I'd like to hear from Bitcoin proponents where we are wrong in our thinking. What assumptions are incorrect? Is there a flaw in economic reasoning? If not, what is being done with Bitcoin to address this existential risk for Bitcoin?
https://www.cs.princeton.edu/~arvindn/publications/mining_CC...
Selfish mining is possible, at least for a short period of a time, but sunk costs are eventually sunk costs and you compete for the next block.
That means block rewards plus TX fees need to be greater than the cost of running the network. Block rewards are effectively a tax on existing holders through inflation of supply, but that will go to zero in the long run. As the rewards decreases, TX fees will need to increase, which means the average TX will rise. This will increasingly make using BTC prohibitively expensive unless the block size is increased so as to allow more TX per block.
But if the scenario should arise where revenue no longer covers the costs of being a miner, the whole economic model breaks down. This could even get to the point where going rogue, and attempting to exploit the network with the hash power, could become more profitable for a miner.
The rest of your analysis is correct: as rewards decrease, TX fees may increase. You can also see that due to competition for the limited tps, as seen in 2017.
But this is also exactly why the scenario discussed in the paper is implausible: miners get to pick the transactions with the highest fees for inclusion in the next block. If your transaction is not urgent, you pay the minimum and wait. Eventually, it will be processed - if the expected delay (given the mempool) is not to your liking, you can update the fee with RBF.
But again, it means there will be little variance - just a smooth adjustment, meaning the required condition this whole paper is based on is dead wrong.
About the economic model breaking down, you make 2 mistakes: 1) you fail to account for difficulty adjustments made just for this situation, but even people who do often forgot 2) when revenue no longer covers costs (as say for a factory), the company doesn't immediately give up and fire everybody.
It's industrial organization 101, and due to the difference between short term and long term.
Of course, there is less friction and fewer rigidities with software, and mining equipment could be deployed differently if it was still CPUs or GPUs.
But the genius of ASICs having no alternative use means it can't happen (except maybe switching to another coin with the same algorithm)
Overall, regardless of the situation and what you throw at it, there's no situation I can see where the economic model break - except maybe if miners are tracked and executed on sight by the army? But even then, all it would do is move the mining to another country - or lead to bribes!
Mining is competitive. A miner who shuts down while revenue is less than electricity cost, and starts up again when fees rise, will outcompete a miner who just leaves everything running even while taking losses.
>Figure 2: Illustration of Mining Gaps. Miners will only mine when the instantaneous expected reward exceeds the instantaneous cost
This makes no sense, rational actors generally consider discounted future cash flows, not just instantaneous reward. Perhaps the quality of the paper is explained by the researchers following this strategy and only working on 15th and 30th of every month (when their salaries are remitted to their bank account representing an instantaneous reward).
> We also assume that miners always have space to include all available transactions.
This is also a pretty bad assumption. In reality the bitcoin mempool is almost always non-zero as bitcoin has smaller and/or less frequent blocks than many other cryptocurrencies.
This also assumes that miners will be holding enough bitcoin that price increases alone will not only pay for their operations but also cover a reasonable interest in their holdings. It's not logical to think this will happen. And even of it does, you'll be left with only a handful of miners.
I see your point but doesn’t sound like a great pitch.
Flash loans/minting, for example, have turned the markets into the ultimate meritocracy. Anyone - rich or poor - can access up to hundreds of millions of dollars instantly to execute any profitable transaction, no human review or approval necessary. Liquidity pools, introduced by Uniswap, solved many of the problems and risks associated with holding thinly traded assets. Smart contracts have enabled any new project’s tokens to instantly have real value, because in most cases new tokens can only be released to the market by locking ETH into the contract in exchange for the new tokens.
These innovations, along with those that are coming, enable a shockingly large number of new opportunities in the finance world to a much larger audience than ever before. It might be a few years before security, market manipulation protections, etc. are mature enough for mass adoption. But the opportunities that DeFi enables will drive demand for ETH, in a way that today’s Bitcoin simply cannot.
What does this mean? If I'm poor (or rich), why not borrow hundreds of millions of dollars to make some highly speculative trade? If it goes well, I win big; if it goes tits up, the lender loses big (not me).
I'm certain that's an uncharitable reading of your comment - please take it in the spirit of "this is what I'm asking you to explain to me in simpler terms," not as an argument.
This means you can't take the highly speculative trade, you can only go for a sure thing. But if you do have a sure thing, you can borrow as much currency as the lender can provide.
[1] https://etherscan.io/tx/0xfd35e99cbbefea68874391a14ddb09a289...
What sort of situation could this be used in? I'm having a hard time truly imagining use without any risk of transaction rollback.
The markets are not currently too efficient for that, and never will be. In fact Uniswap’s entire design depends heavily on arbitrageurs balancing out the markets between itself and other exchanges.
How are the transactions composed, with a smart contract/s, in combination with Dex API’s?
Then you would have a separate program running on your client machine to scan for market opportunities, and when it spots one, have that program send a transaction to your deployed smart contract to initiate the loan and set into action whatever logic you programmed into the smart contract that will yield a profit.
Yes, it’s quite a rabbit hole indeed. It is hard to believe that something like this is even possible, let alone profitable, but it really can be. I have seen single flash loan transactions yield up to $46k in profits. That profit is irrevocably delivered back to you in a couple of seconds.
The inflation curve in Bitcoin is considered sacred. In Ethereum, it's developer whim and EIP approval.
def calc_annual_reward(total_staked_eth):
return math.exp(31556926 / 384 * 64 / 31622 / total_staked_eth ** 0.5) - 1
RSK MainNet launched about 3 years ago. Currently, most blocks have no transactions, with 0 gas spent.
For 'kill' as in 'stops being big and important' I think it's going to happen relatively soon, mostly agreeing with your article. Bitcoin already lost its past domination in users and total fees paid to ethereum, the only missing part is for eth to actually monetize that by fully switching from PoW to PoS. When eth stakers start making even billions annually while btc buyers lose billions annually to mining, btc losing its first place is only a matter of time. After that, PoW is going to be widely discredited and viewed as obsolete.