[cryptography] Bitcoin observation

Ian G iang at iang.org
Tue Jul 5 03:48:33 EDT 2011


On 5/07/11 4:44 PM, Jon Callas wrote:
> Did you know that if a Bitcoin is destroyed, then the value of all the other Bitcoins goes up slightly? That's incredible. It's amazing and leads to some emergent properties.

This assumes fixed value.  As there is no definition of the value in 
BitCoin, it's hard to sustain that assumption :)

In practice, there will be a number of effects.  If you potlatch your 
own coins, at the margin, others go up in value a little.  And you paid 
a lot for that, so you lose.

If you destroy others' coins, a little value goes up for all, sure.  But 
also currency being money, it loses its "store of value" characteristic, 
and rapidly loses value as people get out.  Demand goes down faster than 
supply, trading price plummets.

> If you have a bunch of Bitcoins and you want to increase your worth, you can do this by one of three ways:
>
> (1) Create more Bitcoins.
> (2) Buy up more Bitcoins, with the end state of that strategy being that you've cornered the market.

If you buy all of them ... you also stopped the market :)

> (3) Destroy other people's Bitcoins. The end state of that is also that you've cornered the market.

Except, reputation effects will cause a run, dumping, loss of value.

> I also observe that if the player succeeds at either strategy (2) or (3), then Bitcoins are no longer a decentralized currency. They're a centralized currency. (And presumably, that player wins the Bitcoin Game.)

Um.  If a player succeeds in isolating all the money to self, it's no 
longer money :)

> I'll go further and note that if a self-stable oligarchy manages to buy or destroy all the other  Bitcoins, they win as a group, too. With enough value in the Bitcoin universe, and properly motivated players, that could easily happen.
>
> I wonder myself when it is more efficient to destroy a Bitcoin than buy or create one? Let's call the value of the energy to create one C. We'll call the value to buy one B. There must be some constant H where H*C or H*B makes it as efficient to destroy one than to buy or create. I suppose there's really two separate constants, H_c and H_b.
>
> Nonetheless, I call this H because it's the Highlander Constant. You know -- there can only be one! If H is large enough, then you have unrestricted economic war that leads to a stable end where a single player or an oligarchy holds all the bitcoins.

Ah... there is only one BitCoin, and it is current!

At which point the film ends, and the script writers scratch their heads 
for the sequel :)

> So if we consider a universe of N total coins and a total market value of V, and a players purse size of P coins, what's the value of H? I think it's an interesting question.
>
> I have some other related things to muse over as well, like what it means to destroy a bitcoin. If you silently destroy one, the value of the remaining coins increases passively through deflation.

The value of the remaining coins might go up because of the "unit of 
exchange" characteristic being in demand, assuming that you don't 
actually hoard it otherwise.

Privately destroyed coins that were otherwise privately hoarded won't 
effect the value.  This is the Fort Knox radiation problem.  Is the gold 
in Fort Knox?  Is it radiated and unusable?  We don't know .. so what's 
it's value?  We don't know.  So it's value to us is zero.

> But if you publicly destroy one, you could see an immediate uptick. ...

Yes, I guess an immediate public destruction is new info to the price, 
so the uptick will be expected.  As long as it is "at the margin" this 
will work.

> Also, does public destruction actually hurt the market by making people tend to not want to put money into Bitcoins? Might this form some sort of negative feedback on the value of H, by cheapening Bitcoins as a whole? But is there a double-negative feedback through the fact that if people want to sell coins cheaply, the big players just buy them cheap and run the market back up that way?

It certainly confuses people's sense of what the value is.  Each trade 
(as opposed to a posted price) will reveal information about the value 
at that point.  These value points are ... valuable to the market, to 
excuse the pun.

However, other events are less informative.  Destruction, seizure, 
expiry, loss, theft all result in unclear information.


> The end of all this musing, though, is that I believe that a decentralized coinage that has the property that destroying a coin has value *inevitably* leads to centralization through the Highlander Constant.

Yes, but centralisation is a self-limiting property, because a 
centralised currency isn't a currency.  It has to be current, which is 
to say, it has to be available to a large number of people in order to 
settle "current" debts.

iang



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