Topic: Bitcoin can never become a currency. Part 2: reward distribution. - page 3. (Read 739 times)

What are these conclusions based upon? I didn't come across Satoshi's view on ASICS. As far as I remember, he had disappeared before all that stuff emerged. The text of the original paper clearly shows that he wasn't aware at the time, otherwise it would have been mentioned.

Much better than Bitcoin as a value storage or a hedging asset? No. In fact, an absolute crap in this role. Much better for investors, who will gain x100 in the first year? No. In fact, a poor investment in long terms. Much better as a currency? Yes, and that's the point. Not only an altcoin itself, but a novel economic model that can be implemented elsewhere, given that the required technical properties are also met.

You see, the problem of altcoins is that they are, as you say, busy selling themselves, instead of trying to solve real problems. It's easy to provide better speed or scalability than Bitcoin, which is why everybody claims "we have 1000 TPS instead of 7" or "finality in 1 minute instead of 60". The quintessence of shitcoin ideology was TON with its ridiculous 1 million TPS and 1,7 billion USD raised for, in fact, an inept Polkadot rip-off with unknown purpose.

I didn’t see any adequate project that was devoted to embodying the initial ideas of Satoshi and creating a cryptocurrency that could actually be used for payments on the consumer level instead of granting x100 to investors.

I tend to agree to this gresham's law isn't that applicable for bitcoin as it talks only commodity money which on part of bitcoin isn't one of, Most probably the opposite of that will work on bitcoin. This is a non-ending discussion if both of you guys would not agree that bitcoin is only an alternative currency, just face check the reality of currencies. Ideally we can have a cryptocurrency to be used by the whole world, what's not ideal is that we are pushing it to be a non-centralized one, we are pushing too hard for bitcoin.

That's correct, except that we cannot apply Gresham's Law to Bitcoin. It only works with commodity money and only given that the price of both good and bad money is set exogenously. In our situation Thiers' law is more appropriate, which states the opposite to Gresham's Law.

Okay then. Though I don't really see why you would need to expound on technical features to explain its economic basis in a couple of words


It's not done manually

And that's the whole thing about fiat currencies and why they are so interesting. They are unique in their capacity to automatically readjust the money supply as required by the economy via creating as well as destroying what has become known as endogenous money. And while we are at it, you can't match this supply manually anyway as it is simply impossible technically. The central bank changes interest rates, that's true indeed, but it is only to oversee and maintain this self-regulating mechanism

The article basically sums up how Bitcoin instead of being a cryptocurrency, became a speculative asset, an investment of sorts. It's basically the problem of adoption that has bothered Bitcoin for as long as possible now, and why we don't really see much merchants actually accepting payments via BTC except for a select few.
Isn't that the problem itself? With how miners incentives last a few decades, they would of course try to get the best profit out of them. Hence creating the idea of Bitcoin being an asset to invest in, and in such, those that would buy the said asset would also try to sell it for as high as possible, creating the problem of them storing the coins in the long term instead of actually using it to buy something from others.

Simply saying, when compared to the current situation where fiat is used to buy an item, crypto is supposed to replace fiat from the system but instead, it became the "item" that is used to exchange for fiat.

All right, I am not saying you have invalid points. But, to cut the story short, is this "Bitcoin can never become a currency" series going to end up with an alternate cryptocurrency which is, as has been claimed by thousands of other altcoins, much better than Bitcoin itself?

I have only read little portions of altcoin ANN threads and altcoin whitepapers and I can remember albeit vaguely that a great many of them seem to start with Bitcoin's flaw, imperfection, shortcoming, lack, or, in other words, with what Bitcoin is not. And they leverage on this and get themselves busy selling just that as though they have a much greater battle than providing the people an alternative to the crumbling fiat.

You are jumping the gun with this question. I’m going to write a large post devoted solely to the issuance model and the supply control. It is complicated and cannot be outlined without explaining some technical features of the platform.

As far as I understand, what you are talking about is the ability to maintain stable prices (or it’s more correct to say stably inflating prices) in the CB-controlled economies by expanding or contracting the money supply according to the fluctuations of the demand. It cannot be matched simply because it’s done manually, while we cannot afford it in a decentralized blockchain system. I can propose an algorithm, however, that serve roughly the same goal, at the same time fully maintaining decentralization and independence. I cannot claim that it’s equally efficient until it’s tested in practice, but at least, it’s something to start with.

Besides, we do not need to surpass conventional fiat infrastructure in all aspects. We can build a system that will surpass fiat from one point of view, but will be inferior from another. We just need it to be competitive overall.

Satoshi was perfectly aware that mining farms and ASICs will emerge, and he didn't view it as a problem, because Bitcoin never had a goal of making 1 CPU = 1 vote or distributing coins equally. Saotshi knew that those things are harmful because they create vulnerabilities, and PoW is a better system because it's backed by game theory.

A currency doesn't need to be distributed to people intentionally, if its good people would exchange their old currency for it. This is how it happened with banks, PayPal, paper money, metal money and all the other types.

The short answer is, fiat currencies are purposefully inflationary

The long answer is that Bitcoin has been made deflationary, due to a hard cap, coin loss, hoarding, or whatever. In the view of Gresham's Law, Bitcoin is good money to be stashed away, while fiat is bad money to be spent shortly. So whenever there is a choice to be made between what to spend and what to save, the choice is evident and straightforward, so there is no need to name it here


At first glance it kinda makes sense

I mean a fee for a service and all that stuff. However, when you think about it, a currency in and of itself is purely utilitarian, and as such, it works better when you don't have to pay for it. And aside from the block reward, the miners are also collecting transaction fees, and these are no going anywhere, at least as long as Bitcoin itself stays with us (read, the incentive has been built in for good as well)

The answer is given directly in the post. The ratio of the real/financial markets shows the perception of an asset as transactional/speculative. To a certain extent, all assets, including cash, are involved in speculations. However, if in 90% of transactions an asset is exchanged for real goods and in 10% for other assets, this looks like a medium of exchange or a currency. In the opposite situation, the asset looks more like a speculative non-cash asset that cannot be considered a currency.


Yeah, it helps make the system secure and doesn’t help reach the initial goals for which the system was created. That’s what I’m saying.

And how is it supposed to work?

Could you please outline the economic model it is based on? You don't need to delve into technical details, just give us a general outlook from an economic point of view. To give you a lead, please explain how it stands against modern fiat currencies which feature a built-in feedback loop that allows them to automatically readjust to the monetary needs of the underlying economy. Fiat is unbeatable in this regard, and no algo-based cryptocurrency could come close

I think those "problems" can be addresses in a more simple manner. The simpler solution is usually correct.


1 - The problem is that Bitcoin simply turned out too attractive to perform money functions and became a hedging and speculative asset instead.

All fiat currencies can be speculative assets. Why bitcoin can't? There is a whole financial market called Forex, which is based on fiat currency trading pairs such as USD/EUR.


2 The second problem lies is in the model of the system’s support and particularly in the reward distribution scheme proposed by the creator.
The reward distribution is basically a fee paid for a service (securing the network, through mining). The incentive will last only a few decades, which will also generated new coins and properly distribute them alogn the years.

Part 1 that covers the problem of the scarce supply is here.

Satoshi Nakamoto created a truly groundbreaking concept of the first fully decentralized and independent payment system. Its design, however, wasn’t flawless and there were some inherent problems that didn’t allow the platform to become what it was conceived.

We have already analyzed the first major problem, which lies in the scarcity of the supply. Satoshi supposed that limited emission would make Bitcoin much more attractive in contrast to constantly inflating fiat currencies and we cannot state that he was wrong about that. The problem is that Bitcoin simply turned out too attractive to perform money functions and became a hedging and speculative asset instead.

The second problem lies is in the model of the system’s support and particularly in the reward distribution scheme proposed by the creator.

How it was conceived

In the original paper, Satoshi describes a peer network in which each node contributes available CPU power for a time-stamping service. Nodes are not decoupled from miners and the author unlikely envisioned mining as a separate professional activity. That can be seen from the description of the network functioning, where all nodes are prescribed to participate in PoW.

Satoshi denotes the described concept of a Sybil resistant timestamp network as a one-CPU-one-vote system. It was likely expected that each participant would run a node on his PC that would keep the record of the database and perform the required hashing work. In such a scenario, the platform looks purely egalitarian: participants play an equal role in the system support and have the same chance to obtain a reward.

In fact, the described egalitarian model is a matter of equal importance to the concept of decentralization itself. Not only the system gained the ability to progress in a trustless permissionless setup, but also the distribution of trust became almost absolute.

At the same time, the initially proposed model had one significant shortcoming: the reward was granted to a single winner of the lottery for each block. Given the total number of participants reaching a hundred, a node would get a reward each 16 hours in average, which is sufficiently frequent. If we raised the number of participants to a hundred thousands, however, the gap would expand to almost two years, which makes the incentive for participation rather dubious.

How it turned out

As we all know, during the early stages the system worked roughly as Satoshi described, but the appearance of ASICs and mining pools changed everything. The efficiency of ASICs drove CPUs out of mining and the emergence of mining pools accumulated trust in the hands of a small group of actors.

To date, we can claim that Bitcoin nodes have split into two different types:

1) Blokchain keepers: nodes that only keep the record of the blockchain and provide information to other nodes upon request.

2) Miners: nodes that perform hashing and participate in the block production.

Nodes that store the blockchain are all that is left from the original concept. Mining turned into a professional activity that requires a meticulous approach to marginal efficiency and is not affordable for ordinary users with consumer-level hardware. The initial egalitarian concept thereby turned completely elitist.

The emergence of mining pools caused the centralization of power and severely reduced the distribution of trust, but on the other hand, provided a solution to the problem of too low chances of getting a reward: the reward for a block is now distributed among the participants of a pool, instead of being granted entirely to a single miner who found an appropriate hash.

How it affects the economy

Now let’s investigate how this all affects the economy of the platform. In my previous post, I proposed two approaches to modelling a crypto economy. While researching the scarcity of the supply, it seemed more convenient to consider Bitcoin as a secondary currency powering the national economy.

In the case at hand, however, it looks better to stick to the second approach. Say Bitcoin forms its own virtual borderless economic zone. Of course, it’s not a fully-fledged economy, as Bitcoin doesn’t power entire production cycles and, what’s most important, wages and taxes are not paid in bitcoins. With some restrictions, however, we can assume that Bitcoin powers a separate economy and count certain variables including GDP. Assume that Bitcoin’s economy consists of two main sectors:

1) Financial sector, which is formed by operations of exchanging BTC into other financial assets.

2) Real sector, which is formed by operations of exchanging BTC into goods and services.

The ratio of these components tells us to what extent BTC can be perceived as a currency. If the real economy prevails, we can conclude that BTC is more of a currency than a non-cash financial asset and vice versa. Apparently, the growth of the real GDP of Bitcoin indicates its adoption as a currency, and if we want to proliferate Bitcoin and achieve the initial goals of Satoshi, we should find a way to support the real economy and reduce the influence of the financial sector.

The growth of the real GDP can be induced from different sides:

1) Merchant side.

The appearance of goods that can only be bought for bitcoins will trigger the response from consumers, who will seek to obtain bitcoins to buy the desired goods. The problem is that business always follows the path of least resistance, so they will only offer payment methods that consumers prefer. It is highly unrealistic that a merchant will agree to lose customers only in the name of Bitcoin’s prosperity.

Setting Bitcoin as an alternative payment option seems more realistic, but it won’t bring the desired result: most ordinary users can obtain BTC only by exchanging fiat money for them on exchanges, which is pointless, since they could also just use fiat money directly to buy the desired goods.

The only relevant situation is the distribution of goods that cannot be sold for cash or there are other obstacles to using conventional payment methods. This is why the major part of Bitcoin’s real economy is currently formed by the darknet market.

2) Consumer side.

A much more realistic way to achieve the same result is to ensure that consumers accumulate a significant number of bitcoins, which will trigger the instant response from business in the form of increasing supply of goods ready to be sold for BTC.

At this point, we address the problem of Bitcoin’s reward distribution. For this scenario to be realized properly, both following conditions should be met simultaneously:

• A large number of consumers should obtain coins on a regular basis. Merchants will add BTC as an optional payment method only if it provides a notable increase in sales. This can only be achieved if issued coins are dispersed among the majority of users and not concentrated in the hands of a minority group.
  
  We need a number of the recipients of coins reaching hundreds of thousands or even millions for this concept to work properly. Even if the award of each user will be insignificant, the total number of distributed coins will incentivize business to attract coin holders.
  
  
• Each consumer should obtain an insignificant number of coins. If the worth of the obtained BTC becomes comparable to users’ income, users may start preferring saving BTC, for they are a better value storage than fiat money due to the scarce supply model. After accumulating a significant amount of BTC, users may turn to speculations and will unlikely consider BTC a means of payment. The speculative motive will prevail over the transactional motive, which will launch the development of the financial sector instead of the real economy.
  
  To start the desired scenario, users should get the amount small enough not to be considered a significant investment and not to let the user overcome the initial reluctance to get involved with exchanges. Only in such a case, the likelihood of Bitcoin to be used for payments will be high enough to launch the growth of the real economy and overcome the speculative stage.

How it could be applied to the initial concept.

Had the initial egalitarian concept worked, it looks like it would have contributed to the proliferation of Bitcoin as a means of payment: as bitcoins accumulated in the hands of consumers, merchants would have likely started accepting BTC as payment. However, as was mentioned, before mining pools emerged, the reward for a block had been granted to a single user.

Considering a 10 minutes average block time, it would take too long to distribute coins among a sufficient number of users. Besides, with the growth of the user base and the corresponding growth of the value of BTC, the value of the reward for each block would likely exceed the boundary where it starts to be considered a substantial investment and becomes subject to hodling.

Given the absence of an algorithm that could disperse coins among the majority of users, we can conclude that the initial concept couldn’t launch the desired scenario and the system would likely end up in the same state as it currently is.

How it could be applied to the current situation.

Although mining pools allowed to distribute the reward for each block between multiple participants, hence fixing one the problems described above, the appearance of ASICs changed the approach to the system support entirely.

Since mining turned into a professional activity, instead of consumers, miners became businessmen themselves. For this reason, we cannot expect them simply spending all earned BTC without considering the most potential profit and hence the involvement in speculations.

In fact, this problem is intrinsic to the concept of PoW and any implementation of a PoW-based blockchain will share the same fate. Even systems with hashing functions that are optimized for GPUs, hence allowing to mine efficiently on a pretty standard hardware, require professional approach, as the most common rigs, which contain 6-8 graphics cards, are not something an average user can easily afford. Moreover, PoW protocols proved to favor players with higher hashing power, which further obstructs the participation of amateurs.

As miners got completely separated from users and formed a small elite cast, there is no incentive for the development of a real economy: miners prefer maximizing profits instead of simple spending and common users can obtain BTC only in exchange to fiat, which is irrational in most cases, unless we speak about illicit activities where BTC starts to provide notable benefits.

Under such conditions, the real economy of Bitcoin is sustained only by the darknet market and a small number of enthusiasts who behave irrationally to support the ideas of Satoshi and the concept of decentralization as an opposition to conventional fiat systems.

Conclusion

To become a fully-fledged currency, Bitcoin should power a real economy instead of the financial sector. This can be achieved by the distribution of bitcoins among a large number of consumers who will be ready to spend BTC for goods and services, which should trigger the response from business and lead to the subsequent growth of Bitcoin’s real GDP.

Unfortunately, neither the initial model, nor the current implementation features an appropriate mechanism of coin distribution. As miners adhere to the professional approach, we cannot expect them to behave as ordinary consumers. Caring about the maximization of profits, miners prefer speculative behavior, while users simply have no ways to obtain Bitcoins apart from exchanging fiat money into them. Without a sufficient demand, business has no incentives to sell goods for BTC.

Combining the stated arguments with the conclusions from Part 1, we can state that, due to several fundamental flaws, Bitcoin couldn’t succeed in embodying the initial ideas of Satoshi and becoming a global peer-to-peer electronic cash system. Instead, Bitcoin became an investment asset or a hedging tool and will likely stay in this role from now on.

P.S. Can we fix it?

Yes. And no. We cannot adjust Bitcoin to meet the required properties, for it would take a major architecture reconsideration, after which Bitcoin would stop being itself. At the current stage, it doesn’t seem possible. Besides, Bitcoin has already occupied its niche and became a specific financial asset for value storage, so there is no need to bother it.

At the same time, it is possible to create a cryptocurrency that can have a potential of becoming a worldwide-adopted means of payment, thus embodying the initial ideas of Satoshi. That’s what I have been working on for the last two years, and that’s what I’ll describe in my next posts.

The original article was published on Medium