This is specifically about Bitcoin, and does not apply to other coins that don’t have a fixed supply, or those that use a different consensus mechanism.
For anyone who stumbles across this comment in the future, the argument is basically that there is no market mechanism to ensure transaction fees stay high enough to maintain block security. The argument hinges on the assumption that miners need to be rewarded at least 1% of daily transaction volumes for them to be willing to spend money on the ASICs needed to mine blocks.
You can collateralize Bitcoin, and that is really where Bitcoin’s future lies, its collateral to recapitalize the financial system. The dynamics of QE operate like an auto-immune disease, its making collateral harder to come by, debt instruments become MORE expensive, because the Fed is effectively bidding up the price. However, this creates a new paradigm where all assets are higher in value than where they should be, if we’re operating in a normal interest rate environment (by normal, one that doesn’t have massive Central Bank interference to effectively fix the market rates). This is why we have such a monopolized economy as well, it makes borrowing costs cheaper for those with the best ability to access credit. Thus, all assets become too expensive. This leads to extreme inequality because few people under 40 can afford to have normal things people want, and leads to this extractive economy we operate in. This also becomes impossible to reverse too because the Fed raising the interest rate leads to a market crash (as they found out in 2018, nearly collapsing the entire stock market).
You need a way to unwind this dynamic because like an auto-immune disease, you’re attacking healthy cells (small businesses, who can’t access credit, or get priced out of competing against would-be monopolists, as well as zombie corporations who just exist in perpetuity rolling over their debt, 20% of US corporations on the stock market are now zombified).
So, Bitcoin operates within the monetary reality of the world today, whereas so many other cryptos are trying to design something new, innovative or fantastical, none of them are obviously better for this absolute contorted situation we find ourselves in. It can become the new version of collateral, so that the Fed can release the pressure valve of perpetual QE, and allow them to unwind without mass bankruptcy of the US economy. However, this is another conundrum, because Bitcoin’s deflationary attributes also make for a more appealing settlement layer than what its actually competing against, which is the Fed. This is ultimately what many technologists misunderstand, Bitcoin is more like a first order layer of money, to clear transactions at the highest level. It’s more comparable to Fedwire or other various Federal Reserve settlement layers.
Yeah this is worrisome for me as well. It also appears that human beings are more objectively rational with their money under slight inflationary pressure, because that slight pressure offsets the irrational loss aversion we all have hard wired into our brains.
It seems like Bitcoin with a small, permanent, inflation rate would function much better as a long term, stable, secure, monetary system than this deflationary one we have. The inflation is paid out to the miners, as a fee for maintaining the network security, rather than to autocrat grifters like it is now. It’s a perfect economic give and take.
The current system is very awkward. I’m holding Bitcoin, but I’m not paying the miners to secure it in any way. I should be paying a small amount of that wealth to the people securing it, because I’m benefiting from its security.
It’s difficult, because 80-90% of Bitcoiners are religious zealots, rather than Bayesian. It’s a new religion, and it certainly has a lot of good things going for it, so it’d be a shame if the zealotry dooms it in the end.
If you’re holding Bitcoin because you believe you can sell it to someone else for the same or more in the future, then I suppose that’s reasonable. It still has another 10-20x before it surpasses the total value of all gold, so perhaps there’s still some alpha to be had.
But if you’re holding Bitcoin because you belive it will actually function as a medium of exchange in the long run, I would re-consider your position. None of the stakeholders developing Bitcoin mining clients have any incentive to increase the functionality of the L1 layer. Most of the funding for such development comes from L2 payment networks like Lightning. They have every incentive to keep the Bitcoin protocol slow and unsuitable for payments (after all, their product is supposed to be the thing that solves that problem).
For that reason, along with the general lack of interest in innovation within the Bitcoin community, I would be extremely surprised if Bitcoin ever became a scalable payment solution.
I’m not really sure I understand your objection. If the L2 improvements are well funded, then the underlying asset would still be at the center of a future payment network.
L2 is the innovation. The idea behind the protocol is that innovation happens on top of L1, because that’s a far less risky way to innovate.
There’s certainly a question of whether L2 built on top of L1 can actually scale enough to succeed, but that doesn’t seem to be what you’re saying. Everyone invested in the Bitcoin space has an incentive to increase the functionality of Bitcoin as a whole. I’m not understanding the issue with L1 staying constant.
I think Bitcoin’s network security is unstable in the long run due to the over-reliance on money printing to subsidize it. The existing validators have strong incentives to resist moving away from proof of work due to sunk costs in ASICs. There also just seems to be a lot of misunderstanding about the lack of advantages of proof of work compared to proof of stake or other consensus mechanisms.
So unless the incentive to attack the Bitcoin network exponentially decrease over time, the fundamental protocol must be changed at some point. And maybe Bitcoin survives that anyways. I don’t really know.
As for L2 scaling, last time I checked the lightning network had something like 650 transactions completed in its entire history. I really have no idea why that number is so low, but to me it indicates the product just isn’t very good. Can it be improved?
Maybe. But with Bitcoin’s transaction rate it would take like 1.5 years for everyone in the US to do one single transaction transferring money from Bitcoin to the lightning network. I just don’t see how that scales unless you basically NEVER write to the Bitcoin blockchain.
I mean maybe that can work? It’s not like people own shares of stock at the depository trust. Intermediaries work well elsewhere in the economy. But why would I want to use the lightning network? Literally the only potential upside I can think of is exposure to Bitcoin prices.
My overall impression is just that there are a dozen obvious things you could do if you wanted Bitcoin to be used as money and basically none of them are being done, so Bitcoin stakeholders must not care that much about facilitating exchange via Bitcoin. And I don’t see any reason why that will change.
I agree that the block subsidy is a large economic driver of mining right now. I don’t understand why Bitcoiners seem so convinced there will be a smooth transition from block subsidy to voluntary fee as the halvings continue. Is there literally any evidence that the fee market will work? Isn’t it pure conjecture? I’d really like an answer on that one.
As for L2 scaling, yeah I don’t believe LN in it’s current form is all that usable. Lots of smart people believe its getting there, though, so without doing object level analysis for myself I tend to think L2 will ultimately succeed. Again, though, I haven’t seen a high quality back and forth about this between two smart, well informed, people, which is definitely concerning.
The one major disagreement we have is that “proof-of-work has no advantages over proof-of-stake.” These two consensus mechanisms are entirely different. Proof-of-work requires staking a resource that is external to the network. This is critical, as it means that, were the network to fork, you can only stake your energy on one of the two new chains. In contrast, under proof-of-stake, your stake is duplicated in a fork.
This is critical, as it means that, were the network to fork, you can only stake your energy on one of the two new chains. In contrast, under proof-of-stake, your stake is duplicated in a fork.
I honestly never really thought about this before but I suppose it’s worth considering. Maybe it’s easier for a community to split after some controversial decision with proof of stake?
Proof of work is not really immune to it though. When the DAO hack happened on Ethereum, the chain split into Ethereum and Ethereum Classic even though the network used proof of work at the time.
Validators will continue to stake on any chain so long as it’s profitable. I don’t really see how proof of stake vs work changes that.
I know I’m kind of late to the party here, but here is the best argument against the future value of Bitcoin I’ve yet read
This is specifically about Bitcoin, and does not apply to other coins that don’t have a fixed supply, or those that use a different consensus mechanism.
For anyone who stumbles across this comment in the future, the argument is basically that there is no market mechanism to ensure transaction fees stay high enough to maintain block security. The argument hinges on the assumption that miners need to be rewarded at least 1% of daily transaction volumes for them to be willing to spend money on the ASICs needed to mine blocks.
You can collateralize Bitcoin, and that is really where Bitcoin’s future lies, its collateral to recapitalize the financial system. The dynamics of QE operate like an auto-immune disease, its making collateral harder to come by, debt instruments become MORE expensive, because the Fed is effectively bidding up the price. However, this creates a new paradigm where all assets are higher in value than where they should be, if we’re operating in a normal interest rate environment (by normal, one that doesn’t have massive Central Bank interference to effectively fix the market rates). This is why we have such a monopolized economy as well, it makes borrowing costs cheaper for those with the best ability to access credit. Thus, all assets become too expensive. This leads to extreme inequality because few people under 40 can afford to have normal things people want, and leads to this extractive economy we operate in. This also becomes impossible to reverse too because the Fed raising the interest rate leads to a market crash (as they found out in 2018, nearly collapsing the entire stock market).
You need a way to unwind this dynamic because like an auto-immune disease, you’re attacking healthy cells (small businesses, who can’t access credit, or get priced out of competing against would-be monopolists, as well as zombie corporations who just exist in perpetuity rolling over their debt, 20% of US corporations on the stock market are now zombified).
So, Bitcoin operates within the monetary reality of the world today, whereas so many other cryptos are trying to design something new, innovative or fantastical, none of them are obviously better for this absolute contorted situation we find ourselves in. It can become the new version of collateral, so that the Fed can release the pressure valve of perpetual QE, and allow them to unwind without mass bankruptcy of the US economy. However, this is another conundrum, because Bitcoin’s deflationary attributes also make for a more appealing settlement layer than what its actually competing against, which is the Fed. This is ultimately what many technologists misunderstand, Bitcoin is more like a first order layer of money, to clear transactions at the highest level. It’s more comparable to Fedwire or other various Federal Reserve settlement layers.
Yeah this is worrisome for me as well. It also appears that human beings are more objectively rational with their money under slight inflationary pressure, because that slight pressure offsets the irrational loss aversion we all have hard wired into our brains.
It seems like Bitcoin with a small, permanent, inflation rate would function much better as a long term, stable, secure, monetary system than this deflationary one we have. The inflation is paid out to the miners, as a fee for maintaining the network security, rather than to autocrat grifters like it is now. It’s a perfect economic give and take.
The current system is very awkward. I’m holding Bitcoin, but I’m not paying the miners to secure it in any way. I should be paying a small amount of that wealth to the people securing it, because I’m benefiting from its security.
It’s difficult, because 80-90% of Bitcoiners are religious zealots, rather than Bayesian. It’s a new religion, and it certainly has a lot of good things going for it, so it’d be a shame if the zealotry dooms it in the end.
If you’re holding Bitcoin because you believe you can sell it to someone else for the same or more in the future, then I suppose that’s reasonable. It still has another 10-20x before it surpasses the total value of all gold, so perhaps there’s still some alpha to be had.
But if you’re holding Bitcoin because you belive it will actually function as a medium of exchange in the long run, I would re-consider your position. None of the stakeholders developing Bitcoin mining clients have any incentive to increase the functionality of the L1 layer. Most of the funding for such development comes from L2 payment networks like Lightning. They have every incentive to keep the Bitcoin protocol slow and unsuitable for payments (after all, their product is supposed to be the thing that solves that problem).
For that reason, along with the general lack of interest in innovation within the Bitcoin community, I would be extremely surprised if Bitcoin ever became a scalable payment solution.
I’m not really sure I understand your objection. If the L2 improvements are well funded, then the underlying asset would still be at the center of a future payment network.
L2 is the innovation. The idea behind the protocol is that innovation happens on top of L1, because that’s a far less risky way to innovate.
There’s certainly a question of whether L2 built on top of L1 can actually scale enough to succeed, but that doesn’t seem to be what you’re saying. Everyone invested in the Bitcoin space has an incentive to increase the functionality of Bitcoin as a whole. I’m not understanding the issue with L1 staying constant.
Sorry, I didn’t really explain myself clearly.
I think Bitcoin’s network security is unstable in the long run due to the over-reliance on money printing to subsidize it. The existing validators have strong incentives to resist moving away from proof of work due to sunk costs in ASICs. There also just seems to be a lot of misunderstanding about the lack of advantages of proof of work compared to proof of stake or other consensus mechanisms.
So unless the incentive to attack the Bitcoin network exponentially decrease over time, the fundamental protocol must be changed at some point. And maybe Bitcoin survives that anyways. I don’t really know.
As for L2 scaling, last time I checked the lightning network had something like 650 transactions completed in its entire history. I really have no idea why that number is so low, but to me it indicates the product just isn’t very good. Can it be improved?
Maybe. But with Bitcoin’s transaction rate it would take like 1.5 years for everyone in the US to do one single transaction transferring money from Bitcoin to the lightning network. I just don’t see how that scales unless you basically NEVER write to the Bitcoin blockchain.
I mean maybe that can work? It’s not like people own shares of stock at the depository trust. Intermediaries work well elsewhere in the economy. But why would I want to use the lightning network? Literally the only potential upside I can think of is exposure to Bitcoin prices.
My overall impression is just that there are a dozen obvious things you could do if you wanted Bitcoin to be used as money and basically none of them are being done, so Bitcoin stakeholders must not care that much about facilitating exchange via Bitcoin. And I don’t see any reason why that will change.
I agree that the block subsidy is a large economic driver of mining right now. I don’t understand why Bitcoiners seem so convinced there will be a smooth transition from block subsidy to voluntary fee as the halvings continue. Is there literally any evidence that the fee market will work? Isn’t it pure conjecture? I’d really like an answer on that one.
As for L2 scaling, yeah I don’t believe LN in it’s current form is all that usable. Lots of smart people believe its getting there, though, so without doing object level analysis for myself I tend to think L2 will ultimately succeed. Again, though, I haven’t seen a high quality back and forth about this between two smart, well informed, people, which is definitely concerning.
The one major disagreement we have is that “proof-of-work has no advantages over proof-of-stake.” These two consensus mechanisms are entirely different. Proof-of-work requires staking a resource that is external to the network. This is critical, as it means that, were the network to fork, you can only stake your energy on one of the two new chains. In contrast, under proof-of-stake, your stake is duplicated in a fork.
I honestly never really thought about this before but I suppose it’s worth considering. Maybe it’s easier for a community to split after some controversial decision with proof of stake?
Proof of work is not really immune to it though. When the DAO hack happened on Ethereum, the chain split into Ethereum and Ethereum Classic even though the network used proof of work at the time.
Validators will continue to stake on any chain so long as it’s profitable. I don’t really see how proof of stake vs work changes that.