Re: [bitcoin-dev] Bitcoin covenants are inevitable

From: Billy Tetrud <billy.tetrud@gmail•com>
To: Peter Todd <pete@petertodd•org>,
	 Bitcoin Protocol Discussion
	<bitcoin-dev@lists•linuxfoundation.org>
Subject: Re: [bitcoin-dev] Bitcoin covenants are inevitable
Date: Mon, 27 Jun 2022 22:55:56 -0500	[thread overview]
Message-ID: <CAGpPWDb=dF4-D5GKb2NoEcdW6TokNQyrwpGVwHJk+0HL43+J1Q@mail.gmail.com> (raw)
In-Reply-To: <YrS8URqD/BW4UrP0@petertodd.org>

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@Eric
>  People who transact are realizing the benefit of money - the avoidance
of barter costs.

I'm very confident you're incorrect that holders don't receive any benefit
and you're certainly not correct that every spend is receiving the same
benefit. As I'm sure you're aware, one of the primary components of a
currency's value and purpose is as a store of value. Storing value happens
while you're holding it, not while you're spending it. Consider the
following two scenarios: one person holds onto 10 bitcoin for 10 years and
then spends those 10 bitcoins in some way in 2 transactions. Another person
spends 4 bitcoins to buy something, then sells it for 6 bitcoins, and then
buys something else for that 6 bitcoins and then never acquires any bitcoin
for 10 years.

Both people spent 10 bitcoins over 2 transactions. Over that 10 year
period, only one of those people utilized bitcoin's utility as a store of
value. Who benefited more from their use of bitcoin?

> Those who never transact, never realize any benefit.

While that's true, its not relevant and basically a red herring. You need
to compare those who transact often and rarely hold, to those who hold a
lot but rarely transact. Its not helpful to consider those who throw their
bitcoin into a bottomless pit and never retrieve them.

On an idealistic level, I agree with Keagan that it would make sense to
have "a balance of fees to that effect". I think doing that would be
technically/economically optimal. However, I think there is an enormous
benefit to having a cultural aversion to monetary inflation and the
consequences of convincing the bitcoin community that inflation is ok could
have unintended negative consequences (not to mention how difficult
convincing the community would be in the first place). There's also the
economic distortion that inflation causes that has a negative effect which
should also be considered. The idea of decaying utxo value is interesting
to consider, but it would not solve the economic distortion that
monetary inflation causes, because that distortion is a result of monetary
devaluation (which decaying utxos would be a form of). Then again, maybe in
this case the distortion of inflation would actually be a correction -
correcting for the externality of benefit received by holders. I'm
stream-of-consciousnessing a bit, but anyways, I suspect its not worth the
trouble to perfect the distribution of bitcoin blockchain security costs to
include holders. Tho, if I were to go back in time and influence how
bitcoin was designed, I might advocate for it.

@Peter
> demurrage and inflation have identical economic properties.

The distortion of incentives is identical, however there is also the effect
it has on a currency's property as a useful unit of account. Decaying utxos
would mean that it would contribute substantially less to market prices
needing to change. I suspect this effect would be bordering on negligible
tho.

On Thu, Jun 23, 2022 at 2:17 PM Peter Todd via bitcoin-dev <
bitcoin-dev@lists•linuxfoundation.org> wrote:

> On Tue, Jun 21, 2022 at 01:00:07PM -0600, Keagan McClelland via
> bitcoin-dev wrote:
> > > The PoW security of Bitcoin benefits all Bitcoin users, proportional to
> > the
> > value of BTC they hold; if Bitcoin blocks aren't reliably created the
> value
> > of
> > *all* BTC goes down. It doesn't make sense for the entire cost of that
> > security
> > to be paid for on a per-tx basis. And there's a high chance paying for it
> > on a
> > per-tx basis won't work anyway due to lack of consistent demand.
> >
> > FWIW I prefer the demurrage route. Having something with finite supply
> as a
> > means of measuring economic activity is unprecedented and I believe
> deeply
> > important. I'm sympathetic to the argument that the security of the chain
> > should not be solely the responsibility of transactors. We realize the
> > value of money on receipt, hold *and* spend and it would be appropriate
> for
> > there to be a balance of fees to that effect. While inflation may be
> > simpler to implement (just chop off the last few halvings), I think it
> > would be superior (on the assumption that such a hodl tax was necessary)
> to
> > keep the supply fixed and have people's utxo balances decay, at least at
> > the level of the UX.
>
> Demurrage makes protocols like Lightning much more complex, and isn't
> compatible with existing implementations. While demurrage could in theory
> be
> implemented in a soft-fork by forcing txs to contain an output with the
> demurrage-taxed amount, spending to a pool of future mining fees, I really
> don't think it's practical to actually do that.
>
> Anyway, demurrage and inflation have identical economic properties. They're
> both a tax on savings. The only difference is the way that tax is
> implemented.
>
> --
> https://petertodd.org 'peter'[:-1]@petertodd.org
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