Quiggin quizzical

My observations on the electricity demand associated with Bitcoin made it into the ABC News Quiz last week, which is a kind of fame, I guess.

Meanwhile, I had another piece in the Guardian, this time looking at the fact that, despite being called a “cryptocurrency”, Bitcoin is used even less as a currency now than it was several years ago. The core problem is that the system is so overloaded by miners creating new coins that processing transactions is slow, costly or both I mentioned the fact that game company Steam had stopped accepting coins and that the list of merchants accepting Bitcoin is small enough to fit on one page. Checking further I concluded that this list is out of date, but not in a good way. Lots of those included, such as Expedia, no longer accept Bitcoin, if indeed they ever did. Here’s one person’s experience. Bitcoin is now a “crypto asset” which is even more obviously a Ponzi fantasy than the original currency story.

One response I got was that transaction speed would soon be greatly improved by something called Lightning. Checking on this it appears that this is software in an alpha (very early) stage of development, which would allow any two parties to set up a transactions account separate from the main Bitcoin blockchain, and only occasionally update the main account. An analogy, for readers of a certain age, is the era before Bankcard, when, if you wanted to do something other than paying cash, you maintained a separate credit and debit account with every store you dealt with. This does not seem like the dawn of a new era to me.

39 thoughts on “Quiggin quizzical

  1. Interesting and thoughtful analysis. But Bitcoin is still too new for any analysis to be anything but speculative.

    I would take anti-bitcoin views much more seriously if those who espouse them were actually short them with their own non-bitcoin currency.

  2. I apologize in advance for the wall of text.

    “Again with the weary technological superiority. It would be great if people making points like this could demonstrate that the energy use problem is an illusion or that Bitcoin is actually making progress as a currency, rather than offering technical quibbles.”

    I didn’t mention anything related to Bitcoin’s energy use. I agree it is enormous and it is a problem that needs to be addressed, and I agree that it is also a point of vulnerability for the network to have the majority of mining in China. However, this could be addressed by Bitcoin switching to a less energy intensive algorithm, such as Proof-of-Stake, away from Proof-of-Work. Proof-of-Stake is thousands of times more energy efficient than Proof-of-Stake. There is nothing intrinsic in Bitcoin that would make such a switch impossible, provided sufficient consensus is achieved.

    It should be noted that cryptocurrencies such as NEO are already using Proof-of-Stake.

    Regarding progress towards becoming a proper currency, I’ve mentioned that observers should seek the Bitcoin Scaling FAQ to observe the problem is known and being worked on by Bitcoin’s developers. Unfortunately, the group of developers working on Bitcoin is small and have limited bandwidth, and changing the network requires achieving wider consensus, which has proven contentious in areas such as the block size. This is a non-trivial process.

    “Searching on some of the firms you mention, I read the following: “While online retailers like Overstock have accepted bitcoin payments for years, the number of such transactions has reportedly been declining, in part because of the rise in fees.” That’s consistent with what I’ve written. So, it would be helpful for you to spell out why Bitcoin is facing scaling issues when its use as a currency is decreasing. You say it’s not because mining-related transactions are using up the capacity of the system. What then, is the problem.”

    The problem isn’t the miners who are generating the coins; the problem is a specific rule in the code that caps the block size to 1 MB. The block is what contains the transactions to be processed, which is what the miners do, and once the processing is done, it is added to the end of the blockchain. Originally, the 1 MB limit was added as a security mechanism to prevent denial of service attacks by malicious parties sending arbitrarily large transactions that could bring the network down. It has had the unintended effect of becoming a hard bottleneck on the network’s ability to process large volumes of incoming transactions.

    In periods of high transaction volume, this is what causes the backlog, which in turn causes a spike in fees as people sending transactions choose to pay more for their transactions to get processed quicker.

    Now you might say, why not increase the block size? This would require a so-called hard fork of the Bitcoin blockchain, and this is indeed the approach that was taken by the Bitcoin Cash hard fork of Bitcoin. But Bitcoin’s developers have feared that an unnecessary hard fork without sufficient consensus would split the network into two, and have chosen to defer the risk for now and fall back on software updates to increase capacity, such as with SegWit. However, these have been slow to roll-out due to the network requiring consensus and wallets to be updated to support the new functionality. The Bitcoin team is aware that a hard fork will become inevitable, but are playing it cautiously, and not without reason.

    The other thing to note is increasing the block size introduces other technical problems, the full scope of which I cannot treat here.

    “With Lightning, I take your point to be that, rather than having a direct channel between parties, it’s possible to pass the transaction through a number of peer-to-peer connections, each of which you must trust to work reliably. That seems even worse than the simple case I describe.”

    There is no reason, at least of which I can see, that you should consider this as “worse”. Information is reliably routed over secure channels between points over the Internet all the time, and routing is a well understood problem in computer science and software engineering, so routing securely isn’t the challenge. The challenge for the Lightning Network lies in infrastructure adoption. I’m not going to speculate whether ultimately Lightning Network will resolve Bitcoin’s scaling issues; as a software engineer myself, what sometimes works on paper can have serious problems in practise, and even well thought out implementations can unexpectedly fail. However, I believe it has a fair chance of success.

    Additional reading for those wanting additional information:
    https://en.bitcoin.it/wiki/Block_size_limit_controversy
    https://en.bitcoin.it/wiki/Scalability_FAQ
    https://bitcoin.org/en/bitcoin-core/capacity-increases-faq

  3. Andrew :
    Interesting and thoughtful analysis. But Bitcoin is still too new for any analysis to be anything but speculative.
    I would take anti-bitcoin views much more seriously if those who espouse them were actually short them with their own non-bitcoin currency.

    From my memory of John Quiggin’s past comments (on topics not directly related), I suspect his respoonse to you would be along these general lines, borrowing from Keynes: ‘the market can stay wrong longer than I can stay solvent’. In order to make money by going short, you need not only to be right that something is going down, you need to be right about when it is going down, which is much harder.

  4. @J-D Exactly right. True in the dotcom bubble and true today. If i’d gone short in 2015, where would I be now? IIRC, the Keynes quote is apocryphal, though also very apposite.

  5. @27 I’m aware of the block size issue and of Bitcoin Cash. But, as I understand it, Bitcoin Cash doesn’t seem to have fixed the problem. More to the point, why is block size a problem now more than in the past?

    As I understand it, it’s because transactions volumes are increasing, with the result that payments for priority processing are rising. Since we know goods and services transactions aren’t increasing, the increased volume must be on the asset side (mining or speculation).

    To sum up it seems to me that our disagreement rests on the fact that I’m looking at the growing demand for (non-currency related) transactions while you’re looking at the fixed supply, constrained by blocksize.
    Happy to be corrected on this.

  6. And here’s a Wired article on the energy issue with various claims -https://www.wired.com/story/bitcoin-global-warming/?mbid=synd_digg

  7. @John Quiggin, apologies for the late response. To respond to your points, no, Bitcoin Cash does not solve the scaling problem. Upping the block size (and ignoring the other technical implications of it) is only a temporary fix. To quote the Bitcoin Scaling FAQ: “For basic Bitcoin to scale to just 2 transactions a day for 7 billion people would require 24-gigabyte blocks”.

    Regarding what the rising volume of Bitcoin transactions are about, I agree that a large chunk of it is being driven by speculation and hype. People are buying, selling, and trading their coins in the hope they will get rich quick. There is no doubt a big degree of greed and stupidity in action here, but I think it’s important to also understand that Bitcoin’s developers don’t and can’t control the media representations and hype that outsiders and media personalities may build.

    However, speculative trading aside, I do believe there is at least some demand by people to use their cryptocurrency as a means for paying for goods and services. If you check the statistics for Living Room of Satoshi, you can see people are using their cryptocurrency to — at least indirectly — pay their bills and credit cards. Perhaps with time, this demand will continue to grow, or it may vanish.

    Also, to correct a rather humorous typo in my previous post, the sentence that reads, “Proof-of-Stake is thousands of times more energy efficient than Proof-of-Stake”, should be, “Proof-of-Stake is thousands of times more energy efficient than Proof-of-Work”.

  8. VM: “There is nothing intrinsic in Bitcoin that would make such a switch impossible, provided sufficient consensus is achieved.”

    The chances of Bitcoin ever achieving “consensus” to completely overhaul the entire Core architecture to become Proof of Stake are zero to zip.

    You may as well be claiming that “war is bad, but peace is hypothetically possible, so war isn’t all that bad”.

    Or – “continued use of coal is justifiable because hypothetically it might become clean one day”.

    And NEO doesn’t use Proof of Stake, it uses modified Practical Byzantine Fault Tolerance.

  9. @Nick
    You’ll pardon me if I am unconvinced by your speculative assertion. Everyone on Bitcoin Core knows a hard fork involving major changes will eventually be needed, and this could entail adopting a different algorithm, whether PoS or some other algorithm which could be developed in the future.

    And you are correct about NEO. I simply did a quick and lazy 30-second Google search for Proof-of-Stake coins. It’s an insubstantial detail.

  10. As a (retired) IT Professional, I’d be shorting the bejesus out of Bitcoin if I were a gambling man. The main reason I don’t is because I’m not quite sure when the bubble will crash.

  11. @VM “I do believe there is at least some demand by people to use their cryptocurrency as a means for paying for goods and services”
    Wouldn’t this be nuts in the current environment, with the price of Bitcoin going parabolic? Why would you spend something that might be worth double in a couple of weeks? (unless it’s for nefarious purposes, I guess)

    It would seem to have potential for either transactions or speculation, but you can’t use it for both at the same time. At the moment, it’s being used for speculation (and there’s no interest or dividend returned based on its output, so it *is* pure speculation), and so is essentially useless as a currency, and (to me at least) will remain so until I can pay my taxes or buy bananas at the local shops with it.

  12. @Norfolk Enchants, I agree that combination of growing value and high fees would give a strong incentive for people to hold onto Bitcoin rather than spend it, but a look at Living Room of Satoshi’s Stats page states that (as of the time of this writing) Bitcoin accounts for about 56% of use of the platform. Evidently, some folks are choosing to spend their Bitcoins on paying off bills, credit cards, and bank accounts.

    Perhaps these folks care less for the high transaction fees, or perhaps they’re timing their spending during periods of lower network activity, or perhaps there is some other reason or combination of reasons. I don’t have an answer.

    Other than holding onto one Bitcoin for sentimental reasons, I don’t have a compunction against spending it provided the fees are not excessive. I think the arguments that it should be a “store of value” are silly, cringeworthy, and are probably harmful for Bitcoin’s acceptance. I think it is better for the Bitcoin community to just be forthright and say, “Sorry, we have scaling problems”, than to say, “Don’t spend it, it’s a store of value”.

  13. Everyone on Bitcoin Core knows a hard fork involving major changes will eventually be needed

    Which means that current bitcoin is, well, useless, no?

    It’s the esperanto problem: esperanto is plainly unfit for the purpose of being an international auxillary language… but fixing esperanto means persuading people who’ve learnt current — defective — esperanto. Who aren’t by-and-large people who are concerned by esperanto’s problems, because if you were you’d never have learned the bloody language.

    So there’s no realistic path forward within esperanto. And no point investing in esperanto, because it’s not going to be the basis of any auxlang. But because esperanto has the bulk of the auxlang buy-in… no realistic prospect of progress outside of esperanto, either. Net result, auxlangs Just Ain’t Gonna Happen.

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