Monday, March 24, 2014

MIT: Weaknesses in Bitcoin’s Foundations

Tom Simonite at MIT Technology Review writes:
One conclusion drawn by Kroll and his Princeton colleagues Ian Davey and Ed Felten is that those rules will have to be significantly changed if Bitcoin is to last. Their models predict that interest in “mining” for bitcoins, by downloading and running the Bitcoin software, will drop off as the number in circulation grows toward the cap of 21 million set by Nakamoto. This would be a problem because computers running the mining software also maintain the ledger of transactions, known as the blockchain, that records and guarantees bitcoin transactions (see “What Bitcoin Is and Why It Matters”).
Miners earn newly minted bitcoins for adding new sections to the blockchain. But the amount awarded for adding a section is periodically halved so that the total number of bitcoins in circulation never exceeds 21 million (the reward last halved in 2012 and is set to do so again in 2016). Transaction fees paid to miners for helping verify transfers are supposed to make up for that loss of income. But fees are currently negligible, and the Princeton analysis predicts that under the existing rules these fees won’t become significant enough to make mining worth doing in the absence of freshly minted bitcoins.
The only solution Kroll sees is to rewrite the rules of the currency. “It would need some kind of governance structure that agreed to have a kind of tax on transactions or not to limit the number of bitcoins created,” he says. “We expect both mechanisms to come into play.”That kind of approach is common in established economies, which tame things like insider trading with laws and regulatory agencies and have central banks to shape economies. But many backers of Bitcoin prize the way it currently operates without centralized control, and would likely rebel at any suggestion of changing the rules.
More here.

This may be just a technological change (but a big technological change) that will be required for Bitcoin, however, I consider the fact that Bitcoin can be changed, at all, very alarming. Assuming that Bitcoin becomes a mainstream currency, which I doubt, but if it does, who is to say that in a democracy a majority can't vote to somehow change Bitcoin in a manner that destroys what the essence of what it is today. Very scary. Contrast this with gold. Gold has no rulers, it doesn't need to be technologically changed to continue working  and majority rule will never change the essence of gold.

(Via Marginal Revolution)


  1. Obviously market participants want bitcoins. The fact that people will pay over $500 for one shows that individuals want them. All value is subjective so there is no legitimate way to explain away this demand as misguided or deluded. Governments, regulators, elites, interests vested in our fiat system, all hate bitcoin and seek to destroy it - but left to their own free market participants buy and sell bitcoins, transact business in it as a payment system, speculate and save with it . . .

    1. You are correct. People also like Amway & Herbalife as well.

    2. value is subjective. you don't like amway, keep away from it. To try to invalidate other people's judgments of what is of value to them is the cause of much evil in the world. If you want to point out why you think something is not as much value to them as they think it is, that is fine - you need to convince another person who may freely accept your arguments or reject them. If they reject your viewpoint and still bid $500 for bitcoin, it is valuable to them and none of your business.

    3. "To try to invalidate other people's judgments of what is of value to them is the cause of much evil in the world. If you want to point out why you think something is not as much value to them as they think it is, that is fine"

      So I'm Evil because I agree with you and point out two very large, successful companies that some feel are ponzi schemes, but reinforce your point that value is subjective? lol

      Dude, it's like you just went into your kitchen, grabbed a large frying pan, and proceeded to bonk yourself over the head with it.

      By the way, people "try to invalidate other people's judgments" all the time, it's called a "disagreement"- surprisingly, sometimes neither of the people who disagree with each other are "evil".

  2. The cited article notes that, "making major changes to the basic rules of how the currency works is likely to meet stiff resistance."


    Bitcoin isn't owned by anyone, but a core group of devs are responsible for managing the open source code base that anyone can review.

    If the core dev team did something that the bulk of bitcoin users disagreed with, a new branch of the software would be created and it would be managed by people who the community approves of.

    As for the theoretical problems noted - they are just that, theoretical. Mining pools are not composed of one or two major players. They are a HUGE collection of people operating mining rigs. If it became apparent that one of the pools was operating malicious software, people are going to drop them like a bad habit. There are more good people than bad out there. Even if all the bad apples got together, there's no way they could overpower all the good guys.

  3. Another truly clueless article about bitcoin. So tell all of us, how does it work that it is the computers doing the mining that is maintaining the ledger for all transactions, when ALL of the transactions ARE PEER TO PEER?!? Yes, in the beginning when few where interested in bitcoin, there was a strong incentive for those interested in the currency to mine it, but where we are now, it's more interesting for individuals and organisations to use bitcoin as a means of exchange. Also whether I'm a business or individual it makes sense that I'm verifying my own transfers and updating the ledgers as I make sales using my own "computer". Why? Because I don't no longer need to keep my money in the bank. I can keep the majority of my bitcoin offline. Nor do I need a broker or exchange in purchase contracts for futures, options, etc in order to hedge my bitcoins since it's programmable (see ultracoin or ethereum). It's seems that once again academics sitting in their ivy towers are clueless about thing in the real world.