Why doesn't the block reward decrease continuously?

[LMGTFY]

But you won't be paying higher fees just for security - you'll be paying higher fees so that your transactions are processed speedily. Security will just be a pleasant side-effect. Higher fees won't be "enforced": they'll come about through the natural operation of a free market.

There is perfect competition between miners, so I think transactions will be payed at their real (hardware processing) cost.
No more than that. (If transaction capacity is voluntarily limited, it won't be the case, but see my second point).

All this is very unclear to me. But bitcoin's security has a very big cost. And it seems nobody knows who will/should pay for it.
People here mostly consider bitcoins advantages and tend to forget about everything else.

You say this is very unclear to you. That's fair enough. But you then assume that "nobody knows who will/should pay for it" - that's not correct. For those of us for whom this isn't very unclear, we have a pretty clear idea who will pay for security: people making transactions. If transaction fees decrease, so will transaction speed. This incentivises people to pay higher transaction fees, ensuring that miners continue/start/resume mining, and improving both transaction speed and network security.

I don't think that there will be perfect competition between miners: it will be cheaper for miners to continue mining than it will be for ex-miners to restart mining, and it will be cheaper to re-start mining than it will be to start from scratch. However, even assuming perfect competition, transaction fees will move towards but not reach real cost - there has to be a profit element or miners simply won't bother. But I'm not worried about that, because if miners stop mining the profit for those that remain will increase. And there will be incentive for ex-miners to restart, or for new miners to start from scratch.

[djoot]

On the day before the reward decreases from 50 to 25, there will be approx 7200 new coins generated out of a total of 10.5 million. Less than 0.08% extra. On the following day there will be approx 3600 new coins generated out of a total of 10.5 million. Less than 0.04% extra.

The change from 0.08% to 0.04% per day won't upset the markets, and the miners will have known about the coming change for ages, and will have factored it into their plans and budgets.

This is not something to sweat about.

Halving the reward is the equivalent of having half the gold content in your ore disappearing over night. This will cause most miners to become unprofitable, so block generation could crawl to almost a halt, making the next 2016 blocks very long and painful.

I think the 2016 block interval for difficulty changes could cause big problems, not limited to times of reward change. Suppose the market tanks at the beginning of a new difficulty, causing 90% of the hashing power to quit - this would mean that it would take 20 weeks until difficulty was adjusted again, not good...

This is unless fees go up a lot or are already a major part of the reward for each block.

Is this correct reasoning?

Just because you see an event happening does not mean it won't cause major changes in a market if you are at a loss at what to do about it...
"Tomorrow God comes down and removes half the gold in your ore" is a smaller problem, since the security of transacting existing gold does not depend on miners to keep mining. Gold miners will resume when/if the gold price makes it profitable.

So I think there clearly is a problem. The solution to this problem should be pretty obvious and, I believe, technically easy to implement. It also should not be that big of a problem politically, but I would like first to see if people agree it is a problem, and comes up with the same solution.

[MoonShadow]

On the day before the reward decreases from 50 to 25, there will be approx 7200 new coins generated out of a total of 10.5 million. Less than 0.08% extra. On the following day there will be approx 3600 new coins generated out of a total of 10.5 million. Less than 0.04% extra.

The change from 0.08% to 0.04% per day won't upset the markets, and the miners will have known about the coming change for ages, and will have factored it into their plans and budgets.

This is not something to sweat about.

Halving the reward is the equivalent of having half the gold content in your ore disappearing over night. This will cause most miners to become unprofitable, so block generation could crawl to almost a halt, making the next 2016 blocks very long and painful.

Doubtful.  At worst, half the miners will give up because they suddenly became unprofitable, and the interval between blocks would stretch to 20 minutes.

[djoot]

Doubtful.  At worst, half the miners will give up because they suddenly became unprofitable, and the interval between blocks would stretch to 20 minutes.

So, at worst 50% of hashing is on free electricity or are just that profitable that they can take a 50% cut in revenue? Maybe.

What did you base your estimate on?

[MoonShadow]

Doubtful.  At worst, half the miners will give up because they suddenly became unprofitable, and the interval between blocks would stretch to 20 minutes.

So, at worst 50% of hashing is on free electricity or are just that profitable that they can take a 50% cut in revenue? Maybe.

What did you base your estimate on?

Assuming that the trade value of a bitcoin is more or less the same on one side of the halving of the block reward as on the other, and also assuming that there is zero revenue from transaction fees in order to take the worst case scenario; the drop in the block reward from 50 bitcoin to 25 bitcoin is mathmaticly the same as a sudden doubling of the difficulty from the perspective of a miner.  This is something that they are all going to know is coming from far in advance, and almost all of them will have a pretty good idea whether or not mining will still be profitable.  So those that would no longer be profitable might stop, and logicly that cannot be more than half of the miners in total just before the cut.  Those that remain would be profitable again by at least the next difficulty retarget.

[malditonuke]

...does anyone know why he chose a block reward function that looks like a staircase rather than a smooth curve?

This is just a shot in the dark, but perhaps the idea was to jog bitcoin from one stage to the next, i.e. less reliance on block rewards and more reliance on tx fees.

[marcus_of_augustus]

Yes. If block reward halves and there are enough people who 'need' to make transactions that cannot wait a few months, then it should spur an increase in transaction fees .... or those 2016 blocks after 1/3/13 could take a looooong time, no free transactions during that period I'd think.

[ribuck]

Yesterday the difficulty went up by 50%, and there was no sudden change in the mining power. I think the miners would easily adapt to the block reward change, which is in some ways similar to a 100% increase in difficulty.

[djoot]

@creighto
Asserting logic does not make your argument logical. Every miner has a cost to generate a block at a certain difficulty, if this cost is more than 25BTC+fees they would be taking a loss after halving the reward. There is nothing that says that at least half the miners have costs less than that. You just make that claim, asserting that it somehow logically follows, without explaining your logic.

@ribuck
Price of BTC also went up a lot, increasing profit margins and drawing investment into hashing power. Halving the reward is indeed like increasing the difficulty by 100%, without having been driven there by market forces, but because it was time to do it.

It will probably sort itself out in the end, but the sorting out process could be very painful I'm afraid.

I think the main problem is the 2016 block retarget interval, which IMO is way too long.
The difficulty could possibly be halved at the same time as reward halves, but this alone would just cause blocks to be spit out twice the speed for a week with a 100% rise in difficulty and back to square one after that. (Simplified example assuming no changes in market conditions...)

My point is, that I would like to see difficulty track actual hash rate a lot closer, and I think this would mitigate potential problems coming from reward halving or big drops in the price of BTC.

[ribuck]

@djoot: My philosophy in life is to not spend time worrying about unprovable conjectures that have minor consequences.

2016-block retargeting intervals are probably suboptimal. But so what? People keep mining regardless.

Don't worry, be happy.

[djoot]

@djoot: My philosophy in life is to not spend time worrying about unprovable conjectures that have minor consequences.

2016-block retargeting intervals are probably suboptimal. But so what? People keep mining regardless.

Don't worry, be happy.

Heh, I hope you're right