A systematic critique of Bitcoin's value proposition

http://blog.rongarret.info/2023/04/a-systematic-critique-of-bitcoins-value.html

by lisper • 3 years ago

35 113 3 years ago

blog.rongarret.info

In the third section I analyze its security model, specifically the cost of mounting a 51% attack on the assumption that hash power is available for rent and doesn't need to be purchased by the attacker.

Bitcoin mining requires special devices (ASICs). These ASICs would lose their value if Bitcoin lost its value. Given this fact, why would anyone rent them out, or rent out the hash power?

pcthrowaway6• 3 years ago

If your hash power typically translates to $X per day and someone offers you 2X $ to rent the hash power for a day, I suspect most people would rent them out

yellowapple4• 3 years ago

Why would someone offer you that, though?

JumpCrisscross14• 3 years ago

mining requires special devices (ASICs)

Profitable mining does. If you’re looking to make money, you need ASICs. If you’re just looking to disrupt the network, e.g. for military purposes, commandeering a cloud or two would do.

wyager2• 3 years ago

commandeering a cloud or two would do.

No; The ASICs are orders of magnitude faster and more efficient per dollar. Every GPU on earth couldn't touch the bitcoin hashrate.

osigurdson• 3 years ago

> Bitcoin mining requires special devices (ASICs)

Nitpick: Any computer can mine bitcoin. Economic bitcoin mining requires special devices.

latchkey6• 3 years ago

My favorite way to mine bitcoin!

https://www.righto.com/2014/09/mining-bitcoin-with-pencil-an...

medellin• 3 years ago

51% of the bitcoin mining hashing power being available for rent is so far fetched that it’s silly to even consider as a valid critique

ursuscamp2• 3 years ago

The author really undersells how difficult/nearly impossible this is and will be for a long time, at the very least. If the market transfers successfully from miner subsidy to transaction fees, then it will always be nearly impossible.

akira2501• 3 years ago

Aside from Satoshi's hoard.. there's also just regular destruction. Units can be mined and then permanently lost. The system has a limited number of units that can be generated in total and no mechanism to replace the lost units.

Why is this not a long term problem for bitcoin?

throwaway220322• 3 years ago

It's divisible down to 0.00000001.

If that ever became a significant issue I imagine users would be happy to increase the precision via a fork.

LN supports sub satoshi (i.e. higher precision) payments on L2.

If you're talking about the numbers getting super small and being unwieldy, most fiat currencies have the opposite problem of the numbers getting super large, they just redenominate every now and then.

TheBlight3• 3 years ago

It's divisible down to 0.00000001.

This is an artifact of the implementation. I don't think there's any real reason it couldn't be divided further using higher precision.

wyager2• 3 years ago

Because the units are highly divisible and the divisibility can be increased easily if it becomes necessary.

When someone loses/destroys bitcoin, they are effectively donating the value to everyone else who still holds bitcoin.

rattlesnakedave2• 3 years ago

Infinitely divisible

TigerTeamX3• 3 years ago

1. As other people mention Bitcoin is highly divisible. 2. Other Bitcoins simply becomes more valuable and thus strengthening the system

mrguyorama• 3 years ago

I love how everyone responding to you seems to think that this is fine because you can just continue dividing the currency, as if the problem is a technical one, and seem to be ignoring or unaware of the actual problem:

Constant deflation is HORRIBLE for any economic system. By design it rewards early capital holders and punishes you for needing to make any transaction. It disincentivizes doing anything. You are always better off not spending money. This may sound good to idiots who just like "line goes up", but that makes normal people not use that system if they have the option.

Bitcoin, by design either on purpose or through negligence and a lack of basic economic knowledge can only ever reward the original whales and harm normal users of the system. Hoarding is the only rational position. That's what crypto proponents push for, because they are already bought in and want to reap the rewards. It's always hilarious and infuriating when they claim this system is more equal, more distributed, or more egalitarian than any other.

overthrow5• 3 years ago

Sounds a lot like VTSAX. But somehow people still buy food and shelter even though they could put their money in VTSAX instead and get 7% returns.

Either way less spending sounds good to me. We could use a world with more saving and less consumerism.

tromp• 3 years ago

I also find it infuriating when crypto fans defend the massive advantage afforded to early miners. To me the only truly fair distribution is one where the rewards never change; later generations of miners should get the same reward as those mining right after genesis, rather than fight over crumbs. A pure linear emission doesn't really make money any less sound [1].

[1] https://john-tromp.medium.com/a-case-for-using-soft-total-su...

ghiculescu3• 3 years ago

In private discussions I have heard three counter-arguments, none of which I accept

I think this article skips the most compelling (to me) counter argument.

If there’s a 51% attack, the currency loses all value. Nobody will want to trade Bitcoin or use it as a currency once this attack is exploited. So a 51% attacker is disincentivized to perform said attack because doing so would make the prize lose its value.

Now I write this, I suppose if your worry is a government trying to destroy Bitcoin, then that’s exactly how to do it…

JumpCrisscross14• 3 years ago

a 51% attacker is disincentivized to perform said attack because doing so would make the prize lose its value

North Korea and Russia heavily use crypto. If either does something super stupid, the Congress could create a credible commitment to repeatedly launching attacks on their payment networks, including Bitcoin. This isn’t some far-fetched threat.

pcthrowaway6• 3 years ago

I think the U.S. would be reluctant to do so (although I'd love it if they did), because they hold several billion dollars of bitcoin

DennisP• 3 years ago

One approach would be to just rent the hardware, and short the coin.

JumpCrisscross14• 3 years ago

short the coin

Unacceptable counterparty risk and scale limits.

overthrow5• 3 years ago

Not enough rentable hardware exists on the planet. The article's suggestion that someone would throw billions of dollars into a black hole to "buy up" all hardware globally, get nothing in return, and outpace those who act in their own rational self-interest is just silly.

paulgb5• 3 years ago

You're right that the article doesn't address that counter-argument, but the suggested means of profiting from the attack is immune from it:

A successful 51% attack, indeed even a credible threat of such an attack succeeding, would almost certainly sow fear and uncertainty in a wide range of public markets. An attacker could leverage this because they would have a certain amount of control over when news of the attack broke, so they could (for example) take a short position on a portfolio of financial stocks before launching the attack.

JumpCrisscross14• 3 years ago

take a short position on a portfolio of financial stocks before launching the attack

This is subject to detection and reversal. FX, credit and rates, on the other hand, could be massively exploited in a risk-on trade.

alex_suzuki• 3 years ago

I think one could argue that there are probably easier ways to manipulate a market than a 51% attack on Bitcoin.

ghiculescu3• 3 years ago

If someone tried to buy 10s of billions of dollars of Bitcoin shorts, who would take the other side of that deal?

dllthomas3• 3 years ago

A 51% doesn't get you coins, it lets you spend coins twice. Imagine:

1) borrow a bunch of BTC, 2) use it to buy stuff you want, 3) 51% attack to fork the chain and reverse your spend, 4) pay back the borrowed BTC

What does it matter if the price of BTC falls through the floor afterward?

Of course depending on what you buy, what your lender knows and cares about, and more, you might still face repercussions that make it unreasonable to expect to benefit, but that's enforced outside of BTC rather than by BTC, relying on the systems BTC proponents often explicitly distrust.

ghiculescu3• 3 years ago

Okay sure. At best you can do that once, ever. So you’d better buy something worthwhile.

anonymouskimmer2• 3 years ago

You can already spend coins twice, it's just that one of the addresses you send the coins to ultimately won't get them. So people have to wait some time to ensure the transaction fully processes before they can give you the goods in full confidence that they have received payment.

At some point, if cryptocurrencies become more established, it might be financially beneficial for one blockchain if another blockchain becomes non-viable.

latchkey6• 3 years ago

I suppose if your worry is a government trying to destroy Bitcoin, then that’s exactly how to do it…

Andreas Antonopoulos - 51% Bitcoin Attack

https://www.youtube.com/watch?v=ncPyMUfNyVM

pcthrowaway6• 3 years ago

Did you read the article?

animal_spirits• 3 years ago

I think this is not a realistic worry for potential attackers. If someone gets control of 51%, there will be a lag time for when people start to truly believe that the currency lost its value. So there will definitely be a huge value gain for any attackers that manage to pull this off.

lisper6• 3 years ago

a 51% attacker is disincentivized

You missed this:

"An attacker could leverage [a market crash] because they would have a certain amount of control over when news of the attack broke, so they could (for example) take a short position on a portfolio of financial stocks before launching the attack."

thesausageking• 3 years ago

it means that bitcoin is ultimately not, as is often claimed, protected by mathematics or physics or even economics, but rather by the social cohesion, cooperation, and (dare I say it?) trustworthiness of the mining community

This isn't a dig. Bitcoin's value does come from the community and authority of the chain.

If it were just math, you could fork Bitcoin and have a competing currency that had the exact same code as Bitcoin. It wouldn't have any value because miners, exchanges, and users wouldn't believe it did. They believe in Bitcoin because it's been around a long time (it's Lindy) and the community around it has proven very resilient to all sorts of different kinds of attacks over the years.

JumpCrisscross14• 3 years ago

Bitcoin's value does come from the community and authority of the chain

Agree it isn’t a dig. But it’s a refutation of a common argument in favour of crypto, namely, that it’s protected by math, not custom.

ipaddr• 3 years ago

It is still protected by math. The value is found between trustless entities. Math prevents fraud. The group can change the math.

There isn't one true coin protected by math. An unlimited number of coins can be created between different groups of people. Math protects each coin.

robcohen• 3 years ago

I mean, it solves the byzantine general's problem, which requires two thirds honest participants. I'm not aware of anyone who's ever claimed that bitcoin "mathematically protects" you even when everyone else is lying.

bufferoverflow2• 3 years ago

It's protected by both. So ommitting one factor isn't wrong.

If you say flu is caused by a virus, it's not wrong. But flu is also caused by weak immune system, human interaction, lack of UV lights everywhere, evolution, among other reasons.

TheBlight3• 3 years ago

What's protected by math is the custody of the coins. The system is a delicate balancing act of incentives, math and social consensus. It's common among detractors to want to flippantly dismiss it as "only having value because of shared belief." That's not entirely accurate. All of the components are necessary to give Bitcoin its interesting properties which allow it to function as the first currency not managed by centralized control and these properties are inherently valuable.

bloppe• 3 years ago

Bitcoin is very much protected by math. Transactions require cryptographic signatures. That's math!

Obviously not talking about the Nash equilibrium but still relevant.

The important distinction is who (or what) is being trusted. It's always possible that a compromised bank employee commits fraud against me, or a capricious treasury secretary causes runaway inflation with stupid monetary policy (this was actually one of the main motivations behind bitcoin, as immortalized in the Genesis block "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"). These vulnerabilities aren't really possible with Bitcoin, because you place your trust in a massive community rather than a few key individuals.

bb88• 3 years ago

There's several aspects to trust in Bitcoin.

1. The miners won't just up and leave, or are regulated out of existence.

2. The developers (and/or miners) have your best interest (and not theirs) at heart.

3. Hodlers won't suddenly do a run on BTC bringing down the value dramatically. Diamond Hands often turn into Bag Holders (with out diamonds in the bag, btw).

4. The government won't prosecute you for holding BTC or exchanging it for goods and services, or say, dollars.

5. There's nothing propping up the value of BTC other than the good will of hodlers. There's no FDIC, Federal Reserve, or other large entity that can inject capital to stabilize the price.

6. Your public wallet tied to your real name/bank account won't get tied to a money laundering/human trafficking case accidentally. Why? Because you accepted BTC from a known bad wallet!

paulgb5• 3 years ago

Something I've always considered a curious decision about Bitcoin is the decision for halvings to occur as discrete events rather than as an exponential decay occurring on each block. Having them be discrete events is probably easier for someone to verify by eyeball, I guess, but it has the disadvantage that it creates moments in time where some large portion of the hardware in the market can suddenly no longer mine honestly and profitably.

This decision seems to greatly increase an attacker's chances at obtaining a huge supply of hardware that is too inefficient to mine profitably, but can be used profitably for a short time to attack the network.

I suppose Satoshi never imagined there would be specialty hardware used to mine, and that whatever commodity hardware mined bitcoin could find another use.

TheBlight3• 3 years ago

I don't follow your attack logic. If mining hardware becomes inefficient why would using it to "attack the network" be profitable? Can you say more about what attack you're thinking of?

He absolutely did imagine speciality hardware would be used to mine:

"At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware."

paulgb5• 3 years ago

If mining hardware becomes inefficient why would using it to "attack the network" be profitable? Can you say more about what attack you're thinking of?

The idea is that under normal day-to-day circumstances, a big deterrent to dishonest mining is that miners are deeply invested in the hardware and attacking the network would devalue that investment (if it craters the market). Normally if you have a big mining operation, the winning strategy is not to “defect”.

But halvings change the dynamic, because they take a bunch of hardware that was profitable one day and make it unprofitable the next. So for a brief period there's a bunch of hardware floating around that can't be used profitably to mine, and so has no value to honest miners, but has temporary value to dishonest ones if they can accumulate enough of it.

I don't think this will be feasible for a while, but a few halvings from now it could be.

He absolutely did imagine speciality hardware would be used to mine

I stand corrected, I hadn't seen that post: https://satoshi.nakamotoinstitute.org/emails/cryptography/2/...

yieldcrv• 3 years ago

Satoshi era was consciously operating under a “gentlemen’s agreement” not to do mining farms

But I don’t think we really need to elevate him to a deity level, 2010 bitcoin client had a lot of dumb stuff in it that everyone promptly scrapped when Satoshi went away

TigerTeamX3• 3 years ago

This is the only argument I have found against Bitcoin that have substance. I can see this as a problem, but so far there have always been enough miners that was profitable. One day that might not be true though - hopefully it wont.

One reason for the halving cycle could be the way it kinda shocks the price and that makes people speculate and talk about Bitcoin like crazy. This is the perfect way to have a wrecking ball breaking the old broken system. Or it might just have been easier to implement.

jwestbury2• 3 years ago

Not the fact that the value proposition is poor because its inputs are destructive to society whilst providing questionable incremental value over existing currencies?

bufferoverflow2• 3 years ago

Can you demonstrate this at all? Bitcoin has been mined for over a decade and never came even close. When miners drop off, mining difficulty decreases.

If you're talking about a nuclear war scenario, we will have much bigger problems than bitcoin mining being slow.

paulgb5• 3 years ago

Bitcoin has been mined for over a decade and never came even close.

The problem with using past performance of the Bitcoin network as an indicator of future performance is that the exponential nature of halvings means that each decade is a vastly less subsidized environment for the network than the one that came before it. Over the last decade the network has given ballpark 4.2mm BTC to miners for their services; there are now about 1.7mm BTC available for miners for all time.

0zemp1c• 3 years ago

misses out on the single biggest threat to BTC

Western governments simply outlaw its use and ownership

without the USD, there really isn't even a USA, Western governments live and die by their fiat currencies

outlawing it would not be that hard, confiscate all Coinbase assets would be an easy first step

latchkey6• 3 years ago

The single biggest threat to BTC isn't that. It is tokenized BTC. As soon as enough people realize that there is a lot more utility to bitcoin, as a tokenized version, on other networks, they might stop using bitcoin itself. I did that years ago.

ashwagary• 3 years ago

As soon as enough people realize that there is a lot more utility to bitcoin, as a tokenized version, on other networks, they might stop using bitcoin itself.

That is extremely unlikely due to the introduction of counterparty risks that Bitcoin users are growing more careful to avoid.

TigerTeamX3• 3 years ago

Outlawing Bitcoin assumes quite some things.

1. The governments are competent and could do outlaw it - The outlawing of guns, drugs, alcohol, tax evasion seems to have had the opposite effect. 2. For all of the flaws of western governments, they are still within some kinda laws. Coinbase is a public US based company. They are entangled with pension funds, hedge funds, rich people. I am sure they would fight against this 3. This also assumes people follow the law. In general, people follow the law but when they see their banks implode, prices going like crazy, they lose their job... Well then they might not. 4. This also assumes the current system could survive. If you look at the math you'll see that there are not enough currency to pay of the debt. It is increasingly more levered system that is breaking apart.

greyface-• 3 years ago

The consequences of a 51% attack are greatly overstated. A 51% attacker can prevent new transactions from confirming, and roll back recent transactions. They can't roll back transactions that happened (roughly) longer ago than the sustained duration of the attack. They can't mint extra coins, or double-spend arbitrarily old transactions. Under 51% conditions, you need to be more careful about accepting recently-confirmed payments, similar to 1 sat/vB transactions in a full mempool today. You can still transact, you just need to be patient and careful. The value will drop, yes, but it won't go to zero unless the attacker is able to sustain the attack indefinitely.

pcthrowaway6• 3 years ago

Just the possibility of 51% attacks (if they occur 'occasionally') means people have to wait longer til they can consider transactions settled.

Do they need to wait 4 hours instead of 1? 1 day? 3 days? 2 weeks?

Whatever it is, it's materially significant. What does bitcoin do well now? What does it do better than other networks?

dxhdr• 3 years ago

What does it do better than other networks?

Provides you complete control over your money. You can send any amount to whoever you want, whenever you want, with no third parties capable of approving, disapproving, or delaying the transaction.

Obviously, there are downsides to that. But that's what it does better.

Animats• 3 years ago

Trying to rent 51% of Bitcoin mining capacity in the short term would mean that major Bitcoin miners would have to be set up for remote short-term rental. Are they?

A bigger threat is collusion by the top Bitcoin mining companies. At one time, that was five guys in China. There was a picture of them together at a conference. Not sure what the situation is now.

latchkey6• 3 years ago

Trying to rent 51% of Bitcoin mining capacity in the short term would mean that major Bitcoin miners would have to be set up for remote short-term rental. Are they?

They just need to point their hashrate at a pool which enables rental. Nicehash is a prime example.

See also: https://www.crypto51.app/

Not sure what the situation is now.

It is a pool based in the US. https://miningpoolstats.stream/bitcoin

yellowapple4• 3 years ago

The cost of a 51% attack drops dramatically if you can rent the necessary hardware rather than buy it. Bitcoin mining hardware is available for rent. Would carrying out a 51% attack on rented hardware be possible? Would it be practical? A back-of-the-envelope calculation indicates that the answer to both of these questions is "yes", indeed, that it might be even worse than possible and practical, it might even be profitable.

If it was possible (let alone practical, let alone profitable), it would've happened by now. The article acknowledges this, but doesn't quite grasp on why - that being that the rewards and difficulty are not static. By the time one's able to rent 30,000 of the article's proposed 3.3GH/s miners, the number of hashes required to win a block would be accordingly higher.

Had this article been written a decade ago, it would've likely proposed a hash rate that's readily feasible today - and it would still be dwarfed by the increase in difficulty.

Bitcoin can be inflated through chain splits and also by policy.

Chain splits do not inflate Bitcoin. They inflate the supply of cryptocurrencies overall, but there is precisely one Bitcoin, that being the "one true chain". Bitcoin Cash is not Bitcoin, and the chain split that produced the former did not impact the latter in the slightest; they are entirely separate currencies, and always will be.

As for "by policy", it's possible in the sense that a camel passing through the eye of a needle is possible: a lot of work, and the camel would in all likelihood cease to exist as such. Such a policy change would itself result in a split chain, and it's entirely possible/probable that the unaltered chain would continue on its merry way. In other words: the chain with the altered policy would not be Bitcoin (at least not without the global network of miners and nodes agreeing to it), for the same reason that Bitcoin Cash is not Bitcoin.

I'll just point out that irreversibility is no panacea. If it were, it would be universally adopted as the de facto standard.

It was the de facto standard for nearly the entire history of the very concept of currency. Cash transactions are already irreversible, and legal systems have managed fine with that fact for hundreds (if not thousands) of years.

Likewise:

In particular, if you lose your keys, or entrust them to a third party who decides to defect, then you have no recourse.

If you lose your cash, or entrust it to a third party who decides to defect, then you have no recourse.

In fact, it is arguable that the rise of bitcoin was the catalyst that birthed ransomware as a global industry. A thief can now steal your money with impunity from the comfort of their own living room.

Theives have been able to do that with gift cards, wire transfers, check fraud, and countless other non-cryptocurrency media of exchange for about as long as telephones have existed. Bitcoin being the catalyst of nefarious acts long predating it is certainly "arguable", but even Elastigirl would pull a muscle or two in doing so.

I think the main value of Bitcoin in the long run will be as a store of value, comparable to precious metals but easier to move around.

I agree with this. Between Lightning and the umpteen million cryptocurrencies iterating on Bitcoin's design, I don't think Bitcoin needs to be the currency of choice for day-to-day transactions, but rather for moving large sums of money around and storing it relatively securely (in the technical and valuation senses).

lisper6• 3 years ago

Bitcoin Cash is not Bitcoin

That's true, but that is just branding. The values of fiat currencies are bound to the economies of their sponsoring countries. The value of cryptocurrency is not bound to anything except the name, so if enough people start to believe that "bitcoin" and "bitcoin cash" are interchangeable, it will become so.

And the only reason this is not a problem right now is because the BTC/BTCC split was amicable. Had it not been, had both sides insisted on branding themselves as "Bitcoin", then it would be a lot less clear which side's claim to the name was legitimate.

yellowapple4• 3 years ago

Right, but that necessitates that people actually do believe two sides of a given split chain to be interchangeable. That's not the case for Bitcoin and Bitcoin Cash; they may have a shared transaction history in their ledgers up to the point where their chains split, but after the split there is no way to turn BTC into BCH or otherwise reconnect the chains. Accordingly:

Had it not been, had both sides insisted on branding themselves as "Bitcoin", then it would be a lot less clear which side's claim to the name was legitimate.

The clarity would come from whichever chain a majority of the network adopts. Rogue chains calling themselves "Bitcoin" happen all the time; they're short-lived because they fail to attract consensus that they're the "one true chain".

jerry19792• 3 years ago

As far as I can tell, for most users a 51% would at worst look like their transaction didn't "go through". This is because wallet software waits for the system to mine a certain number of blocks before showing the final wallet balance. A 51% attack that is 1 block deep may actually be a good thing for bitcoin because it would cement the idea of needing to wait for confirmations in the minds of users. In this way, 51% attacks do not kill bitcoin, but instead the attack simply makes the network appear as though it is moving more slowly than it used to because users would need to wait for more confirmations.

lisper6• 3 years ago

No, it's much worse than that. The nightmare scenario for most people is thinking that a transaction for which they are the recipient did go through and then later have it turn out that it didn't, and the money actually went somewhere else. Because of this, the net effect of a 51% attack would be to very quickly destroy confidence in the system for the duration of the attack (at least).

jerry19792• 3 years ago

Wouldn't that nightmare scenario mean that an attacker would need to perform a 51% attack 7-ish blocks deep?

ursuscamp2• 3 years ago

The author is correct, in a sense, that Bitcoin's core security is social consensus, but he falsely equivocates it with fiat currency. They are most definitely not governed by the same sets of incentives. The incentives of Bitcoin ensure its monetary policy won't change, and those incentives have strengthened consistently over time.

He oversells the need of miners to band together to defend Bitcoin. They do not. All that's needed is for nodes to invalidate blocks, which is a simple command. No code changes or anything required. If an attacker is 10 blocks deep into an attack, node operators can just invalidate the first block of the attack, wasting all of the effort and resources of the attacker. Nodes can invalidate blocks longer than an attacker can stay solvent.

Miners must follow the economic majority of the network or risk wasting resources mining a losing chain. Miners aren't rule makers, they're rule takers. This was the main lesson of the Bitcoin Cash fork which the author mentions several times, but maybe he missed the point of it.

jmcphers• 3 years ago

I think the main value of Bitcoin in the long run will be as a store of value, comparable to precious metals but easier to move around.

I disagree with this. Bitcoin makes a terrible store of value because of the constant energy cost to prop up the network. This energy is paid for by diluting Bitcoin's value.

Source: https://cryptostackers.substack.com/p/bitcoin-is-not-a-store...

A systematic critique of Bitcoin's value proposition

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