Topic: The deflationary problem - page 7. (Read 32501 times)

If tx fee is .5%, the amount of currency needed to move to get the equivalent of 2% inflation would be 4x the amount of btc in circulation.

I will describe another flaw that can be exploited in a deflationary cryptocurrency.  It will be known as a Sweft attack and is described below.

Sweft attack: A prolonged deflationary attack on a cryptocurrency network describing a situation in which a rogue miner processes transactions solely for the purpose of removing the fee of said transaction from circulation. A necessary precondition for said attack is that the average transaction fee must exceeds the average rate of cryptocurrency inflation.

 This should be known as the 'Sweft point'

Make an alt currency with a cap minimum 3% inflation. This will satisfy the profits of the miners and hash of the network.

So your saying you expect it to stop?  I find little evidence that it will ever stop, the continual halfing every 4 years of mining rewards clearly points to a about ~20% deflation per year over the long term as the price of BTC must rise to keep mining profitable.

Well historically if we look at the full history of BTC it has deflated at a rate of around 1000% a year, or roughly one order of magnitude per year.  In its MOST stable period which was 2012 it managed to only increase 300% but this was a lull between two massive bubbles and crashes.  So I think it's quite reasonable to say that BTC lives up to it's intended deflationary nature and is by any reasonable definition is hyper-deflationary.

Well historically if we look at the full history of BTC it has deflated at a rate of around 1000% a year, or roughly one order of magnitude per year.  In its MOST stable period which was 2012 it managed to only increase 300% but this was a lull between two massive bubbles and crashes.  So I think it's quite reasonable to say that BTC lives up to it's intended deflationary nature and is by any reasonable definition is hyper-deflationary.

 Golum's position or "Golums Law" seems to be that "Stable money drives out unstable money", and what people seek is not the maximally deflating currency but rather the maximally stable currency.

I will introduce the concept of Sweft's Law and Sweft Attack below.

Sweft's Law:  The network hashrate of a cryptocurrency must rise at a rate at least equal to that of the rate of Moore's Law to ensure minimum network security.

Sweft Attack:  A prolonged deflationary attack on a cryptocurrency network describing a situation in which a rogue miner processes transactions solely for the purpose of removing the fee of said transaction from circulation.  A necessary precondition for said attack is that the average transaction fee must exceeds the average rate of cryptocurrency inflation.

Edit:  originally titled the 2040 problem, a more apt title is the deflationary problem.  I use 2040 as a point where mining reward via block reward would be negligible.  I'm starting to believe this point where miners no longer profit enough to increase hash will come much sooner, perhaps by 2020.

 
In 2040 new block generation will be negligible, bitcoins will be fixed.  Miners will only be rewarded for transaction fees.  This may not seem like a problem, it IS.

The health of the network depends on constant hash growth.  Without constant hash growth, the network is prone to attack.  Why?

What protects the network right now is a high hashing rate.  This secures it from attack.  Without this, there is no security.  The price of bitcoins would fall.  The more hash, the more security, the higher the price will be.  Because it's impenetrable from exterior forces or supercomputers.  If a government were to be able to attack the network, 99% of the network, the system would fail.  If the system has the ability to fail, the price of bitcoins is worthless.

Thus, the whole network depends on hash.  The security and price, which is also reflective of hardware and electricity, and again, security.  The more hash the network has the more secure.

Thus, miners need incentive to increase hash.  They do this by generating new coins.  Thus you increase hash and create a more secure network.

The problem is that in 2040 new block generation will stop, and coins will be fixed.  Now, people want to make you believe this is fine.  It's not.  It's stupid and beyond stupid.

The stupid part about is is that it removes an incentive for miners to increase hash.  It removes a revenue stream for miners.  New coin production is not BAD, it's GOOD.  Only a moron would think otherwise.

This is extremely important.

When you remove the reward for generation of new blocks, you remove a revenue stream for miners, hash will fall.  You say, who cares, hash falls.  

Hash secures the network.  It ensures that miners will profit and the miners ensure there is no double spending of coins.  If miners stop mining because intensives become smaller (loss of profit), hash goes down, the network is prone to attack.

Then the coin holders will be mining to protect their own money.  This will be an incentive of the richest members.  The problem is that every year hardware advances and you're no longer making as much money mining, maybe not even to cover the hardware costs to protect the network.  So now, the network is prone to attack.

This is irrespective of assuming whether or not transaction fees will support the network.  It's irrelevant.  The network will be weaker because you removed profit from miners.  Now, miners stop mining.  Thus, you decrease hash.

Bitcoins are only worth the hash(security) of the network.





Edit:  I haven't posted in two years but i will provide an updated analysis below.

For BTC to to have value, miners must secure the network. If miners do not constantly increase hash, Moore's law will catch up to the network and it will become prone to attack. This should be easily accepted as fact. If you don't accept this premise i can't possibly help you understand the deflationary flaw in bitcoin.

If you don't understand, let me try to explain it again. If hash remains constant and doesn't increase for a number of years, technological advancements (Moore's Law) will make an 51% attack more likely.

Now what some people seem to argue is that tx fees will support mining growth.

This is true in two scenarios.

1) bitcoins are sent/received more frequently (velocity) 2) tx fees increase

I will addresses the problems with both scenarios.

The problem with #2 is that there is a cap on maximum fee the miners can charge, at 100%. So velocity remains constant, miners cannot increase profit beyond 100% tx fee. So this cannot create increasing profit.

The problem with #1 is that bicoins can be permanently lost, and there is a hard cap on the amount of bitcoins. That means that there will eventually be more bitcoin lost than is generated by block reward. This should be known as the 'Sweft point' where bitcoin turns into a deflationary currency from an inflationary one. Thus, to believe that transactions will increase as coins are lost, aka deflation, is not a sound proposition.

Another issue is that rogue miners can mine the network, charging tx fees and sending the coins to the trash. This would further exaggerate the deflationary tendency of the bitcoin design.

Thus it should be obvious to anyone that understands the issues to also understand that there exists a simple solution which will make the person who implements it rich.

Make an alt currency with a cap minimum 3% inflation. This will satisfy the profits of the miners and hash of the network.

R

Sweft:  We at Freicoin have long understood the scenario you describe and are in agreement with you on the unsustainable nature of Transaction Fees to support BTC, velocity is far far below 1 so you would need terribly high fees to generate a revenue stream that would replace present mining rates.  So far the response to lower block rewards has been a rise in valuation, which appears to have blow through the mere doubling that would have kept miners at parity and is now an out and out speculative bubble.

The Freicoin solution is to reduce all wallet funds by 5% per year (in tiny amounts per block), all these funds are then payed to Miners.  Total monetary base dose not increase so their is no inflation, after a short initial distribution of 3 years miner rewards remain constant and the network never needs to depend on Transaction fees.  All users essentially pay to secure the network based on their wealth rather then by transaction fees, this is both better economically as well as intrinsically more fair.

We also believe their are a myriad of other detrimental macro-economic effects (Usury) cause by Deflationary currency (putting us radically at odds with the majority of the community that feels it deflation a good thing), and these were our primary motivations, but we've been aware of the death-by-transaction-fee scenario for a long time.  Our website is http://www.freicoin.org/

If I buy the iPhone with bitcoins and want to buy new bitcoins I have to transfer money to MtGox which costs money and take time, and I have to pay 0,6% fee to MtGox to buy bitcoin. And I also risk that buy back the bitcoins at a much higher price when I have funded my MtGox account.. the price might have moved 50% in two weeks.

Or I can just pay for the new iPhone with fiat$ and keep my coins. Much easier and I dont have to spend money on transactions or possible pice rise on bitcoin.

That makes no sense. Why would you prefer this to buying your iPhone with Bitcoins and then just buying more Bitcoins?

If you really would significantly prefer to buy the iPhone with Bitcoins rather than dollars, that just means the price of Bitcoins relative to dollars is too low *today*. If that were true, people would be trying to buy Bitcoins for dollars and nobody would be selling them, which would cause the price to rise immediately. In practice, this simply never happens. The price of Bitcoins relative to dollars is already fair to the typical buyer and typical seller or it would already have changed.

If I got 1000$ in my bank account and 1000 $ worth of BTC I would rather buy the new iPhone with my fiat-money than my BTC since the dollars decrease in value every year and the bitcoin increase in value every year.

Because people have to eat.
50 inch flat screen? I could hold out, but the Super Bowl is tomorrow.
Air conditioner breaks down in the middle of summer.

Apple comes out with a new iPhone every year. Why buy this years model when you know you can buy a better model next year, or this year's model at a lower price next year? Doesn't stop people from standing in line for 8+ hours.

Deflation will kill bitcoin businesses - why spend your bitcoins today if they are worth more tommorow, or next week, or next month...
Bitcoin simply becomes an asset to speculate in or hedge against inflation instead of being used as a trading currency.
The best thing that can happen to the bitcoin community is a crash followed by a stable price for a long time so people get used to spend their coins instead of just hoard the coins.

One solution to the deflation problem is that if everybody votes for a change in the bitcoin protocol so a 2%  inflation can go on for ever even after 21 million coins have been mined.