3 ms·

>> the mining cost of bitcoin should not affect its value any more than the cost of printing regular currency... This is a frequently made logic mistake. Proof

by cateye 8y ago

>> the mining cost of bitcoin should not affect its value any more than the cost of printing regular currency... This is a frequently made logic mistake. Proof of work determines the value of the currency strongly because it is inherently interconnected with the sustainability of the underlying network operation. That is why it is often explained as "the ledger is the currency". Mining is not only for creating new coins but also for validating transactions and propagating of the ledger. Therefore cryptocurrency is a different paradigm where direct comparisons are not always possible and result in wrong conclusions.

amarkov 8y ago
But why does this interconnection necessarily establish a price floor? The cost of producing a penny is more than 1 cent, for example.
- cateye 8y ago
  The main difference is that only the central authority can produce a penny. In the case of cryptocurrency everyone is entitled and able to produce it. So there is direct competition and open market for creating "coins". Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value.
  - mancerayder 8y ago
    Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value. How does that figure given timeframe? Are you somehow calculating equipment initial cost and electricity in an estimate? Over how long?
Ihfhcub 8y ago
Sorry but the complete opposite of everything you say is true. Hashrate follows price only. Very rarely will the hashrate effect price Miners have no say in what is a valid transaction. Mining system had only one purpose. To make sure miners have no say on what is a valid transaction Miners have no control over how new coins are made. They disempower themselves by competing for the protocol dictacted reward
- cateye 8y ago
  Don't want to go in a discussion and maybe you are completely right, but to my understanding: Miners collect the transactions on the network into large bundles called blocks. These blocks are strung together into one continuous, authoritative record called the block chain. Miners create blocks of transactions, and they have to create them in such a way that the rest of the network will accept them. One of the requirements is that the transactions in the block are all valid transactions. So yes, miners will validate transactions before they add the transaction to a block. If the miner cheats, and puts an invalid transaction into a block, then the rest of the network will reject that block, and the miner would have wasted their time doing the proof of work on that block. https://bitcoin.stackexchange.com/questions/148/what-exactly-is-mining https://bitcoin.stackexchange.com/questions/148/what-exactly...
  - Ihfhcub 8y ago
    Yes you're right. But people's first analysis is to give too much weight to miners The protocol decides what is a valid transaction and the users enforce it. If miners decide what is valid the price of bitcoin goes to zero. They are a slaves to the protocol and that is the only reason that the mining mechanism works. Miners disempower themselves by competing
- rcxdude 8y ago
  Miners can refuse to process some transactions (this is somewhat intentional, in that higher fee transactions are supposed to get priority, but there is no mechanism which prevents them from simply excluding all transactions to/from a specific address from a block). If a large percentage of them do so it can have a significant impact on how long those transactions take (and the mining pools are very big and few in number).
waleedka 8y ago
I think you got it backwards. Which seems to be a fairly common mistake because, intuitively, we tend to associate the amount of work to the amount of value. In Bitcoin, and other PoW blockchains, the protocol dynamically adjusts the difficulty of mining a new block such that it requires more work if there are more miners. Which also means that it requires less work if there are fewer miners, which is why it was easy to mine Bitcoin on a laptop in the early days but now it requires specialized hardware. The causality path works like this: Price of the coin goes up -> it becomes more profitable to mine -> more miners jump in -> difficulty goes up -> cost of mining increases. This continues until there is an equilibrium.

by cateye 8y ago

amarkov 8y ago

But why does this interconnection necessarily establish a price floor? The cost of producing a penny is more than 1 cent, for example.

cateye 8y ago
The main difference is that only the central authority can produce a penny. In the case of cryptocurrency everyone is entitled and able to produce it. So there is direct competition and open market for creating "coins". Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value.
- mancerayder 8y ago
  Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value. How does that figure given timeframe? Are you somehow calculating equipment initial cost and electricity in an estimate? Over how long?

Ihfhcub 8y ago

Sorry but the complete opposite of everything you say is true. Hashrate follows price only. Very rarely will the hashrate effect price Miners have no say in what is a valid transaction. Mining system had only one purpose. To make sure miners have no say on what is a valid transaction Miners have no control over how new coins are made. They disempower themselves by competing for the protocol dictacted reward

cateye 8y ago
Don't want to go in a discussion and maybe you are completely right, but to my understanding: Miners collect the transactions on the network into large bundles called blocks. These blocks are strung together into one continuous, authoritative record called the block chain. Miners create blocks of transactions, and they have to create them in such a way that the rest of the network will accept them. One of the requirements is that the transactions in the block are all valid transactions. So yes, miners will validate transactions before they add the transaction to a block. If the miner cheats, and puts an invalid transaction into a block, then the rest of the network will reject that block, and the miner would have wasted their time doing the proof of work on that block. https://bitcoin.stackexchange.com/questions/148/what-exactly-is-mining https://bitcoin.stackexchange.com/questions/148/what-exactly...
- Ihfhcub 8y ago
  Yes you're right. But people's first analysis is to give too much weight to miners The protocol decides what is a valid transaction and the users enforce it. If miners decide what is valid the price of bitcoin goes to zero. They are a slaves to the protocol and that is the only reason that the mining mechanism works. Miners disempower themselves by competing
rcxdude 8y ago
Miners can refuse to process some transactions (this is somewhat intentional, in that higher fee transactions are supposed to get priority, but there is no mechanism which prevents them from simply excluding all transactions to/from a specific address from a block). If a large percentage of them do so it can have a significant impact on how long those transactions take (and the mining pools are very big and few in number).

waleedka 8y ago

I think you got it backwards. Which seems to be a fairly common mistake because, intuitively, we tend to associate the amount of work to the amount of value. In Bitcoin, and other PoW blockchains, the protocol dynamically adjusts the difficulty of mining a new block such that it requires more work if there are more miners. Which also means that it requires less work if there are fewer miners, which is why it was easy to mine Bitcoin on a laptop in the early days but now it requires specialized hardware. The causality path works like this: Price of the coin goes up -> it becomes more profitable to mine -> more miners jump in -> difficulty goes up -> cost of mining increases. This continues until there is an equilibrium.