Bitcoin & Tragedy of the Commons

[cunicula]

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.

[ripper234]

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.

[ripper234]

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

[cunicula]

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.

[cunicula]

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!

[Meni Rosenfeld]

- 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).

[Mike Hearn]

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.

[ripper234]

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.

[cunicula]

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.

[ripper234]

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.

[cbeast]

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.

[cunicula]

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.

[kjj]

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.

[cypherdoc]

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.

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.

How will assurance contracts make monopoly less attractive?

[cunicula]

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.

[cbeast]

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.

[cunicula]

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.  

[kjj]

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.

[cunicula]

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.

[cunicula]

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.