are not willing to pay, then he gets pretty much nothing. Users would have slightly slower transactions but by not paying the fees they would force the 20% player to lower his fee threshold because he is asking too high of a price. This is text book stuff btw.

So basically if the miners start to get rich, Bitcoin userbase has ultimate power to stop that. They only need to stop paying high fees for a while and the pools that demand higher fees are forced to correct their prices. Especially with Bitcoin price probably still being fairly volatile at that stage, it's important for users to stay awake. If Bitcoin price doubles and the pools still demand similar fees, then something is wrong.

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March 15, 2012, 11:52:43 AM
 #151

It's easy to think that everyone would just mine at the pool that accepts all transactions, because their blocks have the biggest rewards. Fact is that it just doesn't work like that. If everyone did that, we would be back to square one where mining is unprofitable. This is why there will be a sort of profitability index or "difficulty" for each pool, not just mining in general. If too many miners go to a low fee pool, suddenly users are not paying high fees anymore because there is sufficient hashing power in the low fee pools. Thus the profitability of all mining goes down. This is not in the interest of miners so it simply won't happen.

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March 15, 2012, 11:52:45 AM
 #152

Pool z will include all transactions with a fee above 0.001, which includes all transactions included by pool y, which in turn includes all transactions included by pool x. The total block reward in a block find by pool z will be higher than in pool x. The expected payout for mining at pool z is higher than in pool x. Nobody will mine at pool x.
[...]
What happens is that major mining businesses who don't want to just quit, start raising their fee thresholds.
[...]
to become even less profitable?

bad behavior is incentivized, good behavior is not. that's why it is hard to imagine it could work (similar to communism).

there might be a solution to get it right simpler than proof of stake by changing the fee mechanisms.

Examples (just brainstorming):
* limit the tx fee spread within a block   (factor 10: 0.1 highest --> 0.01 lowest fee alowed)
   spread could be hard coded or voted on by the miners
* have the miners vote on future minimum fees / spread by destroying coins

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March 15, 2012, 12:01:18 PM
 #153

to become even less profitable?

bad behavior is incentivized, good behavior is not. that's why it is hard to imagine it could work (similar to communism).
Not less profitable, more profitable. Imagine if 80% of hashing power simply decided that they've had enough of these free transactions. Their mining hardware costs money, it requires work and they want some profit. Traditional block rewards are a fraction of what they were back in the day. They want to keep mining and supporting the network but it's simply unprofitable.

As an attempt to make mining profitable again, the 80% change their fee threshold from 0.001 to 0.01, effectively increasing the fees by a factor of 10. Now users have a choice, they can either send transactions with a 0.001 fee and wait on average for 50 minutes to be included in a block. Or they can add a 0.01 fee, which is still quite cheap, and make sure that their transaction is in the next block.

What do you guys think users will choose? I believe a lot of people would choose paying 0.01 which would basically increase the overall profitability of mining by a lot. It would increase even for the ones who stay mining 0.001 transactions. Everyone would benefit, except the users of course, but they must understand that mining doesn't run on free hardware and free energy.

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March 15, 2012, 12:01:25 PM
Last edit: March 15, 2012, 12:21:14 PM by Meni Rosenfeld
 #154

What happens is that major mining businesses who don't want to just quit, start raising their fee thresholds. This eventually creates a situation where you might only have 10% of total hashing power in pool z and everyone else has moved on to either the high fee pools or the medium fee pools.It's true that pool z gets the fees for everything but they only find 1/10 of the blocks. All users that appreciate speedy transactions will pay more than the minimum and 90% of those blocks do not benefit pool z in any way.
Who has moved on? Miners?

You're confused about how mining and mining pools work. If a pool has N miners (suppose for simplicity all pooled miners have the same hashrate), then it finds on average N*a/D blocks per day, where D is the difficulty and a is a global constant. If the average reward per block is B, the average total reward per day is B*N*a/D, which is distributed among N miners, so each gets B*a/D on average. The only thing that changes between pools is B (based on their inclusion policy), so miners will always go to the pool with a higher B (which is the pool that includes all transactions). The fact that this pool is "only 10% of the total hashing power" has no effect on this.

A smaller pool will have more variance, but since the all-inclusive pool pays the best, there's no reason it should be small.

The end result is that pools which only include high-fee transactions will not be competitive, and 100% of the pooled mining hashrate will be in low-fee pools.

And the point remains that although all pools would be better off if all pools accept only high-fee transactions, no pool would initiate a move to higher threshold (without being part of a cartel) because it will decrease its own profitability. Which, once again, is called "tragedy of the commons", or "prisoner's dilemma" in the 2-player case.

I find it perfectly possible that all of the different pool classes can be profitable, except perhaps the one that only accepts minimum transactions. I'd imagine that at this stage a very large majority of users want to pay more than the minimum to make sure their transaction is at least in the next couple of blocks. Pool z gets a small share of that action.
It gets a share of that action proportional to its hashrate, like any pool. And in addition it gets a share of the low-fee action.

Not less profitable, more profitable. Imagine if 80% of hashing power simply decided that they've had enough of these free transactions. Their mining hardware costs money, it requires work and they want some profit. Traditional block rewards are a fraction of what they were back in the day. They want to keep mining and supporting the network but it's simply unprofitable.

Now imagine that 80% changing their fee threshold from 0.001 to 0.01, effectively increasing the fees by 10. Now users have a choice, they can either send transactions with a 0.001 fee and wait on average for 50 minutes to be included in a block. Or they can add a 0.01 fee, which is still quite cheap, and make sure that their transaction is in the next block.
Yes, if 80% of hashrate forms a cartel and make an explicit agreement to play hardball, they will increase their profit. But even after the cartel is formed, members of the cartel are better off if personally they defect from the cartel and start accepting all transactions (unless the cartel enforces it somehow), as well as non-cartel members who will still accept all transactions. The cartel would have to crush competition by rejecting all blocks who do not conform to the cartel. And that is not a scenario I wish to happen.

It's easy to think that everyone would just mine at the pool that accepts all transactions, because their blocks have the biggest rewards. Fact is that it just doesn't work like that. If everyone did that, we would be back to square one where mining is unprofitable. This is why there will be a sort of profitability index or "difficulty" for each pool, not just mining in general. If too many miners go to a low fee pool, suddenly users are not paying high fees anymore because there is sufficient hashing power in the low fee pools. Thus the profitability of all mining goes down. This is not in the interest of miners so it simply won't happen.
Now I'm sure you haven't read Prisoner's dilemma and Tragedy of the commons (the former is clearer, it refers to a 2-player case but the logic is the same). Every miner will act in his own self interest, not in the interest of other miners. Whatever other miners do, the most profitable thing to do is to defect (which in this case means accepting all transactions).

Everyone will do that, and as you correctly state, we will be back to square one where mining is unprofitable. (And it's not necessary that everyone will do that, it's enough that someone will do that).

This can be resolved if we change the rules so that the global interest is aligned with everyone's self interest. But this requires a coordinated effort, it doesn't happen spontaneously.

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March 15, 2012, 12:20:13 PM
 #155

A miner can try to demand high fees, but if 99% of miners accept low fees, nobody will be willing to pay these high fees.


No, that's my whole point. Anyone who wants >99% chance of being in the next block will pay higher fees. Especially if the fee is like .01 on a 100BTC tx.

Even needing to rely on this pricing power phenomenon seems unlikely to me and it's just there as back up.

Already we're paying miners fees so that non-mining nodes will take us seriously enough to pass the tx on.

There are many other things like this that can happen. Maybe some subset of people will be appalled to receive a tx that didn't have a fee. Uncertainty about who these people are may lead to a .0001 (don't hate me for being a freeloading jerk) standard.

Maybe a lot of miners won't keep a complete chain and will be unable to easily verify small or old inputs. You'll need a fee if you don't want to wait for the one generous soul who keeps the whole thing and charges no fees.

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March 15, 2012, 12:29:49 PM
 #156

I know about the tragedy of the commons but let's just say that I've always been very skeptical about it, it really does not apply well to most real life scenarios. I understand what you're saying and maybe I'm the one who is clueless here but I'll try my best now to make sense of all of this.

I don't believe that high fee miners will defect to low fee pools simply because it appears that they would get more by going there. In fact they get significantly less because by doing that users don't have incentive to pay high fees anymore.

To think about this in another way is to imagine that all miners will defect to the low fee pools. What happens then? Mining becomes unprofitable and some miners will again attempt to raise fee thresholds.

Of course it won't happen like this in reality, there will be a constant equilibrium where the increase of miners in low fee pools results in the decrease of profits for everyone which basically results in low fee miners moving back to high fee pools because that's the only way they can keep mining profitably.

So in conclusion I still think that what I'm talking about could work and fairly well actually. But I don't mind if you prove me wrong.


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March 15, 2012, 12:36:43 PM
 #157

@meni

It's true a tiny miner will simply migrate to a pool that takes all fees. However, in the all tiny miner  situation where no one has pricing power the tiny miner doesn't mine at all. But he has cheap/free electric, nice GPUs etc. So he offers to sell it to some smart guy. Smart guy realizes that buying the power of 4000 tiny miners will give him pricing power and profit. It happens to start raising the level of fees across the board making it harder or more expensive for him to buy more miners power because they can better profit on their own now.

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March 15, 2012, 12:41:48 PM
 #158

Of course it won't happen like this in reality, there will be a constant equilibrium where the increase of miners in low fee pools results in the decrease of profits for everyone which basically results in low fee miners moving back to high fee pools because that's the only way they can keep mining profitably.


They can sell their power to someone who realizes it will make more coin by working together.

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March 15, 2012, 01:07:18 PM
 #159

Good points by FreeMoney. That is certainly a market where more awareness helps. If everyone understands that certain actions will benefit all (including me) and certain actions will be harmful to all (including me) then I don't see how the tragedy of the commons can surface in any significant way. It doesn't require a cartel either, all serious miners simply know that it makes no sense for them to accept only low fees because it will crush profits very quickly (in a matter of hours, once user clients realize that you can make fast transactions with low fees). So the feedback is very quick as well especially if there is a lot of Bitcoin usage / high number of transactions.

There will of course be defections and that's natural. Someone decides to mine at a low fee pool, hoping he can get away with it. Eventually these people notice that the grass wasn't greener on the other side, they only got more profits for a short while. Too many people defected and now they profit less than they did originally at the high fee pool. These people will change back to high fee pools in an attempt to increase the incentive for users to pay higher fees. Thus we have a constant back and forth which results in an equilibrium.

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March 15, 2012, 01:15:04 PM
 #160

I know about the tragedy of the commons but let's just say that I've always been very skeptical about it, it really does not apply well to most real life scenarios. I understand what you're saying and maybe I'm the one who is clueless here but I'll try my best now to make sense of all of this.
In some cases tragedy of the commons is overcome when there are additional factors at play. It depends on the ratio between incentive to defect and the stabilizing forces.

But I think it's much more prevalent than you think. Voting is a classic example. AFAIK voting rates in US are very low, and it is generally agreed that the total welfare would increase if everyone voted (the total effort of all people voting is justified by the election of a party which better addresses people desires). But for each person, the effect of his own vote on his own welfare is negligible, so most people pass.

Another example is software. Would it not be better if instead of dealing with DRM, registration keys, closed platforms and so on, companies would allow anyone to download the software, specify a price, and receive payments on the honor system? If this was in place and everyone (who pay under the current system) paid, everyone would be better off. But everyone would be incentivized to spare himself this cost, which eventually results in the breakdown of this model and resorting to DRM. (Some people have offered software on an honor system, somewhat successfully, but mostly because of the novelty factor - it doesn't scale.)

There are no doubt cases where it could have occurred, if society hadn't been able to redefine the rules to dispel it.

People have been suggesting all sorts of factors that would mitigate the tragedy of the commons problem in Bitcoin mining, but I still doubt that they will be enough quantitatively. We need something about which we will be able to be much more confident.

I don't believe that high fee miners will defect to low fee pools simply because it appears that they would get more by going there. In fact they get significantly less because by doing that users don't have incentive to pay high fees anymore.

To think about this in another way is to imagine that all miners will defect to the low fee pools. What happens then? Mining becomes unprofitable and some miners will again attempt to raise fee thresholds.
Again, if I am a small miner, the effect of my mining on the equilibrium is negligible. By going to a high-fee pool, I'm increasing the frequency of high fees by about 0.0001% (which I will also enjoy). If I go to a low-fee pool with twice the total reward, I increase my rewards by 100%. I would much rather that all other miners go to the high-fee pool; but whether they do or don't, I'm still better off at the low-fee pool.

In other words: My personal benefit from defecting is always higher than my share of the global benefit of me cooperating. I lose from other people defecting, not from me defecting. (Unless I'm a sufficiently large miner.)

You need some balancing factors to prevent that from happening. And they need to be stronger than the total incentive to defect.


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March 15, 2012, 01:19:29 PM
 #161

Good points by FreeMoney. That is certainly a market where more awareness helps. If everyone understands that certain actions will benefit all (including me) and certain actions will be harmful to all (including me) then I don't see how the tragedy of the commons can surface in any significant way. It doesn't require a cartel either, all serious miners simply know that it makes no sense for them to accept only low fees because it will crush profits very quickly (in a matter of hours, once user clients realize that you can make fast transactions with low fees). So the feedback is very quick as well especially if there are a lot of Bitcoin usage / lot of transactions.


I don't think that's right still. Imagine this game (I know if isn't  close to the mining situation just an example of clear TOC).

There is a $10 pot. Any of 10 players can take the whole pot at any time. Every minute the pot doubles.

It is obvious to everyone that if they can all agree they'll make a fortune. Otherwise nearly nothing. But they can't expect everyone to trust everyone else so they all grab for it.

Mining is pretty different, if even a few can agree they can prop it up. I don't even expect tiny individuals to do that. I expect somone(s) to buy up some significant enough amount of power. Probably there will be plenty of miners who'd rather not be subject to the whims of difficulty and variable fees and will sell for less even that the expected return to reduce variance.

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March 15, 2012, 01:34:09 PM
 #162

I would much rather that all other miners go to the high-fee pool; but whether they do or don't, I'm still better off at the low-fee pool.
As far as I understand it, the more hashing power there is in the high fee pools, the better off everyone is, including you. If a sufficient amount of miners defect from high fee pools, you're worse off than you were originally, regardless of how profitable it seemed at first. This means that if the profits to be gained in the short term are not adequate enough, many miners will not bother to hop at all.

Quote
In other words: My personal benefit from defecting is always higher than my share of the global benefit of me cooperating. I lose from other people defecting, not from me defecting.

You need some balancing factors to prevent that from happening. And they need to be stronger than the global incentive to defect.
I agree. The balancing factor comes from the fact that miners will be constantly pool hopping in an attempt to increase profits. FreeMoney is correct that mining would probably become a bit more centralized from the effects of people selling hashing power to keep it simple. It's important to understand that the miners are not the only ones who control this. Pool operators can change their fee threshold and they hold fairly significant bargaining power.

Also, as I already said, if everyone knows that all you get from defecting is a short term increase in profits, it isn't that straight-forward to calculate if you even want to do it. I still think that there would be a strong equilibrium where major mining businesses and pool operators constantly try to put the fees as high as they can. Not by some cartel or conspiracy, simply because that way all miners, including them, get more profit.

There will be defections and in the end users have a lot to say as well, if they're not willing to pay huge fees then it becomes very unprofitable to run a high fee pool and the pool is forced to lower their threshold or the miners will switch. In any case miners will always attempt to put the fees as high as possible, anything they can get away with. This will be balanced by the low fee pools and by what users are willing to pay but still, they will not stop trying which is exactly why I think that what I'm talking about does work.

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March 15, 2012, 01:43:24 PM
 #163

Just think of it from the perspective of a mining pool operator or someone who runs a major mining operation. If they hold some bargaining power it makes sense to them to constantly change the fee threshold to a higher amount, for at least a little while and see if others want to do the same. Other operators see this and decide that well, we'll do it too. Thus the fees start going up and profits start increasing for everyone. Then we see defections and it starts getting worse again. Cycle restarts. In reality this cycle will actually be continuous and never ending, which creates a sort of equilibrium.

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March 15, 2012, 01:45:23 PM
 #164

As far as I understand it, the more hashing power there is in the high fee pools, the better off everyone is, including you. If a sufficient amount of miners defect from high fee pools, you're worse off than you were originally, regardless of how profitable it seemed at first. This means that if the profits to be gained in the short term are not adequate enough, many miners will not bother to hop at all.

Quote
In other words: My personal benefit from defecting is always higher than my share of the global benefit of me cooperating. I lose from other people defecting, not from me defecting.

You need some balancing factors to prevent that from happening. And they need to be stronger than the global incentive to defect.
I agree. The balancing factor comes from the fact that miners will be constantly pool hopping in an attempt to increase profits. FreeMoney is correct that mining would probably become a bit more centralized from the effects of people selling hashing power to keep it simple. It's important to understand that the miners are not the only ones who control this. Pool operators can change their fee threshold and they hold fairly significant bargaining power.

Also, as I already said, if everyone knows that all you get from defecting is a short term increase in profits, it isn't that straight-forward to calculate if you even want to do it. I still think that there would be a strong equilibrium where major mining businesses and pool operators constantly try to put the fees as high as they can. Not by some cartel or conspiracy, simply because that way everyone gets more profit.

There will be defections and in the end users have a lot to say as well, if they're not willing to pay huge fees then it becomes very unprofitable to run a high fee pool and miners are forced to lower thresholds. In any case miners will always attempt to put the fees as high as possible, anything they can get away with. This will be balanced by the low fee pools and by what users are willing to pay but still, they will not stop trying which is exactly why I think that what I'm talking about does work.
It's not short term vs. long term. It's not hopping between pools to increase profits. It's each miner vs. everyone else. If I'm a selfish miner who only cares about my own long-term profits, my total profits will be higher if I mine at a low-fee pool. Always. I don't hop. I stay in this pool forever. Going to a high-fee pool will not increase my profits, not the profits I have now and not the profits I will have at some future time. And while I'm permanently staying at the low-fee pool, I hope there will be suckers who mine at a high-fee pool and increase my profits. If there are no such suckers I'm screwed, but in this case I'm screwed either way, even if I chose to go to a high-fee pool.

Without a protocol change, the only way to change this equilibrium is with an enforceable way to aggregate hashrate (such as an agent buying mining capacity as described by freemoney).

Just think of it from the perspective of a mining pool operator or someone who runs a major mining operation. If they hold some bargaining power it makes sense to them to constantly change the fee threshold to a higher amount, for at least a little while and see if others want to do the same. Other operators see this and decide that well, we'll do it too. Thus the fees start going up and profits start increasing for everyone. Then we see defections and it starts getting worse again. Cycle restarts. In reality this cycle will actually be continuous and never ending, which creates a sort of equilibrium.
If we assume that everyone is selfish and that this is common knowledge, this won't happen, unless each pool individually is big enough to change the equilibrium. Of course, if some pools are altruistic (or at least superrational) or believe others are, this is a possibility.

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March 15, 2012, 02:09:19 PM
 #165

I think we're finally on the same page. First of all I believe that altruism is no different from self-interest, it's just an indirect version of it. For example, humans in stone age communities probably learned to be friendly to each other because it increased their chances of survival. I have never seen a case of altruism that can not be explained by self-interest, if you think it through.

I now agree with you that small individual miners do not have any incentive to ever mine anywhere else than the low fee pools. This seems to be clear. I also think that Bitcoin mining will become more centralized than it is now, FPGA and ASIC chips will slowly but surely kill off all GPU mining except perhaps those that either have fixed electricity costs or those who effectively use the GPU's for heating.

This development will lead to a situation that such a small part of Bitcoin mining is done by small individual miners, that what I'm talking about could work theoretically. It's important to remember that this whole issue is not an issue in many years, there is plenty of time for the Bitcoin mining network to evolve before that.

When we talk about superrationality, it's the bigger miners that are most rational about their profits, just like in regular business. There is no emotion, there is self-interest and it doesn't matter if it's direct or indirect, altruistic or not, as long as the end result is more profitable than the alternative, it's better. So I do think that players with some bargaining power would attempt to get others on board the high fee train by changing and then hoping others react.

With big rational players there is no emotion. They really do not care even if the low fee pool would be immediately more profitable. Their bargaining power allows them more profit than if they did not use it and if someone gets more profit than them by using the low fee pools, so be it.

Of course there is a limit on how large the difference in profitability can become before even bigger players will start wondering if they are being exploited. I think this could actually lead to a not-so-stable equilibrium, meaning that when a few big players defect from the high-fee train, everyone else is forced to defect as well.

I'm honestly not sure if this is a good way to do it from the user's perspective, one day the fees are that and next day they are this. The variance could potentially be fairly large. Maybe this is one of those aspects where my plan fails Sad

On the other hand, I guess my earlier description could work also, that miners (referring to big miners) start to change back to high fee pools fairly quickly when they notice that defecting had negative consequences.

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March 15, 2012, 02:22:08 PM
 #166

this is hard to imagine working as most of the time it will be more profitable for pool x to also include all the low fees.


That is the point people who naively believe a market will flourish fail to understand.

99.9999999999999999999999999999999999999999999999999999999999999999999999999999 99999999999999999999999999999999999999999999999999999999999999999999999% of the work in solving a block is .... solving the block.  0 transactions or 20,000 transactions the amount of work (and thus cost) is roughly the same.

So there is no economic value to exclude any paying transaction of reasonable value and no economic value in including free transactions so it is more like this.

User fees.
For a fee of 1 BTC avg confirmation time is 10.087 minutes.
For a fee of 0.1 BTC avg confirmation time is 10.09 minutes.
For a fee of 0.01 BTC avg confirmation time is 10.1 minutes.
For a fee of 0 avg confirmation time is 20 weeks.

Now this assumes min fee is 0.01 but in actuality it is 1 satoshi.  1 satoshi will guarantee relatively fast confirmations  0 satoshis will guarantee unbelievably slow confirmations and exponentially higher fees will only marginally decrease confirmation time.  Fees will avg 1 satoshi per confirmation until network gets small enough that a monopolist can gain 51% of network, exclude other blocks and raise fee prices creating a cartel.

How to fix it?
No idea.  Putting a more realistic minimum fee is a bandaid but partially solves the problem.  A better fix would be to have difficulty rise based on value of transactions in the block.  This means avg time per block will have more variance but it directly couples the difficulty with number of transactions and thus puts an economic cost on including transactions and makes fee pricing more plausible.





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March 15, 2012, 03:42:39 PM
 #167

Has this part been considered?:

Senders pay fees, but the only ones actually benefiting from the fee's purpose (transaction being included in a block) are the receivers. So, wouldn't the receivers, aka merchants, be the ones with the interest in getting their transactions through, and as soon as possible, and thus wouldn't they be the ones to keep track of fees charged by pools, have contracts with pools, and force the senders to pay a fee of their choosing? If they only charge the lowest fee along with their merchandise, they'll have less guarantee of getting their money confirmed quickly (or if the transactions/block reach their limit, at all). So the incentive to enforce fees may even be higher with merchants than with miners.

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March 15, 2012, 03:51:57 PM
 #168

Has this part been considered?:

Senders pay fees, but the only ones actually benefiting from the fee's purpose (transaction being included in a block) are the receivers. So, wouldn't the receivers, aka merchants, be the ones with the interest in getting their transactions through, and as soon as possible, and thus wouldn't they be the ones to keep track of fees charged by pools, have contracts with pools, and force the senders to pay a fee of their choosing? If they only charge the lowest fee along with their merchandise, they'll have less guarantee of getting their money confirmed quickly (or if the transactions/block reach their limit, at all). So the incentive to enforce fees may even be higher with merchants than with miners.

Something Mike Hearn has mentioned before is that in the future people may just pass around unconfirmed tx and only when it's for something fairly important will someone bother to pay for confirming all the tx that their 'important' tx has as inputs.

I guess that scenario assumes pretty high fees.

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March 15, 2012, 05:41:14 PM
 #169

I wanted to reiterate a point about market power and its (lack of) potential to save the day.

It is possible that oligopolistic mining could lead to sustained high fees. However, that oligopoly cannot be sustained unless there is a significant entry cost. As long as mining is possible to do efficiently on a small scale, oligopoly will not be possible. Therefore, there will need to be a fundamental change in the technology before oligopoly becomes possible. (For example companies develop patented hashing technologies that are not available to the general public).
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March 15, 2012, 07:28:11 PM
 #170

I wanted to reiterate a point about market power and its (lack of) potential to save the day.

It is possible that oligopolistic mining could lead to sustained high fees. However, that oligopoly cannot be sustained unless there is a significant entry cost. As long as mining is possible to do efficiently on a small scale, oligopoly will not be possible. Therefore, there will need to be a fundamental change in the technology before oligopoly becomes possible. (For example companies develop patented hashing technologies that are not available to the general public).
That's a nice tautological statement. Oligopolists can only operate if they act as an oligopoly.

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March 15, 2012, 09:13:03 PM
Last edit: March 15, 2012, 10:54:36 PM by markm
 #171

It will be interesting to see if the people currently selling ASIC systems will go on to mass-mass-produce them to the point that anyone can afford a few chips. Maybe instead of letting the public have them in huge numbers they will, as soon as they have their "stake", use their proprietary hardware to make a bid at the monopoly.

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March 15, 2012, 10:41:36 PM
 #172

That is the point people who naively believe a market will flourish fail to understand.

99.9999999999999999999999999999999999999999999999999999999999999999999999999999 99999999999999999999999999999999999999999999999999999999999999999999999% of the work in solving a block is .... solving the block.  0 transactions or 20,000 transactions the amount of work (and thus cost) is roughly the same.

So there is no economic value to exclude any paying transaction of reasonable value and no economic value in including free transactions so it is more like this.
I agree with your point, but way too many nines there. There is a tiny cost to including a transaction (verifying ECDSA sig, more bandwidth to broadcast the block) which is larger than a satoshi.

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March 16, 2012, 02:05:17 AM
 #173

It will be interesting to see if the people currently selling ASIC systems will go on to mass-mass-produce them to the point that anyone can afford a few chips. Maybe instead of letting the public have them in huge numbers they will, as soon as they have their "stake", use their proprietary hardware to make a bid at the monopoly.

-MarkM-


This is right. The most likely basis for mining oligopoly is several companies competing for monopoly control using proprietary mining technologies. Once one company has significantly better technology, then it will end up as a monopolist.

If the technologies are not proprietary and instead are sold on a competitive market, then there are three possibilities:
1) The technologies have increasing returns to scale. This will lead to monopoly.
2) The technologies have increasing returns to scale when scale is small to medium, but decreasing returns to scale when scale is large. This could support oligopoly.
3) The technologies have constant or decreasing returns to scale. This would lead to competition.

While oligopoly is possible, I think that monopoly and perfect competition are both much, much more likely as long-term equilibira.
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March 16, 2012, 10:20:29 AM
 #174

Good points by cunicula. Overall I've come to the conclusion that this issue could prove quite challenging. The good thing is that there are many years to work on this, currently our mining network (and thus security) is oversized compared to the size of the market. It will take a long time until this starts to be a real problem but it's good that people are thinking about it already.

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March 16, 2012, 01:25:14 PM
Last edit: March 16, 2012, 01:36:57 PM by Rassah
 #175

I'm not really sure how future technologies can be any different from current technologies in regards to returns to scale. Increasing returns to scale suggests variable costs per unit (hash) decrease as production output (hashes per second) increases, but the hash production is linear to electricity (each extra miner costs the same in additional electricity). The only other variable costs are warehouse storage space (especially if renting), cooling/ventilation, and internet bandwidth. Increasing returns to scale would mean having 20 miners is cheaper to run per miner than having 10 miners, but the additional electricity for each additional miner is constant, as is bandwidth, and though you save a bit of money by warehousing them all close together, you will spend more on keeping that tight cluster cool. As I mentioned earlier, I see mining as more analogous to crop farming than, say, manufacturing or providing electricity, meaning competition is perfect: my hash is just as good as anyone else's, even if my costs were different. Maybe someone can explain where monopoly inducing increasing returns to scale come from?

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March 16, 2012, 01:46:23 PM
 #176

It will be interesting to see if the people currently selling ASIC systems will go on to mass-mass-produce them to the point that anyone can afford a few chips. Maybe instead of letting the public have them in huge numbers they will, as soon as they have their "stake", use their proprietary hardware to make a bid at the monopoly.

-MarkM-

Of course they will sell them to the public. PoW will require a much higher demand of faster and more efficient chips. A "stake" holder only needs a few chips, hardly worth even developing, let alone manufacturing. Stake holders could go back to CPU mining.

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March 16, 2012, 01:55:49 PM
Last edit: March 16, 2012, 04:19:32 PM by DeathAndTaxes
 #177

Rassah with no barriers to entry your right it is unlikely larger operations will be more efficient.

One could develop a custom ASIC that gets 20x better MH/$ and MH/W in bulk with a budget of say $10M.  They could then keep them off the open market creating a barrier to entry (a $10M one). Obviously because of the upfront cost that opportunity is only available to those people who have the scale necessary.  Even better you could develop a chip deploy it privately in bulk and then plan a replacement (possibly incorporating a die shrink).  Sell the "obsolete" version at high markup to public as you deploy the superior one internally.  Doing this provides two advantages.  It improves capital efficiency and it also kills off any potential hardware competitors.  If someone was offer 10 GH/s "obsolete" ASICs for $1000 it doesn't matter if they only cost $400 to build.  It would kill off all the FPGA hardware suppliers reducing the chance someday someone makes a competitive product.

The same thing could apply to improved software.  Most miners are open source thus any improvement gets shared with everyone else.  If I released a miner today which was 10% more efficient the network is made more secure but nobody comes out ahead.  Eventually everyone upgrades (and the improvements are copied to other miners).  If you already have a budget of millions for ASICs one could hire in-house developers to work on things like improving stale rates, improving block broadcast delays, etc. 

Also there is the ability to squeeze some marginal efficiency by using lot latency links to give your blocks a "boost" in any potential fork race.  Lastly the more hashing power you control the more likely your block will be the one extended in a split and re-org.  All those things are more cost effective when ammortizing over say 1TH/s then 1GH/s.

TL/DR version:
Without barriers to entry just being bigger isn't better.  With enough capital you could potentially create some barriers that give you a competitive advantage.
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March 16, 2012, 03:06:28 PM
 #178

Now showing at a theater near you: The Lorax And The Tragedy of the Commons

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March 16, 2012, 03:26:50 PM
 #179

Robin Hood is also a tale about "Tragedy of the Commons." The king owns all. Hunting for food on the king's land is punishable by death. Obviously the hero of the tale is the Sheriff who is looking out for King Richard's private interests. If Robin and his band of terrorists had their way, the lands would be destroyed and civilization would be lost. People like Robin should STFU and be grateful for whatever mercies the Sheriff offers. /sarcasm

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March 16, 2012, 03:28:51 PM
 #180

If the king owns it all the it isn't a tragedy of the commons.
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March 16, 2012, 04:05:00 PM
 #181

Good points by cunicula. Overall I've come to the conclusion that this issue could prove quite challenging. The good thing is that there are many years to work on this, currently our mining network (and thus security) is oversized compared to the size of the market. It will take a long time until this starts to be a real problem but it's good that people are thinking about it already.

yes, but the earlier we find a good solution the better. it should be first tested in a fork, too. Also I am interested if it can improve Namecoin, where the block reward is getting quite low in fiat terms.


I repeat my suggestion from above: Hard code a maximum spread factor of four between the highest and lowest transaction fee within a single block.

Miners will usually want to include the highest fees.
Low fee TXs will sum up and at some point become profitable to include in a low fee block (that does not contain any high fee TXs).

Advantage: The "fee market" will become less steep (compare DeathAndTaxes' post above)

Possible disadvantage: fees of certain height might be delayed because they are too high.

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March 16, 2012, 04:07:18 PM
 #182

If the king owns it all the it isn't a tragedy of the commons.
that's why I added the "/sarcasm"  Tongue
Wow, if you didn't see that I guess I should not presume everyone has read/seen any Robin Hood stories.

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March 16, 2012, 04:33:20 PM
 #183

Sorry for off-topic:
The irony of Robin Hood is that it's a story that demonizes the state, which is literally stealing people's livelyhood through taxes, and shows as heroes the group that takes down said state and returns wealth to its actual owners, the people who worked to produce it... while we commonly think of it as a story that demonizes the rich, who somehow have all this money that shouldn't belong to them, and shows as heroes the group that "steals from the rich and gives to the poor," because the poor deserve that money by virtue of being poor and needing it more.
How the hell did that happen???

D&T - completely agree regarding that type of monopoly. Monopoly through trade secrets is a definite possibility/inevitability. I don't know why cunnicula was bringing up monopoly through any returns to scale, since, yeah, there are minor advantages as you mentioned, but they're minor.

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March 16, 2012, 04:35:49 PM
 #184

I think (although I can't speak for him) the fact is that any monopoly through superior technology requires a lot of scale.

YOU could today make an ASIC miner which is not only cheaper per MH/s than anything on the market it is also more power efficient than anything on the market (back on napkin is ~500MH/s per watt).  This could be done TODAY... only the minor roadblock of needing ~$10M in capital and the risk that capital would be taking.
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March 16, 2012, 05:16:57 PM
 #185

Sorry for off-topic:
The irony of Robin Hood is that it's a story that demonizes the state, which is literally stealing people's livelyhood through taxes, and shows as heroes the group that takes down said state and returns wealth to its actual owners, the people who worked to produce it... while we commonly think of it as a story that demonizes the rich, who somehow have all this money that shouldn't belong to them, and shows as heroes the group that "steals from the rich and gives to the poor," because the poor deserve that money by virtue of being poor and needing it more.
How the hell did that happen???
You are not off topic at all. Tragedy of the Commons is as much a fallacy as The Lorax, Robin Hood, or even applying thermodynamic laws inappropriately when it comes to complex and open systems. Trying to solve a problem that doesn't exist doesn't mean we're redefining the problem (i.e. demonizing the state because the Sheriff < Richard), I am simply saying that applying a Tragedy of the Commons argument to an artificial structure like money is silly. Tragedy of the Commons can only apply to natural systems like Lotka–Volterra equations. Humans are resourceful enough to find technological solutions to resource issues, not that they always do, but that's another issue entirely NOT related to the resources themselves.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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March 17, 2012, 02:36:11 AM
 #186

I think (although I can't speak for him) the fact is that any monopoly through superior technology requires a lot of scale.

Yes, D&T is correct as usual.



YOU could today make an ASIC miner which is not only cheaper per MH/s than anything on the market it is also more power efficient than anything on the market (back on napkin is ~500MH/s per watt).  This could be done TODAY... only the minor roadblock of needing ~$10M in capital and the risk that capital would be taking.

You might be able to recoup a lot of that. Just sell as many patented units on the open market until it is just about saturated at a price equal to say four times your marginal cost. I think you could pawn off several million dollars worth. Now make another, larger batch of units and use these to seize control of 51% of the network, expropriate your customer's mining rights, and earn ~35k USD of revenue a day.

I agree that it is still highly risky, but the look on your customers faces would be priceless.
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March 17, 2012, 03:46:44 AM
 #187

Sorry for off-topic:
The irony of Robin Hood is that it's a story that demonizes the state, which is literally stealing people's livelyhood through taxes, and shows as heroes the group that takes down said state and returns wealth to its actual owners, the people who worked to produce it... while we commonly think of it as a story that demonizes the rich, who somehow have all this money that shouldn't belong to them, and shows as heroes the group that "steals from the rich and gives to the poor," because the poor deserve that money by virtue of being poor and needing it more.
How the hell did that happen???
You are not off topic at all. Tragedy of the Commons is as much a fallacy as The Lorax, Robin Hood, or even applying thermodynamic laws inappropriately when it comes to complex and open systems. Trying to solve a problem that doesn't exist doesn't mean we're redefining the problem (i.e. demonizing the state because the Sheriff < Richard), I am simply saying that applying a Tragedy of the Commons argument to an artificial structure like money is silly. Tragedy of the Commons can only apply to natural systems like Lotka–Volterra equations. Humans are resourceful enough to find technological solutions to resource issues, not that they always do, but that's another issue entirely NOT related to the resources themselves.

Like wanting to know what the wind chill factor is on steel when the temperature is +19F.

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March 17, 2012, 06:29:22 AM
 #188

Just sell as many patented units on the open market until it is just about saturated at a price equal to say four times your marginal cost. I think you could pawn off several million dollars worth. Now make another, larger batch of units and use these to seize control of 51% of the network, expropriate your customer's mining rights, and earn ~35k USD of revenue a day.

I'm glad THAT scenario is almost impossible  Roll Eyes

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March 17, 2012, 08:42:53 AM
 #189

this is hard to imagine working as most of the time it will be more profitable for pool x to also include all the low fees.
That is the point people who naively believe a market will flourish fail to understand.

99.9999999999999999999999999999999999999999999999999999999999999999999999999999 99999999999999999999999999999999999999999999999999999999999999999999999% of the work in solving a block is .... solving the block.  0 transactions or 20,000 transactions the amount of work (and thus cost) is roughly the same.
Actually there is some difference for the pool. Really.

Now this assumes min fee is 0.01 but in actuality it is 1 satoshi.  1 satoshi will guarantee relatively fast confirmations  0 satoshis will guarantee unbelievably slow confirmations and exponentially higher fees will only marginally decrease confirmation time.  Fees will avg 1 satoshi per confirmation until network gets small enough that a monopolist can gain 51% of network, exclude other blocks and raise fee prices creating a cartel.
50 000 satoshi, not 1.

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March 17, 2012, 07:58:56 PM
 #190

this is hard to imagine working as most of the time it will be more profitable for pool x to also include all the low fees.
That is the point people who naively believe a market will flourish fail to understand.

99.9999999999999999999999999999999999999999999999999999999999999999999999999999 99999999999999999999999999999999999999999999999999999999999999999999999% of the work in solving a block is .... solving the block.  0 transactions or 20,000 transactions the amount of work (and thus cost) is roughly the same.
Actually there is some difference for the pool. Really.
please elaborate

Quote
Now this assumes min fee is 0.01 but in actuality it is 1 satoshi.  1 satoshi will guarantee relatively fast confirmations  0 satoshis will guarantee unbelievably slow confirmations and exponentially higher fees will only marginally decrease confirmation time.  Fees will avg 1 satoshi per confirmation until network gets small enough that a monopolist can gain 51% of network, exclude other blocks and raise fee prices creating a cartel.
50 000 satoshi, not 1.
he aint talking about what is hard coded into the standard client. network does not currently enforce a minimum fee.

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March 18, 2012, 09:13:13 PM
 #191

[...]
Now this assumes min fee is 0.01 but in actuality it is 1 satoshi.  1 satoshi will guarantee relatively fast confirmations  0 satoshis will guarantee unbelievably slow confirmations and exponentially higher fees will only marginally decrease confirmation time.  Fees will avg 1 satoshi per confirmation until network gets small enough that a monopolist can gain 51% of network, exclude other blocks and raise fee prices creating a cartel.

How to fix it?

Does it need to be fixed?
The (wannabe) monopolist raising fees makes mining more profitable --> new miners try to enter the business taking away the 51% to the (ex) monopolist --> fees get lowered again due to the new competition, and that delicate equilibrium is found again.

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March 15, 2013, 07:40:47 AM
Last edit: May 29, 2013, 03:35:26 PM by phelix
 #192

As it turns out transactions actually come at a cost:
https://gist.github.com/gavinandresen/5044482  "Back-of-the-envelope calculations for marginal cost of transactions"


So I am not sure if it is really needed any more but I would still like to throw this idea out:

There might be a way to balance a single miners short time interest with all miners long time interest to hold up transaction fees. It allows for something like a limited miners union.

1.) In each block miners vote for a minimum tx fee by the lowest tx fee included. This txFeeMin is averaged over 50 blocks or more.
2.) Only txs with fees above 0.5 * txFeeMinAvg are valid.


The averaging could be done via a moving average (or even together with difficulty changes).

Of course the factor does not have to be 0.5. The averaging time could be 2016 blocks.

Probably it would be more robust to use a median instead of average or an upper limit to prevent artificial increase of txFeeMinAvg by rogue miners.

edited: up to, clarity & brevity, median

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March 15, 2013, 08:20:34 PM
 #193

0.5 * min?  Wouldn't that force the fee lower and lower until it reached zero.

i.e. avg min fee is 0.001. 0.001 * 0.5 = 0.0005.  So only fees below 0.0005 are valid?
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March 16, 2013, 12:43:25 AM
 #194

i see in the future when the block chain is too big to manage and all the other blah that people panic about passed their lifetime. people would just leave their coins in a bitcoin address fully verified and then they would dispurse out physical notes or metal coins backed by the verified bitcoin.

thus not requiring the need for miners.

that is one low tech slution.

there are MANY solutions to the problems. so dont worry about 40 years time. just think about the next few years and base things off a "5 year plan" where you change strategies or investment idea's as things change.

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Please do your own research & respect what is written here as both opinion & information gleaned from experience. many people replying with insults but no on-topic content substance, automatically are 'facepalmed' and yawned at
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March 16, 2013, 09:53:04 AM
Last edit: May 29, 2013, 03:26:26 PM by phelix
 #195

0.5 * min?  Wouldn't that force the fee lower and lower until it reached zero.

i.e. avg min fee is 0.001. 0.001 * 0.5 = 0.0005.  So only fees below 0.0005 are valid?

 Roll Eyes   I meant above. Thanks for pointing that out. What a bummer.


Also I got a new variant:

1.) In each block miners vote for a minimum tx fee by the lowest tx fee included. This txFeeMin is averaged over 50 blocks or more (2016?).
2.) Only 10% of the txs in a block are allowed to be below txFeeMinAvg.

My gut says this might go into the right direction to balance the miner's short term and long term interest.

It would be nice to have some kind of simulation or a small game with real people to quickly test the outcome of such fee rules. And the final test should be with an altcoin.

edit: Percentage of txs in a block might not be such a good idea because miners can simply create txs to themselves (depending on orphan rate).

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March 16, 2013, 09:59:02 AM
 #196

Miner actually vote with every block, since transactions they include define what they expect.

Clients can estimate average fee/byte needed to get into the block by analyzing recent blocks, then using a multiple of that depending on their urgency.