Bitcoin’s Innate Problems: Volatility and Mining CentralizationsteemCreated with Sketch.

in #bitcoin3 years ago

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After going through a lot of information and conversations about Bitcoin and Bitcoin Cash, two problematic elements seem to be at the top of people’s list of deficiencies of these markets are volatility and mining centralization.

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Every argument against Bitcoin starts with mining centralization. In this case, I’m talking about an informed person who has done their research. The Roubini’s and Dimon’s who simply call Bitcoin a fraud because they either don’t agree with the principles or because it challenges their oligarchy (respectively) are excluded from this. People who have been up to date - studying and researching this space - often come to this conclusion.

42.5% of the current Bitcoin hash rate is controlled by the top 5 mining pools. 80.5% of the hash rate is controlled by mining pools while the remaining 19.5% is controlled by individuals and other smaller pools of miners. It seems an awful lot like the current economic system where a few wealthy individuals and large institutions control the global economy. But this is far from the truth.

Another top concern for people is the volatility. As I mentioned in a previous article, we cannot use frameworks for other asset classes to define cryptocurrency. Volatility hinders adoption and lack of adoption prolongs volatility – a paradox for the ages. While mining centralization is a relatively new addition to the list of problems, volatility is quite possibly the oldest. People keep talking about waiting for volatility to subside, but it isn’t that easy. Moreover, volatility is linked to the blatant manipulation in the market. But maybe we need to think about the possibility of volatility not disappearing. The volatility is something we may have to hold dear. But that lasts only till we are pegged to the fiat world.

These two problems are beautifully tied together and influence each other. So let’s dig right into it.

The Current Global Economy and Bitcoin

The volatility-adoption paradox doesn’t seem to be going anywhere. That is something we have to accept for the near future. There doesn’t seem to be a solution present for the volatility. On one hand we can make the argument that as supply expands and price moves upwards, the amount of control these whales have in the market will diminish. But how can we know the whales aren’t miners who are increasing their control by directly absorbing the supply? The simple answer is we cannot. When you’re dealing with trustless markets, uncertainty is a by-product which you must bear. But it doesn’t mean these markets are not efficient or useful. In fact, I would argue that it makes Bitcoin much more efficient.

In the current economic landscape, there is the same (if not more) amount of manipulation. It’s just hidden in a web of deceit and lies. It is run by a private cartel that colludes with the government. Who controls the currency markets? Central banks and governments do. This isn’t ‘speculation’. Most countries peg their currency on a system called a ‘managed float’. A managed float is literally defined as a system where the government has the ability to push or pull price based on what they feel is required. China follows a peg called a ‘dirty float’ where they manipulate the price of the Yuan beyond the accepted boundaries. It is called dirty because other countries don’t like it. More specifically, the USA doesn’t like it. The IMF, World Bank and all other supranational agencies are all American cronies. America provides the most funding to these institutions. In return, they grant them a pass to do as they please. 16.52% of the votes belong the USA. China, Japan, and Germany follow closely with around 6%.

When you compare such an economy to Bitcoin you’ll see one uncanny similarity - the existence of a cartel of high liquidity entities who move the market. But these market movers in Bitcoin cannot control who can be a part of the network and who can’t. They can’t decide if the network changes dimensions or consensus. So all the people who say Bitcoin isn’t decentralized are actually very wrong. These assumptions are based on the fact that 80% of the hash rate belongs to the known mining pools. This is a real risk. But more than causing something malicious, this is just setback to development. The real developers who submit commits and actually write the code are different from the mining pools. Most mining pools will stick with whatever these developers propose as the real technological innovation comes from them. These pools could potentially use their power to play around with the network and/or double spend coins, but they cannot change the network. If the developers feels the miners are blocking something necessary, they can fork the network and continue on the new chain. For this reason, these pools will stick with what I call ‘developer consensus’. This means that the real risk of malicious intent in Bitcoin stems from the developers. The real decentralization needs to be in the code base over the hash rate. This doesn’t mean the centralization of Bitcoin mining isn’t a problem. It most definitely is. My opinion is that it is a slightly overblown problem while more important issues are being neglected.

Real Blockchain Consensus

Let’s view this with an example. Has the Bitcoin network ever been under attack because a mining pool tried to double spend their transactions? Alternatively, has the Bitcoin network ever forked because a mining pool was up to something? The answer is a straight no. But from a development stand point, when developers disagree, a fork is imminent. The minority group forks the network and heads off into their own direction. This is happened when BCH forked from BTC and when BSV forked from BCH. The mining pools have no real network power because they simply run the network, they don’t make the network.

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One particular mining pool, Antpool (owned by Bitmain), was mining empty blocks just for the block reward. When asked why, their answer was “because we can”. So when this started to blow up in the community, Antpool reduced the frequency of these greatly. This is because they understand the scenarios this can go down; neither of those ends in favor of Antpool. Let’s say this continued and hindered the network. The developers would most likely work this into the code to make mining empty blocks a penalty that strips the miner of their reward. Suppose they don’t receive the consensus to do so, they would fork the network and implement it. People automatically shift to the new chain because it’s were the development happens. Since the transactions and value is in the new forked chain, the mining pools will move. At the end, the mining pools don’t really win the power battle: the developers do.

Think of it from a traditional context in an imaginary scenario where power isn’t concentrated with banks. Chase, Wells Fargo, Citibank, and Bank of America control most of the money supply. Imagine these banks only getting to process transactions and take their cut of the fees and interest from banking activities. But when it came down to who can use their services, they had absolutely no control. This was decided by an independent group of people who share different views and perspectives. This is what a government is supposed to be like. Unfortunately, governments allow privatized financial institutions to run the economy. This means in the end, individuals have no say in what happens in the entire process. But that’s the beauty of Bitcoin. It integrates governance in a way that empowers a regular person. You don’t need a law degree from Yale or Harvard to join a cult of elites and take part in running the system. You just need a computer and the will to contribute.

Just for the sake of putting everything out there, the mining pools play an important role. Bitcoin’s mempool is currently around 40-60 thousand transactions. For reference, the mempool is the pool of unconfirmed transactions on the Bitcoin blockchain. This sudden spike in activity has been succeeded by a huge spike in transaction fees. The fee to be included in the next block is $2.12 per transactions and $2.06 to be confirmed after 6 blocks (60 minutes). It’s scary to imagine the state of the network if it didn’t have the mining pools contributing such a large portion of the hash rate. Maybe giving up on some of the things the Bitcoin community wants in the short term for some much needed functionality isn’t so bad after all.

Working Past Shortcomings

Decentralized systems are nascent. Unfortunately, mainstream adoption is quite far off. The developmental angles for cryptocurrency are getting better, but they aren’t at the level required for global penetration. My semi-evidenced prediction for the future is that we will have an ecosystem of decentralized protocols and systems rather than just one sole protocol we rely on. The single-protocol structure is what Bitcoin maximalists believe to be the future. Unfortunately for them, all the data on adoption and growth points in the other direction. This ecosystem of decentralized systems is at best in the initial development stage as we are still intellectually structuring it.

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Volatility is an innate feature of small, unregulated markets. This is such an easy thing to say but so incredibly difficult to implement. The markets will continue to be volatile for quite some time. It isn’t something that will disappear overnight. In fact, we should ideally be prepared for it to never stop. This is why development of portfolio backed stablecoins like Reserve Protocol are important to the ecosystem. Gold developed its reputation as a store of value after years of proving itself to be one. Bitcoin doesn’t become a store of value just because we want it to be one.

The need for stablecoins might diminish if we move to a pure one-crypto economy. For simplicity, let’s assume this single crypto will be Bitcoin. All prices are quoted in Bitcoin. The volatility of the peg to USD no longer matters. The economy is deflationary as supply is limited, but it isn’t deflationary in a bad way because it doesn’t de-incentivize production and spending. When we do have a crypto economy, I can guarantee it will not be a single-coin system. Various utility tokens and cryptocurrencies with different functionalities will co-exist. This example was just to show you that volatility exists because fiat is dominant. In a society where fiat is no longer dominant, volatility would cease to exist. Rather, Bitcoin may become the USD in the sense that everything else will be pegged to it. The second the peg disappears, it takes volatility along with it.

I’ll end this with a famous quote from the ever-positive doge community: “1 doge = 1 doge”.

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Thanks! This has been one of the better written articles on cryptocurrency that I have seen. Too often the side in favour of crypto sound too much like paid shills or moonboys who are blind to any shortcomings. Looking forward to reading more from you!

Thank you @bengy

Glad you enjoyed the read. Grateful for your support and kind words!

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You raise some interesting and relevant points.

Re the centralized mining, I believe that Satoshi never intended mining to be as centralized as its become. In fact, he may have believed that it would be much less centralized. Nevertheless, it's most likely that the centralization was inevitable

As you pointed out, in certain ways, the crypto field is like the current economic system. But at least the crypto space does not have the rampant fraud, the centralized power, and the counterfeiting (aka QE, aka money printing) of the fiat money system.

As you stated, the big players in the crypto space cannot manipulate the crypto prices as the banksters do to their currencies.

Re volatility, we can be certain that all overvalued fiat currencies will soon prove to be very unstable and very volatile. And we can be certain that their volatility will occur in a very steep downwards trend.

So, I'll take the minimal volatility of cryptocurrencies over that of fiat currencies any day.

Very true @majes.tytyty

Good points. Your theory on Satoshi is correct. His goal was to create a system where everyone banks themselves. His idea was not for a mining pool business to be born. It was for each individual using the network to run a node and mine Bitcoin.

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Ideal cryptocurrency,
If scattered in the hands of most people,
If the majority holding rate is not high,
then It will naturally be very stable.
but in fact,
The cryptocurrency is scattered in the hands of most people.
But each one holding ratio is very different.
So there will still be great fluctuations.

All is moving around BTC, everybody knows that BTC is decentralized and miners are centralized, this is a huge speculation..

This is like RIPPLE and it is made for bankers to bankers and it is centralized...

Some people say that BTC could destroy everything in this world, but this is totally wrong, bitcoin is moving a lot of different coins.. For now exist more than 40 different kind of coins (tokens)

Mining is not the problem, the system is the problem, governments, evangelist and many others who want to destroy decentralization ...!!!

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Agree with your sentiment @edgarare1

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First of all, great post.

Coming to the point. You take into consideration the mining pools but I guess you forgot the exchanges and wallets that have a good enough importance too. In reality not many people setup nodes. People just love the ease of setup in remote clients and wallets. And in such a case their power to take part in the consensus is partially lost. So in a way even this leads to "centralization" of the network.

What do you think?

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Definitely @chirag-parmar

If you're aware of the Bitfinex and EOS tie up, where Bitfinex was willing to stake all the EOS held on their exchange to power the network, you know the power an exchange can bring.

CZ and Jesse Powell brought BSV to the gutters in one fell swoop. Exchanges, as the main liquidity providers, are at the forefront of the current ecosystem. Centralisation is often misconstrued as purely "on chain". This isn't true at all, as you've pointed out.

Exchanges, wallets, the community, and mostly the developers are the focal point of consensus. As people who drive adoption and innovation, the power they hold is significant. That's why I pointed out "developer consensus" is possibly the most important thing here.

Thanks for the great feedback. I love intellectual comments like these that get me thinking further.

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Yet another great article @reverseacid.

You touched on some of the hottest topics in this space. One that I'm most concerned with is the political issue. I'm referencing to that fact that, and particularly around Bitcoin, the majority of the mining power is centralized in China which is a very controlled society. It is not inconceivable that a 51% attack could be orchestrated by the government if the desire or need arose. Whether you believe this would happen or not is immaterial. The numbers are there.

Added to that, there is a lot of selfish mining, which you alluded to and which is predominate in China with Bitcoin. So, to sum it up, we have the possibility of negative impact due to geo-political issues as well as selfish interests on the biggest cryptocurrency of them all. This is a risk that you read little about, especially since the push is for greater adoption. It should be noted that many coins and tokens also fall into this political area, but I do not believe to the exposure level of Bitcoin.

Selfish mining is actually just a very naive term coined by Craig Wright. It is easily refuted with mathematics (you can check Vitalik's arguement against it).

The China concern is indeed very valid. You make an excellent point, thank you for bringing that up. That is essentially the biggest external risk to the Bitcoin network. If China was to orchestrate such an event it would cause mayhem on the network.

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Hi @reverseacid. Firstly, I truly appreciate your work. Keep it up!

In a quick google search, I found a number of recent articles about Craig Wright and Vitalik. I'm not a mathematician, so I won't embarrass myself my trying to address the theory. However, I don't believe Craig Wright coined the term, "selfish mining". My first exposure was in 2015, maybe 2014, but 2015 for sure.

The general premise that many put out against selfish mining is that a miner would not do something that would hurt the network and in effect themselves. This is a naive statement. There are politicos involved here that are not about money and there are factions that would loose money to hurt someone else.

I too was working on a China post that included information on selfish mining. I've gotten sidetrack and hope to get back to it. But this whole POW mining space is very interesting. While not a fan of POW due to the power drain, I must admit to making money on mining and mining stocks.

Thank you so much for taking the time to respond. Looking forward to more of you posts.

If that's the case I apologize for not diving deeper into selfish mining. My first exposure to it was when CS spoke of selfish mining and negative gamma and was refuted from top to bottom by Buterin.

As I mentioned, what keeps selfish mining from happening is the power of developers. Like the empty block mining by AntPool, if something selfish continues for a prolonged period and endangers the network, developers, who by default gather majority consensus, will be able to punish these miners for doing so. Selfish mining in the short run is possible to expose certain faults, but it works in the networks advantage as these weaknesses are identified and can be fixed.

As Andreas Antonopolous said, "with each hack and fault, Bitcoin becomes more resilient".

Thank you for the excellent conversation @guysellars

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Appreciate the conversation @reverseacid. This is a topic I'm very interested in as it will ultimately impact institutional investment.

Another question. You mentioned the following.

As I mentioned, what keeps selfish mining from happening is the power of developers. Like the empty block mining by AntPool, if something selfish continues for a prolonged period and endangers the network, developers, who by default gather majority consensus, will be able to punish these miners for doing so.

Do you have anything specific on how developers would be able to punish offenders? In my mind, this would be a game changer, but I'm not aware of anything.

In my research, I did uncover reference to "dark" pools, in particular in China, that were essentially selfish mining. But no where have I ever seen reference to any repercussions. Just curious if you have something specific.

Again, always appreciate your post @reverseacid.

This is more of a "what-if" scenario considering the fact that no miner would want to get into the networks bad books.

Let's say AntPool decided to just constantly mine empty blocks with just a header and no transactions, allowing the mempool to fill up. We see 2 distinct features here:

  1. This reduces their own financial gain as they ignore all the fee income they could've made.

  2. Developers will start to identify this as a major bottleneck to consensus and implement a soft fork to punish empty block miners and remove their incentive.

Because of this, AntPool won't let the mempool fill up and will only resort to mining empty blocks when no new transactions are coming into the network. In 2015 and maybe even early 2017 this was possible on a select few days, but today, this is virtually impossible.

Given the amount of vigilance in Blockchain communities, things like this will be dealt with quite seriously. Miners will not go against consensus and network health as they rely on the health of the network to make money.

Selfish mining battles itself by killing the short term incentive with more long term benefits. This is essentially how I see it. Hope you've found this insightful @guysellars

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My guess is that btc is the ibm of its generation. It paves the way, but other coins will take over. It is slow and costly compared to many of the others.

I am a user of steem and blog here to make my living. I take steem out weekly and convert to fiat. The conversion currency I use is usually ltc. It is very cheap and takes 10 minutes or less to clear into my exchange. The one time I tried btc, it was 10 times the fees and took about 8 hours.

I hear stories of this all the time in crypto groups. People think btc is the big guy so they should use it and others say use ltc, or dash, or a number of others instead.

The segment of investors in crypto is small and will always be. It's the users that need to come to make this work and they will not be using the expensive slow coin to transact and buy the mythical cup of coffee. Instead they will use the fast coin with cheap fees.

It's such a small market right now @fitinfun

Anyone who tells you one crypto is going to make it over the other is absolutely delirious.

Nobody knows what's going to happen in the next 2 or 5 years. That's what's so exciting! The opportunity to innovate and create a whole new financial system to be used for generations to come

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Thanks for the notification.
I will be reading and analyzing the information, for me it is educational and can enrich my knowledge about cryptocurrencies.
The one I have is very limited to issue an opinion according to the article.
At the moment I vote, resteem and share on twitter.
Happy life.

I think the crypto world is very promising for the future, when compared to gold, maybe if we sell gold when the price is high and buy it when the price drops

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I believe crypto and gold are two very seperate things @anitacarolina

Crypto is not a store of value like gold and gold is not fungible currency and tokens like crypto. I feel the comparison of the two is premature and quite rash.

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One of your best pieces @reverseacid. Very insightful with many takeaways. Thanks.

Thanks a lot @devann

Glad you found value in this piece. Always appreciate your constant support and feedback :)

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Thanks for sharing.
I find this article very interesting and as a product of intense research. Even though these aspects do not dominate them well, I recognize that it is necessary to be as informed as possible because it is our publication environment and money is important.
I congratulate you for the breadth and seriousness with which you handle the issue and I hope to continue reading you.

Thanks for your kind words @mllg

Research is the most important part of writing technical articles. I'm glad you are able to see the effort behind the scenes of such an article.

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I'm happy to read your interesting articles.
@reverseacid

Hi @reverseacid
Thanks for sending memo.
I have gone through the post and learnt much about mining pool. You have such an amazing knowledge about these technical facts and I can learn a lot from you.
I never heard that empty block is also possible and I find it's not fair. Just because ant is leading mining pool so they can't do anything.

Such a nice write up.. great work.

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Thank you for your kind words and feedback @alokkumar121

Yes the empty block mining is possible. As long as there is a block header and nodes accept it, it is allowed. It is unfair but that is reality. As I said in the article, it cannot go on for too long as the developers will put up protocol to block such action.

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An article well substantiated and complete. The theme of the centralization by what I see is quite large and with a lot of fabric to cut. Congratulations, I am aware of the events. Thank you for the invitation

Thanks for your kind words and feedback @belkisa758

Hope to keep you around our feed for the distant future!

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Bitcoin is still the king of cryptos but it can no longer fulfill all the requirements of an economy of even a small nation. It is not so easy to trade in cryptos and price of cryptos is highly volatile. It means it is merely being used for the investment purpose. So, I don't think cryptos can replace fiats.

Very interesting your post, although difficult to digest because there are many things that I find difficult to understand. Apparently, all tokens are affected by the volatility of Bitcoin. If it falls, they all fall and vice versa.

But who determined the value of the Bitcoin? Who decides? Who raises it? Who lowers it? I suppose the same people who make the fiat or the items fluctuate.

But I wanted to ask a question or comment: the volatility of Bitcoin and cryptocurrencies gives me the impression that they could be avoided if they were backed by an asset or by a decentralized project that gives a utility to the crypto active?

I'll explain myself: if someone creates a project with blockchain technology with a specific utility: medical, logistical, social, legal, governmental, whatever it is; obviously supported by its own blockchain cryptocurrency. Then the price of it, could be determined by its usefulness and not by the whim of a few.

Am I wrong?

Cheers!

Not quite @jadams2k18

The fact that the market is unregulated and trades are not orderly is the reason for volatility. You'll be surprised as to how many tokens have real world utility, but are still volatile. Volatility ≠ lack of utility.

Volatility is the result of a young, unregulated, and infantile market. It is something we must bear in a market so small. It is something we must learn to ignore as the fundamentals grow.

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A very good informative post...
Good job friend @reverseacid

Thank you @reverseacid - my upvote & re-steem per your kind direction, I believe the key to tha ~crypto~ unraveling is in fact the summation above in the assessment of inevitability of centralization...good work good sir


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Dear @reverseacid,

I am sorry if I did not reply immediately. I think that in all the currencies that we have- fiat or crypto, we encounter almost the same problem. The volatility, economy, that happened before and, folks got past that before, I am sure that we can find a way for us to surpass this issue.

But, what concerns me is the empty block mining. I have not yet gone into the level where I seriously invested a part of my money for mining. I honestly do not know anything about an empty block and, I have never known its existence before reading your post but, for those who does not know, here are their uses:

-they extend the blockchain
-extend the security

weather its good or bad for the community, I also do not know- in all the articles I have been searching, they do not seem to have any "official" statement.

I just want to take this opportunity to ask anyone out there who are mining/into bitcoin mining or any other crypto mining to give me a heads up. I am interested to know more about them and, I am considering to "mine" in the near future.

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