4 ms·

Great paper! Based on a quick first read, and ignoring numerous important details, the main argument boils down to this: "mining" costs (i.e., the computationa

by cs702 8y ago

Great paper! Based on a quick first read, and ignoring numerous important details, the main argument boils down to this: "mining" costs (i.e., the computational and other costs of processing transactions) in the network must be greater than the profits that could be obtained by compromising or sabotaging the network. Otherwise, it becomes profitable to compromise or sabotage the network. For example, if the cost of mining is lower than the one-time profit that could be made by betting a large sum against the price, it becomes profitable to bet such a large sum against the price and then investing a smaller sum necessary to acquire a majority of the computing power to sabotage the network. This is correct... but only if there is a zero-profit condition among miners -- i.e., if the Bitcoin network behaves like a standard theoretical rent-seeking tournament that reaches and settles into a classical equilibrium, instead of behaving like a distributed transaction processing network that produces profits for the parties that process transactions (AKA "miners"). I have not seen a good study (or actually any study) on the profitability of miners, but many miners claim to be making money by processing transactions! If mining is profitable, as miners claim, we have to add another condition: the net present value of the profits that could be obtained from compromising or sabotaging the network would need to exceed the net present value of the profits that could be obtained in perpetuity from behaving honestly. If the value of the profits that could be obtained in perpetuity by behaving honestly are greater, there would be no incentive to compromise or sabotage the network. Those are my initial thoughts, based on a quick first read. But I'm barely doing justice to the paper, which I found to be well-written and easy-to-follow. I've downloaded it to read it (and think about it) more carefully. Highly recommended reading if you have an interest in cryptoassets!

wmf 8y ago
IIRC all mining ASICs have been continuously sold out throughout the history of mining; this can explain profitability if miners are trying to drive the market towards equilibrium but there isn't enough supply. But even if mining is profitable today, miners might discount the NPV of future profits due to various massive risks (like the price dropping 70%).
Blackthorn 8y ago
> If mining is profitable, as miners claim, we have to add another condition: the net present value of the profits that could be obtained from compromising or sabotaging the network would need to exceed the net present value of the profits that could be obtained in perpetuity from behaving honestly. This is really why I don't think that 51% attacks are a problem for Bitcoin (and only Bitcoin). As soon as one is shown, the network's value will be destroyed. And if you're already on the gravy train through cheap power and cheap asics, why would you give that up?
- TangoTrotFox 8y ago
  It seems that the institutional banking industry is taking note of cryptocurrencies as a potential threat. And so there is an incentive there by some players to want to destroy coins without direct reward. But even this scenario is I think somewhat guarded against. Attacks on networks are completely visible to everybody. In light of an attack, a network could be forked, illicit transactions rolled back, a new proof method adopted if necessary, but otherwise keep the entire ledger intact. And indeed if/when this happens, there will likely be numerous forks that try to become the new standard. And this could actually end up being, in net effect, profitable for holders. Think about Bitcoin vs Bitcoin Cash. Bitcoin Cash was a somewhat controversial fork that some feared would split Bitcoin to unknown effect, but in the end it's only effect was giving all bitcoin holders an additional $754/coin (price as of today). In a time when a network was compromised, there would be a large market incentive to takeup the forks which would send their prices skyrocketing. Coins may end up being like the hydra. You slice off one head only for 10 to take its place. In a way this seems to be true of decentralized systems in general. Each time e.g. a major torrent site is taken offline, a dozen more come to try to fill that vacuum that's been created.
- QML 8y ago
  > As soon as one is shown, the network's value will be destroyed. I don't believe this to be accurate statement. Looking at two other cryptocurrencies -- Verge and Bitcoin Gold -- which have undergone 51% attacks, neither of them have experienced a collapse in value as a result.
  - 8y ago
beefield 8y ago
> we have to add another condition: the net present value of the profits that could be obtained from compromising or sabotaging the network would need to exceed the net present value of the profits that could be obtained in perpetuity from behaving honestly. I think you have hidden one interesting assumption there. You assume there exists a relatively low upper limit for the interest rate used in npv calculations for all investors. In other words, if there is even one investor at any point of time that needs the money really badly very soon, your argument breaks down.

by cs702 8y ago

wmf 8y ago

IIRC all mining ASICs have been continuously sold out throughout the history of mining; this can explain profitability if miners are trying to drive the market towards equilibrium but there isn't enough supply. But even if mining is profitable today, miners might discount the NPV of future profits due to various massive risks (like the price dropping 70%).

Blackthorn 8y ago

> If mining is profitable, as miners claim, we have to add another condition: the net present value of the profits that could be obtained from compromising or sabotaging the network would need to exceed the net present value of the profits that could be obtained in perpetuity from behaving honestly. This is really why I don't think that 51% attacks are a problem for Bitcoin (and only Bitcoin). As soon as one is shown, the network's value will be destroyed. And if you're already on the gravy train through cheap power and cheap asics, why would you give that up?

TangoTrotFox 8y ago
It seems that the institutional banking industry is taking note of cryptocurrencies as a potential threat. And so there is an incentive there by some players to want to destroy coins without direct reward. But even this scenario is I think somewhat guarded against. Attacks on networks are completely visible to everybody. In light of an attack, a network could be forked, illicit transactions rolled back, a new proof method adopted if necessary, but otherwise keep the entire ledger intact. And indeed if/when this happens, there will likely be numerous forks that try to become the new standard. And this could actually end up being, in net effect, profitable for holders. Think about Bitcoin vs Bitcoin Cash. Bitcoin Cash was a somewhat controversial fork that some feared would split Bitcoin to unknown effect, but in the end it's only effect was giving all bitcoin holders an additional $754/coin (price as of today). In a time when a network was compromised, there would be a large market incentive to takeup the forks which would send their prices skyrocketing. Coins may end up being like the hydra. You slice off one head only for 10 to take its place. In a way this seems to be true of decentralized systems in general. Each time e.g. a major torrent site is taken offline, a dozen more come to try to fill that vacuum that's been created.
QML 8y ago
> As soon as one is shown, the network's value will be destroyed. I don't believe this to be accurate statement. Looking at two other cryptocurrencies -- Verge and Bitcoin Gold -- which have undergone 51% attacks, neither of them have experienced a collapse in value as a result.
- 8y ago

beefield 8y ago

> we have to add another condition: the net present value of the profits that could be obtained from compromising or sabotaging the network would need to exceed the net present value of the profits that could be obtained in perpetuity from behaving honestly. I think you have hidden one interesting assumption there. You assume there exists a relatively low upper limit for the interest rate used in npv calculations for all investors. In other words, if there is even one investor at any point of time that needs the money really badly very soon, your argument breaks down.