Comment by WJW
4 years ago
As long as miners can't pay the power company with their mining rewards, bitcoin can't exist outside the fiat system. The mining reward denominated in the currency the miner has to pay their electricity bill in MUST be higher than the electricity cost to mine the reward, otherwise the miners go bankrupt.
Capital-intensive industrial-scale miners might go bankrupt, but the origin of Bitcoin (starting from the whitepaper) imagined an ecosystem powered by effectively spare CPU cycles, where the marginal cost of electricity wasn't a big factor.
The beauty of the design lies in the balance of the incentives -- if electricity is too expensive, then sure miners will drop out, which lowers the hashrate and thus the security of the ecosystem, but remember that if electricity is expensive for honest miners than it will also be expensive for attackers. And if somehow there is an asymmetry where attackers have access to cheaper electricity than other honest miners, well it's likely in their economic interest to simply become miners themselves rather than attackers...
Bitcoin can easily exist at a minimal survival level that is effectively outside the fiat system for all practical intents and purposes, by leeching off free or near-zero cost electricity (I mean, nobody cares about the electricity bill for "folding@home"). In that kind of mode, it may not have industrial scale and you might not want to transact trillions of fiat-dollars worth of value through it, but it can easily exist.
From my understanding that's not exactly how Bitcoin mining works. It scales based on the amount of miners. So if the situation is as you described (value relative to USD tanks - which I find very unlikely due to inflationary nature of fiat) people would stop mining which would decrease the difficulty of mining causing it to use less electricity.
There are however miners using nearly free sources of electricity such as flared gas wells, solar, etc... If Tesla accepts Bitcoin/Doge for solar panels then you may have a system independent of fiat.
I'm just saying it's possible, not that I think it will necessarily happen. Like I mentioned I think BTC's value relative to USD will increase over time due to fiat's inflationary nature (Fed is targeting 2-3% inflation).
> people would stop mining which would decrease the difficulty of mining causing it to use less electricity.
This is true, but then you have a bunch of costly mining ASICs sitting idle. The bitcoin network does not pay miners out of the goodness of its heart but because it needs a very high hash rate to defend against double spend attacks. Guess what those unused ASICs might be very effective at? A prolonged fall in mining power caused by a falling BTC price is a death sentence for bitcoin as it would lead to massive attacks by opportunists renting hashing power to double spend their coins. You can already see this in many smaller coins.
> nearly free sources of electricity such as flared gas wells, solar, etc
Those may be cheaper than regular power, but they are not free. Taking solar as an example, you need to invest capital to buy the solar panels and they have a finite lifespan. Cost divided by lifespan gives you the running cost in $/year. Similar things are true for flared gas wells; you still need to capture the energy somehow and generators are not free.
> If Tesla accepts Bitcoin/Doge for solar panels then you may have a system independent of fiat.
This just moves the problem by one degree of separation. Unless Tesla can buy solar panels for bitcoin, they will need to sell crypto for fiat to buy their inputs. This goes all the way down the supply chain down to the real-world miners who dig up the ores for the solar panels and even they will need to pay their taxes, which you cannot do in bitcoin.
> I think BTC's value relative to USD will increase over time due to fiat's inflationary nature (Fed is targeting 2-3% inflation).
Perhaps. I suppose that this will depend on how much the maintenance costs in electricity and miner ASIC replacement costs as a percentage of total bitcoin market cap per year. If these costs are higher than 2-3% per year, bitcoin will see a net outflow of fiat as running costs and can only rise in price if new users continuously flow in (and of course, only ~7 billion potential users exist).
Also, it might be interesting to read up on why central banks universally target a low but nonzero inflation. There is a ton of established theory about why this is desirable and none of it is based on "let's screw taxpayers". Throwing that away will basically guarantee that crypto will never be very useful to pay your bills with.
That's a really interesting scenario. But I'd imagine if double-spends became a persistent threat, they'd just hard fork to a slightly different hashing algorithm. That would brick all the pre-existing ASICs.
In the 2018 bear market, BTC lost 82% of its market value peak-to-trough. Double spend attacks by dark ASICs didn't become a factor then. So most likely you'd have to see BTC fall by 95% or more before this became a threat.
>>> This goes all the way down the supply chain down to the real-world miners who dig up the ores for the solar panels and even they will need to pay their taxes, which you cannot do in bitcoin.
Unless more countries follow El Salvador's example, and accept cryptocurrencies as legal tender. If El Salvador hadn't banned metals mining in 2017, you could the guys digging up ores with BTC today.
I can't pay my hydro bills with shares of a private company either or japanese yen either, it doesn't mean those things have no intrinsic value.
The difference is that you can pay someone with JPY and that's the whole transaction. When you pay someone in BTC, you also have to pay the power company with something. The system is an inherently leaky bucket.
> When you pay someone in BTC, you also have to pay the power company with something. The system is an inherently leaky bucket.
The same holds for, say, transactions in US dollars. Here, you also pay your bank or your credit card company.
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no one said that. you're paying in some fiat, right?