{"type":"rich","version":"1.0","author_name":"npub1ac86vemj7ce5z8jyxt39rna3tvwql6xd30ha3vxcd6esysp23d9qrlswfj","author_url":"https://nostr.ae/npub1ac86vemj7ce5z8jyxt39rna3tvwql6xd30ha3vxcd6esysp23d9qrlswfj","provider_name":"njump","provider_url":"https://nostr.ae","html":"📅 Original date posted:2014-10-25\n📝 Original message:Some thoughts about Alex's analysis:\n\n- bitcoin price may increase (though doubling immediately might be\nunlikely) after the halving (because the new coins are in short\nsupply). Apparently there is some evidence of a feedback loop between\nnumber of freshly mined coins sold to cover electrical costs ongoing\n(which depends on halving also), in that there are claims that the btc\nprice experiences some downwards pressure when margins are slim as\nminers sell almost all of them when the electrical cost takes most of\nthe profit, and otherwise tend more to hold coins longer term.\n\n- that people who cant make money mining with 1/2 reward will resort\nto attacking the network rather than living with it for 2weeks until\ndifficulty adjustment).  actually it will be longer than two weeks if\nits going to result in a difficulty fall.\n\n- that the miners wont act in their own meta-interest to aim for the\nplausible new hashrate supported by the lower reward.  mining\nequipment investment horizon being 3-6mo+ so it can easily make\neconomic sense to subsidise it for a bit to smooth the transition.\n\n- fees might go up to unjam the network also, so the people\nbenefitting from the transactions utility also help cover the\ntransition costs.  or maybe someone makes an assurance contract to pay\nthe short fall and phase it out over a few months to smooth the shift.\n\n- there is a wide range of electrical efficiency, and some are much\nworse than others so there maybe a convenient equilibrium where there\nare enough left who can still profit.\n\n- alternatively you might say why not 1/100th reward reduction per 2\nweek period rather than 1/2 every 4 years, a difficulty retarget could\nbe a convenient point to do that.\n\nAdam\n\nOn 25 October 2014 11:06, Alex Mizrahi \u003calex.mizrahi at gmail.com\u003e wrote:\n\u003e # Death by halving\n\u003e\n\u003e ## Summary\n\u003e\n\u003e If miner's income margin are less than 50% (which is a healthy situation\n\u003e when mining hardware is readily available), we might experience catastrophic\n\u003e loss of hashpower (and, more importantly, catastrophic loss of security)\n\u003e after reward halving.\n\u003e\n\u003e ## A simple model\n\u003e\n\u003e Let's define miner's income margin as `MIM = (R-C_e)/R`, where R is the\n\u003e total revenue miner receives over a period of time, and C_e is the cost of\n\u003e electricity spent on mining over the same period of time. (Note that for the\n\u003e sake of simplicity we do not take into account equipment costs, amortization\n\u003e and other costs mining might incur.)\n\u003e\n\u003e Also we will assume that transaction fees collected by miner are negligible\n\u003e as compared to the subsidy.\n\u003e\n\u003e Theorem 1. If for a certain miner MIM is less than 0.5 before subsidy\n\u003e halving and bitcoin and electricity prices stay the same, then mining is no\n\u003e longer profitable after the halving.\n\u003e\n\u003e Indeed, suppose the revenue after the halving is R' = R/2.\n\u003e    MIM = (R-C_e)/R \u003c 0.5\n\u003e    R/2 \u003c C_e.\n\u003e\n\u003e    R' = R/2 \u003c C_e.\n\u003e\n\u003e If revenue after halving R' doesn't cover electricity cost, a rational miner\n\u003e should stop mining, as it's cheaper to acquire bitcoins from the market.\n\u003e\n\u003e ~~~\n\u003e\n\u003e Under these assumptions, if the majority of miners have MIM less than 0.5,\n\u003e Bitcoin is going to experience a significant loss of hashing power.\n\u003e But are these assumptions reasonable? We need a study a more complex model\n\u003e which takes into account changes in bitcoin price and difficulty changes\n\u003e over time.\n\u003e But, first, let's analyze significance of 'loss of hashpower'.\n\u003e\n\u003e ## Catastrophic loss of hashpower\n\u003e\n\u003e Bitcoin security model relies on assumption that a malicious actor cannot\n\u003e acquire more than 50% of network's current hashpower.\n\u003e E.g. there is a table in Rosenfeld's _Analysis of Hashrate-Based Double\n\u003e Spending_ paper which shows that as long as the malicious actor controls\n\u003e only a small fraction of total hashpower, attacks have well-define costs.\n\u003e But if the attacker-controlled hashrate is higher than 50%, attacks become\n\u003e virtually costless, as the attacker receives double-spending revenue on top\n\u003e of his mining revenue, and his risk is close to zero.\n\u003e\n\u003e Note that the simple model described in the aforementioned paper doesn't\n\u003e take into account attack's effect on the bitcoin price and the price of the\n\u003e Bitcoin mining equipment. I hope that one day we'll see more elaborate\n\u003e attack models, but in the meantime, we'll have to resort to hand-waving.\n\u003e\n\u003e Consider a situation where almost all available hashpower is available for a\n\u003e lease to the highest bidder on the open market. In this case someone who\n\u003e owns sufficient capital could easily pull off an attack.\n\u003e\n\u003e But why is hashpower not available on the market? Quite likely equipment\n\u003e owners are aware of the fact that such an attack would make Bitcoin useless,\n\u003e and thus worthless, which would also make their equipment worthless. Thus\n\u003e they prefer to do mining for a known mining pools with good track record.\n\u003e (Although hashpower marketplaces exist: https://nicehash.com/ they aren't\n\u003e particularly popular.)\n\u003e\n\u003e Now let's consider a situation where mining bitcoins is no longer profitable\n\u003e and the majority of hashpower became dormant, i.e. miners turned off their\n\u003e equipment or went to mine something else. In this case equipment is already\n\u003e nearly worthless, so people might as well lease it to the highest bidder,\n\u003e thus enabling aforementioned attacks.\n\u003e\n\u003e Alternatively, the attacker might buy obsolete mining equipment from people\n\u003e who are no longer interested in mining.\n\u003e\n\u003e ## Taking into account the Bitcoin price\n\u003e\n\u003e This is largely trivial, and thus is left as an exercise for the reader.\n\u003e Let's just note that the Bitcoin subsidy halving is an event which is known\n\u003e to market participants in advance, and thus it shouldn't result in\n\u003e significant changes of the Bitcoin price,\n\u003e\n\u003e ## Changes in difficulty\n\u003e\n\u003e Different mining devices have different efficiency. After the reward halving\n\u003e mining on some of these devices becomes unprofitable, thus they will drop\n\u003e out, which will result in a drop of mining difficulty.\n\u003e\n\u003e We can greatly simplify calculations if we sum costs and rewards across all\n\u003e miners, thus calculating average MIM before the halving: `MIM = 1 - C_e/R`.\n\u003e\n\u003e Let's consider an equilibrium break-even situation where unprofitable mining\n\u003e devices were turned off, thus resulting in the change in electricity\n\u003e expenditures: `C_e' = r * C_e`. and average MIM after the halving `MIM' =\n\u003e 0`. In this case:\n\u003e\n\u003e     r * C_e = R/2\n\u003e     C_e / R = 1/2r\n\u003e     (1 - MIM) = 1/2r\n\u003e     r = 1/(2*(1-MIM))\n\u003e\n\u003e Let's evaluate this formulate for different before-halving MIM:\n\u003e\n\u003e 1. If `MIM = 0.5`, then `r = 1/(2*0.5) = 1`, that is, all miners can remain\n\u003e mining.\n\u003e 2. If `MIM = 0.25`, then `r = 1/(2*0.75) = 0.66`, the least efficient miners\n\u003e consuming 33% of total electricity costs will drop out.\n\u003e 3. If `MIM = 0.1`, then `r = 1/(2*0.9) = 0.55`, total electricity costs drop\n\u003e by 45%.\n\u003e\n\u003e We can note that for the before-halving MIM\u003e0, r is higher than 1/2, thus\n\u003e less than half of total hashpower will drop out.\n\u003e\n\u003e The worst-case situation is when before-halving MIM is close to zero and\n\u003e mining devices, as well as cost of electricity in different places, are\n\u003e nearly identical, in that case approximately a half of all hashpower will\n\u003e drop out.\n\u003e\n\u003e ## MIM estimation\n\u003e\n\u003e OK, what MIM do we expect in the long run? Is it going to be less than 50%\n\u003e anyway?\n\u003e\n\u003e We can expect that people will keep buying mining devices as long as it is\n\u003e profitable.\n\u003e\n\u003e Break-even condition: `R - C_e - P = 0`, where P is the price of a mining\n\u003e device, R is the revenue it generates over its lifetime, and C_e is the\n\u003e total cost of required electricity over its lifetime. In this case, `R = C_e\n\u003e + P`, and thus:\n\u003e\n\u003e     MIM = 1 - C_e / (C_e + P)\n\u003e\n\u003e `f = C_e / P` is a ratio of the cost of electricity to the cost of hardware,\n\u003e `C_e = f * P`, and thus\n\u003e\n\u003e     MIM = 1 - f * P / (f * P + P) = 1 - f / (f + 1) = 1 / (1 + f)\n\u003e\n\u003e MIM is less than 0.5 when f \u003e 1.\n\u003e\n\u003e Computing f is somewhat challenging even for a concrete device, as it's\n\u003e useful lifetime is unknown.\n\u003e\n\u003e Let's do some guesstimation:\n\u003e\n\u003e Spondoolies Tech's SP35 Yukon unit consumes 3.5 KW and costs $4000. If it's\n\u003e useful lifetime is more than 2 years and a cost of KWh is $0.1, the total\n\u003e expenditures on electricity will be at least $6135, thus for this device we\n\u003e have `f \u003e 6135/4000 \u003e 1.5`.\n\u003e\n\u003e If other devices which will be sold on the market will have similar specs,\n\u003e we will have MIM lower than 0.5. (Well, no shit.)\n\u003e\n\u003e ## Conclusions\n\u003e\n\u003e Reward halving is a deficiency in Bitcoin's design, but there is some hope\n\u003e it won't be critical: in the equilibrium break-even situation hashpower drop\n\u003e is less than 50%.\n\u003e Hashrate might drop by more than 50% immediately after the halving (and\n\u003e before difficulty is updated), thus a combination of the halving and slow\n\u003e difficulty update pose a real threat.\n\u003e\n\u003e ------------------------------------------------------------------------------\n\u003e\n\u003e _______________________________________________\n\u003e Bitcoin-development mailing list\n\u003e Bitcoin-development at lists.sourceforge.net\n\u003e https://lists.sourceforge.net/lists/listinfo/bitcoin-development\n\u003e"}