Categories
Satoshi Nakamoto

Bitcoin minting is thermodynamically perverse

I believe that the amount of energy input required to the bitcoin economy represents a serious obstacle to its growth.

The following content was written by gridecon on August 06, 2010, 01:52:00 AM in the thread Bitcoin minting is thermodynamically perverse. All content is owned by the author of the bitcointalk.org post. (original)


Let me begin by saying that Bitcoin is an amazing project and I am very impressed with the implementation and the goals. From reading these forums it seems to be understood that debate about the design and operation of the bitcoin economy ultimately serves to strengthen it, so I hope these comments are taken in that spirit. *EDIT – I have been convinced by further research and discussion that Bitcoin is actually highly efficient compared to most traditional currencies, because the infrastructure required to support a government issued fiat currency represents a much larger investment of resources than Bitcoin’s cpu power consumption. I am leaving this thread active though because it has been generating a lot of interesting discussion.*

I believe that the amount of energy input required to the bitcoin economy represents a serious obstacle to its growth. I think in the long-term, transactions may be even more serious than minting in this regard, but I will for the moment discuss minting because it is more precisely bounded and defined. The idea that the value of bitcoins is in some way related to the value of the electricity required, on average, to mint a winning block is generally accepted, but the precise nature of this relationship is contentious.

One argument is that anyone who chooses to generate coins is actually making the choice to purchase bitcoins with electricity/computational resources, and that because some/many people are in fact making that choice, bitcoins have at least that much “value” to the generators, who can be assumed to be maximizing their utility. A contrasting argument is that cost of production is different than market value, and the most objective measure is the current market conversion price to a more liquid and widely traded currency such as the US dollar.

My contention is that both of these arguments miss the point and the real problem, which is the fundamental perversity of wasting large amounts of energy and computations in generating the winning blocks for the minting process. The minting process exists because of the necessity of actually “printing” the currency, and certain desirable properties of crypto-math for making the currency’s behavior predictable. The fact that the current minting process requires a large energy input of computational work is highly unfortunate and has the perverse consequence that bitcoin may actually be “destroying wealth” in the sense of wasting energy producing a digital object worth less than the resources invested in it.

As is often pointed out, a currency does not necessarily have, or need to have, any inherent value – a medium of exchange is a useful tool and can have value purely as a consequence of social convention. The cost of production of bitcoins in electricity consumed represents a waste, a “thermodynamic burden” that the currency has to carry. Consider a hypothetical alternative digital currency called “compucoin”, which purchases cpu cycles from nodes on the network. The market value of this currency would converge very closely with the cost of electricity required to generate cpu cycles. Instead of costing cpu cycles to mint, the value of the cpu cycles the coins could be exchanged for would create a rational basis for the currency’s value and integrate it with an existing market. I imagine that alternatives to Bitcoin (many of them probably sharing a lot of Bitcoin’s source code) will inevitably emerge and Bitcoin’s current minting process makes the currency “expensive” in terms of energy input. I believe this places it at a competitive disadvantage to other currencies and can only hinder its widespread adoption and long-term value. *Edit – as mentioned above, I am now much more optimistic about Bitcoin long term. I still think compucoins would be a cool idea, though!*

The following content was written by knightmb on August 06, 2010, 02:26:50 AM in the thread Bitcoin minting is thermodynamically perverse. All content is owned by the author of the bitcointalk.org post. (original)


I believe that the amount of energy input required to the bitcoin economy represents a serious obstacle to its growth. I think in the long-term, transactions may be even more serious than minting in this regard, but I will for the moment discuss minting because it is more precisely bounded and defined. The idea that the value of bitcoins is in some way related to the value of the electricity required, on average, to mint a winning block is generally accepted, but the precise nature of this relationship is contentious.

One argument is that anyone who chooses to generate coins is actually making the choice to purchase bitcoins with electricity/computational resources, and that because some/many people are in fact making that choice, bitcoins have at least that much “value” to the generators, who can be assumed to be maximizing their utility. A contrasting argument is that cost of production is different than market value, and the most objective measure is the current market conversion price to a more liquid and widely traded currency such as the US dollar.
My only counter is that it will seem that way to a first time user, because they have no bitcoins at all. But there are a possible 3.6 million bitcoins out there plus a member here runs a site that gives away free bitcoins so people can experiment with the system. The amount of actually energy, if you break it down, is only that of the PC itself. When you consider how few watts a processor runs to get a block where each 50 BTC block is worth about $3 USD, that’s much more than the electricity cost it took to create it. Right now, you can generate BitCoins and sell them for more than it cost the electricity to run the PC to do it unless your electrical rates are the highest in the world. The only reason no one does is the scale of economics that would be required to make it profitable.
Quote
My contention is that both of these arguments miss the point and the real problem, which is the fundamental perversity of wasting large amounts of energy and computations in generating the winning blocks for the minting process. The minting process exists because of the necessity of actually “printing” the currency, and certain desirable properties of crypto-math for making the currency’s behavior predictable. The fact that the current minting process requires a large energy input of computational work is highly unfortunate and has the perverse consequence that bitcoin may actually be “destroying wealth” in the sense of wasting energy producing a digital object worth less than the resources invested in it.
The same can be said about gene folding or SETI since a ton of CPU time and electricity often does not reward the individual user of the their client software. It’s the collection as a whole that rewards everyone in non-monetary ways (find cure for cancer, find aliens, etc.)
Quote
As is often pointed out, a currency does not necessarily have, or need to have, any inherent value – a medium of exchange is a useful tool and can have value purely as a consequence of social convention. The cost of production of bitcoins in electricity consumed represents a waste, a “thermodynamic burden” that the currency has to carry. Consider a hypothetical alternative digital currency called “compucoin”, which purchases cpu cycles from nodes on the network. The market value of this currency would converge very closely with the cost of electricity required to generate cpu cycles. Instead of costing cpu cycles to mint, the value of the cpu cycles the coins could be exchanged for would create a rational basis for the currency’s value and integrate it with an existing market. I imagine that alternatives to Bitcoin (many of them probably sharing a lot of Bitcoin’s source code) will inevitably emerge and Bitcoin’s current minting process makes the currency “expensive” in terms of energy input. I believe this places it at a competitive disadvantage to other currencies and can only hinder its widespread adoption and long-term value.
Unless electrical rates go up higher than the value of BTC, there will always be people willing to trade out CPU resources for it. Currently, cheap VPS farming has a return on BTC generation, though not very much. The other benefit is that the generation rate tries to remain constant, so it’s not always going be hard to generate BTC if less and less people decide to do it, the difficulty goes back down.

The following content was written by gridecon on August 06, 2010, 03:00:12 AM in the thread Bitcoin minting is thermodynamically perverse. All content is owned by the author of the bitcointalk.org post. (original)


Thanks very much for the extensive and informative reply. I do not disagree with the points that you made, but I also don’t believe it invalidates my fundamental point: it is not inherently necessary for a digital currency such as bitcoin to require as much energy input as bitcoin does. A digital currency that offers bitcoin’s behavior at a “lower cost” of energy overhead of the currency and transaction system has a competitive advantage. The digital currencies that will win and become standards, I believe, are the ones that offer the most value-added on top of the costs of running the system. Of course, there is room for many currencies – we already have a multiplicity – so it is not necessary for Bitcoin to become the “one true money” for it to succeed, but I believe the current minting policies will be harmful to its growth and adoption long-term. Much of the utility value of bitcoin resides in the work done to establish the security and reliability of the system – accomplishing that work with a smaller energy input would seem to be beneficial.

The following content was written by knightmb on August 06, 2010, 03:30:45 AM in the thread Bitcoin minting is thermodynamically perverse. All content is owned by the author of the bitcointalk.org post. (original)


Thanks very much for the extensive and informative reply. I do not disagree with the points that you made, but I also don’t believe it invalidates my fundamental point: it is not inherently necessary for a digital currency such as bitcoin to require as much energy input as bitcoin does. A digital currency that offers bitcoin’s behavior at a “lower cost” of energy overhead of the currency and transaction system has a competitive advantage. The digital currencies that will win and become standards, I believe, are the ones that offer the most value-added on top of the costs of running the system. Of course, there is room for many currencies – we already have a multiplicity – so it is not necessary for Bitcoin to become the “one true money” for it to succeed, but I believe the current minting policies will be harmful to its growth and adoption long-term. Much of the utility value of bitcoin resides in the work done to establish the security and reliability of the system – accomplishing that work with a smaller energy input would seem to be beneficial.

I think though you are comparing apples to oranges. The coin generation is for currency creation. You don’t need to generate any coin to use the bitcoin system. You can purchase it from many market sites or get some donated for free from other sites. The current minting policy is what makes it useful because a digital currency where everyone has unlimited amounts (or large starting amounts) just causes unnecessary starting inflation. The overhead for the currency is by design, otherwise if someone creates an *easier* system, it will be quickly abused. Since you can’t make everyone play fair, you create something where it’s nearly impossible to cheat by using math. To make cheating expensive instead of “easy” is where this system works. If it’s more profitable to generate coin than to cheat it, guess which one everyone will go with?
Ali Sherief

By Ali Sherief

Editor-in-chief and serial coder & blogger.