Subject: Re: [bitcoin-dev] Bitcoin covenants are inevitable

From: Eric Voskuil <[email-masked]>
Date: Thu, 7 Jul 2022 09:24:26 -0700

> On Jul 7, 2022, at 07:13, Peter Todd via bitcoin-dev <[email-masked]> wrote:
> 
> On Thu, Jul 07, 2022 at 02:24:39PM +0100, John Carvalho via bitcoin-dev wrote:
>> Billy,
>> 
>> Proof of work and the difficulty adjustment function solve literally
>> everything you are talking about already.
> 
> Unfortunately you are quite wrong: the difficulty adjustment function merely
> adjusts for changes in the amount of observable, non-51%-attacking, hashing
> power. In the event of a chain split, the difficulty adjustment function does
> nothing; against a 51% attacker, the difficulty adjustment does nothing;
> against a censor, the difficulty adjustment does nothing.

Consider falling hash rate due to a perpetual 51% attack. Difficulty falls, possibly to min difficulty if all non-censors stop mining and with all censors collaborating (one miner). Yet as difficulty falls, so does the cost of countering the censor. At min difficulty everyone can CPU mine again.

Given the presumption that fees rise on unconfirmed transactions, there is inherent economic incentive to countering at any level of difficulty. Consequently the censor is compelled to subsidize the loss resulting from forgoing higher fee transactions that are incentivizing its competition.

With falling difficulty this incentive is compounded.

Comparisons of security in different scenarios presume a consistent level of demand. If that demand is insufficient to offset the censor’s subsidy, there is no security in any scenario.

Given that the block subsidy (inflation) is paid equally to censoring and non-censoring miners, it offers no security against censorship whatsoever. Trading fee-based block reward for inflation-based is simply trading censorship resistance for the presumption of double-spend security. But of course, a censor can double spend profitably in any scenario where the double spend value (to the censor) exceeds that of blocks orphaned (as the censor earns 100% of all block rewards).

Banks and state monies offer reasonable double spend security. Not sure that’s a trade worth making.

It’s not clear to me that Satoshi understood this relation. I’ve seen no indication of it. However the decision to phase out subsidy, once a sufficient number of units (to assure divisibility) had been issued, is what transitions Bitcoin from a censorable to a censorship resistant money. If one does not believe there is sufficient demand for such a money, there is no way to reconcile that belief with a model of censorship resistance.

> We should not imbue real technology with magical qualities.

Precisely. It is economic forces (people), not technology, that provide security.

e

>> Bitcoin does not need active economic governanance by devs or meddlers.
> 
> Yes, active governance would definitely be an exploitable mechanism. On the
> other hand, the status quo of the block reward eventually going away entirely
> is obviously a risky state change too.
> 
>>>> There is also zero agreement on how much security would constitute such
>>> an optimum.
>>> 
>>> This is really step 1. We need to generate consensus on this long before
>>> the block subsidy becomes too small. Probably in the next 10-15 years. I
>>> wrote a paper
> 
> The fact of the matter is that the present amount of security is about 1.7% of
> the total coin supply/year, and Bitcoin seems to be working fine. 1.7% is also
> already an amount low enough that it's much smaller than economic volatility.
> 
> Obviously 0% is too small.
> 
> There's zero reason to stress about finding an "optimal" amount. An amount low
> enough to be easily affordable, but non-zero, is fine. 1% would be fine; 0.5%
> would probably be fine; 0.1% would probably be fine.
> 
> Over a lifetime - 75 years - 0.5% yearly inflation works out to be a 31% tax on
> savings; 0.1% works out to be 7.2%
> 
> These are all amounts that are likely to be dwarfed by economic shifts.
> 
> -- 
> https://petertodd.org 'peter'[:-1]@petertodd.org
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