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On the Instability of Bitcoin Without the Block Reward [pdf]

cs.princeton.edu

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Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#61

Post by fanciestManimal »

wildbunny wrote: post #51
CJefferson wrote: post #48

I've been interested in what will happen without the block reward. One (small) thing which really irritates me about bitcoin is how it is claimed it is "not inflationary", yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies -- it's easy to claim that at some point in the future you will stop inflation, I'll believe it when I see it.

You don't need to 'claim' anything. It's written into the rules of the blockchain. You cannot change the rules like that and expect to have your blocks appended to the canonical chain.

It depends on where the miners and users go.

I don't know that we can predict today what people in the future will view the incentives to be, but its certainly not impossible that the collective view of the bitcoin community might shift towards some change on that front.

I'm not saying this is the only solution, but if having no block rewards really threatens the existence of bitcoin, and a regular inflation rate were deemed to be the beset way to solve that -- the cap on the number of coins isn't actually immutable. There would be a hard fork in that case, sure, but if that's where the people went, that's where the value would go.

Keep in mind that the miners would have some incentive to back a change to that cap. Every block reward would be extracting value from the non-mining users and distributing it to themselves -- similar to the inflation tax we face with normal currencies. It's not inconceivable that they could drag the user base along with if it was seen as existential. A 2% inflation rate is better than the collapse of something holding a significant fraction of one's wealth.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#62

Post by Pungsnigel »

kybernetikos wrote: post #52
cyphertruck wrote: post #33

Earlier quoted context omitted.

The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience. They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.

Surely with a deflationary currency, interest rates would need to be significantly higher, making it harder to borrow the capital you need to start a business. As someone with capital the expected rate of return will have to be high to make it worth lending rather than just holding on to it in a deflationary situation.

Yes and no. Higher savings would also mean more capital to load from. Expected return on investment would be higher, which is probably just a good thing. Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#63

Post by 0x64 »

cyphertruck wrote: post #28
chrisco255 wrote: post #15

Why can't Bitcoin simply transition to proof of stake after mining dries up? Once there are few or no bitcoins left to mine then PoW is a lot of ceremony for very little security gain at that point (and perhaps opens up risks that this paper points out).

There is no such thing as “Proof of stake” to replace proof of work. Proof if work is a solution where you do not have to trust anyone, as the block is won by the person who finds the right math result, essentially a lottery. Proof if stake is either really proof of work that is less secure and obscured, or more often dimply giving the creators of the coin the power and your trust.... which reverses the entire point…

>Proof if work is a solution where you do not have to trust anyone, as the block is won by the person who finds the right math result, essentially a lottery.

The same applies to Eth2's PoS network, as block proposers are randomly selected with on-chain randomness. Block rewards are also not a major source of income for a staker on Eth2 — the majority of income (>90%) comes from simply attesting the chain correctly. This attesting occurs once an epoch for every validator, or every 32 blocks.

>Proof if stake is either really proof of work that is less secure and obscured, or more often dimply giving the creators of the coin the power and your trust....

PoS vs. PoW is really only a matter of how you ensure your chain can't be attacked. For PoW it's equipment cost, burnt electricity, and opportunity cost for losing rewards due to attacking the chain. For PoS, the security is ensured through a high-enough buy-in cost (32 Eth), and penalizing attackers harshly through slashing.

You can imagine how expensive it would be to accumulate enough Ether to attack the current PoS chain. There is 3.3 million Ether staked across over 100,000 validators, and one would need more than half of that total stake to have a chance at attacking the network, a failed attack resulting in massive slashings. This is made even harder as the attesting validators are shuffled continuously.

I personally loathe the energy consumption of PoW, and believe PoS to be the future. The fact that hundreds of validators can be run on just 5 watts of power should say enough.

If all validators on the current Eth2 PoS chain were run on individual machines, the energy consumption would be ≈4.4 GWh yearly vs. the current PoW chain's ≈25 TWh — a 5000-fold decrease. This is decrease is in reality probably even larger since pools, decentralized and centralized, will be running multiple validators on a single machine which affects resource usage very minimally.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#64

Post by BelenusMordred »

CJefferson wrote: post #48

I've been interested in what will happen without the block reward. One (small) thing which really irritates me about bitcoin is how it is claimed it is "not inflationary", yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies -- it's easy to claim that at some point in the future you will stop inflation, I'll believe it when I see it.

> yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies

Why does every HN bitcoin thread have this ridiculously incorrect statement being mindless parroted? The inflation rate of bitcoin is currently 1.8%, this is easily confirmed for anyone willing to put in 10 seconds of research.

In comparison the US M1 monetary supply is up over 60% in the last year and the S&P 500 valuation is at all time highs despite a massive global recession. At what point will people actually capitulate regarding the value of cash in their wallet being rapidly inflated away across the planet?

https://tradingeconomics.com/united-states/money-supply-m1

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#65

Post by superbcarrot »

cyphertruck wrote: post #33
coliveira wrote: post #17

Earlier quoted context omitted.

The whole economy depends on people spending. If everybody starts to hoard currency, economy will implode. That's why deflation is worse than (light) inflation, from an economic standpoint.

The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience. They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.

https://www.youtube.com/watch?v=PHe0bXAIuk0

Here's a video of Ray Dalio explaining inflation-deflation and some other basic economic principles. The process explained in the video is the reason why you can never have a real economy running on Bitcoin.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#66

Post by 0x64 »

chrisco255 wrote: post #30
xiphias2 wrote: post #23

Earlier quoted context omitted.

It's because just because you write ,,simply'', it's not a simple thing. Just as an example Ethereum was trying hard to do it for many years now without any success. But the real reason is that there is no real solid formally written and proven ,,proof of stake'' algorithm so far.

ETH2 proof of stake beacon chain shipped in December. There's tens of thousands of ETH2 validators live today. Proof of work is still in place for base chain, so ETH is a hybrid currently. But they'll be off proof of work within a year to year and a half. For blockchains as big and old as Bitcoin and Ethereum I understand migrating to a new consensus algorithm is no easy task and comes with risks. But it is doable. A…

>There's tens of thousands of ETH2 validators live today.

Over 100,000 as of a few days ago!

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#67

Post by CJefferson »

BelenusMordred wrote: post #64
CJefferson wrote: post #48

I've been interested in what will happen without the block reward. One (small) thing which really irritates me about bitcoin is how it is claimed it is "not inflationary", yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies -- it's easy to claim that at some point in the future you will stop inflation, I'll believe it when I see it.

> yet for it's entire existence so far, the block reward has made it more inflationary than all major currencies Why does every HN bitcoin thread have this ridiculously incorrect statement being mindless parroted? The inflation rate of bitcoin is currently 1.8%, this is easily confirmed for anyone willing to put in 10 seconds of research. In comparison the US M1 monetary supply is up over 60% in the last year and the…

I was just considering inflation that people see "on the street".

By including M1, aren't you including fractional banking? If that is so, if bitcoin became "standard currency", banks would just fractionally bank bitcoin.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#68

Post by orwin »

afiori wrote: post #41
witweb wrote: post #37

Earlier quoted context omitted.

So people living in countries without a stable currency due to hyperinflation don't count as a real use case? It's sometimes the only way they can secure their capital. I think that we need to think outside of our elitist western bubble more often. Not all people live in a stable democracy with (semi-)stable currencies.

But for them there are better alternatives to BTC, one being BCH for example

And even if they do use BTC (they don't really, at least in Africa, i don't know about Venezuela), they do not trade using BTC but a second layer anyway.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#69

Post by steve_gh »

xiphias2 wrote: post #3

This is the first interesting paper I see here on HN about Bitcoin. While many people think that Bitcoin's energy usage is too high, I honestly hope that it's high enough to deter a nation state sized attacker. Many Bitcoiners argue that miner rewards shouldn't decrease more, but at the same time it's too late to change the concensus on it.

Maybe we need a heavy Carbon Tax on Proof of Work cryptocurrencies. Using the energy consumption of Argentina to verify financial transactions does not fit with moving to a Net Zero economy.

Re: On the Instability of Bitcoin Without the Block Reward [pdf]

#70

Post by aaron695 »

I haven't read the paper but I'll still be downvoted for this either way so please upvote, but Bitcoin uses a lot of energy that it shouldn't and banks work better and it is just a speculative market which means gambling, and I think it's probably racist. Please remember Bitcoin is bad.

If I was smart I might ask if this paper is relevant within the next 100 year given how Bitcoin works currently, but I'm not :(

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