Comment by didgetmaster
15 hours ago
It sounds very similar to things like oil production, gold mining, and even farming. When the price is high, everyone wants in on the action. As supply explodes, the prices drop. Once prices get low enough, the costs to pump the next barrel of oil, find the next ounce of gold, or harvest the next acre of a certain crop; exceed the reward. When that happens, wells are shut down, mining operations suspended, and different crops planted. The cycle begins again.
There's a soft failure-mode for bitcoin where due to the alternating difficulty adjustment, you could end up with people only mining every other 2016-block adjustment.
Let's call this cycle A and cycle B.
If A is too hard, miners drop out, cycle B gets easier, miners flood back, cycle A gets harder.
This results in the hard cycle getting longer and the easy cycle getting shorter.
This isn't completely critical as there is I believe a small damping effect, so it isn't completely lethal to bitcoin, but a key thing about bitcoin mining is that whether other people are mining or not doesn't actually affect your own profitiability.
Other people dropping out doesn't actually mean you get more bitcoins per hour/watt, it only affects the next difficulty adjustment as a secondary effect.
The damping effect is that part of your costs are the hardware, space, depreciation etc. leaving that stuff idle costs money - so it makes sense to mine in the less profitable periods too.
That depends on each miner's energy costs, so long as (variable cost of energy - revenue from coins) < fixed costs. It's still negative cashflow either way, but the monthly losses have to be weighed against the cost of going insolvent and losing the hardware.
Yes though AFAIK electricity is a large %
Crypto-miners are switching to AI token farming when bitcoin is low. They have compute that's both installed and powered, so why not do what pays better?
7 replies →
The difficulty can only adjust by a factor of 4 which also limits the incentive change. You'd need more than 90% of miners to disappear to start seeing actual problems.
I think you're right, it's counterintuitive but less competition means less rewards to share for those who keep mining. Though transaction fees / hour shouldn't decrease, maybe your share of that is bigger.
I thought the rate of mining was tied to the maximum transaction rate the network can support?
It's the other way around, and there's no obligation to even carry transactions when mining, although it's incentivised through fees.
Your mining rate is simply your hash rate vs the hash difficulty.
Conceptually, it's analoglous to rolling random numbers in (0,1) until you get to a number smaller than 1/X, where X is large.
How long it takes you to do that, isn't dependent on how many other people are also trying to do that, if you get 1 hit per hour, then lots of other people getting hits doesn't actually stop you getting your 1 hit per hour.
Now, that's not quite the whole truth, as there's a small amount of time needed for propagation of the previous chain, but with an average hit globally of ~10 minutes, that's not actually a big factor.
What could happen to incentivise people is increased fees if blocks get less common due to dropped miners, there'd be more competition to get into blocks if they start filling up.
That combined with the fixed costs such as depreciation as othes mentioned, keeps the risk of this form of failure to a minimum.
Satoshi thought of everything, man.
Except people wanting to do more than 15 transactions a minute. Or that to scale everyone would need to store a petabyte size blockchain.
https://en.wikipedia.org/wiki/Lightning_Network
I have been paying for my VPN with lightning payments; it takes less than one second to go through.
11 replies →
> Except people wanting to do more than 15 transactions a minute It's more like 7 transactions per second, which is still absolute crap, but that was after the original Bitcoin project was kidnapped. There aren't such limitations in the original Bitcoin (forked as Bitcoin Cash)
> Or that to scale everyone would need to store a petabyte size blockchain That is addressed in the whitepaper (SPVs and pruning)
Except for the inevitable and obvious fact that proof-of-work creates a self-sustaining primary incentive for energy waste more pernicious than has ever been seen in any other financial or commercial enterprise, obliterating any hope of having energy that is too cheap to meter.
Isn't this kind of the opposite?
Mining Bitcoin requires both hardware and electricity, and the cheapest electricity is solar. There isn't any severe scarcity of the raw materials to make solar panels, or of sunlight, so Bitcoin miners can buy as many solar panels as they want and it would only increase the economies of scale for producing them for other purposes too.
Solar has inconsistent output. There is none at night and it varies based on weather during the day. Mining hardware wants a fixed constant amount of power. The logical thing for miners to do is to somewhat overbuild the amount of generation they need and then sell any surplus to the grid, and sell to the grid during the day and buy it back at night. The same incentives hold if the miners and the generators are two different parties, and the result is to increase the amount of generation capacity by more than the amount of consumption and have "too cheap to meter" during periods of above-average generation. (You were never going to get "too cheap to meter" during periods when generation is low and demand is high.) And even during short periods when demand significantly outstrips supply, then their incentive is to stop operating those few days out of the year because the spot price of electricity makes mining unprofitable then, which allows the generation capacity installed to do mining be used to support the rest of the grid and inhibits the price of electricity from rising above the point where mining becomes unprofitable even for people who already have mining hardware. It's basically a buffer that buys electricity when it's cheap and sells when it's expensive.
Bitcoin has a volatile price. When the price is high, miners buy hardware and increase or pay someone else to increase generation capacity. When the price declines, the mining hardware becomes idle but the power generation capacity still generates fungible electricity that can be used for any other purpose. The result is that miners pay to install a lot of generation capacity during the boom, and have the incentive to prioritize investing in more generation rather than newer/more efficient mining hardware because it's the thing that's still worth something if the price declines, and that generation capacity then gets offloaded into the grid during the bust, with the result that grid prices go up some during the boom and down by even more during the bust. By the next boom some of the generation added last time has already been sold to non-miners or locked into long-term contracts so now they're back to adding new capacity again.
"Incentive to fund increases in generation capacity but then not use all of it" has what effect on average prices?
3 replies →
Now compare it to the annual energy use for the creation/printing of money and funding of infinite wars due to the Federal Reserve having the ability to print money out of thin air at the cost of future generations.
Clearly not because they created wallets that they can’t even use without unmasking their pseudonym. Seems pretty stupid to me.
Doesn't this assume that traceability of all transactions wasn't a goal?
The difference is that the quantity of what is being supplied is a factor with supply of oil/gold/grain/etc.
For mining it is just necessary that it happens.
The amount of work in mining is way higher than is required to prevent another party from being able to overwhelm the Blockchain. It is that high because of the subsidy of the mining reward means if Bitcoin has a high value the reward is worth a lot.
This is factored in with the halving of the reward. Either the price will increase exponentially or the mining reward will drop. Causing mining to reduce to those who can be profitable from fees. Which rewards those who can mine most efficiently, it becomes a supply and demand calculation in a market where there are relatively low barriers for competitors.
> The amount of work in mining is way higher than is required to prevent another party from being able to overwhelm the Blockchain.
Isn’t that exactly the point? Bitcoin incentivized wasting resources. It is, according to your own comment, unnecessary to use so much computing to keep bitcoin going. But it’s being used.
There is an interesting missing link in the feedback cycle with Bitcoin though - the same amount is produced regardless, supply does not contract with demand.
Yep economics rules everything around me