"We first document that 90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity."

"We show that the Bitcoin mining capacity is highly concentrated and has been for the last five years. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity. Furthermore, this concentration of mining capacity is counter cyclical and varies with the Bitcoin price."

"We show that the balances held at intermediaries have been steadily increasing since 2014. By the end of 2020 it is equal to 5.5 million bitcoins, roughly one-third of Bitcoin in circulation. In contrast, individual investors collectively control 8.5 million bitcoins by the end of 2020. The individual holdings are still highly concentrated: the top 1000 investors control about 3 million BTC and the top 10,000 investors own around 5 million bitcoins."

I haven't read the methods yet, but the idea that the authors were able to do this analysis is fascinating.

This is incorrect. Replace "miners" with "mining pools" and they're closer to the mark. What's happened is that the block construction (done by the pool operator) and the PoW (done by miners) are mostly decoupled. Some miners will run everything themselves, but they're not represented in those numbers. (There are some things that can change here in stratum2, the new protocol used for coordinating mining pool s, but whatever)

Sure, pool operators can abuse their power. But as the paper shows, hash power is liquid; miners do move between pools for various reasons.

While there is a bit of a systemic risk there, it's not necessarily as bad as it might seem.

IMO the biggest risk here is censorship; and we saw how responsive miners are to things like that earlier this year with the whole "OFAC-compliant" debacle.

It is correct. They are talking about miners not mining pools.

One thing I’m noting is that they exclude ~70% of miners and assign ~30% as exchange miners (note that those two figures only coincidentally add up to 100%). One possible methodology error I can see (and again, further digging would have to be done to verify) is that exchanges often pool their user wallets together; it could be that for some exchange(s), they mistakenly lump together several users as one. Since their claimed concentration is very high, it should be feasible to look at the top 50-100 to cross-check.

Would be awesome to get more research like this.

Overall it’s an insightful article and the authors show great understanding.

So, the much-vaunted "mathematical guarantee" that only 21m BTC will ever be mined depends on the benevolence of those 50 miners not to fiddle with the code base. Makes perfect sense to trust those honourable individuals more than the central bankers in control of fiat. /s

That is not the issue caused by this concentration of mining power.

There's no telling whether it'd be the "hijacked" branch or the original one - assuming they control 50%+ of the mining power, there's a decent argument that the remaining miners would follow their lead if only to stay on the largest branch.

There is a protocol and system specification. There are implementations of that specifications. There is a distributed system running those implementations. And the distributed system has a state. Each of those can change and each of those or a combination of them could arguably be called Bitcoin.

If everyone would run new implementations with a different coin cap, you can argue that it is no longer Bitcoin because Bitcoin is a very specific specification with a 21M coin cap, but this would have little bearing on the actual situation.

Money has worth because people accept it in exchange for goods and services.

Bitcoin has worth because people accept it in exchange for goods and services.

It’s not the miners that create value, it’s the merchants. If miners start some fork they’ll leave the main blockchain, which will run fine without them. And they have absolutely no way of forcing anyone to use their fork. Only if the merchants start accepting coins from the forked blockchain will it become valuable. But that’s up to the merchants, not the miners.

There are problems with one miner controlling over 50% of the mining power. This is not such a problem.

It's been quite educational watching the whole cryptocurrency community re-invent economics 101 and find out the problem has never been technical, always been political.

Yes, these 100 miners are pools. But where pool participants will go then? Will pools who have not forked keep pool participation fees low?

Etc.

The game here is not quite simple. It is much more complex than appears at first sight.

Here’s a graph of the time blocks took over the last three years:

https://bitinfocharts.com/comparison/bitcoin-confirmationtim...

Look at the peaks and try to remember the issues that resulted in.

Second, instead of two weeks to hash rate adjustment, it will take four weeks.

And if these staying with this slow bitcoin would decide to leave to more profitable currencies (not necessarily Bitcoin, there are other SHA256-based PoW schemes), that will push hash rate adjustment even further into future.

https://www.cnbc.com/2021/07/03/bitcoin-mining-difficulty-dr...

We survived.

Usually forks have checkpoints as well so things can't change willy-nilly.

This is less a criticism towards you @CompuHacker and more about how ill-informed reporters are (especially it's most vocal critics) about Bitcoin's history.

We already went through this during the USAF/Segwit war that went on for far too long if you were there and delayed so many other key features that we are only now catching up to. With the added caveat that Roger Veer (a VERY ignorant whale with influencer status) and Jihan (CEO at the time of Bitmain with a monopoly on ASIC miners and large hashing power on the network) decided to hi-jack Bitcoin for their own ends. There were other whales/high net worth entities, including Coinbase, but lets keep it simple for arguments sake.

In short, it didn't work and no one uses/used their fork (Bcash) because the end result was that Bitcoin's mainchain and it's features was valued far more than what whales and hashing power/devices. Furthermore, upon the fork people arbitraged the coin and dumped it in exchange for Bitcoin and Bcash has never recovered since. Showing that playing by the rules has it's incentives and is rewarded: rewarding consensus is one of Bitcoin's core features, and I wish more people would realize this is the ecosystem is far more conducive toward progress than abject discord.

What's even more amusing is that a core developer of Bitcoin Core decided to help patch some of Bcash's source code, showing that what you fear has actually already played out and proved why Bitcoin has already proven itself and has a the battle scars to prove it.

It's remarkable what has happened in this space in the last 12 years, and in my ideal World I think their would be more time spent on that and what it has taught us via empirical experimentation rather than just the price.

Sidenote: It's why the plot of the 51% attack on the series Silicon Valley only made sense to people who really have no idea how the network attack would actually play out on decentralized networks.

What mechanisms do those 50 miners have to coordinate amongst each other, starting with how do they identify each other, communicate with each other, then overcome Prisoner's Dilemma in negotiating with each other?

Also, it exacerbates inequality immensely. When deflation is high, it means your existing money becomes more and more valuable for no other reason than existing. So the "rich get richer" in the most literal sense, for no other reason than having been rich in the first place. No investment or risk required.

https://www.investopedia.com/terms/d/deflationary-spiral.asp

Therefore, over a long enough time scale, the number of available BTC tends towards zero.

Currently, you can only chop them up into atoms worth 1e-8 BTC (satoshis), but there isn't much that needs be changed in the code and the protocol to get that to much finer grained.

Therefore, it's unlikely that there will ever be zero bitcoins.

Such a change would be a hard fork and, as you know, we don't do that in Bitcoin. But, no worries because we have millisatoshis in Lightning. Because Bitcoin scales in layers, each layer can implement more and more divisibility as required.

https://bitcoin.stackexchange.com/a/69704

As you said, bitcoin is infinitely divisible, therefore the world economy can run on 1 btc or 1 satoshi.

True, it'd be a hard fork. However, I don't believe hard forks are impossible if managed properly.

The taproot upgrade (not a hard fork, I know) was rather uncontroversial and accepted rather easily.

I suspect a hard fork allowing for - say - bitcoin amounts encoded in 64 bits would not necessarily generate the kind of upheaval the blocksize wars did.

And, hopefully, even for controversial upgrades, the lessons of said wars will have been learnt and the process of upgrading Bitcoin can be done in a slightly more reasonable / orderly fashion.

In a world where only 1,000,000 BTC remain in circulation if one person owns 500,000 of them means he controls half of the total value of BTC and that everyone else's coins will add up to the other 500,000 BTC, and being able to divide the each BTC into smaller and smaller amounts doesn't change that fact. Whether we can divide 500,000 BTC into 50 trillion Satoshis or 5 quadrillion "New Satoshis" worth 1e-10 BTC each doesn't make new wealth appear.

Miners can't change the protocol of the entire network.

The only malevolent thing they could do is perform a 51% attack if they all colluded together. And even that wouldn't achieve much, so there's not much incentive to do it. All they can do is a double spend. They would've been better off spending that energy on mining blocks to be rewarded with the Bitcoin subsidy.

Sure, it's unlikely. But not impossible. Just as runaway inflation in a reasonably managed fiat currency is not impossible. Just unlikely. (And, yes, hyper inflation has happened historically. Similarly, rewriting of the immutable Ethereum chain and BTC forks have happened historically.)

> If they're bored, they can devote some of their hash power to double spend attack the "good" chain. Which chain will come out on top?

That's a different attack entirely.

I.e. isn't the BTC I have parked at Coinbase is in the same wallet as many of their other customers' BTC, and shows up on the blockchain as one owner by this analysis?

If said investor abused his leverage to manipulate the stock value to dump his holding on unwitting buyers prior to making it tank, he would be facing a prison sentence.

In BTC that would be just another uneventful day.

I mean, are you surprised that some things are illegal? Of course not, no one is surprised by this.

Could you imagine what a clusterfuck the market would be with no regulations?

Generally regulations are written after clusterfucks have occurred to reduce the risk of them happening again.

It's the same reason we have building codes: after a Great Fire or two happens in a given city, fire breaks are usually mandated.

It’s amazing to me how many times we’re repeating the same mistakes over and over again that we’ve made in the relatively recent past because “it’ll be different this time because technology!” or whatever—and i don’t only mean in the coin sphere.

I work, live, breathe, eat and play with technology however, quite a few people, usually those falling for marketing hype have deluded themselves pretty hard. Humanity scale chaotic complexity problems still exist and technology isn’t even close to solving those and won’t be for a long, long time.

There's a reason for this: while in the short term dropping these rules gives flexibility, lower costs and the promise of new sources of profit, inevitably if unruly capital markets get big, small investors get screwed and a lot of investor wealth gets destroyed. We've seen this pattern a lot over the last two centuries.

Simplistic free market ideology has a lot to answer for: successful markets need well-functioning institutions.

That makes as much sense as claiming that a free society isn't really free because you're subjected to arbitrary restrictions that punish you for stealing and embezzling.

Edit-This would also provide people who want to cash a large amount of crypto to cash an incentive to prop up the value during their transaction period.

Edit2-latest I can find, it was about $6.6 trillion dollars worth of daily forex activity back in 2019. Also note, this is cited as the biggest market in the world by trading volume. https://www.bis.org/statistics/rpfx19_fx.htm

Is that how it works for currency? I would think that if people tried to sell every single Euro for USD, the conversion rate would absolutely change.

Realistically, I was thinking of trading cash for cash of one nationality- which absolutely wouldn't change the face denominated. Kind of tautological and not as helpful. Probably testing whether bitcoin to usd acts similarly to another foreign currency to usd may be a useful metric.

But why do people exchange international currencies? So some are just forex traders performing intraday arbitrage. But the real/biggest use of it is to exchange goods across national borders. That's a use which cannot exist with the cryptos in quite the same way. Even if a nation adopts a crypto like bitcoin as its currency it does not have the same function as a currency backed by that government since bitcoin is controlled by other people - see the nber article referenced here.

Edit - my main point remains about the exchange elasticity of crypto to usd/a national currency. If the exchange rate changes rapidly with the number of crypto exchanged then it's not very liquid, by definition, and not storing value nor acting like a currency.

It's more likely that the developers has leverage that could be abused, but then their own holdings would tank, so unlikely to happen.

There are a lot of similarities for sure between Tesla stock and BTC in terms of price versus traditional measures of value (based on current income and enterprise value), not to mention the volatility.

There is not as much price discovery when a handful of owners own more than 50% of stock or crypto and are easily diamond handing. The price discovery is only happening on the portion that's actively trading which can distort the market price. I bet in the early days of BTC there were a lot of tricks like the Jason Fried/DHH Basecamp unicorn example[1].

As they eventually lose interest/need to pass assets to the kids, when they start unloading, there will be price drops as there were once Bill Gates started unloading MSFT stock. Part of the challenge that Steve Ballmer faced (other than lackluster leadership) was the headwinds and downward pressure created by BillG's retirement related unloading of MSFT stock.

[1] https://signalvnoise.com/posts/1941-press-release-37signals-...

People sell at some point. I'd argue it's incredibly hard to diamond hand for early holders, that is why there are more stories of people selling their coin for cheap rather than diamond hands.

If everyone stopped buying BTC and only held BTC and bought another crypto currency, BTC would go to zero since no one would be putting money in. Similar to a pyramid scheme, once there is no new money it collapses.

On the other hand, if investors decided to never buy MSFT again and sold their stock the price could go down a lot, but it couldn't go to zero because that would make the dividend yield go to infinity. If MSFT went down to $20/share it would yield over 10% a year, and it is absurd to think that no one would want to get 10% a year return.

Obviously companies can and do go bankrupt, but for this comparison I'm comparing successful crypto to successful companies.

It feels foolish to be long USD at the moment.

Perhaps its better to throw in some growth stocks that ended up not being particularly amazing such as WeWork, Evernote, Zynga, etc. All had low stock float, no/negative income and so were trading on emotion.

Are you talking secondary markets?

"no one can control" means:

1. you can't get bail-outs from phishing/fraud/mistakes (there are card companies/banks that actually provide this service)

2. combined with anonymity, means more wiggle-room for tax-evasion/black-market... (though if you look carefully, you'll have to 'financially-dance' a lot to get actual anonymity in bitcoin... all transactions are logged, right?)

Except the "small group controlling 90%" of mining power that introduced that change (in the hypothetical example) would use it. And their chain would grow longer and be the canonical one (though that, of course, is also just a convention encoded in the code). And they could still spend some 20% or so of their hash power to entirely mess up the one true chain, if they so desired.

The history of the bitcoin blockchain can't be changed unless a miner can contribute the same amount of work it took to generate the section of blockchain they'd wish to change (so from a historical start block to the latest block). Even then, the most they can do is undo payments and double spend coins. This would probably not be economically viable since Bitcoin clients would probably start to blacklist expenditures from the miners addresses if suspicions of a double spend attack arose. Because wallets and nodes can tell when there's forks, people would also pick up on double spends which would disqualify any and all money attempted for the double spend. Overall it would probably be cheaper to just spend coins fairly.

Also, as an aside, the protocol-valid bitcoin blockchain with the most work gets chosen, not the longest* blockchain

You would need to control the majority (of the important) nodes to be able to pull this off. If the nodes are incentivised to keep the limit, they will.

Not quite. The only people bitten by inflation in the long run are those who stockpile cash and intend to perpetually live off capital gains without contributing anything to society. Meanwhile, the vast majority, which are either salaried employees or own businesses, see both their income and expenditures adjusted to inflation.

This is in fact one of the often ignored aspects of inflation, as well as taxes: a way to mitigate or avoid concentrations of wealth detrimental to society.

This is completely missing the point. People with big amounts of cash never keep it, they invest in something to avoid inflation. The only people who suffer are poor people who happen to have a small amount of USD saved for a rainy day.

As somebody living in Argentina, a country with usual double digit inflation, your argument is complete bullshit.

Here the wealthy are not affected by inflation: they can save in real state, strong currencies, shares... And the same rich families stay rich for generations. We also have very high taxes.

Inflation harms the poor more than the rich. Try living in Argentina for some years and you will learn.

The only bullshit I spot is this idea to use Argentina, or Zimbabwe or Venezuela, as the posterchild of responsible monetary and economic policies, when they are actually the result of gross and perpetual mismanagement.

https://www.wsj.com/articles/why-argentina-faces-an-economic...

Meanwhile most of the world reaps the benefits of sane and responsible monetary policies, and thus is free from hyperinflation, and somehow that's supposed to mean nothing? Only your cherry-picked appeals to emotion matter?

Even the European Union, which has been subjected to quantitative easing policies from around a whole decade and thus has been seeing their central banks print money like crazy, at most only complains about low inflation and mild economic stagnation.

The part with print money like crazy is absolutely true. The claim that there's low inflation in Europe, is absolutely false. Official inflation numbers are relatively low only because real estate and other things are arbitrarily excluded from cpi. It's always astounding to me how people can pretend as if rising real estate prices did somehow not trickle down to rents and thus effectively all everyday purchases, people make.

The world is full of zero-sum games whose existence people often deny ... just because many of them are long and complex and interconnected chains of interactions which means they are lots of work to describe accurately doesn't mean they're not there.

What about your idea regarding inflation as a way to avoid concentrations of wealth? (the idea I quoted and I replied to). That one is unsustainable.

When inflation is present, but less than 3%, there isn't an incentive to hoard it, because simply sticking it in a bank account means it will be slightly less valuable a year from now than it is today. For poor people, who are spending most of their money on necessities, it won't mean much (unless their employers don't match incomes with inflation, which IS a problem). But for rich people, it offers a powerful incentive to spend today, or to invest their money with hopes that the returns will offset the inflation. A rich person's money flowing through the economy, be it through exchange for goods, or through investment, is far more valuable to society than it is sitting under their mattress.

Debts are also easier to pay off. With inflation, your debt of $X is easier to pay off in the future than it is today. Poor people struggle to pay off debt more than rich people, and governments are more likely to rack up debts to pay for public works and infrastructure, knowing the bill will be easier to pay down the line with inflation.

Compare that to deflation. With deflation, your money gets more valuable over time, not because you invested it in something useful, but simply because it exists. Now if you are rich, why do anything at all with your money other than stick it under a mattress? Why spend it, or take the risks that come with investment, when you are guaranteed it will be worth more than you have now in the future? Poor people don't have this luxury. They have to spend money on their needs today, which means they are missing out on even more value tomorrow.

Deflation is just as toxic to the economy, and especially poor people, as hyperinflation.

The way I see this, there's a fallacy there.

The claim, that inflation won't matter much for poor people is wrong. Even if their employers compensate for inflation with accordingly increased salary (which they don't always do) then there's still the fact that poor people are treading their treadmill, unable to advance one bit. In the best case they stay right where they are (relative to others).

Rich people on the other hand have the "burden" of sitting on assets that do not suffer inflation. And any excess money they earn which they don't need to spend on everyday items, they can put into investments that again do not lose value like cash does (under inflationary circumstances).

Quite simple: rich people have opportunities to invest and earn profits, letting them improve their position relative to poor people even further. Poor people don't have these opportunities and they even have to constantly fight for compensation of inflation while having shorter levers to push everywhere in society.

If rich people weren't urged to invest money they have sitting around (by threat of inflation), they'd maybe just hoard bigger proportions of it and sometimes spend some, instead of using it to acquire ever increasing proportions of assets from poorer people who have to sell. I'd say inflation almost directly causes wealth concentration.

In this way, inflation does indeed mean much for poor people. No, it's not totally obvious, kind of counterintuitive even. But it's true.

The current development is like a continuously happending race along a path of steadily increasing availability of pleasant goods and opportunities ... where the rich are moving significantly faster along the path than the poor. Yes, the poor do advance, but the lead of the rich continually grows larger. Since wealth is psychologically very much a relative thing, this is bad, even if the absolute wealth of the poor is indeed increasing over time.

mainly the referenced links

You're free to discuss the facts I've pointed out, instead of going off on a tangent with a non-sequitur regarding Argentina's hyperinflation. It's undeniable that stockpiling cash out of the economy has a deeply negative social, economic, and even fiscal impact on a nation. Inflation provides an incentive to actually put the money to use, and interest rates for the most conservative investments, like risk-free bonds, are then used to provide incentives to couple investments with economic cycles.

As a counterargument I said that rich people don't save in cash and that inflation damages the poor more than the rich, the world bank has evidence for that: https://openknowledge.worldbank.org/bitstream/handle/10986/1...

> Inflation provides an incentive to actually put the money to use,

Inflation provides an incentive to get rid of the money that loses its value over time and instead change it for something else. This not only affects the rich, but also the poor. An effect is that it becomes more difficult for the poor to save and invest. The rich can handle inflation much better than the poor.

I found another article that arguments about this https://mises.org/library/whats-so-scary-about-deflation

The US, unlike Argentina, hasn't spent over a decade experiencing with a >10% inflation rate, and half a decade at >25%.

Most of the world hasn't.

Until it does, any comparison with Argentina, or any country experiencing years of hyperinflation as a result of gross mismanagement, is overwhelmingly positive.

I appreciate a good appeal to pity, but unfortunately you got it completely wrong. Even though pension funds use investments to complement their investment pool, they are primarily funded through contributions from the employer and existing members as an income redistribution scheme[1].

[1] https://www.investopedia.com/terms/p/pensionplan.asp

No, you trust the 50 miners that control the majority of the hash power not to mess with the code that embodies your math (or doesn't, as the case may be).

[1] https://whalewisdom.com/stock/tsla

Poor people can't get in and fat cats dominate so the more you zoom out the more you're right.

Their work is nonsense. They assume address=single investor, which is not the case. That large address that has hundreds of thousands of bitcoin on it? It could be a whale, sure. It could also be Bitfinex's cold storage wallet representing tens of thousands of individual investors.

What do you think a similar metric would look like for the US dollar, when you consider the $600 trillion-plus derivatives markets?