Crypto currency and solving real world problems

[russ_watters]

But there's no simple way for them to get it.

I'm not sure why that would be true. All it really takes is identifying what miner solves what problem, and then the company they are working for pays them for it. SETI@home tracked user stats. If I remember correctly there was even a public leaderboard.

Whether a cryptocurrency protocol is adopted or not is not decided by the miners but by how many people use the currency for their real world transactions and investments. The value of the currency is what determines the reward of the mining.

That's a different issue. I do wonder though if the value drops below the energy cost, do miners stop mining? And what happens to the currency then?

 

[BWV]

I do wonder though if the value drops below the energy cost, do miners stop mining? And what happens to the currency then?

Then the incentive and potential for a majority attack increases

 

[Dullard]

Then the incentive and potential for a majority attack increases

Or the transaction fees go up.

 

[russ_watters]

Or the transaction fees go up.

How do the miners get a cut of the transaction fees?

 

[Dullard]

Specific to Bitcoin, I believe they get all of the transaction fees. That's how they are 'encouraged' to include your transaction in their block (they don't have to include any). As the 'reward' for solving a block reduces toward zero (by design), the fees will be the entire incentive for the miners- that implies (to me) that those fees are going to increase dramatically.

Edit: I'm addressing only the fees 'built into' Bitcoin. Exchanges charge fees in addition to those.

 

[russ_watters]

Specific to Bitcoin, I believe they get all of the transaction fees.

How are they paid? Are they slicing off the top of each transaction?

 

[Dullard]

As I understand it, you actually have to tender a user-specified fee with every transaction. A bigger fee will typically get you faster execution. The 'built in' problem that I see (maybe I'm confused) is that the long-term viability of the mining business (with the 'award' part of the compensation ever-decreasing) hinges on increasing transaction volume, increasing transaction fees, or both. The number of transactions which can be 'immortalized' in a single block is limited and the amount of space required for a single transaction varies with the details of the transaction - that will (likely) be a larger factor in future fee structure.

I don't want to start a debate about the merits of one coin vs another (or the whole ecosystem). Many of the 'alternative' coins are attempts to address the assorted perceived limitations of the original Bitcoin (and/or spawn). 'Proof of Work' vs 'Proof of Stake' is one of those 'forks in the road.'

Disclaimer:
I was approached by a customer about designing him a crypto-mining farm (shipping container) which could be located at flare-gas sites - I won't even get into what a huge challenge that is. I decided that I needed to understand his business to evaluate how much time I was willing to spend (before he started paying me). What I know is from that research (not any actual involvement). I decided that he needed to be a cash customer. It's possible that my imagination is too limited.

 

[anorlunda]

No, not transaction fees. The bitcoin protocol awards newly minted bitcoins to miners. That increases the number of bitcoins in circulation. I guess that is like the government printing more money.

https://en.wikipedia.org/wiki/Bitcoin_network#Mined_bitcoins
By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block. This is the incentive for nodes to support the network. It provides the way to move new bitcoins into circulation. The reward for mining halves every 210,000 blocks. It started at 50 bitcoin, dropped to 25 in late 2012 and to 12.5 bitcoin in 2016. The most recent halving, which occurred in May 2020 (with block number 630,000), reduced the block reward to 6.25 bitcoin. This halving process is programmed to continue a maximum 64 times before new coin creation ceases.

 

[Dullard]

Not sure what you're saying. There are transaction fees. Right now, the 'award' is significantly larger than the transaction fees, but it's not hard to see what happens as the award continues to be cut in half - and ultimately to 'zero.' If the value of the coin increases at a high rate, all is good (until creation completely stops).

https://river.com/learn/how-bitcoin...their transaction validated on the blockchain.

 

[anorlunda]

Not sure what you're saying. There are transaction fees.

Yes, but the people who process the transactions and collect transaction fees are not necessarily the same people as the miners.

 

[Dullard]

Essentially Incorrect.
The 'premium' paid to the miners is the sum of the 'award' and the transaction fees. That's not to say that there aren't additional 'transaction fees' extracted by exchanges, etc. - that really depends on exactly what you're doing. The fact that an exchange (if you're using one) may be the one to 'collect' the transaction fee which is submitted with your transaction (as part of their probably-larger total fee) doesn't change the facts that the miners collect as described in my first sentence.

 

[jack action]

@anorlunda , from your Wikipedia source:

Transactions​

A bitcoin is defined by a sequence of digitally signed transactions that began with the bitcoin's creation, as a block reward. [...]

[...] Common transactions will have either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and one or two outputs: one for the payment, and one returning the change, if any, to the sender. Any difference between the total input and output amounts of a transaction goes to miners as a transaction fee.

Process​

A rough overview of the process to mine bitcoins involves:

1. New transactions are broadcast to all nodes.
2. Each miner node collects new transactions into a block.
3. Each miner node works on finding a proof-of-work code for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. Receiving nodes validate the transactions it holds and accept only if all are valid.
6. Nodes express their acceptance by moving to work on the next block, incorporating the hash of the accepted block.

Mined bitcoins​

By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block.

The miner will receive the block reward and the transaction fees only if the miner achieves the proof-of-work before the others.

 

[anorlunda]

OK, I stand corrected.

 

[Vanadium 50]

This question seems at best only peripherally related to crypto. Why don't we require that someone presenting a paper dollar (or some other currency) perform some action beneficial to society before we accept it?

 

[anorlunda]

This question seems at best only peripherally related to crypto. Why don't we require that someone presenting a paper dollar (or some other currency) perform some action beneficial to society before we accept it?

I already offered the idea of not consuming the CPU power (and electrical power) and sparing the world the environmental impact. Nobody seemed interested in that.

 

[phinds]

I already offered the idea of not consuming the CPU power (and electrical power) and sparing the world the environmental impact. Nobody seemed interested in that.

Because negative externalities are of no interest to the miners who make money from the bitcoin process (and others). These are not altruistic people.

 

[Baluncore]

Why don't we require that someone presenting a paper dollar (or some other currency) perform some action beneficial to society before we accept it?

We pay tax when we earn a dollar, and a consumption tax every time we hand it on.

 

[Mark44]

We pay tax when we earn a dollar, and a consumption tax every time we hand it on.

That's not always true. For example, just this week I sold a motorcycle part on eBay, which garnered a few untaxed dollars. I used some of the money to buy food, another untaxed transfer of money.

 

[russ_watters]

This all sounds like a recipe for a death spiral to me:

1. Bitcoin value drops, reducing the mining incentive.
2. Miners quit, reducing supply of transaction executors.
3. Transaction fees go up.
4. Bitcoin becomes less efficient and less popular.
5. Goto 1.

 

[kith]

This all sounds like a recipe for a death spiral to me:

1. Bitcoin value drops, reducing the mining incentive.
2. Miners quit, reducing supply of transaction executors.
3. Transaction fees go up.
4. Bitcoin becomes less efficient and less popular.
5. Goto 1.

The effort for mining a block isn't fixed. It is determined by how many leading zeros the calculated hash value needs to have and if the transaction rate gets too low, I believe this number of zeros is adjusted dynamically. Also the block size has been increased in the past.

(That's not to say that death spirals won't occur. I'm very skeptical of cryptocurrencies keeping their value over the long run.)

 

[phinds]

The effort for mining a block isn't fixed.

Exactly. Bitcoin has a limited number of coins that can EVER be created and as that number is approached, the effort gets harder and harder. See post #54

 

[kith]

I'm not sure why that would be true. All it really takes is identifying what miner solves what problem, and then the company they are working for pays them for it. SETI@home tracked user stats. If I remember correctly there was even a public leaderboard.

Sure. But weren't you talking about the miners refusing to mine if they wouldn't get a piece of the value of the byproduct (the hypothetical SETI computations)? I was just pointing out that the main product (the block reward associated with the currency) provides enough incentive to mine if the currency is valuable enough.

That's a different issue.

No, it's my main point (see above). Maybe we are talking past each other.

 

[jack action]

This all sounds like a recipe for a death spiral to me:

1. Bitcoin value drops, reducing the mining incentive.
2. Miners quit, reducing supply of transaction executors.
3. Transaction fees go up.
4. Bitcoin becomes less efficient and less popular.
5. Goto 1.

#3 will not necessarily happen. As miners quit, the ones who stay have more chances of getting the reward with less competition; thus less wasted computation time leading to lower costs and fees.

Ultimately, hypothetically speaking, if there was only one miner left, he would do all the transactions and get all the rewards, thus increasing the mining incentive for others to jump in.

 

[russ_watters]

The effort for mining a block isn't fixed. It is determined by how many leading zeros the calculated hash value needs to have and if the transaction rate gets too low, I believe this number of zeros is adjusted dynamically. Also the block size has been increased in the past.

That's just the other side of the coin from my #1: Cost of mining increases. The rest of the death spiral still follows.

 

[kith]

That's just the other side of the coin from my #1: Cost of mining increases. The rest of the death spiral still follows.

I was talking about your #2. If miners quitting leads to a decreasing transaction rate, a downward adjustment of the difficulty of the computations is triggered because there is a target transaction rate. As a result, the mining cost decreases to the point where enough miners rejoin to reach the target transaction rate. There is a feedback loop in the system which you seem to be unaware of.

 

[Dullard]

My understanding:
It is true that the 'difficulty' is adjustable. The potential problem with that is that the 'difficulty' is also the 'security' for the blockchain. 'Proof of Work' systems use that difficulty to to create a statistically difficult situation for those with ill intent - they have to hit the lottery a number of times (in a row) to be in position to 'rob the bank.' A reduction in the difficulty or the number of active miners both serve to reduce the difficulty for evil-doers.

https://www.bitpanda.com/academy/en/lessons/what-is-a-51-attack-and-how-is-it-prevented/

The thing that I'd add to Russ' list is:
The ultimate value (and survival) of most cryptocurrencies depends on them being used for lots of transactions - It keeps the transaction rates up to incentivize miners. I know lots of folks who bought cryptocurrencies (as an 'asset'); I don't know a soul who actually used it as currency (more than once). The only valid argument (IMHO) for crypto value is based on utility, but most crypto isn't in the hands of folks who intend to 'utilize' it - they're counting on 'everyone else' to utilize it (and drive up the value). I guess we'll see how that works.

 

[BWV]

Like any ponzi/pyramid scheme it collapses once it runs out of new money, the details become unimportant

However the incentive for a majority attack increases as mining becomes uneconomical

 

[jack action]

Like any ponzi/pyramid scheme it collapses once it runs out of new money, the details become unimportant

The major problem here is that most unsophisticated investors currently view Bitcoin as an investment. It’s not — it’s a currency, a vehicle of trade, a means to an end. Currency is the oil that keeps the engine running smoothly, but it’s not the engine itself.

The reality is that the majority of current Bitcoin holders see themselves as investors, not users, and have fallen prey to investment bias, sunk cost fallacy, money illusion, escalation of commitment, and a host of other cognitive biases. Not many of us say we’re “invested” in USD or CAD or GBP, because we understand that’s not a national currency’s primary purpose.

As a currency, Bitcoin is an extremely intriguing innovation.
As an investment, it is the biggest Ponzi scheme ever invented.

 

[Dullard]

Interesting:

https://www.coindesk.com/business/2...r-btc-holdings-to-cope-with-market-headwinds/

 

[Vanadium 50]

How is that related to this thread, other than being about Bitcoin?

 

[Dullard]

Really? Did you read any of the 30 (or so) posts preceding your question.

 

[Vanadium 50]

Suew did. The only thing I see in common I see is "Bitcoin".

Why don't you explicitly state the point you are trying to me.

 

[Dullard]

Miner incentives
in-built features to regulate Miner population
Economics of the Bitcoin ecosystem

These were all discussed in the thread. The article describes them in action.

p.s. the Socratic B.S. may be OK for your students, but it's offensive to others.

 

[Melbourne Guy]

In other words, instead of trying to make money, why doesn't everyone just do everything for free. Good luck with that.

I'm late to this thread, but this piqued my interest. Some social media platforms are essentially this. LinkedIn, for example, generates revenue from user content that those users cannot monetise. And of course, the open source software community epitomises the concept of people doing things for free. Neither of these are as comprehensive as your statement, @phinds, but people seem very happy to do a lot for free...where 'free' equates to monetary gain, presumably those who participate on LinkedIn etc. are realising an intangible benefit for their efforts.

 

[phinds]

but people seem very happy to do a lot for free...where 'free' equates to monetary gain, presumably those who participate on LinkedIn etc. are realising an intangible benefit for their efforts.

Yes, THEY get a benefit. The benefit of "free" communication with hoards of other people. They do NOT join social media in order to get a benefit for someone other than themselves with no benefit to themselves other than feeling good about themselves, but that's what some in this thread are proposing --- totally selfless acts of charity. Again, good luck with that.