I'm making bold statements because I've read reams and reams of treatises on the topic, and every single one ignores some basic, simple, fundamental truths that are inherent to a proof-of-work system. I certainly don't believe I'm particularly smarter than average, and there are definitely other people saying the same thing I am, and certainly much smarter people than I have realized this issue and are transitioning other cryptocurrencies to other proof systems, but I have come to believe that many people are content to keep the music going, even if they know it's going to stop at some point.

When it comes to mining BTC, it really doesn't matter much how miners are paid: through block rewards, transaction fees or some other sort of "security fee". Miners spend money on electricity, and get BTC in return. Furthermore, it's, again by design, a competitive system: those who are able to mine faster (i.e. are spending more on electricity, on average) will win the "block contests" faster and get more BTC.

All other arguments are just "yada yada yada" unless you are somehow arguing that electricity spend is no longer proportional to chance of mining a block, at which point I'd argue that's probably no longer proof-of-work.

This is not a hard concept. If I'm an idiot (which is totally a valid proposition), somebody should be able to explain how a proof-of-work system can get around this "arbitrage problem" very simply - it shouldn't take pages and pages and pages of circular argument.

You're making sweeping statements here, when in reality it depends on both the block reward AND the price of bitcoin. Currently, the block reward has decreased as the price of bitcoin has increased. If the market cap of bitcoin stays the same, then the mining reward in terms of energy will decrease.

Argh!!! I get this kind of response all the time, and it's frustrating for one simple reason: miners certainly DO NOT CARE where their reward comes from: block rewards, transaction fees, whatever.

At the end of the day, it's a very simple calculation for them: electricity costs in, Bitcoin value out. No matter where their Bitcoin reward comes from, they will not (for long anyway) spend more on BTC then they are rewarded.

> If the market cap of bitcoin stays the same, then the mining reward in terms of energy will decrease.

NO! The simple rules of arbitrage would ensure that more miners would be incentivized to beef up their electricity spend to mind faster to win the reward (again, block rewards or transaction fees, doesn't matter).

Please just stop and think for a moment FFS.

Miners care about where their bitcoin comes from. Let's imagine the case where 100% of their income comes from the block reward and 0% from fees (seeing as this is nearly the case right now):

1. the block rewards are getting CUT IN HALF every once and a while. If the price of bitcoin stays the constant, their rewards in terms of dollars will be CUT IN HALF. The only way for their income (the upper limit on they can spend on electricity, hardware, etc.) to increase is for the price to increase by more than DOUBLE every time the mining reward gets cut in half.

2. the block rewards increase the supply of bitcoin, decreasing the market cap/price over time. It depends on the emission schedule. Even if the block reward was a constant 1 bitcoin per block, then you would just have a different (logarithmic) inflation/block reward graph with the same characteristics.

Let's say 100% of income comes from block rewards of 1 BTC. If it costs 0.5 BTC to mine a block then miners will beef up their mining capacity so they can mine more. In a vacuum, this would be great, but because of how mining works (winner takes all), the cost of mining would go up as the number of miners increases. This will keep happening until the cost to mine is close to or equal to 1 BTC (and because of currency conversion, the cost might even exceed 1 BTC today but miners are hoping that the price goes up so they can sell at a profit).

Let's say tomorrow, the income is cut in half. All of a sudden, most of these miners would become unprofitable and stop. However as a result, the cost of mining will go back down to 0.5 BTC. It's a self balancing system but that also means that it's fundamentally flawed for reasons mentions by previous commenters in this thread.

I think you are talking past each other. Leaving out transaction fees for a second (which are currently a very small percentage of the miner reward). The block reward is programmed to half every 4 years, taken alone this together with a fixed market cap would mean that the mining electricity spend would also half every 4 years. So the energy consumption of bitcoin will grow only so long as its market cap also doubles every 4 years. That's a tall order.

Bringing back in transaction fees-- I don't think anyone really knows what they will be, but it will be a long time until the dynamics of that are more important than the dynamics of the block reward halving and the market cap.

> At the end of the day, it's a very simple calculation for them: electricity costs in, Bitcoin value out. No matter where their Bitcoin reward comes from, they will not (for long anyway) spend more on BTC then they are rewarded.

True, but the hypothesis in your original comment, that energy expenditure will equal Bitcoin total market cap, does not follow. As other commenters here note, with each block reward halving, the energy required to mine a new block becomes more and more decoupled from the price of Bitcoin itself. In the distant future when block rewards are minimal and fees make up the majority of miners' rewards, only miners who can utilise the cheapest sources of energy will be able to mine profitably, which in the "negligible-block-reward" era will be for the lowest fees. And people making transactions will not pay more fees than they need to, so the existence of miners able to mine profitably for lower fees will in turn bring down average fees. I think all of this should be uncontroversial; it simply follows from the Bitcoin protocol and the work of Adam Smith.

So, given these incentives and Bitcoin's difficulty adjustment mechanism, in the future the only miners capable of making profit from mining will be those with access to the cheapest forms of energy. Anyone who can mine for marginally lower cost is going to push out other miners. This will likely mean the majority of the energy used for Bitcoin mining will come from otherwise wasted energy - such as flare gas, remote hydro not economical to transmit to where people actually live, excess wind and solar supply when demand don't line up, that kind of thing. (And, as an aside, it's probably not going to involve burning lots of oil and gas, since these are more useful to humans in other ways and will therefore cost more.) Obviously more efficient hardware will have the same effect, so there will also be an incentive there. In the end it will have very little to do with Bitcoin market cap and far more to do with the availability across time and space of cheap energy.

> And people making transactions will not pay more fees than they need to, so the existence of miners able to mine profitably for lower fees will in turn bring down average fees.

Only to a point. Since a limited number of transactions can fit into a block, users competing to get their transactions mined in a timely manner will drive the fees up. That price point can be well above the cost of many forms of energy.

So as long as Bitcoin is still valued and there are enough people wanting to make transactions, there will still be miners burning useful energy.

There is still some coupling over time - the miners' bitcoins depend on transactions happening to retain their value

> depends on the block reward AND the price of bitcoin

The direct block reward goes to zero over the years, but the miner's fee will still be a positive amount.

Each miner will be competing for the miner's fee, and will buy more electricity if they can mine more blocks (and get more miner's fees).

The rewards will be proportional to the market cap of bitcoin. If it goes up, so will the investment in electricity.

> making sweeping statements here

The sweeping statements that poster made are the results of a microeconomics analysis.

There is a large & "efficient" market competing for bitcoin mining rewards by buying more electricity.

This is tapping into laws of economics on the level of supply/demand curves: Well studied scenarios that become more accurate the more efficient the market is.

>The direct block reward goes to zero over the years, but the miner's fee will still be a positive amount.

Yes.

>Each miner will be competing for the miner's fee, and will buy more electricity if they can mine more blocks (and get more miner's fees).

Yes.

>The rewards will be proportional to the market cap of bitcoin. If it goes up, so will the investment in electricity.

No.

You're conflating two different things here: A reward-dominated bitcoin and a fee-dominated bitcoin.

The reward takes money from bitcoin owners in the form of inflation. It decreases the market cap by increasing supply.

The fees take money directly from bitcoin users.

In the reward-dominated case, miners are funded by new demand for bitcoin, which props the market cap up. In the Fee-dominated case, miners are funded by bitcoin users who compete with each other for limited bandwidth. In either case, the money being given to miners by these two parties is always greater than or equal to the money spent on mining (power, hardware).

What we've seen so far is a reward-dominated bitcoin in which demand is very high and the market cap increases as the block reward decreases. I predict the demand will stabilize and the reward will continue to decrease. This means there will be less mining. Eventually the reward will asymptotically trend to zero in which case bitcoin will become fee-dominated.

Fees are dependent on the supply/demand for bitcoin bandwidth (the supply is a static 1MB/10 mins), not market cap or price.

It's weird how so many of the arguments against what I've originally written pretend that it matters whether the reward comes from a block reward or transactions fees. It does not matter. Certainly miners don't care how they get paid - for them they have a simple calculation of "bitcoin value I get out must be greater that electricity cost I spend".

And the fundamental idea behind proof-of-work that they amount of work you're "proving" must be enough to make double-spend attacks infeasible. If the electricity cost to mine a block is low enough compared to the value that could be gained by a double-spend attack (which is of course comparable to total BTC market cap), then the network is not secure.

>It's weird how so many of the arguments against what I've originally written pretend that it matters whether the reward comes from a block reward or transactions fees. It does not matter.

It does matter. Block rewards are a transfer of value from bitcoin owners, which increases as people BUY bitcoin. Block fees increase as people USE bitcoin. Those are two separate things. What we are seeing now is mining that goes far beyond the mining necessary to secure the network, and that's due to (temporary?) speculative demand which increases the value of the block reward.

>And the fundamental idea behind proof-of-work that they amount of work you're "proving" must be enough to make double-spend attacks infeasible.

well, infeasible by a single antagonistic party. There's also the cost associated with the depreciation of the hardware. Even if mining somehow required no electricity, then the network would still be secure because there is some Time-Value cost associated with owning computer hardware.

>If the electricity cost to mine a block is low enough compared to the value that could be gained by a double-spend attack (which is of course comparable to total BTC market cap), then the network is not secure.

I agree. I think bitcoin will eventually succumb to selfish mining attacks.

"It's weird how so many of the arguments against what I've originally written pretend that it matters whether the reward comes from a block reward or transactions fees. It does not matter."

"It does matter."

Miner do not care, so it does not matter.

This is amazing to watch. hn_throwaway_99 complains that he only gets handwaving and circular arguments against this, only to get multiple answers which are exactly that.

Mining will always spend a large chunk (>50%? depends on the complete distribution of efficiency off all miners) of rewards on electricity. A quick search shows this to be 0.5% of all electricity used in the world. If Bitcoin price goes up 10x right now, this would shortly increase to around 5%.

But, there is also a thing that miners still have to pay electricity in dollars or whatever, so they are forced to sell on exchanges. This creates a downwards pressure on Bitcoin price.

Currently this could be somewhere around $billion per month. So, you need a billion a month of fresh sucker money, just for the bitcoin price to stay the same.

Aren't the fees dependent on the velocity of Bitcoin, and not the market cap?

There's some dependence in the fees, since they'll be paid in Bitcoin, and that there's still the odd new Bitcoin being made, but you're still being paid per transaction, unrelated to the value of the bitcoins in the transaction

You're right that there isn't a direct causal relationship between fees and market cap, but I think the ratio between them is important. If miner revenue becomes a tiny fraction of market cap, 51% attacks become a very real threat. Then the community would need to do something to increase the ratio, such as establishing a permanent block reward.

I agree. In fact, some cryptocurrencies like have implemented constant "tail emission" block rewards. The problem is that this scares off investors and speculators because there's not as much scarcity.

When market cap / price goes up, more people enter the market to mine until supernormal profits are gone - This is the relationship being discussed.

People will enter the market which pushes up the difficulty / electricity and hardware consumption until profits are brought back down to a normal level.

Yes, but I predict people will cease entering the market once the hype dies down and people learn how flawed bitcoin is.

People will always enter the market (to produce) if there is a difference between the price of a Bitcoin and the cost to produce a Bitcoin (electricity, equipment etc).

If the price goes down and it costs more electricity to produce a Bitcoin that is economically viable, people will leave because the juice isn’t worth the squeeze.

So the same relationship works inversed too - difficulty to mine and electricity consumption is related to market cap / price from an econ perspective. I agree with your point on Bitcoin hype, but the production side is just economics and people trying to make a buck if there is money on the table.

Upon a second reading of parent poster's comment, there's nothing much to debate the conclusion but mostly debating the degree of certainty of the conclusion, which is a much lower bar.

The way I see it though, unless anyone is shorting cryptocurrency with 100% of their net worth I think they are at some level expressing that the world is not so clear cut. Sometimes meme stocks win before you run out of runway.

Knowledge something will fail eventually, and knowledge of exactly when it will are entirely different propositions.

The market can stay insolvent longer than the investor.

"The stock market can remain irrational a lot longer than you can remain solvent."

https://quoteinvestigator.com/2011/08/09/remain-solvent/

> I've read reams and reams of treatises on the topic

Care to share any of them here? I'm not that knowledgeable about BTC so I have no idea whether or not you're right, but I'd love to learn more.

start with bitcoin whitepaper. but it is a very deep subject, and also full of liars and people with ill motivations

> Proof-of-work requires, by design, that the electricity value expended on mining is proportional to the total market cap of Bitcoin.

Proof of work in Bitcoin requires computation of a thing called a Nonce. If a miner gets the right Nonce while hashing, they get that block's reward. The electricity value expended on mining that block is proportional to the total amount of hashes being performed by miners in the network at the time. There is no "design" for requiring the cost of this power be equal to anything directly related to the market capitalization of Bitcoin, which really means how much Bitcoin is worth compared to other markets, such as USD. Are they linked to each other through human action and decision processes? Certainly. Is it coded in the chain? No.

> It's really just simple arbitrage: if the value of Bitcoin goes up, but the electricity cost doesn't, then you have essentially 2 different prices for 1 good, which should attract more miners to spend more money on electricity.

If the electricity cost doesn't go up, then the number of Nonce being computed will only go up if more miners join the effort. If they don't, the network is still operational, and produces the same amount of new coin every so often. What is NOT obvious here is that the technology for increasing the mining rates is always increasing, so the clowns will continue to pay to upgrade their hardware over time to save on electrical costs and engage in competition with the technology. The exchange rate for Bitcoin may be related to the technological "power" that is required to keep the network running and producing new coins, but less directly so related to the amount of power burned.

> Furthermore, it's, again by design, a competitive system

By design, Humans compete. The Bitcoin blockchain could be mined and run by two clowns in a tent if nobody else cared. It's not coded to be competitive, it's coded to be cooperative. This means the the amount of power spent on mining and running the network is a cooperative function. The amount of money spent on developing and producing faster hardware is a competitive function. The two together produce something that is chaotic and interesting.

Bitcoin does have a downside, and that is that it is a viral thing that cannot be taken down by any one person or organization. It would take 51% of those running the network to cause it to fork into two. It would take an impossibility to halt it. Maybe this scares some people and maybe it makes some people excited about the possibilities. Either way, we're going to need Fusion to run it in the future.

Most of what you said I agree with, but not your last point:

> Either way, we're going to need Fusion to run it in the future.

In my understanding, the economics of Bitcoin mean that eventually mining will be performed with predominantly waste energy, which is by definition that which has no other practical use. The existence of a practical use for the energy other than for mining will push its price higher than is economical to use for Bitcoin mining, because other miners using waste energy will be able to pay less to mine the next block. It's likely that energy for Bitcoin mining will come from sources like heat from flare gas, currently just burned at oil refineries and released as photons into the night sky, leaving Earth forever. Or energy from wind turbines or solar panels during periods of low demand. Or a hydroelectric dam 1000s of km from civilisation willing to pay the transmission costs to use it. Or, heck, even heat extracted from sewage in Vegas hotels, if it's enough to run a steam turbine. Basically anywhere where otherwise useless energy can be extracted in quantities sufficient for mining. I don't think, given the costs of the infrastructure likely required for fusion, we'll be seeing it employed for Bitcoin mining long term.

This is one of the aspects of Bitcoin I find most beautiful - it monetises waste.

Ehm.... "waste energy"? I'm not sure there is such a thing. If it can be harvested and used, why should it be used for Bitcoin instead of... well, anything else?

Because energy (at least currently) can not be easily transported, to where it can be used. Factories can not easily move to power plants due perhaps increased supply chain cost or labor cost. Whereas Bitcoin mining can be moved anywhere with a shed and an internet connection.

Aluminum smelters are specifically sited to be near low cost power plants. Refined aluminum is essentially a storable and somewhat portable form of energy.

Good. Now try turning an aluminium smelter on and off when there's surplus/shortage of supply on the grid. Right, you don't.

Here's one key difference between many if not most large scale industrial processes and Bitcoin mining.

I still don't see the prerogative for bitcoin. Yes, most industrial processes are inefficient and we can and should reclaim lost energy. There are many ways to do this, and many purposes. Charging batteries seems the most reasonable: making the energy stable and portable.

Admittedly I don't know much about battery efficiency, so there may be other more efficient uses. Hydroponics lighting?

Where "waste energy" is difficult to access and available only in trickles, it's surely very unsuitable for bitcoin mining, which is energy intensive.

Frankly, there are far more pressing issues than making more bitcoin.

Who exactly do you think is going to be building the expensive infrastructure necessary to capture this low-value waste energy?

Sure, there’s conceivably times of low demand when some energy would otherwise go unused. But a “ hydroelectric dam 1000s of km from civilisation”? Heat extractors in Vegas hotels? You’re imagining a fantasy world.

Further, what you’re ignoring is that none of this is “waste”. It’s already being stored or used. Finding new demand for it simply makes it more expensive for existing users.

> ... none of this is “waste”. It’s already being stored or used.

Turned off wind turbines at times of surplus. They tell us that nope, it is not (yet) being used or stored.

> Finding new demand for it simply makes it more expensive for existing users.

It's not that simple. It could very well be the case that selling a portion of energy that otherwise has no demand to a buyer of last resort enables the business to be profitable. Not selling this portion of energy would mean that the operator would have to charge their other customers more in order to be profitable.

So it could in fact make things less expensive indeed.

I'm not sure you understood my comment correctly.