How economics broke the Bitcoin monopoly & what are the consequence?

Foreword:

I’m dedicating this latest blog entry to the moderator that deleted my post on bitcointalk.org, the post was an expression to give some simple advice to Patrick Byrne the CEO of the company “overstock”  the first part of this is the information i would have given him basically in private, but due to this creative censorship of myself I think it would be better shared publicly, as it is Crypto Currency common knowledge anyhow, it’s just that it is often wrapped up in a lot of technical jargon, fortunately i can break that down for anyone to read.

 

First some basic facts:

Bitcoin is a “supply side monopoly”   this is due to it having a complete and dominant mining monopoly, why this idea is difficult for some economists (or anyone else) to fully understand, is because the mechanics of such a “global” monopoly have not existed before on earth, so we could say the whole idea is alien to human thought in a manner.

 

But I have fortunately found a way to explain it, it goes like this:

“Liquid Gold” on planet “Crypto Currency” (explaining difficulty monopoly)

On this planet lets say there is a particular element, lets call it “liquid Gold” and it is only available in a fixed amount on the entire planet;

But there is an important difference – if one tries to mine this element it affects all the other parts of the element, so in effect all mining locations have a relationship, in reality all the “liquid Gold” is linked all across the planet.

So lets say on our planet  we have two mines:

  1. Location A you have a “liquid gold” mine.
  2. location B another Mine on the other side of the planet.

But the difference is on this planet (remember) is that all the “liquid gold” on the planet is linked together and every mining site has a relationship.

So what happens when mining occurs.

The miners at location A start to mine the “liquid Gold”  and also the miners at location B.

But due to advances in technology (specialization) The miners at location A can extract 100% more than the miners at B now remembering that all mines have a relationship, (because “liquid Gold” is linked all across the planet) this in effect makes mining more difficult for the mine at location B  because “liquid Gold” is now harder to extract in proportion to how much better the miner at location A can mine it.

Furthermore the hardware and advance of technology (the specialization) is unavailable to many on the planet (it’s rare), and the initial sales of the “liquid Gold” allows the miners at location A to keep this technology monopoly.

The net result is that as long as “liquid Gold” is still purchased by the market (confidence) the miners at mine A can continue to increase their technology monopoly and drive  the other mines effectively out of business. (or at least out of any profitability)

 

Bitcoin mining monopoly.

This is in effect the Bitcoin story, the net result is that the market of Bitcoin producers is very small in numbers terms of people, many people talk about “Network hash-rate” or “power consumed” this is a complete misrepresentation of participation.

More power and hash rate does not equal more participants, in fact it equals less net participants, it equals better technology (specialization) that fewer people have. (ASIC chips)

But because of the increase in “hash power” & “Computing hash power”, this drives difficulty out of reach for the majority of the market (just like our example.)

so that explains basically how the initial Bitcoin monopoly started, lets move on to what happens next…

 

but wait, monopoly you say? So what? life wasn’t mean to be easy or fair right?

correct, but that’s not the issue, mathematics does not care about fair, but the Bitcon protocol is designed to basically try to break the monopoly, and it is pretty effective as I will explain.

The problem is that the initial monopoly has meant that it is impossible for the market to price the entity, because the initial monopoly (as described above) was very effective and literally, the participants in the monopoly (in a very human way)  could “choose” not to sell the entity and effectively manipulated prices in an upward direction, with even the smallest of demand on the upside.

Again, so what? monopolies exist, this has been human history for a long time..

Well however i will explain now how this initial monopoly is breaking down, {that’s got to be good right?}

well, no, actually it presents multiple (possibly terminal) problems in the medium to longer term.

The biggest cause is “Economics”, Bitcoins future (and biggest) issues relate directly to how this initial monopoly on mining is managed in the future, and we can see the scrambling right now to try to save it –  :

Geothermal Gold: Why Bitcoin Mines are Moving to Iceland

http://www.ibtimes.co.uk/geothermal-gold-why-bitcoin-mines-are-moving-iceland-1468295

Iceland.

Key points:

  • Mining is not profitable for most of the (initial monopoly) any longer.
  • If Mining monopolies dump the mined BTC on the market it will crash to under $50 (in all likelihood) (perhaps even lower) This causes an unprecedented price “standoff” (see later)
  • If you believe the “good news story” of the 9 million Sell and Buy recently on Bitstamp, then I have a bridge for sale – robot trading with “yourself” was very common in Bitcoins recent past. (I’m very skeptical)
  • Mines are moving to Iceland to save on power, because another competitor has driven mining out of profitability.
  • The only hope for this initial mining monopoly is to sell unprofitable mining “cloud” contracts to unwitting “cloud miners” (basically charity)
  • They will be asking people to give them fiat dollars to build more machines to keep up with the competitor but the cost of the contract will never be returned.
  • I.e this is similar to a gold mine issuing shares; the shareholder buying them, but the Shares both dropping in price from IPO and never returning to that value and also never returning a dividend (sound like a good deal?)

 

So who is the new competitor?

Inside one of the world’s largest Bitcoin mines

http://www.thecoinsman.com/2014/08/bitcoin/inside-one-worlds-largest-bitcoin-mines/

“A week after I visited the last bitcoin mine in northeast China, I was able to arrange a trip to a larger, even more secretive operation. These exclusive photos provide a glimpse inside one of China’s largest bitcoin mines.”

China

 

 

How economics broke the Bitcoin monopoly & what are the consequence?

Good old economics is the actual number one enemy of the initial Bitcoin mining monopoly.

how does that work?

Well (and some people are going to find this immensely ironic and amusing) Primarily because of the distortions in fiat money systems, particularly the distortion between China and “The West”. (basically the Yuan and the USD)

I don’t need to give most people (economists)  a history lesson about the fact that due to exchange rate differentials (particularly the Yuan Peg)  most (low cost) manufacturing of the world has immigrated itself to China, this of course includes the manufacturing of the  all important SHA256 ASIC chip that is used to mine Bitcoin.  (things become clearer)*

———update—

*Update – to make sure “things become clearer” the need for this SHA256 ASIC chip is directly related to the ALGORITHM, which is why when Sen Paul J. Massicotte referred to the Algorithm in reference to “what did you get wrong” that was a pretty landmark event for the education and understanding of crypto currency, I  feel.

if the algorithm is different the specialization is different or eliminated – thus this, (as the senator pointed out) is “what we got wrong” ( to a degree)

https://kolinevans.wordpress.com/2014/10/09/watch-this-amazing-exchange-between-paul-j-massicotte-and-andreas-m-antonopoulos/

———update—

Also due to (of course) the massive foreign debts that “the West” runs and our own home grown monetary system “Banking” collapse,  China has been one of the only “spheres of influence”  that has been growing, China has been expanding GDP at least at any real rate for the last 5 or more years (At least).

This of course means there is vast amount of under utilized manufacturing capacity , add a touch of free market corruption in which you have possibilities of free “state” energy and things begin to add up..

The answer is unless the initial monopoly can find some way to literally “shift the economics of the world ” they will soon completely lose their the monopoly, and in all facts are probably by now a smaller  “competing partner” in a difficulty arms race, that they will almost certainly lose.

Things become more amusing, when we can consider that perhaps a large “Government” industry or agency could try to compete against the free market in China and  secure this monopoly, but it’s hard to see any great motivator in that regard.

 

Ok so the monopoly is broken, what are the consequences?

Well put it this way, the protocol was really designed such that there really shouldn’t  be any monopoly, in fact the presence of a monopoly can be terminal (if abused) (under certain condition) to the entity, when i say “terminal” i mean a total loss of confidence due to either extensive disruption of the system (with knowledge of who that is) or a failure of the “double spend” security.

So you see in terms of this being an important issue for Bitcoin, it is quite up there.

 

– Update –

I know some of the Draper University students might be reading this so for further reference  please see this analysis and study by the Cornell university researchers; Emin Gün Sirer & Ittay Eyal.

Bitcoin Is Broken

http://hackingdistributed.com/2013/11/04/bitcoin-is-broken/

 

How A Mining Monopoly Can Attack Bitcoin

 

Hmm ok , but wait..why haven’t we seen these problem (as described) if there has been a monopoly nearly from the start of Bitcoin?

Because of human nature of course,  lets put our “thinking logically” hat on…

The initial monopoly was the creators (developers) and the people that arrived immediately afterwards, so when you think logically about that question, they had every incentive to work together and create the “appearance” of a decentralized mining market with great volume and fantastic opportunity !!

and some of it was real, but only a tiny % and very early.

Now our free market interlopers have out mined and out “economics” the initial monopoly , what are their motivations?

would you like to hazard a guess?

if you guessed “to extract the most wealth from the system and then use the ultimate power they have over it to manipulate it to their advantage” you might have been pretty close. (in my humble opinion)

because if we use the power of logic again the competitor to the monopoly had to basically start from the halfway point and “catch up” they are driven by profit, they didn’t create Bitcoin and they might have plans to adopt a completely different crypto currency system at a later point, it’s all speculation, but what is not speculation is the very real possibility that the large competitors to the initial monopoly already have control of the largest % of mining.

This might better explain all my price predictions and the “why” around why they were correct.

 

Now my simple message to Patrick Byrne:

Those are the problems, but for the specifics of what you are trying to achieve the solution is very simple and relatively very very cheap, the innovation of the open source market place has already solved basically all the issues related to the above topic,(basically monopoly in case i haven’t said the word enough)  Bitcoin PoW would need drastic and dramatic changes to adopt any of the solution.

none of that is even being discussed right now, so you are proposing to layer a XCP (counter party) “protocol layer” on top of the above described BTC Blockchain, then the XCP will build a smart contract system to make a functional decentralized stock market.

So you see you want to basically do this:

 

{Top user facing}

  • The Decentralized Stock Market System.
  • XCP Counterparty Smart Contracts.
  • Bitcoin PoW

{Bottom Engine}

 

I don’t personally know what that is costing you, but I can tell you this, it can obviously still be achieved, but the described risks I have outlined are large. (see bold)

The good news:

Everyone can still win, even if you chose a different PoW system, everyone can walk away happy including the Bitcoin team and the XCP team and yourself with a functional system.

(did i mention political analysis) education in the market place is so low, you can still say you “used a bitocin protocol” (and not distort the truth)  and you would in practice still use XCP (counter-party) as the modification to the code would be minor (tiny) the difference would be you would eliminate all the above described and referenced possible future problems.

and no the solution I’m suggesting is not the Quark PoW algorithm, but there are many solutions and they are common knowledge in the open source scene, contact me for my “flavor” of solution or seek open source peers but here is what i would rule out:

  • Anything that isn’t PoW
  • PoS (its too “complex”) (DPoS is interesting but not tested enough)

This decentralized “stock” market place will happen, its inevitable you just seem like a nice guy and I’d rather you don’t throw lot of money away to have another (more viable) system simply replace it.
I don’t deny BTC will be around for an indefinite period but it is the getting from where we are now to what I’d see as a viable PoW system that could be “more than disruptive” to an entity being derived from it. (Like a system you propose)

So my advice is simply get multipe points of advice.

 

Regards

 

Kolin Evans.

“decentralized economist”

 

 

 

 

 

Advertisements

6 comments

  1. Interesting, but have you considered what happens when mining advances stop making such large leaps. Eventually they will level off, which causes hardware manufactures to scale out instead of up. This means that mining hardware will become very cheap as manufacturers are forced to sell more units with smaller margins. I wouldn’t be surprised if we see ASIC co-processors attached to videocards or act as heaters.

    If there is a healthy market, then market forces should prevent centralization on its own. I see large mining oops burning out in the arms race and liquidating their assets. Most of these ops are funded through VCs which have short time horizons and high ROI expectations. If their expectations are not met, they will bail leaving cheap hardware to be picked up by hobbyists. The interesting thing is that hobbyists have a primary income, so their ROI horizon is 5-20 years out. They’ll mine as long as its fun to them.

    Maybe I’m wrong, maybe mining will become even more competitive with ops creating secret features that give them the edge and they never sell that hardware to the public. Maybe mining will end up pushing ASIC fabs beyond microprocessor fabs and advances us towards graphene faster. Making a SHA256 ASIC is far easier than building a complex micoprocessor. It’s a raging battle of efficiency and the higher the price of BTC goes, the more it will rage.

    1. Good reply – where I would disagree with you is you have missed something out of the equation.

      The efficiency of software over hardware.

      your response solution is approaching the problem and saying:
      “well this is the way it is, fixed, and this is the successful design and the economics will adjust around this design.”

      what i’m saying is this:

      “The design is flawed at the algo software and economic level, the price is not a market price (i.e fake) and economics will not shift (reality won’t ajust itself to the flawed model), more likely the monopoly owner will push it to its inherent price value, then the market will move onto a more efficient design.”

      so we both could be correct, i’m confident that the presence of monopoly in the specific terms of single specialization, and the lack of a response from the market = flawed.

      Software innovation has already solved the problem, but the market education will not catch up for a while.

      * edit to make more clear.

    1. Hi great question!

      The answer is they would want to.

      But English is evading me again , so as the game theory algorithm starts of course there are the least amount of players you see and can only multiply from there. (Competition that is ) ( there is a price paradox here as the price relates to monopoly and means in turn (the paradox) more demand for competition, but ill not go there)

      So what I’m saying is the entry of a new competitor(s) by default hurts the { deception of decentralized market} because it breaks the trust .

      So you see less trust will equal a breakdown of that effect.

      Joe + Joe trust each other, but Joe + joe and Sam (they don’t know) don’t really trust each other..

      Joe + Joe trust each other, but Joe + joe and Sam and Simon (Simon doesn’t know Sam) = less trust.

      And both circumstance and evidence suggests this is correct for example the “51% pool” is an indicator of that, it would not have happened with a perfect monopoly as all players would make “arrangements” for the appearance of distribution.

      So answer is yes they would want to, but who makes that deal?
      and it is next to impossible to maintain, because each competitor does not trust the other (as it is meant to be)

      What it means for price is as i described , wealth extraction i.e they will do everything possible to gain as much wealth from the entity because that’s is what humans do.

      Then any majority monopoly will abuse that to maximum advantage.

      Its not the end of the world its just not bullish for the price in the short term. And will probably need a hard fork. Crypto is here to stay.

      * edit for better english

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s