Replies (30)
The trojan horse model never made sense to me.
at what point is Bitcoin SO valuable to central banks that they voluntarily surrender the ability to *print* money?
What am I missing?
They'll come to the realization that their money is useless. It's outdated.
I don’t think they *voluntarily* surrender anything.
The game theory makes it so they must hold it, for their own survival (relevant searches: Nash equilibrium in a coordination game, prisoner’s dilemma, first mover advantage). They can still print to the extent that fiat currencies keep their entrenched network effects but it loses its benefit over time and hurts whatever legitimacy they have more and more. So if they’re smart they use at least part of the print to buy BTC.
This ultimately makes NGU which empowers early adopter (or any smart opportunist, really) to invest in / build infrastructure that goes completely around them.
so in the current system they can automatically extract value from the general population with fairly little overhead
And the thesis is that they will just stop because they decide that model is "outdated?"
Okay so following that scenario
It's in everybody's best advantage to hold
and also everybody's best advantage to prevent others from holding no?
so we see an outright war on P2P exchange and efforts to be the first one to monopolize the network, no?
because of the total transparency they can leverage the threat of IRL violence to prevent free use.
having trouble seeing the inevitability of a Bitcoin standard here.
There’s a missing piece most people don’t talk about, but I personally love: without transaction / block space demand long term, the network actually becomes unstable (as the block reward dwindles). So eventually there’s also this paradoxical incentive to want everyone to have some and transact with it as well or else it sort of collapses in on itself.
Admittedly this is probably a tough landing to stick, but it does hint at the next stage of the game where all the big hodlers are forced to coordinate / incentivize BTC based economic activity or else see their valuable reserve go haywire with volatility.
There’s nothing comparable to this in history… a sound money that rehypothecates itself thru proof of work. So we’re in for a weird ride IMO- and I’m skeptical of anyone who claims to know exactly how it plays out. If it works, we’ll all be forced to adapt in ways our species has never seen before. I hold naive hope it will be beautiful, but this long game transition is definitely not talked about enough and your questions are valid.
yeah
@mister_monster has been telling me about that.
essentially the design choices Bitcoin has made incentivizes hodling.
but hodlers don't pay for network security.
its kinda a big problem.
and since bad money chases out good money,
its easy to see a scenario where large, powerful players use violence to monopolize the network,
and issue a shitcoin (Backed By Bitcoin ™) for people to actually use for txs,
while they hoard the actual capital.
And nobody actually wants to SPEND their BTC anyway so there's not a lot of incentive to resist.
but like you say
its uncharted territory.
¯\_(ツ)_/¯
Most “hodlers” are also accumulating more are they not? And to accumulate you have to transact on chain. There are also points at which it is advantageous to spend some of the capital to improve one’s life. Or you hear of hodlers consolidating UTXOs which is another transaction. I don’t think there are many that just have old coins and just sit on them without accumulating, sellin to buy things, or consolidating. So I don’t see how the network just stops being used. Because everyone is just hodling seems extreme.
Hmmm, interesting take on how it plays out. My view has been the same problem you describe, but that there's no solution, that network security reduces as it becomes less profitable and with it, value of the network and therefore the price of coins. But, if a consensus can form as that happens to incentivize use of the network for transacting, you're right. I think though that that consensus will be difficult to accomplish, you'd need bigger blocks for that, you'd need an uncapped supply for that and you'd need all the stakeholders betting on second layer solutions to get screwed. Seems like a long shot to me, that's an understatement.
So there's an incentive in bitcoin due to the hard supply cap for people to hodl that is a positive feedback loop. I wrote more about it here
This problem applies to any coin with a hard supply cap, and the rate at which that happens has to do with the transaction fees, which are a function of use and block space.
mister_monster
Alright. Let me take a deep breath real quick.
So, miners are rewarded for securing the network. If they're not, they don't do it.
In bitcoin, they're rewarded by the block subsidy, the coinbase transactions, and by the transaction fees of people moving money around. I'm going to call these "users" as opposed to holders, which are also users but I'll distinguish between them in that way.
The block subsidy is like a tax on all holders and users in the network, just as monetary inflation (which I refer to as "debasement" because that's what it is) is a hidden tax on all of us who work for and buy things with fiat.
Holders benefit from the security of the network. That is bitcoins entire value proposition, that's what gives it value, that it is infeasible for anyone to just steal your money without tying you up first. A coin with a supply of 1 and no security is valueless. Scarcity isn't the end all be all of value, as you can see from countless other supply capped altcoins, other considerations are, demand being the big one, but none of that matters if you can wake up to your money gone. The security of bitcoin is it's primary value proposition.
Network security is a commons in game theory parlance, to the bitcoin network, and a situation where some group can benefit from the commons without contributing to it leads to what is called a tragedy of the commons. Those people in game theory parlance are called "free riders", they benefit from it without any cost incurred to them, and for the commons to continue to exist, the cost must be incurred by someone else. That someone else in bitcoin is the users, those actually sending bitcoin and paying transaction fees.
There's a block subsidy right now in bitcoin, but since the supply cap is known, we can treat that yet to be issued subsidy as existing and just not being spent yet. It is "priced in" as you might say. It can be treated as if it already exists, just like satoshis coins can be treated as if they don't exist. Consider your share of the debasement via the block subsidy paid, consider your share of bitcoin as being out of a total supply of (slightly under) 21 million coins, that's what most people do anyway.
So what happens is, there's an incentive built into this game theoretical system that is bitcoin, where people are incentivized to hold and not to spend. They benefit from the security paid for by those who have to spend, and their wealth is secured for free. So as time goes on, more people do this. The more people that do this, the more users have to pay to spend money, the more pressure they feel to just hodl and spend something else, and so on. It has a compounding effect.
The end result of this is of course, a world where nobody or almost nobody spends bitcoin on chain, and where miners have to reduce cost and therefore security. And as security goes down, so does the value of the network, and therefore so does the value of your bitcoin holdings.
A solution to this is a tax on holdings. But that's messy, you need a way to just take money from people when mining a block, keeping track of everything and knowing what everyone has.
A simpler way to do this is to just create some press determined number of new coins every block. It taxes everyone equally in proportion to their holdings, everyone pays for security of their wealth in exact proportion to the benefit they derive from the security of the network. Simple, elegant, problem solved, as long as this money only goes to miners and nobody else.
This could be done on any number of schemes. You can do it on a geometric scale, 2% or 3% as central banks do (even though they don't need it to pay for security. They're just scammers), or you can do it on a linear scale, like Monero does with a set per block emission number that we call a tail emission. I could go into the reasons why this is optimal even though on the surface it may not appear to be viable long term as opposed to geometric debasement, but that's a whole separate thing.
Do you see it? It's not about "the miners have to be paid", it's about who pays the miners and who benefits from mining. The two have to be one and the same, and in proportion to their benefit, or any network is doomed to fail. Incentives are outcomes, always, with anything social in nature.
View quoted note →
The paradox is if they do the forced shitcoin scenario plus hoarding (which you can obviously see happening already) then they actually hurt the value of their stash long term. Like falling on their own sword. But they don’t see that - yet.
Yes there’s a limited incentive to spend vs hodling, but
@2Pac made a decent response to that already. I would add / argue there’s also an incentive to be paid in BTC which “pulls” spending.
Very difficult to achieve yes. Not likely to succeed in early iterations. Maybe even an impossible balance to strike… nobody knows.
However bigger blocks not necessary. Layer 2s have base layer settlement needs from time to time which ultimately drive transaction value on the base chain up as they are used more.
Uncapped supply wouldn’t help… I think. Firstly I don’t think that it ever gets out of the first part of the game. Then also miners are never totally forced to coordinate economic activity and they are likely the biggest player in the endgame.
It might be an intractable problem. Just some faithful thoughts.
If they succeed on getting a controlling share of the network
and they have a captured market of users
i don't think its true that doing a fractional shitcoin off of Bitcoin hurts the value of their stash.
i guess it depends a lot on the details
and its all pretty theoretical
sure I agree they will always be some activity,
but i don't think acquiring and consolidating amount to much.
maybe capex could be... 🤔
but like I said
if theres a lower friction shitcoin provided by the central bank you can use,
99% of people probably use that instead
Anyone getting a controlling share of the network sends it towards zero… the next step of that scenario comes with a fork and a huge sell off of the controlled asset. Mutually assured destruction.
Fractional shitcoins kill transaction demand so reducing the value of the assets they control long term, which includes both utxos and miners.
Where I see Bitcoin as beautiful is it has all these paradoxes where total control ultimately hurts the one who would invest in that goal. It forces coordination and distribution in so many ways.
I dont think the new VC capital and cantillionaire investors that have drivin the price up this cycle know or care one little bit about decentralization.
if a powerful enough entity guarantees Blackrocks investment, they aren't going anywhere.
You’re absolutely right they don’t.
They’ll be forced to realize the reality of the protocol design eventually though.
Yep. I have thought about this too.
> .. hodlers don't pay for network security ..
This might mostly be true for now. But life (at least today) is finite and at some age and price, many (especially poorer) hodlers are going to spend BTC for goods/services.
Sure, some hodlers will rather pass their BTC on to some heir than just spend it for something. But will all/most do this? Hardly.
why would it be any different on the future?
if the value proposition is "your Bitcoin will ONLY increase in buying power"
you have huge incentive to spend whatever else you have.
*even more so* at a future higher valuation.
no?
Because you inch closer and closer to where you yourself are simply running out of time to enjoy with your very own senses anything your BTC can buy.
And thus - as I see it - the sensorical value someone gets by spending some of their BTC will at some point in time turn almost every hodler into a net seller.
Some people are lucky enough to have enough cash flow to enable a satisfying lifestyle _as well as_ buy/hodl BTC without _ever_ selling any. But I'm pretty sure these people make up a small fraction of all hodlers. All the others will - IMO - turn from buyers into sellers at some point in time.
sounds like trickle down economics.
maybe...
its one theory anyway.
My thoughts on the supply cap are basically that hodlers are free riders and so as long as that remains network security will trend downward after some threshold is reached. Haven't done the math on that threshold, so I couldn't give you an estimate of when.
I'm not the only person that thinks this, and in fact this was a well studied problem well before I came to understand it. Usually it's framed as "the miners need to be paid" and as a block size problem but actually it's more a problem with who pays and the incentives that emerge from that.
As far as layer 2s handling settlement, that could suffice, but the problem then is, a miner needs to be paid whether from a thousand small transactions or one big one. If everyone is settling on lightning or something those close transaction fees need to be large, which means channels need to be large, which is a centralizing force in lightning. We already see most users using lightning with large liquidity channel prividers, increased fees to open and close channels will make that problem worse, and would apply to any layer 2 architecture whereas the centralizing trend we see on lightning is specific to it's architecture.
I'm happy to see a die hard Bitcoiner willing to talk about these things, usually but not always I get dismissed when I bring this stuff up. It is a real problem that needs a solution if Bitcoin is to succeed.
mister_monster
Alright. Let me take a deep breath real quick.
So, miners are rewarded for securing the network. If they're not, they don't do it.
In bitcoin, they're rewarded by the block subsidy, the coinbase transactions, and by the transaction fees of people moving money around. I'm going to call these "users" as opposed to holders, which are also users but I'll distinguish between them in that way.
The block subsidy is like a tax on all holders and users in the network, just as monetary inflation (which I refer to as "debasement" because that's what it is) is a hidden tax on all of us who work for and buy things with fiat.
Holders benefit from the security of the network. That is bitcoins entire value proposition, that's what gives it value, that it is infeasible for anyone to just steal your money without tying you up first. A coin with a supply of 1 and no security is valueless. Scarcity isn't the end all be all of value, as you can see from countless other supply capped altcoins, other considerations are, demand being the big one, but none of that matters if you can wake up to your money gone. The security of bitcoin is it's primary value proposition.
Network security is a commons in game theory parlance, to the bitcoin network, and a situation where some group can benefit from the commons without contributing to it leads to what is called a tragedy of the commons. Those people in game theory parlance are called "free riders", they benefit from it without any cost incurred to them, and for the commons to continue to exist, the cost must be incurred by someone else. That someone else in bitcoin is the users, those actually sending bitcoin and paying transaction fees.
There's a block subsidy right now in bitcoin, but since the supply cap is known, we can treat that yet to be issued subsidy as existing and just not being spent yet. It is "priced in" as you might say. It can be treated as if it already exists, just like satoshis coins can be treated as if they don't exist. Consider your share of the debasement via the block subsidy paid, consider your share of bitcoin as being out of a total supply of (slightly under) 21 million coins, that's what most people do anyway.
So what happens is, there's an incentive built into this game theoretical system that is bitcoin, where people are incentivized to hold and not to spend. They benefit from the security paid for by those who have to spend, and their wealth is secured for free. So as time goes on, more people do this. The more people that do this, the more users have to pay to spend money, the more pressure they feel to just hodl and spend something else, and so on. It has a compounding effect.
The end result of this is of course, a world where nobody or almost nobody spends bitcoin on chain, and where miners have to reduce cost and therefore security. And as security goes down, so does the value of the network, and therefore so does the value of your bitcoin holdings.
A solution to this is a tax on holdings. But that's messy, you need a way to just take money from people when mining a block, keeping track of everything and knowing what everyone has.
A simpler way to do this is to just create some press determined number of new coins every block. It taxes everyone equally in proportion to their holdings, everyone pays for security of their wealth in exact proportion to the benefit they derive from the security of the network. Simple, elegant, problem solved, as long as this money only goes to miners and nobody else.
This could be done on any number of schemes. You can do it on a geometric scale, 2% or 3% as central banks do (even though they don't need it to pay for security. They're just scammers), or you can do it on a linear scale, like Monero does with a set per block emission number that we call a tail emission. I could go into the reasons why this is optimal even though on the surface it may not appear to be viable long term as opposed to geometric debasement, but that's a whole separate thing.
Do you see it? It's not about "the miners have to be paid", it's about who pays the miners and who benefits from mining. The two have to be one and the same, and in proportion to their benefit, or any network is doomed to fail. Incentives are outcomes, always, with anything social in nature.
View quoted note →
It's a simplified model that assumes a lot. It assumes people know when they're going to die. This is of course not true. It assumes people won't take their keys with them.
But it assumes higher time preference than some people have. Maybe it's your desire to build a nice life for yourself. That's definitely most people. I personally am building a family, and that family has an open ended lifespan if I do it right. What resources I accrue are for mostly after I'm gone. I don't intend to blow it all after retirement on a sports car and a boat.
I'm glad my article could spark some conversation about this topic.
embarrassingly I didn't read it.
but I will 🙏
Our thesis has been that
if we assume premature ossification,
institutional adoption leads to regulatory capture of the network.
i was being generous
trying to turn over a new leaf 😅
Blabbing responses from mobile:
Yeah it’s unfortunate more Bitcoiners won’t talk about it, because debate/discussion around it is really the only way to get to solutions. Better than burying heads in the NGU sand, but maybe less cozy.
My left curve approach to the problem is to build something that increases transaction demand.
Really interesting point around Lightning centralization. That’s a tough one. The write up you attached is also great- I’m going to look more into XMR to educate myself.
Other things I’ve seen brought into the conversation are the many ways the BTC block space might be valuable long term, like for example the concept of an open+immutable time-chain is interesting. Then there’s innovations that might happen thru a soft fork but I’m not counting on that ha ha…
I’ll maintain the naive belief for now that there’s a possible sustainable path to global BTC adoption but it requires a lot of chaos and compromise to get there. Using energy as money brings so many awesome hopeful possibilities into play… maybe this works with other PoW chains too who knows.
The people trying to corner the market are dumb, and will see they’ve shot themselves in the foot eventually.
On the whole these are all chaotic technologies which are going to rip a new one into the current system. All attempts to control it without building something useful for others seem to be stupid- which I love about these protocol designs. Can’t put these genies back.
My base case is at least some chaos before whatever stable era comes next. Maybe I need to hedge more? We’ll see. Thx for the insights.
Agree. Governments hold nuclear power too. Doesn't mean they would love others to hold the same. 🙃
And now?
