57. On the Higher Cost of Mining

57

On the Higher Cost of Mining

THIS THREAD DISCUSSES the increase in difficulty of mining following an increase in the amount of computer power, when the increase in computer power is followed by a drop in computer power. Then, the miners left in the network would then have to deal with a much higher difficulty level, which increases the time per block until the next adjustment.

This problem has not affected Bitcoin, but it did greatly affect some alternative cryptocurrencies such as Feathercoin. A solution called Kimoto’s Gravity Well was developed for alternative currencies to integrate. The thread below addresses this potential problem.

Satoshi specifically addresses the market response to the cost of mining.

Potential disaster scenario

Posted by gebler, August 14, 2010, 12:43:54 PM

The difficulty for generating bitcoins is periodically adjusted using a method that has worked well this far. However, I am afraid there are plausible scenarios where the current method would misbehave quite spectacularly.

One scenario goes like this:

1) As bitcoins become more known, competition among minters continues to increase, with corresponding increases in difficulty. The increased difficulty will eventually make bitcoin minting clearly unprofitable for those who do not have access to good energy prices and cheap access to an energy-efficient HW/SW combination.

2) Some bitcoin users may continue to mint bitcoins even though it is not profitable for them. This could be due to ideology, the fun factor, or just ignorance. But it is quite plausible that the vast majority of bitcoins will be minted by those who profit from it. Let’s say that 99% of all bitcoins are eventually minted by for-profit-minters.

3) The competition among for-profit-minters will drive profit margins down, to the point where it is profitable to continue minting, but barely so. Let’s say that the typical profit margin during one difficulty adjustment period (2016 blocks) is 10%.

4) Since bitcoin minting is a decentralized uncoordinated process, we can expect random fluctuations in bitcoin minting activity. This does not affect the difficulty during a specific2016-block period, so the minting activity can e.g. increase by 20% during a period without making minting unprofitable within that period.

Given the above assumptions, we now have a disaster at hand at the next difficulty adjustment. As bitcoin production was 20% more than target, difficulty is adjusted upwardsby 20%. But the profit margin was only 10%, so for-profitminters would now lose money if they continued minting. They will therefore stop minting, and as they make up 99% of the minting capacity, generating the next 2016 blocks will take100 times longer than normal. Everything that depends on block generation will slow to a crawl, and this slowness will persist for a very long time, since the next 2016 blocks will take 100 times longer to generate (almost 4 years rather than two weeks).

Now, if this was to happen, I guess a new client could be released that resets the difficulty to some sensible number and started using a better algorithm for difficulty adjustment. But it would be much better to do it proactively before it becomes a problem (perhaps with a predetermined “flag day” activating the new algorithm at a certain time in the future, giving the new client a chance to propagate).

A simple(?) modification of the algorithm would be to apply the adjustment after a certain amount of time rather than at a certain block number. The switch could still be synced to take effect for the next block, so time synchronization between clients would not need to be super exact to have the vast majority of them agree on when the new difficulty is to be applied.

Also, the difficulty adjustment should probably take into account the adjustments of the number of bitcoins minted per event (now 50, halved every 4 years). Halving the numberof bitcoins generated each time is equivalent to doubling the difficulty as far as profitability is concerned, and such a drastical drop in profitability is unnecessary if it can be avoided easily.

I’m not sure if the current adjustment algorithm already takesthat into account somehow, but I couldn’t see any obvious adjustment for it in the source code.

Re: Potential disaster scenario

Posted by satoshi, August 15, 2010, 04:37:16 PM

Some places where generation will gravitate to:

1) places where it’s cheapest or free

2) people who want to help for idealogical reasons

3) people who want to get some coins without the inconvenience of doing a transaction to buy them

There are legitimate places where it’s free. Generation is basically free anywhere that has electric heat, since your computer’s heat is offsetting your baseboard electric heating. Many small flats have electric heat out of convenience.

How expensive is heating oil? With the price of oil so high, if it’s actually more expensive than electric, then generating would have negative cost.

There’s also kids putting it on their parent’s power bill, employees their employer, botnets, etc.

Case 3 comes into play for small amounts. The overhead of doing an exchange doesn’t make sense if you just need a small bit of pocket change for incidental micropayments. I think this is a nice advantage vs fiat currency, instead of all the seigniorage goingto one big entity, let it go in convenience amounts to people whoneed to scrape up a small amount of change.