That’s a problem because then BTC is a perfect investment which always grows at exactly the same rate as the global economy. So it gives you the exactly average return on investment with zero volatility. So it seems like a near-perfect store of value and people will want to hold it rather than spend it.
Assuming BTC gives exactly the average return on investment with zero volatility we shouldn’t expect all people to hold it rather than spend it. Neither an economy of actual humans nor an economy of ideal agents would act that way.
With respect to consumption: Use as a transactional currency for spending would track convenience factors. People buying stuff with one fungible asset is much the same as buying stuff with another asset then transferring between their two accounts. For spherical cow in a vacuum purposes we can ignore this. Investment spending is the issue here.
In the counterfactual BTC currency which perfectly tracks the global economy the incentive is for anyone who believes they know of any investment that they expect to have higher returns than the average of the global economy to spend their bitcoins and invest in that opportunity. Those who don’t believe they have any knowledge of anything that will produce better than average returns or who are risk averse will instead purchase bitcoins either directly or indirectly from those that do have that knowledge.
In that idealised scenario the BTC currency is essentially operating as a vehicle to efficiently transfer real-world capital to places those who people with value expect will provide better return in investment than the average growth of the economy. Note that I am emphatically not claiming that this is an ideal system, it would be bizarre if something so arbitrary happened to be optimal. Just that it doesn’t seem to quite have the degree of problem that is described. People would certainly want to spend it.
There are plausible reasons why predictable inflation of the above currency could be more desirable than precisely zero inflation. Let’s say Satoshi had arbitrarily decided that BTC mining should go on indefinitely, with the bitcoins produced per year exactly equalling 2% of the number of bitcoins already mined. Then the incentives to the the participants change slightly. Rather than people who expect an investment to grow at more than the average for the global economy to be the only ones to so invest, it is any (risk neutral) person who expects an investment to grow at not less than 98% of the rate of the global economy. That has (well known) advantages.
The unfortunate problem with the above monetary policy is that we just effectively dedicated 2% of the of the value stored in the bitcoin currency each year to the computation of irrelevant hashes (in addition to irrelevant computation that is proportional to transaction fees). This problem applies to any cryptocurrency based on cryptographic mining. There may not be a good solution to that problem that potentially prohibitive degree of waste that does not rely on something external to the cryptocurrency as basis. (And the latter is not necessarily a problem. The currency having value in itself isn’t the most potentially useful feature of bitcoin.)
Let me rephrase: The problem is that Bitcoins will have an advantage over the average productive investment, e.g. stocks (sort of), as a store of value, since Bitcoin has all their average expected growth with none of their added (local) volatility. This is what presents the starting problem in an economy that starts out with a steady velocity of Bitcoins, and then increased holding makes the velocity go down (and the value go up, and the bubble effect hit even harder). This is why we don’t get an equilibrium with steady Bitcoin velocities. Even if we did have that equilibrium, people would have a much greater incentive to just “invest” in Bitcoins instead of being forced to try to invest in something productive. You don’t want an economy to have a perfect non-inflating store of value which is intrinsically unproductive!
Let me rephrase: The problem is that Bitcoins will have an advantage over the average productive investment, e.g. stocks (sort of), as a store of value, since Bitcoin has all their average expected growth with none of their added volatility.
I like the rephrasing. To expand on what seems to be a generalisation of this problem: Any cryptocurrency sibling of bitcoin that relies on cryptographic mining as a basis will either have this problem or will result in (value of currency * inflation rate) additional resources wasted on computation each year.
I believe (tentatively) that the above is an unavoidable result of the cryptographic and micro-economic principles that such currencies rely on.
Note, I wrote this in reply to the original version of the grandparent, which is as quoted in the parent. This is confusing since it is a bug/feature of the lesswrong system that Eliezer’s edits to his own comments do not get marked with an asterisk like others.
I do not endorse the current version of the grandparent, in as much as it overstates the position and seems to verge on encouraging magical thinking about how a currency can extract value from a system.
To expand on what seems to be a generalisation of this problem: Any cryptocurrency sibling of bitcoin that relies on cryptographic mining as a basis will either have this problem or will result in (value of currency * inflation rate) additional resources wasted on computation each year.
I believe (tentatively) that the above is an unavoidable result of the cryptographic and micro-economic principles that such currencies rely on.
This is not limited to cryptocurrencies, e.g., gold-based currencies cause people to “waste resources” mining.
This is not limited to cryptocurrencies, e.g., gold-based currencies cause people to “waste resources” mining.
Yes, the ‘mining’ metaphor was well chosen.
In terms of that gold analogy, what we are talking about in the context would be if gold spontaneously generated itself in proportion to the amount of existing gold and automatically buried itself at whatever depth makes it barely worthwhile to dig up. That waste is the unavoidable cost of making bitcoin-style cryptocurrency have ongoing inflation.
Assuming BTC gives exactly the average return on investment with zero volatility we shouldn’t expect all people to hold it rather than spend it. Neither an economy of actual humans nor an economy of ideal agents would act that way.
With respect to consumption: Use as a transactional currency for spending would track convenience factors. People buying stuff with one fungible asset is much the same as buying stuff with another asset then transferring between their two accounts. For spherical cow in a vacuum purposes we can ignore this. Investment spending is the issue here.
In the counterfactual BTC currency which perfectly tracks the global economy the incentive is for anyone who believes they know of any investment that they expect to have higher returns than the average of the global economy to spend their bitcoins and invest in that opportunity. Those who don’t believe they have any knowledge of anything that will produce better than average returns or who are risk averse will instead purchase bitcoins either directly or indirectly from those that do have that knowledge.
In that idealised scenario the BTC currency is essentially operating as a vehicle to efficiently transfer real-world capital to places those who people with value expect will provide better return in investment than the average growth of the economy. Note that I am emphatically not claiming that this is an ideal system, it would be bizarre if something so arbitrary happened to be optimal. Just that it doesn’t seem to quite have the degree of problem that is described. People would certainly want to spend it.
There are plausible reasons why predictable inflation of the above currency could be more desirable than precisely zero inflation. Let’s say Satoshi had arbitrarily decided that BTC mining should go on indefinitely, with the bitcoins produced per year exactly equalling 2% of the number of bitcoins already mined. Then the incentives to the the participants change slightly. Rather than people who expect an investment to grow at more than the average for the global economy to be the only ones to so invest, it is any (risk neutral) person who expects an investment to grow at not less than 98% of the rate of the global economy. That has (well known) advantages.
The unfortunate problem with the above monetary policy is that we just effectively dedicated 2% of the of the value stored in the bitcoin currency each year to the computation of irrelevant hashes (in addition to irrelevant computation that is proportional to transaction fees). This problem applies to any cryptocurrency based on cryptographic mining. There may not be a good solution to that problem that potentially prohibitive degree of waste that does not rely on something external to the cryptocurrency as basis. (And the latter is not necessarily a problem. The currency having value in itself isn’t the most potentially useful feature of bitcoin.)
Let me rephrase: The problem is that Bitcoins will have an advantage over the average productive investment, e.g. stocks (sort of), as a store of value, since Bitcoin has all their average expected growth with none of their added (local) volatility. This is what presents the starting problem in an economy that starts out with a steady velocity of Bitcoins, and then increased holding makes the velocity go down (and the value go up, and the bubble effect hit even harder). This is why we don’t get an equilibrium with steady Bitcoin velocities. Even if we did have that equilibrium, people would have a much greater incentive to just “invest” in Bitcoins instead of being forced to try to invest in something productive. You don’t want an economy to have a perfect non-inflating store of value which is intrinsically unproductive!
I like the rephrasing. To expand on what seems to be a generalisation of this problem: Any cryptocurrency sibling of bitcoin that relies on cryptographic mining as a basis will either have this problem or will result in (value of currency * inflation rate) additional resources wasted on computation each year.
I believe (tentatively) that the above is an unavoidable result of the cryptographic and micro-economic principles that such currencies rely on.
Note, I wrote this in reply to the original version of the grandparent, which is as quoted in the parent. This is confusing since it is a bug/feature of the lesswrong system that Eliezer’s edits to his own comments do not get marked with an asterisk like others.
I do not endorse the current version of the grandparent, in as much as it overstates the position and seems to verge on encouraging magical thinking about how a currency can extract value from a system.
Reclarified?
This is not limited to cryptocurrencies, e.g., gold-based currencies cause people to “waste resources” mining.
Yes, the ‘mining’ metaphor was well chosen.
In terms of that gold analogy, what we are talking about in the context would be if gold spontaneously generated itself in proportion to the amount of existing gold and automatically buried itself at whatever depth makes it barely worthwhile to dig up. That waste is the unavoidable cost of making bitcoin-style cryptocurrency have ongoing inflation.