Some major flaws about Bitcoin raised in this video clip- can anyone explain?

[OleOle]

There's very rarely anything without flaws, everything is more or less in a constant state of ebb and flow, sometimes getting better, sometimes getting worse.

It may be completely unfounded but for a variety of reasons I am quite confident bitcoin can grow from strength to strength as there are seemingly enough evolutionary drivers associated with the cryptocurrency.

Just sayin'.

 

[HELP.org]

Still haven't seen a decent response to this problem...

The problem is not stated completely correctly since mining pools do not have as much control as he states.  They depend on the pool members who can switch instantly so I think that part of the problem is overstated.  Beyond that he makes some good points but the system is still experimental  and it is unclear to me how it will pan out.  Several people have claimed the current system is unsustainable over the long term.  The problem is that the solutions proposed are mostly centralized models and that eliminates the main point of Bitcoin.  Right now we are in the gold rush era since the block rewards are so large.  In just over 100,000 blocks the reward will be halved again and there is pressure to keep the transaction fees low so I think that will create a big upheaval in the mining ecosystem.  I don't think the current rate of increase can be sustained past the next halving.

Note that Dan Kamisky went through this same thing before and claimed POW would be over by the end of last year.  His issue was that Avalon asics had a huge percentage of the hashing power because they designed the first working chips.  Of course they had no incentive to disrupt the Bitcoin ecosystem so they sold the miners instead of taking over the system.

The bottom line is that it is experimental and people who claim to know what will happen or claim something "dead" is hyperbole.

[CliveK]

One thing Daniel Larimer mentions which should be of concern to everyone who supports Bitcoin:  The average cost per transaction.

This obviously needs to be low because the intent is to be below the current trusted 3rd party financial institute's fees.  I base this on the following from Nakamoto's paper:

"Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services."

Larimer suggests that eventually the transaction fees will be around the $8 mark. This got me thinking along the lines of what the cost to process a transaction is today.

So what is the cost of adding a transaction into the blockchain?  NOTE: I am not talking transaction fees, I am talking the actual cost of processing the transaction based on the cost of computational power. Since the transactions are processed by miners, I would suggest the answer to is the cost of the power to mine divided by the number of transactions as a starting point.  Note, this is a starting point, it does not include hardware required, services, bandwidth, etc. which would need to be added in to get the total cost before dividing the number of transactions (ie: only making it worse). Disclaimer:  Please understand, I am not an economist and neither do I have a degree in finance.

Total number of transactions for a year (from Blockchain.info): 45,795,557
Estimated cost to power Bitcoin mining (from Haas McCook): $780,000,000

I get $17 per transaction.  This is a seriously shocking figure.  Even if McCook's estimate of power used in Bitcoin mining is twice as much as he suggests it is, the cost is still $8 to process a transaction.  Miner revenue for this same period is $834,649,130.70

With an increasing hash rate, though thankfully more power efficient miners, this is likely to get worse.  With mining equipment having a ROI life of say 6 to 9 months, mining gear could be purchased up to twice a year in order to maintain revenue.  This should really be the concern of the Proof-of-Work mechanism used.  Competition is increasing the cost versus decreasing it like you would expect in other industries.  Food for thought.

Please find McCook's paper here:
https://cdn.panteracapital.com/wp-content/uploads/The-Relative-Sustainability-of-the-Bitcoin-Network.pdf

Blockchain.info URL:
https://blockchain.info/charts/n-transactions-total?timespan=1year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

CK

Donations towards my thesis welcome:  1ADEzUG7HVQkq3mu5g85KkupAAbzRTppyd

[HELP.org]

Here is the rate of transactions which has not gone up significantly in 2 years
https://blockchain.info/charts/n-transactions?timespan=2year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

It is reaching a record of staying above 50,000 per day for 2 months continuously but it is not some huge increase.

[delulo]

One thing Daniel Larimer mentions which should be of concern to everyone who supports Bitcoin:  The average cost per transaction.

This obviously needs to be low because the intent is to be below the current trusted 3rd party financial institute's fees.  I base this on the following from Nakamoto's paper:

"Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services."

Larimer suggests that eventually the transaction fees will be around the $8 mark. This got me thinking along the lines of what the cost to process a transaction is today.

So what is the cost of adding a transaction into the blockchain?  NOTE: I am not talking transaction fees, I am talking the actual cost of processing the transaction based on the cost of computational power. Since the transactions are processed by miners, I would suggest the answer to is the cost of the power to mine divided by the number of transactions as a starting point.  Note, this is a starting point, it does not include hardware required, services, bandwidth, etc. which would need to be added in to get the total cost before dividing the number of transactions (ie: only making it worse). Disclaimer:  Please understand, I am not an economist and neither do I have a degree in finance.

Total number of transactions for a year (from Blockchain.info): 45,795,557
Estimated cost to power Bitcoin mining (from Haas McCook): $780,000,000

I get $17 per transaction.  This is a seriously shocking figure.  Even if McCook's estimate of power used in Bitcoin mining is twice as much as he suggests it is, the cost is still $8 to process a transaction.  Miner revenue for this same period is $834,649,130.70

With an increasing hash rate, though thankfully more power efficient miners, this is likely to get worse.  With mining equipment having a ROI life of say 6 to 9 months, mining gear could be purchased up to twice a year in order to maintain revenue.  This should really be the concern of the Proof-of-Work mechanism used.  Competition is increasing the cost versus decreasing it like you would expect in other industries.  Food for thought.

Please find McCook's paper here:
https://cdn.panteracapital.com/wp-content/uploads/The-Relative-Sustainability-of-the-Bitcoin-Network.pdf

Blockchain.info URL:
https://blockchain.info/charts/n-transactions-total?timespan=1year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

CK

Donations towards my thesis welcome:  1ADEzUG7HVQkq3mu5g85KkupAAbzRTppyd

Agree 100%. I calculated around 30$ per transaction at the current level of POW security. https://bitcointalk.org/index.php?topic=395761.msg6852307#msg6852307
With BitsharesX it is $1 cent per transaction while providing more security per time passed since the tx was broadcasted.
...Someone has to pay the costs, either the users ($8-$40 USD per tx; ~ $40 was calculated by Tim Swanson) or the coin holders (as it is today, ~10% dilution = 10 % increase in money supply per year with Bitcoin atm).
Those are bare facts.

[hhanh00]

One thing Daniel Larimer mentions which should be of concern to everyone who supports Bitcoin:  The average cost per transaction.

This obviously needs to be low because the intent is to be below the current trusted 3rd party financial institute's fees.  I base this on the following from Nakamoto's paper:

"Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services."

Larimer suggests that eventually the transaction fees will be around the $8 mark. This got me thinking along the lines of what the cost to process a transaction is today.

So what is the cost of adding a transaction into the blockchain?  NOTE: I am not talking transaction fees, I am talking the actual cost of processing the transaction based on the cost of computational power. Since the transactions are processed by miners, I would suggest the answer to is the cost of the power to mine divided by the number of transactions as a starting point.  Note, this is a starting point, it does not include hardware required, services, bandwidth, etc. which would need to be added in to get the total cost before dividing the number of transactions (ie: only making it worse). Disclaimer:  Please understand, I am not an economist and neither do I have a degree in finance.

Total number of transactions for a year (from Blockchain.info): 45,795,557
Estimated cost to power Bitcoin mining (from Haas McCook): $780,000,000

I get $17 per transaction.  This is a seriously shocking figure.  Even if McCook's estimate of power used in Bitcoin mining is twice as much as he suggests it is, the cost is still $8 to process a transaction.  Miner revenue for this same period is $834,649,130.70

With an increasing hash rate, though thankfully more power efficient miners, this is likely to get worse.  With mining equipment having a ROI life of say 6 to 9 months, mining gear could be purchased up to twice a year in order to maintain revenue.  This should really be the concern of the Proof-of-Work mechanism used.  Competition is increasing the cost versus decreasing it like you would expect in other industries.  Food for thought.

Please find McCook's paper here:
https://cdn.panteracapital.com/wp-content/uploads/The-Relative-Sustainability-of-the-Bitcoin-Network.pdf

Blockchain.info URL:
https://blockchain.info/charts/n-transactions-total?timespan=1year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

CK

Donations towards my thesis welcome:  1ADEzUG7HVQkq3mu5g85KkupAAbzRTppyd

Agree 100%. I calculated around 30$ per transaction at the current level of POW security. https://bitcointalk.org/index.php?topic=395761.msg6852307#msg6852307
With BitsharesX it is $1 cent per transaction while providing more security per time passed since the tx was broadcasted.
...Someone has to pay the costs, either the users ($8-$40 USD per tx; ~ $40 was calculated by Tim Swanson) or the coin holders (as it is today, ~10% dilution = 10 % increase in money supply per year with Bitcoin atm).
Those are bare facts.

Block #318997
Summary
Number Of Transactions    118
Output Total   2,390.60927025 BTC
Estimated Transaction Volume   1,315.50637339 BTC
Transaction Fees   0.01761036 BTC

Why talk about the transaction cost without considering the transaction fees vs the block reward?
Today miners get 25 BTC from the reward and 0.01761036 from the fees. Basically, transaction costs are negligible. The idea is that as the rewards go lower, the total fees offset the loss. Obviously, it is not with 120 x 0.0001 btc that you get there. Very roughly, we need 250 000 transactions per block.

So the main question is - How do we get bitcoin to support this type of volume and more importantly how do we get bitcoin to these kind of volumes?

[delulo]

So the main question is - How do we get bitcoin to support this type of volume and more importantly how do we get bitcoin to these kind of volumes?

my calculation is based on the assumption that nothing else changes.

Why should tx volume / mass adoption catch on just because the block rewards is halving?  

[johncarpe64]

One thing Daniel Larimer mentions which should be of concern to everyone who supports Bitcoin:  The average cost per transaction.

This obviously needs to be low because the intent is to be below the current trusted 3rd party financial institute's fees.  I base this on the following from Nakamoto's paper:

"Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services."

Larimer suggests that eventually the transaction fees will be around the $8 mark. This got me thinking along the lines of what the cost to process a transaction is today.

So what is the cost of adding a transaction into the blockchain?  NOTE: I am not talking transaction fees, I am talking the actual cost of processing the transaction based on the cost of computational power. Since the transactions are processed by miners, I would suggest the answer to is the cost of the power to mine divided by the number of transactions as a starting point.  Note, this is a starting point, it does not include hardware required, services, bandwidth, etc. which would need to be added in to get the total cost before dividing the number of transactions (ie: only making it worse). Disclaimer:  Please understand, I am not an economist and neither do I have a degree in finance.

Total number of transactions for a year (from Blockchain.info): 45,795,557
Estimated cost to power Bitcoin mining (from Haas McCook): $780,000,000

I get $17 per transaction.  This is a seriously shocking figure.  Even if McCook's estimate of power used in Bitcoin mining is twice as much as he suggests it is, the cost is still $8 to process a transaction.  Miner revenue for this same period is $834,649,130.70

With an increasing hash rate, though thankfully more power efficient miners, this is likely to get worse.  With mining equipment having a ROI life of say 6 to 9 months, mining gear could be purchased up to twice a year in order to maintain revenue.  This should really be the concern of the Proof-of-Work mechanism used.  Competition is increasing the cost versus decreasing it like you would expect in other industries.  Food for thought.

Please find McCook's paper here:
https://cdn.panteracapital.com/wp-content/uploads/The-Relative-Sustainability-of-the-Bitcoin-Network.pdf

Blockchain.info URL:
https://blockchain.info/charts/n-transactions-total?timespan=1year&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

CK

Donations towards my thesis welcome:  donation spam removed from quote

I disagree with your conclusion. Today the majority of the revenue the miners received is from block subsidies. These block subsidies allow for miners to spend more money on electricity then they earn in TX fees alone. Block subsidies are in place to give miners an incentive to keep the network secure while bitcoin grows and does not have enough transaction volume to support the cost of securing the network. The theory is that over time, the number of TX per second will grow to an amount high enough that TX fees are able to pay to keep the network secure.

[CliveK]

You are welcome to disagree and I encourage debate. Just from your answer I am not sure which point of my conclusion you are disagreeing with.

I conclude that the average cost to protect the Bitcoin network is nothing lower than $17 and this is going to get worse as more POW is added to the network. The average increase since inception has been 18% per transition.  Competition is meant to make things cheaper not more expensive but this is not what we see in POW.

Cost to power Bitcoin mining / number of transactions that are being processed by Bitcoin mining = cost to protect Bitcoin Network

And again, not including full nodes, mining hardware, operational costs of miners other than power, the backbone Matt Corallo has implemented, or any fast payment services available.

Subsidy fees to miners are there for 2 reasons - compensate miners, which you pointed out and introduce/mint new coins which you didn't mention.

[hhanh00]

Doing this calculation today ignores the award. Miners work to get it, they don't care about our transactions. You say 18$ because you divide the mining cost by the transaction count but they would be doing the same even if the blocks were empty.
Would it mean that the transaction cost is infinite?
We'll have a clearer picture when all the bitcoin are created. Then, we'll know the transaction cost. If it's greater than 5 cents, bitcoin is not viable for microtransactions. Until then, it's an upperbound estimation with a significant error margin.

[CliveK]

You are 100% correct, the calculation does ignore the reward. Reward has nothing to do with calculating cost. I did mention the reward total in my post, though it is not relevant in calculating the cost, but it is the incentive that drives the cost up, and one of the major points in my comment.  POW model increases the costs of securing the transactions because it increases competition for the reward.

You are correct, they would be doing the same if it was empty.  The computing power that powers mining is incredibly high, with very few transactions in relation to the computing power to process/safeguard the transaction at hand. This can only be attributed to the reward for solving a block as the transaction fees are negligible today, again pointing to the reward being the reason.

If there are no transactions, then there can be no cost to secure the transactions, so then my formula would be:

Cost to power Bitcoin mining / number of transactions that are being processed by Bitcoin mining (where number of transactions are greater or equal to one) = cost to protect Bitcoin transactions

In reality, there are transactions, so one is able to do the calculation.

With regards to the "until then, it's an upperbound estimation with a significant error margin."  Can you suggest another method of calculating what the cost of securing a transaction is today?  This was my question I attempted to answer. I appreciate you taking the time to reply with a critisism but you don't offer an alternative other than wait and see.  Again, the question is today, not the unknown future.

I do understand that once the incentive is gone, miners will only be claiming transaction fees, and that these fees would need to cover the cost of the miners or there would be no incentive to mine, it clearly states this on page 4 of Nakamoto's paper, and indeed we will be able to calculate the cost of processing a transaction, but that will also have nothing to do with income, rather just the cost of the "CPU time and electricity" as Nakamoto puts it.

[CliveK]

Using the same method I used previously, using AntMiners, so this includes the cost of hardware and power consumption and cooling, I get about $7 per transaction.

Cost of power (including cooling)+ Cost of Hardware (S3+ and PSU)/ Transaction volume (must be 1 or greater) = Cost to secure each transaction.

This assumes:
everyone is running efficient hardware at $0.08 per kWh.
extra 1/3 of power cost is added to account for cooling
conversion rates are as of the time of this post


That is mining at its most economical but still accessible to the average person (subjective)


This also answers whether there is money to be made in mining.  If total income of miners is $834,649,130.70 (using yesterdays posted amount), and the expenses are calculated as per the above ($317,834,173.10).  There is a huge profit in mining.  The question is who is getting it?

People who generate their own electricity, who don't need to pay for cooling and who have invested in and run efficient hardware.

[headswim]

I really don't agree with the stated method as a measure of "transaction cost", since the "cost" to miners must be less than 0 in order to incentivize mining. If it were not, there would be only hobbyist miners, and we would not be seeing network hash rate growth currently. Maybe there's some cost for the solo miner using Antminers and spending more in electricity than the block reward, but they are mining with unprofitable hardware, inflating this measure arbitrarily. Those people don't increase the costs of transacting in Bitcoin at all. In fact, we could likely run the entire block chain on a single node today, if we could only find a trusted central authority.... /sarc. Anyway, "mining operating expenses" / # of network transactions is a poor measure of the cost to transact in bitcoin.

The true "cost" of transactions for comparison should be simply the transaction fees / amount of BTC transacted.

None of this even matters until the mining subsidy is removed in 100 or so years; at that point if transaction fee value is greater than the cost of operating a mining facility, mining will continue to grow until the cost of mining is no longer below the transaction fee reward (or more likely until an overshoot and correction), at which point the network will eventually reach equilibrium. The cost per transaction will remain roughly the same, since the network will self-adjust based on profitability of mining. This scenario would likely require a much higher purchasing power for BTC as well as a higher volume of transactions on the network.

But even if the subsidy were removed today, what would likely happen is people switch off hardware, increasing transaction fee payouts to the remaining players until equilibrium is reached in terms of transaction fees = costs. Either way, equilibrium is roughly reached, at which point the amount of BTC gained from transaction fees would have to be very close to the overhead cost of maintaining the network. Since transaction fees ultimately = cost, my suggested method above is a much more accurate way of stating the cost of transacting in bitcoin

TLDR - cost per transaction is actually almost nothing, still, and the $30, $17, etc. numbers are based on misleading definitions and incorrect assumptions.

[hhanh00]

Right. It's quite simple actually. The price is determined by the equilibrium between suppliers of the service and the people paying for it. Today, everybody is happy to settle on 0.0001 BTC per transaction (excluding large transactions). It's as if there is a massive subsidy on bitcoin transactions. So much that it hides the real cost. When it goes away, we'll settle at a different point. I can't tell you where. We can look at where the reward comes from though. If 25 BTC are created, they dilute the value of the previous coins. But also there, people factored that in. They already consider the final number of coins in their valuation of bitcoin.
So basically, the transaction cost is the transaction fee because we are paying for the rest by accepting the scheduled inflation.

[CliveK]

I really don't agree with the stated method as a measure of "transaction cost", since the "cost" to miners must be less than 0 in order to incentivize mining. If it were not, there would be only hobbyist miners, and we would not be seeing network hash rate growth currently.

You have got to be kidding me. You lost me on this part.

[delulo]

But even if the subsidy were removed today, what would likely happen is people switch off hardware, increasing transaction fee payouts to the remaining players until equilibrium is reached in terms of transaction fees = costs.

...but that would decrease the security of the network as POW security depends on the amount of hashing power available to the network.

[CliveK]

It's as if there is a massive subsidy on bitcoin transactions. So much that it hides the real cost.

What you say makes total sense.  The cost is subsidised by the reward.

I do appreciate this reply, it gave me something to think about.

[Scoremaster]

there is no problem. its the same uninformed people making videos and the noobies get scared lol. just stop worrying.

[hhanh00]

But even if the subsidy were removed today, what would likely happen is people switch off hardware, increasing transaction fee payouts to the remaining players until equilibrium is reached in terms of transaction fees = costs.

...but that would decrease the security of the network as POW security depends on the amount of hashing power available to the network.

That's right. It's why I said that Bitcoin needs to solve the transaction limit problem (1 MB) and get massive adoption so that while fees remain low, their total value is enough incentive to continue mining. If fees are too high, people will not use it. If total value is too low, miner will quit. We need both for a secure system. Fortunately, smart people saw that it takes time and built the schedule over a hundred years.

[dompsairs]

Bitcoin is perfect, his argument is henceforth invalid.