December 9, 2022

The low-transaction-fee argument for Bitcoin is silly

A common argument advanced by Bitcoin proponents is that unlike banks and credit cards, Bitcoin has low (or even zero) transaction fees. The claim is a complete red herring, and in this post I’ll explain why.

Let’s assume for the purposes of argument that Bitcoin transaction fees are, in fact, zero. There are small mining-related transaction fees, but it seems plausible that these fees will always be far smaller than those associated with traditional banking.

Why do banks and credit cards charge those annoying fees? A major reason is fraud. Banks eat the cost of fraudulent transactions, but pass on the cost to the customer by taking a cut of each legitimate transaction. Fraud is not an artifact of a particular system that we can design away — it is inherent to every form of money handled by humans. To compare Bitcoin meaningfully with traditional banking, then, we must ask how big fraud-related losses are for Bitcoin users.

Framed this way, the comparison is not a happy one for Bitcoin. From thefts of wallets to hacks of Bitcoin exchanges, fraud in the Bitcoin ecosystem is rampant. It only gets worse when we add sources of risk other than fraud. A recent study found that 45% of Bitcoin exchanges shut down. Several of the rest have suffered attacks and losses.
[Read more…]

How Consensus Drives Bitcoin

Josh Kroll, Ian Davey and I have a new paper on the dynamics of Bitcoin, which we’re going to release in a few days. This post is the first in a series exploring our paper’s analysis of why Bitcoin works and what could derail it.

Consensus drives Bitcoin. Like any fiat currency (a currency not backed by anything of intrinsic value), Bitcoin has value because of an expectation that people will continue to accept the currency in payment. Like Tinkerbell, who exists because you believe in her, Bitcoin has value because enough people believe it has value. This much is true for all fiat currencies.

But Bitcoin is not just a currency, it is also a technology—and that technology must function correctly for the currency to operate and retain its value. In particular, there are two additional forms of consensus that must exist for Bitcoin to operate.
[Read more…]

Basic Economics of Bitcoin Mining

Arvind wrote yesterday about the availability of chips that do super-fast Bitcoin mining. I want to follow up by unpacking the economics of Bitcoin mining, to see what the effect of the new chips will be, and more generally what the future of Bitcoin mining looks like.
[Read more…]

Bitcoin grows up, gets its own hardware

The big news in the Bitcoin world is that there are several Bitcoin-mining ASICs (custom chips) already shipping or about to be launched. Avalon in particular has been getting some attention recently. Bitcoin mining moved long ago from CPUs to GPUs, but this takes it one step further. The expectation is that very soon most mining will be done by such specialized hardware; general-purpose machines will be too inefficient to be profitable. This development raises a whole host of interesting questions.

First, if ASIC mining is indeed so much faster than any current method, and can recover the hardware cost in just a few days as claimed, why are the creators selling them, or even talking about them?! Why not keep the existence of these devices a secret and mine as much BTC as possible before the world catches on? After all, the costs of packaging and distribution will only decrease the margins. There are several possible explanations:
[Read more…]