This is my rebuttal to the article posted here on Medium. I saw someone commenting in /r/btc that the writings contained had many different fallacies, though pizzaface fails to mention what. I decided to examine the article for myself and give my own insights. Since interfacing with John, I feel the person is level headed and worthy of hearing criticisms.
What is ignored in the discussion is that Bitcoin block rewards will persist for at least another century. It will be more than 100 years before this is actually necessary and the impetus to acclimate users to fee markets now is grossly premature at best and highly suspect at worst.
Current block reward is 12.5 coin…. in 2020 we have a reward of 6.25, 2024 its 3.125, in 2028 its 1.5625…. 1.56 BTC per block… in 12 years from now…therefore, in 16 years, the block reward is down to less than a bitcoin per reward…. 16 years is MUCH smaller than 100 years…..from my point of view a stagnant fee market by that time will force miners to shut off operations. The only circumstance to where mining makes sense is if there is either (a mass amount of users through on and offchain settlement channels – paying fees) or for an artificially increased fee market based on supply and demand economics.
the system can support transaction fees if needed. Clearly Satoshi had no intention of forcing users into a competitive bidding process as long as block rewards could pay for the system to grow.
You just said that “he said ‘The system can support transaction fees if needed'” Transaction fees were always intended to be a part of the system to have transactions confirmed in a timely manner. Free market economic fundamentals are ruled by the concept of supply and demand. He had never intended for there to be a flat, inflexible fee per transaction. I assert this based on the desire to set in the temporary blocksize limit – to prohibit users from exploiting infinite blocksize to cause the network to halt. This had been a major concern at the time because when the blocksize was implemented, we didn’t have SPV wallets, and we didn’t have specialized mining hardware – bitcoin users, by default, used the original full-node software to act as miners and to hold their funds. The fee market was always going to happen regardless and I’m presuming he was aware of it… based on the fundamentals of supply and demand. Bitcoin transaction space was never intended to be a low value ‘free for all’ system – we would have polluted the blockchain with all kinds of feature bloat by now had no blocksize limit been placed.
…transaction fees are available as an option to pay for Bitcoin’s security model (because nothing is free), should the block reward become insufficient.
I assert again that transaction fees were always intended to be required at some point…there were older rules regarding sending coins @ zero cost (based on the amount you intended to send and a term called ‘priority’. Priority is defined as a value-weighted sum of input age, divided by transaction size in bytes). Should the block reward become insufficient, the ONLY users who would not be competing are those who could send occasionally free transactions, not the majority. If the majority is expected to compete for transaction room and there is a limit to the amount of transaction room per block; the rules of supply and demand will dictate the fee market…plain and simple.
… The obvious implication of this is that Bitcoin mining is still profitable to the hardware operator, even when subtracting transaction fees and pool fees on top of that.
The number of hardware operators is becoming increasingly smaller…I would contest that 70% or more of the miners involved in the space between 2010 and 2015 are out….the bulk of remaining hashrate is in the form of organizations that are institutionally mining – they likely open their pool to others to mine as well, but do so on the basis that economic incentives provide them a better bulk hashrate that can be used to acquire more rewards through increased number of blocks solved. Having a myriad of pools does not equate to having a myriad of independent mining hardware operators.
… however, the less profitable mining is, the less incentive there is for new entrants, and only those with the lowest marginal cost will be capable of competing.
That goes without question…however I think you still consider that mining is affordable – home mining (earning an ROI with hardware that can provide a net positive income after paid electricity expense) has not been affordable for years at this point (with existing technology)
Far easier than attempting to force the transition to reliance on fee income is to simply make Bitcoin more valuable, thereby increasing the value of the block reward. This may seem counterintuitive at first: controlling fees is certainly easier than controlling the free market trading price of Bitcoin. Phrased differently, it becomes more apparent. A modest twenty percent year-over-year growth in Bitcoin price is enough to account for the halving in block reward every four years.
MARKETS ARE IRRATIONAL…they are not driven by the actual value derived from increased utility (to rebuttal my own argument – it IS possible to see a bolster in price traction if we see an increase in the different applicable solutions that seek to improve while providing a substitute for traditional and/or new business support structures – i.e. blockchain based distribution of records or verification). The bitcoin price is determined through speculators. ‘A modest increase of 20% year over year’ likely fits out to be an average of the explosive growth years vs the recession years… You cannot know with certainty that bitcoin price will see growth year over year…for the years of 2020 through 2023, in the next 9 months, etc. As I stated, irrationality and speculation rule the price.
Thanks to Metcalfe’s Law, the utility of the Bitcoin network, and hence its price, should grow quadratically even as the number of users grows linearly.
The utility of the bitcoin network IS NOT ITS price…that is a side effect. Here are the utilities we gain from the bitcoin network: An independent store of value that can be securely transacted without assistance from a government entity. An ability to store that value digitally, in multiple locations (if desired). An ability, through encryption, to replace and supersede password based authentication through a challenge/response mechanism (sign/verify) without risking the integrity of the private key that controls such funds.
The word quadratically is throwing me off, in wikipedia, they say ‘is proportional to the square’. Therefore, we see you’re saying The value of the bitcoin network should grow in proportion to the squared number of users involved. We do not know what the ratio actual bitcoin users is…however I interpret what you said to mean that the value of the bitcoin network grows in proportion to the square of the number of users – not necessarily the price – I think the value includes the market cap in addition to the ip gained and the learning effects gained from different systems implemented…we can definitely see this to be the case – as more entrants get into bitcoin, more technologists and entreprenuers build solutions to utilize bitcoin (or derivatives) which then fulfill the needs for other new entrants – driving demand for further usage….. so I suppose I’m saying that metcalfe’s law makes sense, but goes beyond price and price speculation.
What happened to the dream of a $10,000 bitcoin?
$10K bitcoin while fun to fantasize about is infeasible. Many institutional investors and profit motivated holders will exit as we approach this rate, causing a price equilibrium.
We already know that the price of Bitcoin is more than capable of doubling inside of a year, but now we are told that hoping for a price doubling every four years is far too aggressive.
as is possible a circumstance where the price of bitcoin drops in half – which can also happen in the course of a year or four, for example.
…assume that 80% of transactions are capable of confirming in the next block. If the number of transactions being made on the network doubles, then with a 1MB block size in place that now means that only 40% of transactions can confirm in the next block, with these users paying higher and higher fees for the privilege. What does this mean for the other 60% of transactions? Their fees will also rise, even if they only need their transaction to confirm in the next two or three, or ten, blocks.
Actually, their fees did not rise. They already included a transaction fee prior….the fee does not increase for that transaction that has already been broadcasted. Furthermore – you assert that we expect linear growth in users (which is reasonable barring any black swan events – such as a major currency meltdown). Linear growth in users does not result in ‘double the number of transactions’, Not that it is impossible for us to see a sheer increase of transactions in an instantaneous manner; however it is impractical to suggest that we could see a 2x bump in transaction volume over the span of 1 block (~ 10 minutes) that would remain sustained….We see time and time again that the mempool (the structure that full nodes use to hold broadcasted transactions that have not yet been confirmed) rises then falls: there is an ebb and flow for transaction volume at any given moment.
The end result is that fast confirmations become an exclusive resource, available only to an ever-shrinking percentage of users who can afford them.
Over a span of years, with no plans for scalability, I would agree. However, plans (Segregated witness paired with checksequenceverify to facilitate the maximum scalability for the lightning network) for scalability (fast transactions with reasonably low fees being the objective) have been both proposed and created. Implementation will not occur without overwhelming consensus. In other words, I expect segregated witness to not activate either unless a substantial portion of hashrate being directed at viabtc and bitcoin.com to move elsewhere. What I can also see happening is: bitcoin failing. Imagine a stalemate happening: the majority (but not overwhelming consensus) refusing to hardfork to 2mb w/ segregated witness on the principle of not being ‘coerced’. Many feel that the desire for a hardfork to 2mb was a political move designed to subvert the intentions of existing bitcoin-core developers (by the way, it is only called bitcoin-core as a result of attempting to clearly label bitcoinQT/bitcoind so to better separate it from bitcoinClassic, BitcoinXT, and BitcoinUnlimited. Before those software, it was simply ‘bitcoin developers’). Until December 2015(ish) no one had a proposed solution for scalability that was widely accepted. I think the desire to revert to Bitcoin Unlimited has happened as a result of bitcoinClassic losing the wind in its sails.
This argument also assumes that demand for Bitcoin will continue growing even as it becomes more expensive and less reliable — it won’t.
I contest that you are wrong based on the plethora of existing substitutes through the form of alt-coins. Users who sought greater anonymity have transitioned to using Monero; I said above that bitcoin could die – what I mean by that is we have several substitutes that will gain greater traction and usage should overwhelming consensus not be reached – and that’s honestly okay for me. We will see a drop off of users from the primary store of value chain – they will transition to an alt blockchain…this transition of transaction volume will cause the amount of transaction volume in bitcoin to decrease, back to equilibrium, I speculate. It could be that users choose to reserve their coin in bitcoin, but to transact elsewhere – or not – and choose to select a new reserve ‘cryptocurrency’ for the majority store of value, separate from traditional fiat currency.
To suggest that a “fee market” is not a natural part of Bitcoin, but instead something that must be artificially induced by protocol-level developers, is simply the product of an elementary ignorance of economics.
I think what you have got wrong with this statement is that the fee market WAS NEVER INTENDED to be controlled or induced by protocol level developers, ever. If Bitcoin miners intend to vote for segregated witness, and it can reach overwhelming consensus, then the software will activate and allow an increase of about .7 increase (based on stragglers and full node operators (remember spv oracles, libbitcoin, bitcore) I have not verified if those alt-implementations of full nodes have already implemented segregated witness within their codebases). Since we’re waiting to see if overwhelming consensus can be reached, at this moment, I posit that it is the bitcoin miners who choose the path for scalability. I back bitcoin-core’s vision of using a soft-fork to provide scalability that also happens to solve most transaction malleability. I do not back bitcoin-classic’s version (nor bitcoin-unlimited) of scalability where a hardfork imposed by one side could cause a loss in ability to reliably spend coins on the main chain for a bulk of the users.
We are told that support for a block size increase is nothing more than the desire of “greedy Bitcoin miners” to collect more and more fees from the greater number of transactions a larger block size would enable.
Told by whom? As you can see the sentiment everywhere from everyone – the block size DOES NEED TO BE INCREASED. It has zero to do with the funds earned…we want transactions to confirm fairly quickly with a reasonable fee (preferably less than a few cents) …you argued above that bitcoin core developers are attempting to force an artificial fee market as a means to earn greater revenue, short term….bitcoin core development stands to gain nothing from this tactic (miners do) but does stand to lose the faith of the community, aggregately, should it be uncovered that collusion were happening to stall efforts to increase bitcoin scalability.
…yet, in the next breath we are told that fees must rise so that the miners can earn more money.
Agreed – though that must happen organically, through an increased user base. I speculate, if the fee market does not supersede the existing block rewards, that eventually the industrial mining operators will shut down operations and hold a fire sale for both their hardware and for their bitcoin, making a graceful exit, with a tidy profit…bitcoin will either die then and there or will see an extended recession before experiencing either 1) another speculative bubble or 2) a groundbreaking advancement in the technology increases the net value of the ecosystem and demand for those advances drives the price back up to a sustainable level (perhaps some mining operators will not sell their hardware and will simply leave it off until point 2 occurs).
Contradictions aside, the implication seems to be that miners cannot be trusted because they are greedy.
Where does that come from???? Miners are trusted regardless – that is how transactions become confirmed…if you want to participate in the bitcoin network, you HAVE TO TRUST MINERS to accept your broadcasted transaction and attempt to include it in the next block, period.
Instead, their profitability must be externally regulated by a group of developers-cum-central-planners.
You’re drawing a conclusion based on your speculations, but state it as though it were fact.
Miners (as a whole) will not harm the Bitcoin network, as to do so is to destroy their own profits.
Precisely – therefore, why would collusion occur between bitcoin core developers to force an artificially inflated fee market? Word would get out and that mining operation would be subjected to damage in their trustworthiness and reputation. Game theory still applies – that is why we do not see a decision being made by the bulk of the hashrate…I believe there is a rational fear that if a larger mining operator makes the decision to pick one over the other, that if the other succeeds, then they have lost both reputation and community trust – which is why we see the larger operators looking to ‘wait and see’… concurrently, I do side with them that segregated witness, while tested, has not been critically evaluated by the community – it is a brash decision to upgrade and signal if you (as a mining operator) have not taken the time and efforts to code review the proposed soft-fork changes of SegWit.
The best way to safeguard against any entity amassing a majority of hashpower is to ensure that the profit motive of mining is always present, especially for new entrants.
You continued to quote satoshi immediately following this statement above in a means to validate your statement here, I’m not arguing this statement. I am pointing out though, that this advice also absolutely works in reverse….there are economic incentives to building up hashrate as a means to stall progress. Many actors have an incentive in alt-coins that would rise to take the place of bitcoin should bitcoin die. An effective way to kill bitcoin is through stalling progress. Bitcoin.com and ViaBTC are both procuring hashrate, not for economic gain, but to stall progress. In my opinion, that is not even necessary. An adequate code review and time is all that is needed to either refine SegWit to become an easier (better refined) solution that could achieve overwhelming consensus or to allow a superior alternative that better serves the interest of the community to appear and to have reached consensus. By placing artificial resistance, Bitcoin.com and ViaBTC have shown their intentions – the fact that it was BitcoinClassic before it was BitcoinUnlimited only serves to underscore their objective – ensure that SegWit does not achieve consensus through malicously controlling more than 10% of the hashrate. The remaining pockets (slush and gbminers) are allowing their user-base to vote, why isn’t viabtc nor bitcoin.com running a similar setup? (two different nodes running concurrently and allowing their users to connect to one or the other in order to choose which vote they back)
Ceterum censeo blocksize esse increscendum.
Yes, agreed, we need to increase the blocksize – please encourage the remaining miners sitting on the sidelines to do code review on SegWit…if they are still confused then ask us, the community for clarification. I’d rather we find problems with SegWit and fix them….why am I so gung-ho on SegWit? because right now, I do not believe that unlimited is capable of providing graceful scalability on any level – it is, by design, configured such that any miner can pick the blocksize they choose. There is no consensus rule, it’s just a sort of free-for-all.