Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin System [pdf]
columbia.edu
columbia.edu
Here is one high profile example http://avc.com/2017/08/store-of-value-vs-payment-system/
(of course when it starts to go back to zero people will all try to sell and the infrastructure wont be there)
PS: The paper deals with a very interesting problem about how miners are paid. I dont want to take away from it. Just that I feel the whole BTC environment has taken a new turn that makes the problem less of an issue.
I'd beg to differ.. sure there is definitely a percentage of HODL'ers but to say people don't use it in transactions is straight up lunacy.
https://blockchain.info/charts/n-transactions?timespan=all https://blockchain.info/charts/trade-volume?timespan=all
https://blockchain.info/pt/charts/n-unique-addresses?timespa...
Is it not just a blockchain slapped on top of the slower blockchain?
That's not true. By locking funds into a Lightning Network payment channel you solve the double spend problem _in the channel_ (the person receiving your payment knows that in order for you to double spend the channel, the payment recipient would need to approve the double spend). The risk of being double spent still exists on the underlying blockchain though, which is solved with a smart-contract structure that allows the counter party to the perpetrator of fraud to revoke a fraudulent double spend.
This process effectively doubles the required amount of transactions and time spent for the 'lightning' transaction to take place?
Lightning is exactly the same way. You set up a contract with the payment processor. This requires the transaction to be accepted into a block. Then you make as many smaller transactions (which require no blockchain transactions) with the payment processor as you want. At any time, the payment processor can terminate the contract by cashing in the amount of money you have spent. This requires a transaction to be accepted in the block chain. After that the channel is closed and only the amount spent is transferred (the remaining amount is freed up). If it goes beyond the contract length without the payment processor cashing in, then the contract is cancelled and the total amount is freed up.
So basically it allows you to make many transactions through a payment processor, while only making 2 transactions on the block chain. Anyone can be a payment processor, but the protocol requires the payment processor to have capital equal to the transactions in process (they have to transfer funds to a third party before they get paid -- although they are guaranteed to get paid by the end of the contract).
It's actually a pretty slick protocol. Their website has a video with implementation details that explains exactly how it works: https://lightning.network/
Once the channel is set up on the blockchain between two users and has some amount of bitcoin committed to it, the participants can securely transact between each other with only private communications between each other, without requiring transactions in the blockchain. When either user is done with the channel, either of them may broadcast the settlement transaction which withdraws the committed funds in the correct amounts to each participant. (Every time the participants make a transaction between each other, they create create a new settlement transaction, and a separate transaction which invalidates the previous settlement transaction. These are regular Bitcoin transactions, but they're held privately by the participants instead of being broadcast on the blockchain immediately. If either of the particpants tries to broadcast an earlier version of the settlement transaction, then the other participant can broadcast the invalidation transaction within a certain pre-agreed time, which rewards them the funds as punishment to the defector.)
Then the real fun comes from the "lightning network" part: if Alice wants to send funds to Charlie but has no open lightning channel to Charlie, but she knows that both her and Charlie have an open channel with Bob, then she can do an off-chain lightning transaction through Bob to Charlie, without any risk of Bob taking the funds for himself.
And secondly, frankly, I think Bitcoin dreadful for micropayments. It's really hard to get hold of for most people, requiring all sorts of setup and accounts.
"I think this is mostly correct, but I see it a bit differently. This bubble is slowly building up real housing for hard working poor and middle class people. Use cases like pay-day loans and sub-prime mortgages become more and more viable as the network size grows. Eventually enough people own mortgages that it makes sense for it to be baked into a CDO, and for it to be used in lieu of liquid assets. Bubbles are the boot loader of real utility."
Did you mean for the terms you listed to relate to the bitcoin situation in any way?
EDIT: I was also trying to make a point that CDOs were based in a kind of network effect where the risk was submerged under an ocean of statistics. Yet in the end, the underlying assumptions were faulty and the network effects lit on fire like gasoline.
The thing I'm taking away from the article is that it compares BTC to gold favorably, which is an interesting angle. I generally think that gold is an irrational investment, after all there is no intrinsic value to gold other than for jewelry electronics, and high tech science experiments but that's not what the gold bugs claim.
However, if you kind of turn the argument on its head a bit, gold is sort of like a ground up fiat currency. It has no intrinsic value and it has no army, but it forms a focal point of public consciousness that renders it deflationary fiat.
However, there are other problems with BTC even if you accept the idea of deflationary fiat. For instance, money doesn't just pool in rich people's pockets, you can literally lose a BTC wallet and the money is just gone forever. Over time, this will result in the number of BTC in circulation approaching zero. I don't know how long that will take.
The other argument against BTC is that its essentially capitalism run amok. We already destroy the environment to extract dollars, but now with cryptocurrencies, we actually have to destroy exponentially more raw energy to fuel the monetary system itself. It's a satire of capitalism in a world of environmental catastrophe.
As for the Tulips, maybe I'm interpreting the chart incorrectly, but while the options price rose to insane levels, the realized prices, for a shorter duration, still rose to 100x (options were at 200x).
What did you mean by "extract dollars"?
Also, the digital transfer of money throughout the globe and even just domestically requires a significant amount of processing (which requires raw energy) by many different entities. It makes me wonder if a transaction within a cryptocurrency payment system is actually more or less efficient, even with all of the miners.
I get what you're saying, but the entire idea of bitcoin is literally an exponential ramp. Each new technology that improves speed (CPU->GPU->ASIC) will be a linear step up, but mining will get exponentially harder. There are network effects from the banking world, but I don't think they should grow even as (N^2 where everyone is connected to everyone else) as they probably use something between than and a spoke and hub model.
Creating utility/value from achieving network effects (something pretty common) isn't really comparable to issuing loans to people who cannot afford to pay them back, regardless if you think there's overvalued speculation or not.
really thinking about this it is probably not a problem because the free market should find the true price for an on-chain immutable transaction. coffee transactions will happen off chain and be settled up on-chain (lightning network)
Bitcoin competes more against Western Union than against Visa. WU does only 31 transactions per second, perfectly within range of Bitcoin's capabilities (https://corporate.westernunion.com/annual-report/highlights....)
Data shows otherwise. Bitcoin speculators typically leave the coins in an exchange wallet (not sufficiently technically savvy or motivated to run their own wallet). Doing so does not create a transaction on the blockchain, therefore the transaction rate (https://blockchain.info/charts/n-transactions?timespan=all&d...) reflects mostly non-investment-related transactions, and it is sharply increasing.
«The more it goes up the less people are likely to spend it.»
Historically, transaction processors like BitPay have noticed precisely the opposite. I guess people are excited to spend their newfound fortune when BTC goes up? I observe this behavior on myself: I cash out and spend more bitcoins whenever the value is going up (Jun 2011, Nov 2013, today, etc)
Bitcoin is like an Onion- it has layers, and makes you cry.
As I have come to understand it there are many layers- both in technology and economics- at work here.
Most obvious is layer 2 tech like lightening network, side chains, and segwit. (which is a second layer inside the blockchain.)
But as you come to understand it better you realize, for instance, that the network has been under attack and the cost of fees is mainly due to that (when its not under attack because the attackers are moving their bitcoins) you can do micropayments-- like $1.50 sent for $0.05 transaction fee with 3 hours clearing-- which is faster and cheaper than credit cards. You get censorship resistance for free!
The merchant could also let you leave after sending Bitcoin if the risk of double-spending was low enough (and network congestion was down).
Lightning Network will enable instant transactions without needing to wait for block confirmation, which is a true payments solution.
That's a subjective viewpoint. I might just want to earn my salary in Bitcoin and spend it, like a currency.
Many crypto-currencies, Bitcoin being the most prominent, are reliable electronic payment systems that operate without a central, trusted authority. They are enabled by blockchain technology, which deploys cryptographic tools and game theoretic incentives to create a two-sided platform. Profit maximizing computer servers called miners provide the infrastructure of the system. Its users can send payments anonymously and securely. Absent a central authority to control the system, the paper seeks to understand the operation of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed?
A simplified economic model that captures the system’s properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system’s limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
> Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts.
> Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.
Bitcoin is not regulated. It cannot be regulated. There is
no need to regulate it because as a system it is committed
to the protocol as is and the transaction fees it charges
the users are determined by the users independently of the
miners’ efforts.
The gateways, such as the exchanges are more of an essential element in regard to regulatory and economic influence on the cryptocoin economies.
Bitcoin will struggle as long as their development team struggles with fixing the 3-4 transactions per second limit. $20 fees to process a transaction in 20 minutes? Good luck.
All we need is to standardize this behavior, such that each exchange doesn’t have its own closed system (essentially an SQL database with balances). Rather, we’d using an open clearing protocol, with multiple issuers in the same way we use email with multiple email providers. Each issuer/email provider is centralized, but the system as a whole is decentralized (similar to Git as well).
The simplest example of such a protocol is Stroem[1], which offers trustless micro-payments for consumers/payers, such that only merchants/payees take risks (which are proportional to how often they redeem their BTC on the blockchain). So, merchants get to choose their risk appetite: the longer they wait with redeeming, the lower the per-transaction fee, and the more often they redeem the more the security resembles on-chain transactions, with proportionally higher fees.
[1] Presentation http://econ.sciences-po.fr/sites/default/files/file/melissa/...
[2] Presentation https://www.tse-fr.eu/sites/default/files/TSE/documents/doc/...
Satoshi's core design of bitcoin minting favored early adopters to mint coins at extremely low cost and processing power, this is why someone traded 10,000 bitcoins for two pizzas because it took no effort to generate those early on. Satoshi decided to decrease the amount of rewards as the network grew older and presumably more users would adopt it, why? This is a marketing gimmick seen with beanie babies and base ball cards where the cost of production is low yet you tell customers the supply is very limited so you must act quick while supplies last. And the supplies of this type of service are increasing with every day as alternative networks offering the same service (blockchains, trustless distributed databases) are increasingly sprouting up. The question speculators should be considering when evaluating the economic worth in trading bitcoins or any other altcoin should certainly take into consideration what value the network provides them versus alternative service networks, what the risk of volatility in each network is especially because extreme drops in value are much easier than rises in price as liquidity is severely limited and many "whale" accounts often own enough supply of coins to crash the entire market [1] [2] [3].
Exchanges like MTGox, Bitfinex, etc have been suspected of manipulating exchange rates and insider trading via maliciously scripted exchange bots within the exchange [4] [5] [6].
[1] https://bitinfocharts.com/top-100-richest-bitcoin-addresses....
[2] https://etherscan.io/tokenrichlist
[3] ETH had a presale which sold for $0.35 USD - $0.45 USD. The vast majority of cryptocoin variations premine or rapidly mint their supply, and then game speculators to pass the bag off to greater fools in what is essentialy a pyramid scheme backed by a network of databases running double-entry bookkeeping marketed as magic technology that's changing everything.
[4] https://www.theguardian.com/technology/2014/may/29/bitcoin-b...
[5] https://medium.com/@bitfinexed/are-fraudulent-tethers-being-...
[6] https://medium.com/@bitfinexed/meet-spoofy-how-a-single-enti...
Mining needed to have a way to incentivize miners before transaction fees were common, and there needed to be a system to get bitcoins out into users' hands to begin with. Once a critical mass of users have bitcoins and transaction fees support mining, there's less reason to continue minting new bitcoins.
It could be argued that continuous minting creating inflation would be desirable, but that's a big free parameter that there isn't a known best way to calculate. Bitcoin's monetary supply code was intended to function long-term, and if minting was to continue indefinitely, it's debatable what the minting rate should be, and if it was gotten wrong, it would be extremely controversial to ever change. (Some people might think 2% is a good inflation rate, but what if that's specific to now? Say economic and population growth slow down; 2% could be too much inflation.) Having the cap approach a maximum limit instead of increasing forever seems to have been a much easier decision to make and get others to trust. If there's a fixed amount of Bitcoin, then as long as Bitcoin's usage isn't decreasing, it's straightforward to imagine that the value of Bitcoin shouldn't approach zero.
>And the supplies of this type of service are increasing with every day as alternative networks offering the same service (blockchains, trustless distributed databases) are increasingly sprouting up.
A big part of Bitcoin's value is the network effects of its current user-base. The creation of an altcoin doesn't immediately fully dilute the supply of useful bitcoin-like cryptocurrency if it doesn't have the userbase.
If you look at the coin supply minted over time, in the first year ~3,000,000 coins were minted, 1/7th the total supply minted to a very very small group of humans. By 2014 half the entire supply was minted. These coins are now in in the pockets of a very very limited amount of users who spent very little resources to mint these and be granted credits in Satoshi's database. Think about this.
There's no real network effect when migration to any of the other altcoins is just as easy. It becomes incentived more so when actual usage of the BTC network is cumbersome with latency of up to several hours, and or $10-$20 transaction fees.
Bitcoin being mainstream and safe is a very new thing. I remember just a couple years, everyone was freaking out because they were worried that China was going to ban bitcoin.
And years before that, the worry was that the US, or whoever, would try to force AML regulations onto it.
And a couple years before THAT the worry was that the US would do all of that AND arrest everyone involved in the system, and send them to jail for facilitating money laundering.
Being involved in bitcoin was a risk for early adopters, and that risk was rewarded.
The amount of (untaxed!) wealth owned by those early miners would dwarf that of Gates and Buffet. That kind of Ayn Rand level of capitalism doesn't seem to agree with most people — although it does seem palatable amongst Bitcoin aficionados.
1: https://cointelegraph.com/news/who-owns-bitcoin-universe-fro...
As mainstream adoption took place, we've now seen large capital holders acquiring BTC in proportion with their current wealth.
The hodlers play a game of chicken prisoners dilemma, and it's worthwhile to consider what beanie baby they've acquired and how the sausage was made.
On the other hand, as far as I understand there is a huge number of inactive coins that no-one knows whether they've been lost or not. If those coins start moving it would effectively create a large inflationary pressure.