Topic: The deflationary problem - page 5. (Read 32514 times)

Then why are you still using it? Why aren't you using one of the inflationary altcoins? More to the point, why are you still bugging us about it?

Of course anything can happen.  But that isn't a rational argument in favor of a deflationary cryptocurrency.  The whole point of this thread is to argue in favor of an inflationary cryptocurrency.

The less inflationary the cryptocurrency becomes, the more it depends on tx fees for revenue rather than block reward.  Why do you remove a stream of revenue from the the profits of miners when it is their job to create a secure network?

I'm not sure you even read anything in this thread.

As I explained above:

The network must increase hash at a rate of total cost of network hash / 2 every 2 years.

If the network must double in present size of hashrate, then the cost of doubling the hashrate in 2 years will be the value of half the network hashrate in the present.

For example.

If the network is valued at 30b in the future (30b is a minor barrier to entry, which i don't think will be enough, perhaps 300b), but let us use 30.  In 2 years the cost of that hash will be 15b.  Thus every two years, for the network to grow at the rate of Moore's rate, the network must invest 15b for the cost to replicate network hash not to decrease.  Otherwise, if the network does not invest half of its cost every two years, the barrier to replicate the original hash will decrease to 0 over time.

As I explained previously.

Given 1% inflation, the value of the cryptocurrency must be at least 25x the cost of network hash for miners to profit + electricity costs.
Given 2% inflation, the value of the cryptocurrency must be at least 12.5x the cost of network hash for miners to profit  + electricity costs.
Given 3% inflation, the value of the cryptocurrency must be at least 8.3x the cost of network hash for miners to profit + electricity costs.

Given 0% inflation, for us to mimic 2% inflation:
If tx fees is 1%, then velocity of bitcoins has 2.
If tx fees is .5%, then the velocity of bitcoins has be to 4.  That the total bitcoins sent every year must be equivalent to 4 times the amount of bitcoins in circulation.
if tx fees is 0%, then there is no mining profit and we have a problem where it's possible that mining cartels are actively undermining the system.  This is not possible with an inflationary cryptocurrency.

But transaction fees cannot mimic inflation for revenue because inflation will naturally also have the same revenue stream of tx fees.

There really is absolutely no benefit for this type of a cryptocurrency not to be inflationary.

I don't get it... bitcon network hashrate could just increase forever. what's the problem with that?

The problem is that he can fairly easily set things up so that he has legitimately possessed a significant fraction of the coins in circulation, far more than the number of Bitcoins he holds. He can do this by "churning" his Bitcoins through online wallets and exchanges.

Exchanges are actually at the highest risk. I can't see any excuse they could make for not making good on any withdrawal that was subsequently undone. And they could find a significant fraction of the Bitcoins they think they hold disappear from their wallet. I'm not sure they could justify debiting customer accounts for deposits they had accepted that were subsequently undone either.

Long-term holders of Bitcoins are safe, assuming they don't try to move their Bitcoins during the attack. (Which nobody would know until it was too late.)

A 51% attacker can do almost anything, except steal bitcoins that he has never legitimately possessed.  It is impossible for any attacker to steal my coins in cold storage, even if he sold them to me a couple of months ago, due to checkpointing. 

A 51% attacker can do almost anything except steal coins that have not moved recently.

Consider, for example, a 51% attacker who follows this model:

1) He buys a large number of Bitcoins.

2) He starts building his own block chain with the first block containing a transaction moving all his Bitcoins to another of his own accounts and no other blocks containing any transactions.

3) He starts depositing his Bitcoins at online wallets and exchanges. He also withdraws them, depositing them in other services, and then withdrawing them from those. He gradually begins to turn his Bitcoins into Litecoins, Liberty Reserve, and the like, using as many Bitcoin transactions from as many services as possible.

4) Many Bitcoin wallets and services begin to hold large amounts of Bitcoins that trace back to his Bitcoins. Other people who withdraw from online wallets and exchanges get Bitcoins the attacker deposited.

5) The attacker now releases his longer chain with no transactions but the one that invalidates all of his deposits to the public. Now, a significant fraction of Bitcoin withdrawals and exchanges find themselves undone. Whoever held anything traceable to his original Bitcoins, now widely distributed through the Bitcoin ecosystem, finds their balances drop.

While everything you say is true, It isn't really a reply to MoonShadow's post. He's talking about using bitcoin mining waste heat to keep pipes from freezing. If you're going to be throwing watts away to keep the pipes warm, might as well include a little revenue stream while you're at it, right?

Some bitcoins will always be lost but the effect will be astonishingly small; people are not going to accidentally lose several percent of their money per year. The real issue is growth deflation. As the economy grows the same amount of money can buy more stuff than before simply because the stuff is cheaper to produce. That is cheaper measured in real resources such as labor, electricity or steel.

This kind of deflation is very beneficial because it is interest on a loan, the return of a real investment. The money consumes no resources and is entirely useless until it is spent. The seller hopes to regain the value lost in the sale in the future, by spending the money. In effect, the seller has lent out a real resource with hopes of getting paid back in the future.

That would require a government to enforce an exchange rate. Since that's not happening, nor will it, the opposite of Gresham's law applies, and good money drives out bad.

Gresham's law is an economic principle that states: "When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."[1] It is commonly stated as: "Bad money drives out good". http://en.wikipedia.org/wiki/Gresham's_law

Applying Gresham's law to crypto currencies: some inflationary crypto currency will eventually be widely accepted and drive out BitCoin that is deflationary in nature.

I don't, personally.  Yet, for this exact reasoning, I have long ago predicted that Reykjavík, Iceland will likely become a mining hub due to the confluence of factors including a relatively low electric rate (due to geothermal resources), a high demand for space heating and a high degree of international Internet connectivity, along with other more minor factors.  I also predict that asic mining chips will eventually be included into electric "heat trace" cabling intended to produce spot heating to protect public and private infrastructure from extreme cold.  I've personally been involved in many such projects, and the cable currently in use, although really just a continuous resistor, is already very expensive.  A co-mining method would simply represent an alternative income source to counterbalance the capital costs of such infrastructure.  Oil and gas pipelines in the arctic require quite powerful heat cabling across their entire length.  Imagne the hashrate of a strip of asic chips along a linier network and power line, with each chip placed one per foot along it's length AND circumference, in order to achieve a targeted watts per foot.  In my own mild climate, the watts per foot range is 3-7 watts per liner foot for insullated pipes of less than 3" in diameter and 7 watts per square foot of insulated surface.  I have not even seen a project that was les than 3 watts per square foot.  Every public parking garage in the US built since 1985 (in regions that freeze in winter) has pressurized sprinkler systems required by code & insurance, and every linier foot of insulated pipe you might see when you look up has at least 3 watts per foot of heating cable that must energize whenever the local temp drops below 33 degrees (and usually much warmer due to insurance worries).  What do you suspect woudl happen once Bitcoin is as big an economy as many of us believe it will be?  Do you honestly think that Bitcoin wise engineers will not incorporate spot heat co-mining in such infrastructure?

That has nothing to do with my Law.  That specific vulnerability was something that someone else posted, not me.

If you believe you can use your mining to convert electricity into heat, i hope you live in a very cold climate.

This is a nonsense statement.  It's impossible for any entity to bankrupt all other miners, no matter his transaction fees.  Not only would any such miner have to aquire the capital investment in order to build his network to beyond 51%, an uphill battle considering the vast majority of the current running network (now or at any other time) is a sunk cost already paid for; he would also have to compete with the hobbyist miners who benefit from co-generation of waste heat.

I have a GPU based mining rig that I choose not to use, that I can use for space heating in my garage at will.  No miner can bankrupt me.

Therefore your "law" is invalid.

An explanation of Sweft's Law for those having trouble understanding it.

Moore's Law states that the number of transistors doubles every two years.

This means two years from now, the cost of the network (hash / ($ / hash)), given equivalent hash, will be half.

And half in another two years. And half in another 4 years.

That means in 6 years it will take 1/8th the amount of capital to replicate the original hash.

Thus, the network must grow at the rate of Moore's Law to sustain the value of its hash so that the value to replicate the original hash does not decrease.

That means that the network must double its hash every two years.

Every two years there has to be a capital investment equivalent to the cost of network hash / 2 to double the hash in accordance with Sweft's Law.


But then we also have to calculate electricity costs, which i will do later.

This is a good point.  Block reward is fixed, tx fees are not.  Thus, someone can solve blocks at negative cost and bankrupt all other miners, since he can reduce his tx fee to 0.

Inflation also solves this problem because a mining cartel cannot remove all of the income from the solving blocks.

Why wouldn't hashrate grow according to Moore's law. If hardware performance increases in hashrate per $, everything else being equal, why wouldn't the bitcoin network hashrate increase accordingly and Sweft's Law be satisfied?

There will always be new miners entering the game with new up-to-date hardware (or existing miners upgrading) and old rigs will drop out, keeping bitcoin hashing equipment up-to-speed with moore's law.

I do know what a 51% attack is.  Even then, it would be limited to whomever had recently sold the attackers something of value.  A 51% attacker cannot steal coins that he has never legitimately possessed.

http://www.marketoracle.co.uk/Article39704.html
The author of this article posted it here in this forum for discussion:
https://bitcointalksearch.org/topic/bitcoin-the-digital-kill-switch-160612

51% attack can also exist as a "benevolent" mining monopoly or cartel that doesn't necessarily wreck the blockchain or ruin the value of the cryptocurrency, but simply controls the majority of transaction processing. It then controls the flow of money, who gets charged transaction fees, who doesn't, who even gets their transactions processed. They choose what makes it into the blockchain and what doesn't. They could freeze accounts or move coins to other accounts at will, behind the scenes, benevolently of course, to keep us safe or some shit like that, or without the majority of people knowing (or caring probably) that they can do this, as a matter of their policy.

As soon as the block rewards dry up, this cannot help but become a reality. It is a mathematical, economic inevitibilty, because joe shmoe miner can't afford to prevent it without block rewards. He will go out of business, and that is who we depend on to keep the network honest. We need joe shmoe to be at least 51%, not the walmart-amazon-google network hash cartel to be 51%. Don't let joe shmoe go broke mining!

This cartel will be comprised of corporations or entities who can subsidize their own mining operations, as in pay their electric bill out of their own pocket, buy their hardware, etc without needing block rewards or transaction fees. The joe shmoe public mining pools whose members depend on these compensations to operate would dry up, thus surrendering the 51% of network hash and more to fewer and fewer entities, which will then start acting like a cartel or monopoly and dictate their policies with the clout of essentially holding as hostage the blockchain.

Whoever doesn't think this will happen when the incentive to mine is gone is a fool or is too lazy to think into the future.

The economics of deflation (and inflation) is harmful to participants in an economy anyway in my opinion but that is for another thread. That's more of a general opinion on a complex issue, but the sweft law thing is not an opinion, it is bombproof math and economic reality.

The issue isn't any one single double spend attack.

The issue is a long-term, ongoing double spend attack where the attacker holds a significant amount of hash.

Well, you have a point there.


Those are exactly the conditions that I would expect a big drop, due to the eventual popping of a bubble.  And that is largely what happened.  Honestly, I expected it weeks before it happened, and lost a small fortune short selling with a stop-loss limit  at $72.  It never eeven got back down to where I thought it made fundamental sense, so I would have lost it anyway.


It's much like the point about violence and terrorrism; terror attacks make big news but not really big body counts, as a nominally "free" US citizen is 9 times more likely to die by the unwarrented actions of a police officer than a terrorist.

Really, the perception of risks are out of prooportion with the reality of those same risks.