Still, the Federal Reserve was not founded based upon the best interests of the nation as a whole. It was founded upon the best interests of business and government.
And? The federal reserve could have been founded upon the interests of immortal Hitler clones and puppy killers for all it matters to this discussion,
the one who brought it up.
the thing the federal reserve actually did and was intended to actually do was to prevent banking panics and maintain the stability of the currency. Whatever the notional intent of the founders of the federal reserve, the effect is to benefit the government and the people by providing a relatively stable currency.
At the very
best, the Fed was intended to prevent the business cycle of booms and busts. These cycles most directly affect the urban working class, which was in the minority in 1913 and before. Country folk, most of whom had plots of land of 20 acres or less, and grew the majority of their food on their own land, and were generally unlikely to sell much on the markets, were not affected by the business cycle. So, being generous and taking the public statements for the reasons for the Fed at face value, the Fed was founded in an attempt to prevent business cycles to the benefit of the minority over the best interests of the majority. As for actually succeeding in that task, the United States has suffered (and is presently) through at least three 'panics' of greater magnitude, duration and scope than anything that had happened in the prior century; with the notable exception of the Southern states immediately following the Civil War. So in the end, the Fed has failed in it's original intent. Of course, no one even makes the claim anymore that this is the mission of the Fed. These days the mission of the Fed is the impossible "dual mandate" of restricting inflation while maximizing employment/economic growth. In the past three years, if not the entire past decade, the Federal Reserve has failed to accomplish either
of those things.
but how does that lead to the statement that the value of a bitcoin will not change? Value is a subjective evaluation, and has no rigid relationship to the difficulty of creating a block. Care to explain your position, or are you going to just continue to throw opinions around sans support?
A poor phrasing on my part. A bitcoin that is generated after the 50% point represents more effort, but is treated no differently from one generated before the 50% point, one bitcoin is not valued differently from another.
Okay, but how is that a problem? Any currency's note is supposed to be of equal exchange value to any other. (incidently, this isn't entirely true. The founder was offered $50 per bitcoin for coins provablely from the genesis block, which had not at the time, and I believe still has not, been spent at all. The founder refused that offer. This was back when a bitcoin was going for about 6.5 cents.)
Over time, as more of the potential value of bitcoins is locked up and the rewards for mining decrease, it's likely that adoption of bitcoin by new users will also decrease unless a strong bitcoin economy is formed first, which can only happen if early adopters don't hoard.
You say it's likely. I say otherwise. Time will tell who is the wiser prophet.
It doesn't take time to figure out that there is no incentive to create a functioning bitcoin economy while most of the wealth in bitcoins isn't actually being spent.
It takes even less time to figure out that the above statement is provablely false, since a functioning bitcoin economy exists
, and there must be some incentive for users to continue to participate, since they do. Or do you believe that, if you can't see the incentive, there must not be one?
A handful of merchants and exchangers does not a functioning economy make. Canadian Tire Money represents a more functional economy than bitcoin.
Hard to say, since the scope of the bitcoin economy cannot be easily judged, much of it being obscured. You are probably right about the size of the Canadian Tire Money, but the Bitcoin economy is already larger than most (all?) LETS systems and local trade currencies such as the Ithica Hour. It's hard to argue against the small size of the Bitcoin economy, and yet it's also hard to argue against it's potential market, which is huge. The Ithica Hour has been around for decades, but represents an incredibly small economy. Is it not a functioning economy?
The current incentive is all promissory, the idea that bitcoins will represent a functioning economy at some point. You can only live so long on promises and potential though.
It's a risk, and a pretty high one at that. I don't contest that.
EdgarJPublius wrote:One potential problem that has been touched on but I don't think has been directly addressed, is that the reliance on computer architecture means that it's possible for an individual or organization to generate bitcoins much cheaper/faster than any competitors.
That's a feature, not a bug.
No, really. It's by design. The system is set up, as it is, so that participants have an economic encentive to contribute to the cryptological security of the entire system, which is an ongoing process. It also favors the most efficient means of doing so. If it were simply to distribute the newly issued coins in a equitable manner, there are other ways of doing so. For example, many of the regular individual miners are individuals who both have high-end graphics cards for personal reasons (gaming) and live in conditions that favor use of electricity (high latitudes & electro-resistive heating) so that whatever resources that they can commit to Bitcoin are simply a diversion of resources that they would have had to use anyway.
That's not quite what I mean. The value of a bitcoin is only relatively stable while it takes a relatively predictable amount of effort to solve a valid block. Currently, the bitcoin is valuated based on miners using conventional consumer grade hardware. However, computer technology isn't a stable field, over very short periods of time, a given amount of computing power can become much cheaper, and new mathematical techniques or new processor architectures could lead to the problem class used by bitcoin becoming orders of magnitude easier to solve over a period of just a few months to a year or two, leading to an inflationary spiral.
I would recommend that you read up on how Bitcoin's crypto system actually works before writing comments like this, but I'm already certain that you are the kind of person that does not heed such advice. The above statement is false. Increases in the computational power of the Bitcoin network, from greater numbers and from improvements in the technology, lead to the strengthening of the cryptological security of the blockchain. They do not
lead to an increasing rate of currency issue.
I don't think I'm the one who needs to read up on how bitcoin's crypto system actually works here. Node's adjust the difficulty of problems only infrequently (every two weeks) easily enough time for an exploit to generate a large number of coins (as demonstrated by the mysteryminer 'attack')
Again, how was that an 'attack' at all? What harm, if any, did it cause?
It doesn't really matter though, even if the difficulty of problems was adjusted continuously, the system is vulnerable to potential techniques for vastly simplifying the generation of blocks. A more efficient (rather than a strictly faster) system that generates blocks at the proper rate but does so cheaper than competing systems leads to a devalutation of all bitcoins (once again, one bitcoin is not treated differently than another, if the average expense of generating a given amount of bitcoins falls, even bitcoins that were generated by more expensive methods lose value, inflation without increasing rate of currency issue ensues)
Thus far, all improvements and/or simplifications in the generation of blocks has led to the increase
in the difficulty level (and therefore the strength of the security of the blockchain) not a drop in participation. Do you have any information that would suggest anything different in the future?
Historically, increasing computational power has not strengthened existing cryptographic protocols (quite the opposite in fact).
This is true in general, but such cryptographic systems are static
forms of security, Bitcoin is designed to have a dynamic and ongoing cryptographic proof-of-work. But even if it didn't....
If someone discovers a way to 'break' the hash function used by bitcoin, or if sufficient computational power becomes affordable that solving the hash function otherwise becomes trivially inexpensive, then no amount of increasing the difficulty of generating bitcoins will be able to reduce the rate at which bitcoins are generated unless the protocol is re-written to support entirely new classes of problem.
...Bitcoin's cryptographic functions are not only modular, and can be swapped out quickly for better versions of the same type of cryptographic functions if one is broken; those functions also overlap in their security model, so if any one function is broken, the entire Bitcoin system isn't laid bare in the meantime.
A related problem is that individuals can become low-cost producers relatively easily, a botnet administrator can call on large quantities of computing power with virtually no outlay of effort or money and single-handedly disrupt the entire bitcoin economy.
Perhaps. Do you think that would be a problem? Some botnet admin throws his considerable (stolen) computational power at Bitcoin, to what end exactly? Mine those coins for himself? Do you think that I, as a Bitcoin user, would be negatively affected by such an event? Or are you considering some other scenario?
There are two basic scenarios: An entity capable of generating bitcoins faster and cheaper than anyone else can either hoard or spend their bitcoins. In the first case, the total number of bitcoins being traded does not increase, or increases slower than it should. deflation occurs as it becomes effectively more difficult to generate bitcoins unless you are the entity for which it is easy. But since this entity still has bitcoins, it can choose whenever it wants to dump the hoard and cause an inflationary panic.
The second case is essentially similar to the above problem where bitcoins become less expensive to generate for everyone. Since this entity is injecting cheap bitcoins into the economy, bitcoins are devalued.
An interesting scenario. Unlikely, I think, but not impossible. Of course, it's not impossible to counterfit paper money either; and doing so has similar effects upon the economy at large. An 'expensive' attack, in more than one way, certainly. The attacker would have to have some motivation beyond an economic one to attempt this, because there is almost no possibility of profit. Nor would there be much possibility in long term harm to the Bitcoin economy.
The Mysteryminer 'attack' demonstrates some more complex failure modes for bitcoin which are interesting (invariably, 'complex' and 'interesting' are bad things for a failure mode to be)
Care to enlighten me about what harm this 'attack' created? You have a strange definition of failure, I think. Even the longest delays to free transactions that I am aware of were cleared in under two days, and if there was any affect on the market price at all, it certainly didn't last longer than those two days, and couldn't have amounted to more than a ten cent drop in any case.
A wily and malicious attacker can generate a lot of cheap bitcoins and stop right when the difficulty is increased, then not generate any (or generate a reduced amount) for the next cycle when the difficulty increase makes it more expensive for normal bitcoin miners to generate bitcoins. Then, when the difficulty is adjusted down again, strike (this could infact be mysterminer's intent, the difficulty hasn't yet been adjust down after the initial attack) generate a bunch more cheap bitcoins and spike the difficulty again. This way, the attacker is able to generate a lot more bitcoins over a longer period of time than by simply running a botnet until the difficulty sky-rockets, and is still able to suppress the generation of other bitcoins. There are likely other attacks that can be employed against the timing of the difficulty changes, theoretically even reducing the difficulty of bitcoin generation far below current levels.
Could work well enough to irritate the userbase, but couldn't hope to break the system. If such an attack were to materialize, it wouldn't take long at all before other large mining cartels (yes, they exist. Several openly so) take advantage of the pattern by simply not competing with the 'mystery miner' during his attack cycle, and jumping back in once the difficulty has increased and the 'mystery miner' drops out. This might not eliminate the effects of the 'mystery miner', but would certainly temper those effects. If it was the intent of the 'mystery miner' to irritate the Bitcoin community, his intent will be frustrated by his limited ongoing success compared to his substantial
sunk costs. If his intent is to simply generate coins for his own accumulation, it won't take long before he comes to understand that a continuous method is almost always the most profitable methodology. In the worst case, the difficulty could increase by a factor of four, and the interval increased to a 40 minute average. This would annoy any user dependent upon timely confirmations, but contrary to the common first impression, confirmations are not required
for trade most of the time. A transaction is comparable to a digital 'cheque' and the confirmations are comparable to that same cheque clearing the bank that it's written upon. A given vendor can, and some do, accept the transaction, once validated by the receiver's bitcoin client, as being at least as good as a real cheque that you wrote out at the local Piggly-Wiggly and showed your ID. Of course, some vendors are going to expect confirmations for some trades. For example, when have you ever walked into a new car showroom and wrote a personal cheque for a car? Some things will just require more timely confirmations, and that is where the optional transaction fees come into play. If you're buying a item with the value of $10K, a $1 tip to give the miners an incentive to include your transaction over all the free transactions isn't unrealistic.
Any event that effects the number of bitcoins in circulation and/or the difficulty of generating new bitcoins inherently destablizes bitcoins as a currency and ultimately causes negative repercussions for all bitcoin users.
events. It's hard to spook the bitcoin network, since the sudden increase in hashing power is a highly visable event; and still leads to a high degree of near term predictabiity. Particularly after a pattern has been established.
The fact is, without a way to intelligently react to these kinds of events, bitcoin is a fundamentally unstable currency.
The fact is, such intelligent responses are both part of the network itself, and the quiet mission of many major players already.
This isn't a fundamental problem of crypto-currencies (at least not anymore than it is a fundamental problem of all currency) just a problem with this implementation. Nick Szabo's original bit gold proposal
for example included the idea of using secure timestamps (which are implemented to a degree in bitcoin) to verify the difficulty of generating a given unit of bit gold and use that to value units differently.
Of course, the fact that this problem is solvable, doesn't mean there aren't more waiting out there either. An improved bit gold implementation could be more secure than any existing currency and still be highly vulnerable. (which of course isn't an argument against crypto-currency, just an observation)
I would contest your observations as well, but I don't consider them relevant, so I'll pass.