At what price will the Bitcoin death spiral occur? (i.e. when it costs more to produce/handle Bitcoin than the revenue generated, so best move is to just exit the crypto industry).
If so, the answer is never. As people give-up, the costs for the remaining ones reduce so that at some point it's lucrative again.
The interesting question is at what price people will stop speculating on its price and run to an exit? I don't think anybody can answer this one.
If you can flip a switch and 10x the hashrate of a network, all under your control, and you don’t care about killing the chain in your attack, it may be a perfect exit for you if you no longer want to play the mining game.
There’s actually a mining pool doing something like this on smaller PoW bitcoins https://sharkpool.cash (not associated, just think it’s interesting)
That's a relevant threat to every coin that can use the Bitcoin ASICs. And probably will even happen to others before hitting BTC itself.
There are tons and tons of much smaller coins, that can be attacked for very cheap, and yet attacks are still very rare.
IMO, this is because double spends just aren't a very good idea. If you tried to steal money from an exchange, everyone would know it was you doing the attack, and then they wouldn't accept your money in the future, or maybe you'd just go to jail instead.
Also, the network is not static. If there is lots of hashpower sitting unused, maybe that hashpower would turn in to defend against an attack.
More people have something to lose from a successful attack, and thus could be motivated to defend when an attack happens.
So either PoW has a security hole related to dormant ASICs or it’s useless. Either way it’s not a good look.
If someone owns 10s of millions of dollars worth of miners that are temporarily turned off, do you think this entity would want an attack to succeed?
No. They'd want to protect their future investment in mining equipment. They might just turn that hashpower back in, if an attack was in progress, and take a temporary loss to fight off a temporary attack.
Even the threat of a big player coming in to prevent an attack would make the risk of attacking way to high.
We saw this happen recently when someone tried to attack the Bitcoin Cash network. Defending miners temporarily turned on their hashpower to stop any attacks. And it worked.
Well that depends on how much they're holding and how deep they are in the hole at the given time.
> No. They'd want to protect their future investment in mining equipment.
Unless they were in financial trouble and an attack would get them some cash, fast. The sort of financial trouble that can happen when a company invests, say, millions and millions of dollars into now-unprofitable hardware.
The network is not static. It doesn't matter if one miner wants to make a quick buck, because the defenders have more to lose, and would spin up defending POW if needed.
It absolutely can be in the rational self interest of such players. Relying on other dormant capacity to come up in defence seems fanciful at best.
PoW provides some amount of security but in order to pull off a double-spend you have to not only gain majority hashrate, but also somehow actually spend/cash-out both 'copies' of your coins. This carries substantial risk as you first have to be long those coins (not smart when you are attacking the network). Then convince exchanges to convert both 'copies' while hoping they don't have systems that notice the massive increase in hash-rate nor the unexpected fork you are creating.
Simply shorting a coin, then attacking as more of a DoS may be more feasible but still carries risk as a successful defense could positively affect price.
If they can be attacked cheaply, then by definition there's not much money to gain from doing that.
If you try raiding a market the trade will dry up as traders won't want to come where they may be attacked and trading with people who attack traders is bad for business given the precedents it establish for property rights. Essentially even if you could seize it all it would be worth a fraction of the value because nobody wants to give their goods/money to 'dicks who steal stuff from traders' for the same reason you don't go to barbecues with cannibals. This is one way that markets and trade help promote peace - war becomes a losing move and ones who anger others less are better resourced
If they want to take everything by force you need to seize the goods and means of production themselves - which also highlights why communist countries have had terrible economies - in addition to all of the economic fallacies. Expropriation scares people off.
Come to think of it this is something that has bitten Haiti with its history and highlights the amorality of the effect. Slaves suffered under conditions so brutal that the slave population was sustained through importation instead of reproduction, greed and economic forces caused slaves to vastly outnumber the masters, and machetes were indispensable tools for sugar plantations. While their grievance was justified they were pretty much embargoed pariahs as a result.
The point being that these phenomenon aren't moral or immoral in themselves and are something that should be kept in mind by all actors.
> In sum, we strongly believe that it's beneficial to preserve our ASIC resistance. Therefore, we will perform an emergency hard fork to curb any potential threat from ASICs if needed. Furthermore, in order to maintain its goal of decentralization and to provide a deterrent for ASIC development and to protect against unknown or undetectable ASIC development, the Monero team proposes modifying the Cryptonight PoW hash every scheduled fork, twice a year.
[1] https://ww.getmonero.org/2018/02/11/PoW-change-and-key-reuse...
In practice bitcoin is somewhat resistant to large changes or forks, most anyone who would consider any type of alteration to the existing implementation forked off with bitcoin cash for a relatively minor change (block size). That self selection has left a staunchly "traditionalist" majority in the remaining bitcoin community.
The price drop does lower the amount of security in the network, so it becomes cheaper to attack it. However, it also means the payoff to attack is lower.
If the price drops and miners leave this will happen in reverse and coins will not be produced fast enough, then the difficulty will reduce (meaning less power is required to mine a block). The network would be fine even back at $100.
Does the math to calculate a coin change based on... price?
For some reason I assumed the mathematical difficulty just naturally increased as part of what in my mind is "the mathematical problem" vs. number of coins.
If people put less computational power into generating blocks, fewer blocks will be generated. After each n blocks, nodes adjust their difficulty based on how long it took to generate those blocks, to try and achieve an average of a block every 10 minutes.
But how much computational power people are willing to put in depends on price. It only makes sense to mine if you get more out than you put in in the cost of buying the hardware, amortized over the life of the hardware, plus the cost of the power used in mining. If the price of Bitcoin drops, there are fewer people for whom it makes economic sense to continue mining, so some will turn off their miners, reducing the hash rate.
When global hash rate reduces like this, and the difficulty drops, then the people remaining will get more BTC per unit time from mining, so it can make economic sense for them to continue mining, as long as the price doesn't drop further. So indirectly, the total hash power of the bitcoin network is linked to the price of bitcoin; or, the price of bitcoin relative to the price of electric power.
Indirectly.
> "the mathematical problem"
The mathematical problem is producing blocks. A block is a collection of transactions and a bit of metadata, including the address which gets the block reward. The block is hashed along with a counter or random factor (nonce), which is manipulated to try to find a sha-256 output with a certain number of leading 0 bits. The number of zeroes required by the network is the difficulty (this may be somewhat oversimplified).
Hashing has costs, hardware and power mostly. When the price of BTC rises such that the expected income is greater than the expected costs, people switch on more equipment and the network hashrate goes up.
As the hashrate goes up, the difficulty is adjusted by the network in order to keep the new block finidng time at about 10 minutes. If the price falls, miners find it unprofitable, go offline, the hashrate drops and then the difficulty also drops to keep the block time about the same. In this way the costs and rewards balance out.
But this also means that as the price of BTC rises, so does its (already huge) power consumption.
"Your money is safe because it's not worth anything anyway."
Additionally, even when there are rapid drops in value (and thus mining), people still want to transact Bitcoin, so transaction fees go up and become a significant percentage of the overall value of a new block, thus compensating miners for the reduced value of the block reward.
There is no death spiral; there's just regular increase/decrease in value over time.
What happens when the market is flooded with cheap miners? A 51% attack is suddenly affordable.
What happens if the price drops off a cliff right after a difficulty adjustment? As hash rate falls, difficulty adjustments become farther apart than the two weeks they're supposed to be.
What happens when smaller miners close up shop? Bitcoin mining is already very centralized. Falling profitability would move it even more into the hands of the biggest players with the most efficient hardware and the cheapest electricity. Read: China.
A falling price is a huge problem for the security and stability of the network. Bitcoin is teetering on the brink of complete collapse.
>people still want to transact Bitcoin
No one uses Bitcoin. The transaction fees would have to go up by a factor of over 100 to equal the current block rewards. And, if people don't use Bitcoin now, why would they when transactions are 100x the current price?
It's true that the difficulty adjusts both up and down, however it does so over 2016 block intervals. If a sufficiently fast and large drop in value/hashrate occurs, the chain could well 'death spiral'. The drop simply has to occur within the adjustment interval (2016 blocks- or 14 days).
That said, recovering from a death spiral is as simple as a new Bitcoin Core release that hard-forks the difficulty to a new, workable level, so the fatalistic view of death spirals is still wrong.
Nothing happened. There have been bigger threats to the network, the revenue of miners isn't currently one. A threat to the usability of the network would be if 90% of mining power disappeared at the same time, this means it would take 900% longer to confirm a block until the next difficulty adjustment drops the network confirmation time back to 10 minutes. Difficulty adjustments happen every 2016 blocks, each block is supposed to come every 10 minutes. The worst case scenario would be hashrate disappearing right after a difficulty adjustment meaning 2015 blocks will be found very slowly, there could be a max of 4 months of a slower bitcoin network.
Makes me wonder what you even mean by death spiral, like what user experience do you expect to happen?
Users wouldn't immediately stop using bitcoin because it was slower, they wouldn't even know it would suck, so more likely the unconfirmed transactions would add up, and to ensure getting mined into a block, the users would increase their transaction fees to coax miners to include them first (instead of dropping their transaction completely when they run out of memory). With a higher fee market, this is an even greater incentive for miners to come back on the network, because now the block reward doesn't even matter, since the fees can potentially eclipse it totally. The price of bitcoin would even cease to matter, if there is a dollar figure of fees just there. Miners come back on the network would make the hashrate higher again, before the difficulty adjustment, making blocks confirm faster, instead of slower.
This equilibrium is already in the minds of miners, which contributes to them staying on the network so that they don't miss out.
This isn't theory, its all happened before.
There will always be SOME miners who have access to cheap enough electricity and economies of scale for whom it continues to be profitable to mine.
You'll hear some handwaving about difficulty adjustments. That doesn't change the fact that it is becoming increasingly unprofitable and miners are already shutting down en masse.
Bitcoin removes the need to trust a bookie/agent to move money offshore.
Whenever flow of money is possible between a safe haven and a corrupt/socialist big country with high tax rate/more population burden.
Money flows to the safe heaven.
Bitcoin is one such way to move money from african nations/india/china to safe haven like Switzerland, Singapore, UK etc...
I am talking about illict gains/unreported assets which can't be moved through official channels.
Moving your unreported assets to a different country might not be illegal in that country if a deal is structured correctly. That's where lawyers/accounts/consultants come into play.
Bitcoin will rise again once a need to move money to save heaven rises again.
It's an efficient medium to move large sums of money without trusting a bookie.
I can buy coffee loaded in container from an african country where inflation has killed the local currency and banks do not have infra for international settlement or take much bigger cut or simply aren't trusted by local people. For this i make simple bitcoin transfer from Hong Kong and get my coffee contain undocked in Hong Kong.
Edit: it's haven not heaven.
Secondly, are you saying that bitcoin exists solely for the purpose of money laundering and tax evasion?
It removes the need to trust a bookie or agent to move money offshore.
There are lawyers/accountants in Switzerland and Hong Kong who will help you launder money from third world countries.
Moving your assets offshore without local government knowing is not a crime in other country!
Edit: why downvotes? What's wrong?
I personally tend to think that in the vast majority of cases govt spending of tax money does more for the greater good than whatever a self-appointed authority would. There are many exception to this, but I still think this is largely true in democracies. But then again I tend to identify as a social-democrat.
People there will happily pay 60% tax if they get even Rome level of infrastructure access
So, it's no brainer a lot of them move their money offshore.
Edit: people who feel they are not getting fair share of their infra quality, with this line of thinking will move money aboard doesn't matter if it's ethical/legal thing to do or not.
So the answer to your question is never, a Bitcoin death spiral can not occur.