Will the energy cost and deflationary nature of Bitcoins doom the currency to obscurity?

Question

I couldn't find enough questions that ask this head-on¹, so consider that if:

• Bitcoins are designed to reflect the deflationary characteristics of a specie currency; and
• The distributed nature of the cryptocurrency requires a high intrinsic value (energy cost) of the coins to secure them; and
• That neither deflationary contraction nor high transactional energy costs are desirable qualities of a major currency (see Background below);

Then:

Will the energy cost and deflationary nature of Bitcoins doom the currency to obscurity?

Off-blockchain solutions are acceptable answers, but will require centralising a large portion of the Bitcoin network. Or put another way: Trust moves back to centralised banking facilities.

So my guess is these two problems will doom a decentralised Bitcoin, but I open the question to the floor. :-)

---

Background (Due Diligence)

A high transactional energy cost is bad

The green line in this chart reflects the power per dollar in the global economy; of which a tiny fraction is consumed by maintaining the banking network.

_{(Source: Dr Tim Garrett, "A physics based economics model")}

As the distributed Bitcoin cryptocurrency doesn't use laws or other centralised off-blockchain enforcements to protect the transaction ledger, the energy cost per transaction can not be a fixed constant like normal currencies. It must be a percentage of global energy consumption² to discourage state actors with a bevy of power stations from subverting the global Bitcoin economy.

No society will choose a currency that requires O(N) energy to transfer a bank note instead of O(1) energy to transfer a bank note (where N is global energy consumption). Doing so would impoverish human development³.

A deflationary currency is bad

Long story short, a deflationary currency requires a post-growth social model; which while probably a good thing, we don't actually have right now.

In a classic "growth" economy, you must expand the money supply to reflect the size and velocity of economic activity in society. If you do not and the level of economic activity ever contracts (and there are variety of regular reasons this may occur such as a natural disaster or demographic bulge), then you can enter a deflationary death spiral as each contraction contaminates other economic activities that assumed an ROI in the form of interest that is now worth less or worthless⁴.

A digital specie-based currency is deflationary in that it restricts the money supply.

Inflation and hyperinflation are problems, but problems of unchecked greed, speculation and social inequality that don't disappear by sweeping the economy under a deflationary rug.

---

<sub>1. Although "Will deflation destroy Bitcoin?" and "How much energy will the Bitcoin network eventually consume?" come pretty close, I really want a question that collates and settles this for newcomers, without undue eager puppy optimism from early adopters. :-)
2. Production actually, but sane organisms consume energy they produce instead of throwing it away; so global consumption and production can be considered linearly proportional, though not 1:1 due to transmission inefficiencies.
3. To put this in perspective, you could provide everyone on Earth with universal education, healthcare, social security as an O(N) energy cost.
4. Don't get me started on economists of the Austrian-school. They might as well be sock puppets for the entitled mega-rich for all the benefit their pseudo-science has on ordinary human beings.</sub>

Answer 1

On the deflationary death-spiral part:

The bitcoin wiki has a good discussion of deflationary spiral, so that's a good place to get a counter point.

I'd like to make some of my own (amateur) observations:

1. Gold is currently not the most popular money used in the world not because gold is "bad" money, but because:

   a) Laws make it more difficult/expensive to use for day-to-day transactions then nationals currencies (e.g. legal tender laws require capital gains tax to be collected at the time of purchases in gold), and;

   b) Banks are incentivised to use fiat through the fractional reserve banking system. Why hold gold for customers when you can hold national currency and generate an order of magnitude more interest by loaning out 10x the deposit amount that is guaranteed by the central bank?

   To put it another way, the absence of gold used today for your average transactions is not because citizens fear deflationary death-spirals, but because governments have purposefully made it less beneficial to use gold.

2. Bitcoin has been around long enough that we can at least get a sense whether falling prices has been a disaster. As far as I can tell that is not the case. All the major bitcoin merchant services like BitPay, CoinJar and Coinbase record ever increasing purchases/sales made through the website. Yes, more people are using bitcoin, but one person spending money in the bitcoin economy is counter to the death-spiral theory. If the theory is correct, no-one should be spending bitcoins.

3. The deflationary death-spiral, when you think about it, describes something that in layman terms sounds pretty awesome. Theoretically prices will keep dropping to $0, meaning at some point, everyone on earth will be able to buy everything and any service for 0. Sure, the theory states that e.g. everyone will lose their job, but who cares when everything is free! At that point you don't need a job.

4. When I've heard the (in)famous cases of deflationary death-spirals mentioned, they seem to always conveniently ignore the broader context. For instance, the Great Depression happened at a time when the government purposefully reduced the money supply, i.e. it wasn't like the money supply was stable or predictable (like gold/bitcoin). In other words, I'm yet to hear of an example of "bad" deflation that "just happened" during a normal period of dropping prices. There's always something else going on in the economy.

Answer 2

This is my second answer, which does not cover your question directly but is rather given after the lengthy discussion.

Bitcoin is the first approach to a distributed, cryptographic currency. As of now it has not been the last one however. Bitcoin layed the foundation to spawn a lot of similar currencies.

This is not destructive to the idea. in fact, the original paper calls for network participants do improve on the concept by forming a collective consensus about using altered algorithms.

Litecoin does not suffer all the same problems in all the same ways as Bitcoin does. And other spin-off technologies have other reasons to exist.

So the answer could be yes. Bitcoin could be "doomed" as you put it.

... but ...

This does not mean distributed cryptocurrency is doomed. You said, I quote:

I really want a question that collates and settles this for newcomers, ...

And the answer for those newcomers would be, not to dismiss the concept behind Bitcoin right away. Rather keep an eye on the development and come to an informed conclusion about what fits you.

Bitcoin has been the opening door to a technology we are discussing here. Its future may bear another name. This is no reason for regressing to a centralised currency however.

Answer 3

Why would it? Bitcoin does not require a huge number of people to mine hard. Even the idea behind decentralised trust is more based on all people being able to check the validity of a miners generated block, not on actually expending the energy necessary for mining. Corruption is prevented even with only a few parties competing as miners.

Limiting the distribution of gain to only few parties - the remaining miners, which could be seen as the new kind of banks or at least coiners, would still not inherently damage Bitcoin as a currency nor would it hurt the distributed trust model I just mentioned.

++ EDIT ++

Well, after the discussion growing somewhat exhaustive...

Your original question was if Bitcoin is "doomed" to go a specific course. That is, if its development is at the current time bound to a predictable pattern. And I think the answer is plainly: No, it is not!

Your arguments are of course valid concerns, but economics is not a predictive science. Patterns observed in economics are always derived in retrospect. It is unreasonable to look at the Bitcoin development now and predict its course as beeing doomed (or anything else for that matter) in advance.

Answer 4

"Will the energy cost and deflationary nature of Bitcoins doom the currency to obscurity?"

--It really depends. As it is, you can use technology like the raspberry pi hooked up to a solar panel/windturbine/water turbine/even methane from our friends the cow. This would (in my eyes) make the initial investment for renewable energy be about the only time you need to spend money directly on electricity. In fact it could not only cause the cost to mine bitcoin go down, it might even increase the availability of alternative energies which would not only lower the cost of energy but increase the popularity of bitcoin. I can see how one could just set set a weatherized miner on the roof and make some free money with the miner doing its thing, heck you probably could sell the power company some green energy while you are at it. Make bitcoin and fiat.

"what about the cost to produce the mining units" well glad you have asked, a few years ago it would be crazy to have more than 1-5 gh/s... I remember reading of one mmining company who spent something like 50 grand (i could be wrong) to buy fpga (field programmable arrays) to get i think 50 gh/s... Now that same 50 gh/s is worth much less. KNC for example has a 200 gh/s miner for ~~$3000 USD. Not only is this cheaper, this is more energy efficient too, so no upgrade to the power source should be needed on a theoretical solar miner once a design is finally published for a truly unique universal solar powered miner.

As i said before, you could do it now with a rasp pi, a few Block erupters (didn't say how fast or much money you would return)and hook it in to a solar panel for a total cost of probably about $200 usd. The only problem with this idea is the need for an internet connection. Well obviously if the pi has a wireless card and you have a connection already available you can use it. One possibility as well would be an ad hoc network where there are a large enoough base of wireless miners peering that you can get the block chain to you through one of them. wireless network i believe is the word.

Or another idea could be to do "solar hosting" where you buy up half of the state of new mexico from Walter White set up your operation and watch for problems. An outside data center almost.you could run all of these miners either wired, or through wireless networking. Not only would this business venture be unique, you could get tons of government dollars to buy the solar panels. It would also increase the GDP of the state, and add new jobs.

-If you use this idea and start a successful business, i would like to get a royalty ;)

Off-blockchain solutions are acceptable answers, but will require centralising a large portion of the Bitcoin network. Or put another way: Trust moves back to centralised banking facilities. Blockquote

Agreed

So my guess is these two problems will doom a decentralised Bitcoin, but I open the question to the floor. :-)

--My response detailed above, while centralizing to a point, would not go as far as your system would. if you really want to go in to crazy theories. Implant a mining device on someone's right hand (or their forehead :P ), every time your hand moves the chip gets power already provided by the human body. You are almost guaranteed to have enough close p2p connections living in a city, and as you travel around the chips all update each other. That's a very decentralized way to go i think.

So the future will show us what it is...

Remember scientists believed the yetti did not exist until a few days ago when the dna of a unique species of bear was found. Nor until a few years ago did they know that any creature could ever be described as the Leviathan or sea serpent of sailor myths. Nor are scientists correct when they argue you can not do any form of time travel. We are all time traveling right now. Just unidirectional (and we all know that now).

But intriguing post... yet. i don't think this is a question though.

But thanks for allowing me to give away some ideas so others can make some free money off of my idea. It was a pleasure to discuss this concept with you. Criticisms are welcome as long as you are not flaming.

EDIT Adding additional comments as requested by OP

Would you like fold your interesting comments into your answer? I think they would represent a complete standpoint.

Comments I attempted to answer

Thanks for your reply. So: Powering an O(N) banking system could use currently under-utilised renewables. Would this be an accurate summary of your answer? An interesting idea for micro-grid computing independent of the future of Bitcoin. But what happens when a O(1) service like SpaceMonkey or CPUsage comes along and pays micro-grid providers more than Bitcoin ($1 vs $1/N)? Or put another way: While O(N) networks are power hungry enough to innovate new energy sources, O(1) services will then follow and out-compete them. – LateralFractal

O(1) and O(N) in this context means per person. If viewed as a total network, SpaceMoney/CPUsage/Visa/Mastercard are O(N) and Bitcoin is O(N^2) – LateralFractal

yes that is the tl;dr of my post. (someone down voted it without even expressing their opinion. So I up voted this thread in return because you actually discuss not harass) And very valid point, plus you said when and not if (smart person, because a good business plan is always stolen). I think part of the idea that bitcoiners miss right now is this: Bitcoin could be inflatable. True there will be 21 million bitcoins. But currently a satoshi (1/100,000,000 BTC) is the lowest decimal place. Who is to say that in the future the code won't be changed to allow smaller sizes...

An off shoot/fork might even take over. One example is alt coins. Some have more currency, some have less. Some use inflation (PPCoin) some use demurrage (FreiCoin). Some use more novel methods of calculation. One reason that bitcoin may be at an advantage is due to the ease of designing an application specific circuit (asic) for double sha. Where as storage and cpu usage are dynamic. mastercard and visa are companies that could exploit a double sha asic.

My random thought/question (and this actually is a criticism of bitcoin too), just like gold, there is only a finite amount of bitcoin. Yet gold is the standard. Now, with gold being abundant on asteroids, and foreseeable asteroid mining in the near future, Gold will plummet. Nations with tons of gold will be worthless.

Bitcoin was the first cryptocurrency of its time. And IMO is BETA software. An eventual divergence among coins will happen, or another will take over (as is occurring now). Either way. Probably I'm one of the most realistic crypto fanatics. It could all go to crap tomorrow. China/america/iran/korea/mexico/canada/UN/etc could all kill the network with their computing power.

It's still a fun hobby. It has changed the world... But TBH if it would be a "worldclass" currency. There's a lot of changes to be made, and a lot of holes to fill.

Doomed to fail? well, it depends. How big will it get is the real question. Will it be profitable to mine once block rewards run out. Best of all: will it then become a store of wealth, that is only mined to continue the storage of the wealth? Like paying a banker for vault space.

Thanks for some good chat. Feel free to comment. once gain the future will show us what it is... (aka neither of us know the future :P )

Answer 5

You don't turn the steering wheel because there's a curve in the road 10 miles ahead. If the road ahead of you is clear and moves you in the right direction, you steer straight. When and if these threats materialize, Bitcoin will adapt to meet them. Maybe the solution will be sophisticated, decentralized, off-blockchain systems for transferring Bitcoins. Maybe not.

If your point is just that Bitcoin may face future problems that can't be solved, sure, it might. Or people might solve them. But you really can't solve a problem until you actually face it -- there's no way to know what resources you'll have to solve it with, who the stakeholders will be, and so on.

Answer 6

I think the OP question boils down to two points: (1) supply of bitcoin is limited, and, (2) centralization of bitcoin transactions will be needed due to technological constraints.

I think this is a false problem because: (1) supply of gold is limited, and that has not hurt the price of gold, and, (2) centralization of bitcoin transactions is a security problem, not a existential problem.

The real secret to bitcoin's success will be the continued acceptance of bitcoin by the populace as an alternative store of wealth. You can just as easily use giant circular boulders, or clam shells, like certain aboriginal and seafaring peoples did. As a corollary, the ability to convert bitcoin to dollars or some other store of value is required.

But another way: if somebody wants to pay you for something in gold, rather than paper fiat money, and willing to pay a premium, you would simply look up the price of gold to the fiat, add a premium for the hassle, and then sell him the good. Then you would convert the gold to fiat currency and be a happy person. Why should bitcoin be any different?

The fly in this ointment of continued bitcoin success is not a non-post growth economy or centralized bitcoin depositories but something like if governments world-wide decide bitcoins are being used to thwart the 'war on drugs' effort and they decide, collectively in some G-7 etc meeting, to crack down on bitcoin and outlaw it. At the moment this looks very unlikely. But it happened in the Great Depression with gold (in the USA) and I suppose it could happen today.

Answer 7

I don't think world population at large will reject a money system with an O(n) cost for transferring money instead of an O(1) simply because the cost is not constant - they do will should such O(n) be lower than O(1) for the most common transfer sizes.

I compare this to the operating systems' schedulers. For years, the Holy Grail was to develop an O(1) scheduler, and in fact some schedulers with such behaviour were created. And then, Con Kolivas came and demonstrated it was actually possible to create a very simple O(n) scheduler that regularly outbeated the O(1) for the usage case he cared about (end-user desktop computing in systems with low amount of cores).