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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]

#91

Post by xiphias2 »

loceng wrote: post #82
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.

Someone made a comment the other day stating that a 50%+1 attack is more and more likely as it's becoming only a handful of people doing the mining.

I'm more worried about the concentration of miners in China than the miners themselves. For them it's not worth it to try the attack. But for China it may be worth to do it if too much Bitcoin is concentrated in American people's hands.

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

#92

Post by kybernetikos »

jrek wrote: post #84
kybernetikos wrote: post #52

Earlier quoted context omitted.

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.

The opposite actually. The Real interest rate is the nominal rate minus inflation. So negative inflation of, say, 2% pa, effectively adds 2% of real interest to any loan, since 100k of principal today will be worth ~111k in 5 years’ time. In response lenders and central banks are likely to decrease interest rates as, firstly, the money is appreciating in real terms anyway and, secondly, the appreciating value of mone…

I'm obviously no expert, but I don't think it'd make sense for the real interest rate being higher under deflation to factor into anyones decisions about whether to make loans available, so the supply of loans would be lower.

Keeping the money in a hole in the ground gets you that return without taking on any risk, so when you're considering whether to invest your money in a potentially risky venture, you aren't going to care about the appreciation of money over the term of the loan.

My perspective is that if you want a return you consider the expected excess return over the risk-free return, and think about how much you're paying for that. Deflation increases the risk-free return you're comparing all investment opportunities with, so the number of opportunities with excess returns will diminish as that rate increases.

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

#93

Post by [deleted] »

tromp wrote: post #27
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).

> simply transition to proof As opposed to Proof-of-Work, Proof-of-Stake is not as simple as it sounds. Any implementation faces a myriad of design challenges and potential attacks. Things like "nothing-at-stake", "costless simulation", "stake grinding", and "long-range attacks" [1]. And in the end, there is no objective truth about the state of the chain, as there is with PoW's simple longest chain rule. There is no…

[deleted]

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

#94

Post by intotheabyss »

xorcist wrote: post #90
toomim wrote: post #32

Earlier quoted context omitted.

It's difficult for the Bitcoin community to find consensus on changes to the consensus rules. We couldn't change a constant from 1MB to 2MB. I think changing PoW entirely is extremely unlikely to happen. It's much easier for the people who believe in PoS to sell their Bitcoin and buy Ethereum instead.

Or any of the other PoS coins. If you want to invest (which is a word I hesitate to use in the context of any cryptocurrency) in a PoS coin there are more mature ones. It would be interesting if someone would research why this hasn't already happened? It's not like that alternative hasn't been available for a long time now.

Casper and LMD GHOST (which is what Eth2 uses) is one of the most mature proof of stake consensus algorithms out there. The other is Tendermint, but that's a practical BFT algorithm, so limited to 100-300 validating nodes, whereas ETH2 has hundreds of thousands of validators.

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

#95

Post by intotheabyss »

ajkdhcb2 wrote: post #59
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).

The bitcoin community is at a general consensus that PoS is inherently insecure

The bitcoin community would be wrong.

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

#96

Post by xiphias2 »

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…

If ETH is hybrid now, how much it helped the energy usage? Did it go down significantly compared to a year ago (even if measured in ETH)?

Bitcoin had a halving, which was very sifnificant energy usage decrease measured in BTC (which caused the significant price increase).

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

#97

Post by afarrell »

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.

Deflation of a currency only increases the purchasing power of people who already hold that currency. If they start a business, they'll only be able to earn revenue solving the problems of other bitcoin holders.

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

#98

Post by uberswe »

herodoturtle wrote: post #88
michaelscott wrote: post #86

Earlier quoted context omitted.

A much bigger assumption is that this will even be necessary, considering the last BTC mined will be in 2140. With such a long time horizon any prediction is basically fanciful guesswork; at that time miners might have all moved to renewables after they become cheap enough, we may have new forms of energy generation which make supply both super easy and cost negligible, or Earth may have entered a post-apocalyptic st…

I read this comment with interest, thanks for sharing. Makes good sense to me. If I may ask, do you think the distribution of bitcoin will be somewhat equitable as we approach 2140? And do you you think it will actually become a medium of exchange as originally hoped? Or will it remain a store of wealth only (as things currently seem to indicate)? And if it indeed remains only a store of wealth, will said wealth be d…

It's impossible to predict the future. If everyone holds bitcoin as a store of value then the value should drop as it's not being used for anything one would think. I believe the best outcome is that people start using bitcoin for every day purchases and the hope is that by 2140 the price is relatively stable. Most likely there will be many large holders as there are with real money.

However, someone could maybe do a 51% attack on bitcoin at some point. Maybe there is a unforeseen flaw in bitcoin. Maybe something better comes a long. It's impossible to know.

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

#99

Post by Majromax »

generalizations wrote: post #13
_7fvc wrote: post #9

I think demand for transactions is an issue. When it fluctuates, miners' earning becomes volatile. Some blockchains, like Grin and Dogecoin, have tail emission. But that's a pretty dumb solution. The reward/supply rate would approach 0. It's effectively the same as zero new supply unless dev teams decide to increase rewards. Changing reward defeats the purpose of decentralization. This problem is prevalent in any lim…

> Inflation discourages hoarding. People have incentives to spend. I'd rather we use a coin that people want more of (deflationary), rather than a coin people want less of (inflationary). There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.

> There's no inherent reason we want there to be incentives to spend, unless you're some central planner trying to keep the populace invested in society.

You're confusing spending and consumption. Bitcoin holdings don't do anything. They're a nominal amount on a public ledger, and if bitcoins also serve as the medium of exchange this would be subject to the paradox of thrift.

Instead, a healthy economy encourages people to invest. If I have money (or bitcoins) I don't need for immediate purposes, I shouldn't put it under the mattress (or on the blockchain). I should instead loan it out as debt or equity to someone else who wants to expand production in some way, producing a (probable) real return. That's how we become a wealthier society.

A deflating bitcoin is not well-suited for these investments, since a rational holder of bitcoin would probably prefer to continue to hold bitcoin (not doing anything) rather than take an investment with an interest rate less than the expected appreciation on bitcoin. At the same time, bitcoin's volatility is also bad for secondary finance because it becomes difficult to properly value future payments.

Hoarding currency should never be a viable investment strategy. That it is so for bitcoin is evidence for the speculative bubble hypothesis.

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

#100

Post by WanderPanda »

jrek wrote: post #55
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.

It's supported by both logic and experience. It's easy to see logically if we flip the relationship. If house prices are steadily increasing (equivalent to inflation, where my purchasing power is decreasing), I want to convert my money into a house as quickly as possible. If house prices are decreasing (equivalent to deflation, where my purchasing power is increasing), I want to hold off as long as possible. In recen…

Sounds good to me, if you don‘t buy the house because your money is not devalued consistently. House buyers might actually get more use out of it than holding their money, instead of just (or in part) buying it for monetary reasons
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