Hearn: The resolution of the Bitcoin experiment [LWN.net]

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 6:57 UTC (Tue) by shemminger (subscriber, #5739)
In reply to: Hearn: The resolution of the Bitcoin experiment by rgmoore
Parent article: Hearn: The resolution of the Bitcoin experiment

The whole wasting of kilowatts of energy to create virtual currency seems to be one of those ideas that was a mistake to start with.
There probably wasn't a better way in the original design. But with a total anonymous creator who could you ask why?

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Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 7:09 UTC (Tue) by Cyberax (✭ supporter ✭, #52523) [Link] (17 responses)

No, that's a feature. Kilowatt-hours are necessary for a "proof of work" to make bitcoins valuable.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 21:34 UTC (Tue) by drag (guest, #31333) [Link] (9 responses)

Value is not derived from 'work'. The whole 'labor theory of value' _should be_ thoroughly debunked right now if it wasn't for the fact that it's been institutionalized into academic and policy organizations (which itself leads to whole bunch of really poor policy decisions on the part of governments. Sort of like putting a creationist in charge of MIT)

Value is derived from each individual's perspective. Something is valuable if the 'end user' or 'consumer' finds use in it. The fact that you can do something useful financially with bitcoin is the source of the value. What makes bitcoin useful to individuals (and thus the source of it's value) is because it's a limited set of verifiable numbers and that those numbers can be transferred around in what is supposed to be a secure and verifiable manner and thus can be used in financial transactions.

Typically other forms of money originate from commodities.. ie: gold, silver, wheat, tobacco leaves, shells, etc. etc. So they already had market value that served as a 'security' for their use as money. They get elevated to the status of money once people more-or-less accept them universally in any trade.

Bitcoin 'kilowatt hours' doesn't work like that. With gold-based currency it was still gold... it was still it's original commodity. Obvious bitcoin is not a form of battery so you can't input the numbers into your computer and get back those electronic force.

So-called fiat 'government money' usually is derived from money that was once based on commodities, but has long since been divorced from it's original meaning... ie: the dollar (being the 'international standard'. Dollar originally was just a specific measurement of weight of gold or silver, but it threw off it's shackles and went off the gold standard in the late 1970's). Bitcoin is more like that, although without the force backing it and the fact that it's based a finite set of numbers you are not dependent on the USA Federal government to behave itself.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 22:47 UTC (Tue) by nybble41 (subscriber, #55106) [Link] (6 responses)

> Value is not derived from 'work'. The whole 'labor theory of value' _should be_ thoroughly debunked right now ...

Agreed, but that isn't the point. The work (and thus energy cost) required to mine each block contributes not only to ensuring scarcity, but also to providing for a reasonably fair initial distribution and a predictable average inter-block interval, all of which are essential to the Bitcoin system. It isn't sufficient to ensure that there will *be* value, of course, but without that energy cost bitcoins would have no value to anyone.

> Typically other forms of money originate from commodities.... So they already had market value that served as a 'security' for their use as money. They get elevated to the status of money once people more-or-less accept them universally in any trade. ... Bitcoin 'kilowatt hours' doesn't work like that. With gold-based currency it was still gold... it was still it's original commodity. Obvious bitcoin is not a form of battery so you can't input the numbers into your computer and get back those electronic force.

You're comparing apples and oranges here. Bitcoin is not equivalent to kilowatt-hours in exactly the same way that gold is not equivalent to the energy and other resources which required for gold-mining. However, the market value of those kilowatt-hours act as a price floor below which additional bitcoin mining is no longer profitable, just as the cost of gold-mining determines the lowest price you'll be able to pay for newly mined gold.

The difference is that in the case of Bitcoin, the rate of new supply is fixed by the algorithms that automatically adjust the mining difficulty. More competition in mining just means a higher energy cost for all miners, and no additional bitcoins. The demand for gold-mining is limited by the rate of increase in the demand for gold; over-supply drives prices down and makes mining uneconomical. However, since it has no long-term effect on the supply, the demand for bitcoin mining is limited only by the associated energy cost. A fixed difficulty would have been more realistic, and probably cheaper and less volatile, but under such a system it would be hard to account for improvements in computing capabilities. It would also be less secure against attempts to run a 51% attack, where the cost of the attack is the only viable deterrent and the attacker is unlikely to be deterred by a drop in market value due to over-supply.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 23:34 UTC (Tue) by jhhaller (guest, #56103) [Link] (5 responses)

And this suffers from the same problem which caused the US depression in the late 1800s - there was insufficient fiat currency because it was based on gold/silver, and there wasn't enough for the economy, causing trade to collapse. To be a valuable currency, rareness is much less important than stability. Stability requires a certain amount of rarity, but not to any particular absolute level. Only speculators win when a currency is volatile. Inflation (when currencies become less valuable) is a problem to lenders, while deflation is a problem for borrowers. Bitcoin doesn't suffer from this yet, because no one is borrowing or lending to any great degree, and probably won't with a volatile currency. But, one can't build an economy with borrowing and lending. One could index the loans according to bitcoin value, but to what end as long as there are real currencies which are relatively stable. One also loses the anonymity of bitcoin with borrowing and lending, as no lender in their right mind would lend bitcoin when they didn't know who was supposed to pay back the loan, and if they were likely to do so.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 15:29 UTC (Wed) by nybble41 (subscriber, #55106) [Link] (4 responses)

> ... there was insufficient fiat currency because it was based on gold/silver, and there wasn't enough for the economy, causing trade to collapse.

That is simply nonsense. The problem wasn't the amount of gold or silver. In the absence of fixed exchange rates, the prices of the metals will simply adjust to accommodate the current supply and demand. (Short of the price becoming so high or low that the amounts required become inconvenient to deal with, at any rate, but gold and silver have never reached that point.)

The real problem was that the U.S. government issued notes for more gold and silver than it actually had, and eventually went bankrupt (in effect, though they didn't use that term) and refused to honor its banknotes according to the original terms. First they restricted the exchange of notes for gold by individuals, then they repeatedly redefined the notes as smaller and smaller amounts of gold, partially repudiating their debt. In the end they stopped honoring the exchange value of the notes altogether.

There have been many issues with the use of precious metals as currency in the United States (bimetallism and the over-issue of banknotes beyond what the government could repay being two obvious examples), but an insufficient supply of precious metals for use in trade was never one of them.

> To be a valuable currency, rareness is much less important than stability.

I agree about the need for stability, but volatility is not an inherent part of Bitcoin. It's volatile now because it's still new, and growing rapidly. Like any new currency, the rate of inflation is very high, outstripped thus far only by the rate of increase in demand. Over time the rate of inflation will decrease, eventually to zero, and demand will stabilize.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:01 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link] (3 responses)

> That is simply nonsense. The problem wasn't the amount of gold or silver. In the absence of fixed exchange rates, the prices of the metals will simply adjust to accommodate the current supply and demand.
Yes. For example, by causing deflation.

Just ask Hitler about it - it helped him a lot.

> The real problem was that the U.S. government issued notes for more gold and silver than it actually had, and eventually went bankrupt (in effect, though they didn't use that term) and refused to honor its banknotes according to the original terms.
During which of about 10 crises that happened before the Gold standard?

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:22 UTC (Wed) by corbet (editor, #1) [Link] (2 responses)

Perhaps this suggests we're getting close to the Godwin point in this particular thread?

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:36 UTC (Wed) by nybble41 (subscriber, #55106) [Link] (1 responses)

It's not Godwin unless someone makes a comparison between their opponent(s) and the Nazis; simply discussing the conditions in Nazi Germany doesn't count. Just the same, any time someone complains about the supposed dangers of deflation it's probably time to wrap up the thread. Deflation doesn't cause economic problems. There are studies showing that there is no consistent correlation between instances of deflation and economic difficulties. It can sometimes be a *symptom* of deeper issues, like in the case of the American Great Depression, where the deflation followed a period of significant inflation and was accompanied by a major credit contraction which also wiped out a significant fraction of everyone's savings.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 19:41 UTC (Wed) by Cyberax (✭ supporter ✭, #52523) [Link]

> Deflation doesn't cause economic problems. There are studies showing that there is no consistent correlation between instances of deflation and economic difficulties.
[citation needed]

Hearn: The resolution of the Bitcoin experiment

Posted Jan 19, 2016 23:49 UTC (Tue) by Cyberax (✭ supporter ✭, #52523) [Link] (1 responses)

Here's a "1" for you! I value it at $100000. Would you agree to buy it from me for that sum?

I don't think so. In reality, it's scarcity that drives the price. The labor/work required to produce an item might be one reason for the scarcity, but it's certainly one of them. Note, that scarcity alone does not determine the value - it's a necessary but not a sufficient condition.

In case of Bitcoins the only way to guarantee scarcity is to make it hard to mine new coins. It's a distributed system, there's no other way.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 20, 2016 0:19 UTC (Wed) by karath (subscriber, #19025) [Link]

"In case of Bitcoins the only way to guarantee scarcity is to make it hard to mine new coins. It's a distributed system, there's no other way."

Mostly I agree with this but there is one key bit that I think is over-simplified. It's called mining but the activity is not actually creating Bitcoins. The miners are calculating signatures for the blockchain, so that the transactions are publicly logged and irrefutable. As a reward for this activity, the miners are awarded newly created Bitcoins. These Bitcoins are literally created from 'nothing' at a consensually agreed rate. Once all possible Bitcoins are created, the same 'mining' activity will take place but the miners will be awarded Bitcoins from the fees charged to the transactions.

And I hope that I won't be embarrassed by having got this wrong :D

Hearn: The resolution of the Bitcoin experiment

Posted Jan 21, 2016 23:11 UTC (Thu) by ken (subscriber, #625) [Link] (6 responses)

> No, that's a feature. Kilowatt-hours are necessary for a "proof of work" to make bitcoins valuable.

Well not really, it has noting to do with value actually.

The whole mining thing would not have to take massive amount of resources to do. What bitcoin needs is a way to create the next block of transactions about every 10 minutes.

The way its done now is that every full node in the system accumulates transactions and could potentially create the next block. To decide what node will actually do it the current implementation of the bitcoin protocol basically do a big lottery and the winner creates the block.

the lottery thing is what is taking so much calculation as you are trying to find a special number that starts with only 0 bits, and the amount of 0 bits is dynamically altered so the entire network on average gets a new block every 10 minutes.

But this lottery system can and in my opinion have to change in the future so that every node can participate equally. The current system is wasting way to much resources on the consensus so its fewer and fewer nodes that actually participate in the lottery.

There is people working on alternatives. search for bitcoin and consensus algorithm

But if the block size change is any indication doing that change is probably going to start a real war or something.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 21, 2016 23:24 UTC (Thu) by Cyberax (✭ supporter ✭, #52523) [Link] (5 responses)

> The whole mining thing would not have to take massive amount of resources to do.
It has to, unless you want to have some kind of a centralized agent.

> But this lottery system can and in my opinion have to change in the future so that every node can participate equally. The current system is wasting way to much resources on the consensus so its fewer and fewer nodes that actually participate in the lottery.
No, it can not. Finding the next block is by design _hard_ and requires expending significant resources.

Otherwise nobody stops me from creating 1000000000000000000 fake nodes and winning the "lottery" every time.

> There is people working on alternatives. search for bitcoin and consensus algorithm
There are no real alternatives to a hard "proof of work" for a decentralized system.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 22, 2016 0:33 UTC (Fri) by ken (subscriber, #625) [Link] (4 responses)

> Otherwise nobody stops me from creating 1000000000000000000 fake nodes and winning the "lottery" every time.

Yes that is the tricky part but I do not think its impossible to create something that is going to work better than the current way but its going to be a lot more complicated.

In worst case you end up in the same spot as today only difference is that they have to create nodes instead of running this brain dead hardware that just calculate checksums.

But you are probably right that some type of proof of work is probably needed but it has to be done in a different way I think so that its not so local as it is today.

A lot of people is thinking about this, in 2014 there was apparently about 140 papers written on consensus algorithms. Somebody is going to find a way to get around this wasteful use of energy that is the current way.

Hearn: The resolution of the Bitcoin experiment

Posted Jan 22, 2016 3:00 UTC (Fri) by Cyberax (✭ supporter ✭, #52523) [Link] (3 responses)

> But you are probably right that some type of proof of work is probably needed but it has to be done in a different way I think so that its not so local as it is today.
Please, no. Then it will require not only boatloads of coal to generate electricity, but also tons of network bandwidth.

> A lot of people is thinking about this, in 2014 there was apparently about 140 papers written on consensus algorithms. Somebody is going to find a way to get around this wasteful use of energy that is the current way.
No, they won't.

It's a fundamental problem - if you want currency to be usable then it has to be scarce. And if it's decentralized then it means it should be _hard_ to get.

Is wasting electricity required?

Posted Jan 26, 2016 14:31 UTC (Tue) by pjm (guest, #2080) [Link] (2 responses)

> it should be _hard_ to get

Even so, we should still ask whether it absolutely needs to be so *wasteful* to get, as the originator of this sub-discussion wondered. Perhaps the proof of work could still *use* lots of resources, but delivering some side benefit to society that a miner can't directly monetize for themselves.

Is wasting electricity required?

Posted Jan 26, 2016 14:49 UTC (Tue) by nybble41 (subscriber, #55106) [Link]

> Perhaps the proof of work could still *use* lots of resources, but delivering some side benefit to society that a miner can't directly monetize for themselves.

Not a bad idea, in principle, but there are only so many classes of problems which are uniformly hard for computers to solve, with adjustable difficulty to account for variations in technology and computational capacity, and yet very easy for other nodes to check. The stochastic element where every potential solution has an equal chance of being valid is also desirable to ensure fairness, and any system which relies on a trusted server handing out work-packets is unworkable in terms of decentralization. So far no one has managed to come up with an alternative proof-of-work with the necessary properties.

Is wasting electricity required?

Posted Jan 26, 2016 19:31 UTC (Tue) by Cyberax (✭ supporter ✭, #52523) [Link]

There are some projects that attempt to do it, but it's hard to find suitable problems for that. Search for Mersenne primes is marginally better than finding hash codes with consecutive zeroes, but only marginally so.