A problem with mining bitcoins is that the activity itself produces no value (But does burn silicon, rare earth metals, and electricity). Mining it is an economically pointless endeavour - it is like basing a currency on the activity of digging ditches, and filling them.
No, the mechanism by which that service is operated is inherently wasteful. You need to continuously increase your computing resources until half the resources in existence are devoted to Bitcoin mining.
Meanwhile the systems developed by crypto researchers more than twenty years ago solve the same problem, have well-defined security notions and guarantees, use substantially less power, scale better, permit secure offline transactions, and do not require a complete rethinking of modern economic theory to make sense. Of course, those systems all failed due to poor management, lack of demand, and so forth; Bitcoin has seen better management and appeals to a particular political position, and has thus succeeded (at the cost of an increasing amount of coal burned for its sake).
> Meanwhile the systems developed by crypto researchers more than twenty years ago solve the same problem
The difference is that those systems did not solve the "double-spend" problem. Every single prior ecash system required some sort of centralized trusted entity (or a pool of them) in order to ensure double-spends didn't occur.
Bitcoin is the first ecash system that is truly decentralized. This is what makes it technically superior to prior systems, and this is why it is succeeding.
"The difference is that those systems did not solve the "double-spend" problem"
Can you define "double-spend" in a precise way without a central authority? Academic systems define double spending in terms of the bank -- loosely, a double-spending attack is successful if the bank accepts more money for deposit than had been withdrawn; security against double spending is defined as the inability of any polynomial time algorithm to successfully double-spend with more than negligible probability. Note that this definition makes no mentioned of how this security is achieved, nor does it bound the number of users the attacker can control (indeed, the attacker could control all parties other than the bank under this notion of security). The definition is slightly weakened for systems that support secure offline transactions: (loosely) if and only if more money is deposited than is withdrawn, the bank will be able to identify the parties involved in the attack and can prove that those parties acted maliciously (in a way that can be verified by all other parties).
In the case of Bitcoin, you cannot make any statements about deposits or withdrawals if you try to define security. It is also unclear how one might define security, since there is nothing wrong with a party that spends more money than it receives (due to the mining protocol). At best we can only speak in vague terms and vague notions of what should happen in Bitcoin versus what should not happen with Bitcoin.
"Bitcoin is the first ecash system that is truly decentralized."
That is debatable. On paper, Bitcoin appears to be decentralized, but on paper Bitcoin scales extremely poorly. To make Bitcoin scale well, someone occasionally declare a particular branch of the block chain to be the block chain, and all the users must accept this judgment. That is basically what happens now; the Bitcoin developers ship a client with this snapshot state included.
If you doubt the power that the Bitcoin developers have over the network in practice, consider the block chain fork a few months ago. That fork was triggered by an update to the "official" Bitcoin client (worse, it was not even caused by a "snapshot;" it was caused by a seemingly harmless deviation from how the previous client worked). In practice the Bitcoin developers could trigger another fork at any time, and could potentially profit by it.
"This is what makes it technically superior to prior systems"
Except for all the technical deficiencies. Even if we take as an article of faith the fact that Bitcoin is fully decentralized, even if we ignore the complete lack of a security definition, Bitcoin has technical deficiencies compared to academic systems. No support for secure offline transactions limits Bitcoin's usefulness in real-world applications. Enormous amounts of computation are needed to keep Bitcoin running, vastly more than are needed in academic digital cash systems. Academic systems have rigorous anonymity guarantees (except for "cheating" users); Bitcoin has no such guarantee and requires someone to operate a "mixing service" to provide some kind of anonymity.
I think distributed transaction verification service is of great value.
Sometimes people forget that mining has an important property: it is relatively fair compared to other mode of distribution of coin. I would prefer a fair system rather than a system controlled by single entity that distribute the coin as it sees fit.
The mining profit is approximately the percentage of miner's computing power divided by total network computing power.
It's not - but the resource & labour cost of printing a $100 bill is many orders of magnitude different from the resources and labour you can buy with said $100 bill. (Never mind that a lot more money exists electronically, then physically.)
If that were the case with BTC, nobody would be mining it.
Is there value in maintaining safe money stores and transaction integrity? Yes. Is that value the same as the value of all outstanding currency in the world? For anything but BTC, the answer is 'Hell, no!'.
"It's not - but the resource & labour cost of printing a $100 bill is many orders of magnitude different from the resources and labour you can buy with said $100 bill. (Never mind that a lot more money exists electronically, then physically.) If that were the case with BTC, nobody would be mining it."
Err, your logic is flawed. It is the opposite. If it were the case with BTC, then many people would be mining, which is actually what is happening!
In other words: you claim that the resource & labour cost in making and mining 1 Bitcoin with an ASIC mining are huge. This is wrong. The difference in orders of magnitude is so big that this is precisely why the mining activity is currently exploding: there are huge profits to be made due to this difference between cost and value.
You're half-right - I clearly needed more coffee when I was making that post.
However, my claim that "the resource & labour cost in making and mining 1 Bitcoin with an ASIC mining is huge" is completely correct - because even it costs $8,000 of resources, to mine $10,000 of BTC, it would still be a profitable enterprise. (In the meantime, you just wasted $8,000 of resources, to make... Nothing that puts bread on the table, a roof over my head, etc.)
When printing paper money, your profit margins are orders of magnitude greater - if it weren't for the part where 'mining' it is illegal. Since the government has the sole monopoly on printing money, it is (Most of the time) far more valuable than the paper it's printed on.
BTC, on the other hand, is barely more valuable then the 'paper' it's printed on - or, the electricity that was used to produce it.
If producing BTC were anywhere nearly as resource-efficient as producing paper money, the margins for mining it would go up and everybody would be mining it, instead of doing productive work (Producing goods and services) to earn it.
The government's monopoly on printing currency is exactly what keeps it more valuable then the sum of its parts.
As such, if you think that there's value in preserving the integrity of monetary transactions, keeping track of wallets, etc, BTC is the wrong horse to bet on. It can be done a lot more cheaply and efficiently with traditional currencies.
"However, my claim that "the resource & labour cost in making and mining 1 Bitcoin with an ASIC mining is huge" is completely correct - because even it costs $8,000 of resources, to mine $10,000 of BTC, it would still be a profitable enterprise. (In the meantime, you just wasted $8,000 of resources, to make... Nothing that puts bread on the table, a roof over my head, etc.)"
I think you are completely ignoring the potential benefits that a decentralized currency has on society. Therefore you can't say that Bitcoin's proof-of-work is going completely to waste. Bitcoin is already, today, starting to concretely help people in a way similar to "putting a roof over their head":
- it is helping Argentinians escape their government's stupidity who is inflating their currency and limiting access to safer currencies (eg. USD) [1]
- it is helping Iranians working or living abroad to send bitcoins to their families [2]
- it is freeing people from financial censorship, eg. oppressive governments freezing bank accounts or donations to political opposition
- etc
Bottom line, it is too early in Bitcoin's history to tell whether the SHA256 proof-of-work is really a net waste or not. You just cannot make the claim that Bitcoin "produces no value". If I can help reduce financial censorship by spending some computing cycles on Bitcoin, I will do it.
> because even it costs $8,000 of resources, to mine $10,000 of BTC, it would still be a profitable enterprise. (In the meantime, you just wasted $8,000 of resources, to make... Nothing that puts bread on the table, a roof over my head, etc.)
Huh? I don't understand this analysis at all. If a musician takes $8,000 of resources (recording equipment, labor, etc.) and creates an album that earns $10,000, is that also $8,000 of wasted resources? You list things like food and shelter, so is your point that all resources not used directly for basic human needs are "wasted"? Remember that the musician (or the bitcoin miner) can use their $2,000 profit to purchase their basic human needs.
> Since the government has the sole monopoly on printing money, it is (Most of the time) far more valuable than the paper it's printed on.
It would be more fair if you also tried to estimate the total cost of government, or of the part of the government that manages the centralized currency. It's definitely not just the cost of making physical bills.
> BTC, on the other hand, is barely more valuable then the 'paper' it's printed on - or, the electricity that was used to produce it.
The reason a bitcoin is valuable is because it is definitive proof of difficult work. This is fundamental to how the decentralized trustless transaction log works, and is the only reason bitcoin users can be relatively certain that there is no fraud on the network. I think you see this as wasteful because you don't consider the cost of governments' management of currencies.
No, because he created $10,000 of value for society (In this case, an album.) On the other hand, creating $10,000 of paper bills does not create $10,000 of value for society - instead, it transfers value from the rest of society, to me.
Spending money to create currency does not add any value to society. (Or at least, it is a horrible investment, compared to spending 8 cents to print 100 x $100 bills)
And yes, there's more costs to printed currency then just printing bills. However, it does not come anywhere close to the value of the currency. The same cannot be said for BTC. There's 1.2 Trillion printed USD in circulation. I strongly doubt that the cost of printing it is anywhere approaching that amount. There is a billion $USD worth of bitcoin in circulation - and the amount of resources expended on producing it is a much larger fraction of the monetary base.
BTC is not valuable because it is definitive proof of difficult work - its valuable because it is 'difficult' to create, which protects your BTC against inflation/counterfitting. There is nothing inherently valuable about doing difficult, pointless work (Or any work - really), that provides no value to anyone - except shovel manufacturers.
> No, because he created $10,000 of value for society (In this case, an album.) On the other hand, creating $10,000 of paper bills does not create $10,000 of value for society
I disagree. Paper bills and bitcoin provide value for society, as a convenient and fraud-exempt (at least for bitcoin) means of exchange.
> BTC is not valuable because it is definitive proof of difficult work - its valuable because it is 'difficult' to create, which protects your BTC against inflation/counterfitting.
The "difficult to create" part is the same as proof of work.
I'm not a big BTC believer, but building that infrastructure for the paper money system took hundreds of years and is STILL evolving. That's to say nothing of how bureaucratic the entire thing was.
How are paper systems evolving? I can't think of anything besides new creative euphemisms for the thrift like quantitative easing.
Central banking is a relatively new practice from the late 1700's. Ben Franklin encouraged the printing of new notes because printing was his business (this was before he had much political sway) and I consider this one of his bad contributions.
Less than Bitcoin, at least per capita, by an enormous margin (multiple orders of magnitude). You do not need half the computing power in the entire world devoted to paper cash, the banking system, or any of the other methods of making secure payments (and even insecure payments) that exist outside the universe of Bitcoin.
Computing power is cheap and will be cheaper. People who track forgery, look after money, look after people who look after money and so on are expensive.
Consider for a moment the cost of a "51% attack" on Bitcoin. That is basically a lower bound on the cost of running Bitcoin, if you include the value of Bitcoin hardware. Now compare that cost to the amount of money that a bank spends on security, versus the amount of money that same bank processes. The ratio of Bitcoin's total value (basically low billions) to the cost of running Bitcoin (low billions) is much smaller than the scale of a bank's operations (hundreds of billions) versus the amount spent combatting fraud (hundreds of millions).
The only reason nobody notices this cost is that right now, the payoff from mining outweighs that cost. Yet a bank's operations are still vastly more profitable than Bitcoin mining (which is critical in maintain Bitcoin's security), even with the cost of fraud mitigation, and even counting only the cost of electricity required for Bitcoin; were this not true, banks would be running huge Bitcoin mining operations and only dealing in cash when they need to pay their taxes (which they sometimes do).
Do you think that only cost of traditional currencies are the resources that banks spend? What about the cost of the government that guarantees that the currency is worth anything? What about law enforcement that prevents money from being printed? What about costs of people that move and guard physical cash? What about the cost of fending of attack on your currency? What are the costs of having multiple currencies and exchanging it? What are the costs of additional risk to the people forced to operate with multimple currencies while doing business? I'm sure there are some costs of having traditional money that you are missing.
I am sure that if you add all the costs you mentioned together, it is still less than the cost of running the Bitcoin network. You need half the computing resources on the planet to be devoted to Bitcoin for it to be secure. We do not devote anything close to that to maintaining or securing paper money, even if you include the entire government (which would not be any smaller in a world of Bitcoin rather than paper money).
> You need half the computing resources on the planet to be devoted to Bitcoin for it to be secure.
Why do you say that? Bitcoin hardware is specialized and much faster at the task than general purpose computers. You need to spend just a small fraction of resources that all supercomputers cost to build and run to outpace them in calculating Bitcoin hashes.
I still wonder why people aren't paying more attention to Peer-to-Peer Coin (PPC), which uses a blockchain-growing algorithm that depends on the age of the coins you own rather than than the amount of work you do[1]. It's far better for the planet and far more resilient against an attacker with more resources (like the NSA).
Bitcoin wouldn't have the properties it does if the mining structure were changed. People seem to like bitcoin more and more as time goes on, hence bitcoin mining has value. If you don't like that answer, then just remember: all value is subjective.
Mining bitcoins produces proof of work, which has value. The only way (as far as I know) to have a decentralized trustless currency is to base it on proof of work. This is in no way analogous to digging ditches and filling them.
