On ETH economic incentives (Casper FFG / EIP 1011)...

[atlanticcrypto]

I'd like to formally discuss the appropriate block reward to target for the roll-out of FFG. I believe that an economic assessment of the block reward is of the utmost importance for network stakeholders, and shouldn't be looked at as a for/against "miner" conversation.

Early on, the block reward was an economic incentive to bring network security, in the form of PoW "miners" to allow the early network to grow. As the network grew, I believe the objective was for transaction fees to become the reward for PoW participation and network security, with the block reward being phased out over time and eventually moving to a PoS framework.

So, the step during Byzantium from 5->3eth per block happened, and during periods of congestion transaction fees are in fact increasing (with some large blocks in late January having > 3 eth in tx fees), but steady state transaction fees are still reasonably de minimis. The incentive for participation in PoW remains the block reward.

Stakeholders in any market make investment decisions based upon assumptions of what management/conditions may provide for. Operating with a shifting set of assumptions causes an extreme amount of volatility in an asset's price and corresponding infrastructure investment (see weather driven markets like electricity, natural gas, or agricultural products). Markets do not like arbitrary, non communicated decisions. I beg that the development team take all the steps possible to provide a framework for any reward shifts or changes in incentives to the market providing network infrastructure. The BTC network, with seemingly no ability to make contentious decisions, at least has a firm incentive roadmap.

When the Bitmain E3 discussion began and an EIP was proposed, I raised a few points about the nature of the ethereum resource base that's been built as a response to its incentives. Roughly USD 3 billion of highly flexible compute resources have been built in response to the block reward and success of the ethereum network. The ethereum network may inadvertently wind up being the single largest benefactor to a decentralized computing application that simply doesn't exist yet. As the development community matures, they will recognize this resource base exists and take steps to use it (i.e. golem). While it's not the ethereum network's responsibility to continue "paying" for these compute resources, it is what caused the investment to happen. Removing that incentive arbitrarily may have undue consequences.

I can't pretend to know what the most optimal block reward is going to be as this network matures. I do not believe anyone can. I think @MicahZoltu will agree to this. Modeling this will be an exercise in bad data science, as over-fitting will step in really quickly. What I can say for certain though, is if a pre-defined concrete schedule of block reward changes is thoughtfully put together, published and then conformed to, the market will respond appropriately. Markets are VERY effective at finding medium to long term equilibriums.

The eth developers, whether they like it or not, are running a market. Help it mature by allowing stakeholders to make investment decisions with as much information as possible. This is a maturation process for every aspect of this market. Large protocol changes shouldn't be announced on twitter. The official communication channels of projects shouldn't be reddit. There is grown up capital coming to the table, and with thoughtful utilization this project and the applications it births can change the world. Don't scare it away.

[MicahZoltu]

Miners need to be paid enough such that the cost of an attack is necessarily less than the profit one could make on an attack. Paying miners any more than that is overpaying for hashing services, and paying any less than that puts the system at security risk of a profit seeking attack.

Calculating exactly how big the reward needs to be in order to guarantee this is complicated. The opportunity cost of a failed double spend attack is pretty well defined as being the mining rewards the attacker will lose by mining an alternate chain for some period of time. The cost of running a successful double spend attack on the other hand is effectively zero. This is where things begin to get complicated because we need to know what percentage of the time the attacker will succeed at the double spend and what percentage of time they will fail, which requires knowing what percentage of hashing power the hypothetical attacker controls or can control for short periods of time.

We then need to be able to calculate how much the attacker can profit, and how long of an alternate chain they need to mine in order to profit. The most obvious avenue for profit right now is by executing an exchange for some off-chain asset (e.g., through a centralized exchange platform). If the platform uses 100 confirmations as finality, then this means the attacker needs to run a 100 block fork to successfully "double spend". There may be other mechanisms for profiting on a double-spend, but most of the realistic ones revolve around buying off-chain goods/services with on-chain assets.

Unfortunately, since figuring out the input values is incredibly complicated, most blockchains choose to just pick a really big number and hope it is enough. This likely results in greatly overpaying for security, and it would be significantly better for everyone (except miners, who don't really matter since they are fungible) if we could get a more accurate value.

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As to the argument that we should altruistically support miners, I will make the same argument here that I make everywhere. Miners are a fungible service provider. They are not an economic participant whose well being we need to care about. All that matters is that miners are paid enough to achieve the security target.

[atlanticcrypto]

The value of the infrastructure serving the network has a large beta to the overall value of the network. Every dollar of hardware providing security has a multiplier effect on the value of the network. A large infrastructure base attracts investment capital. Simply look at a normalized mining reward chart over time for any crypto asset. The value of a network constantly rebases (within a large band) with network hashrate, barring any step changes in efficiency.

Whether the developers believe miners are a fungible service provider or not, the market looks at them as a fundamental indicator of a network's strength.

When the Obama administration attempted to pass climate change legislation with a super majority, they let every environmental purist have the microphone. They let the best become the enemy of the good. The best outcome is rarely adopted. Obama got no climate deal. The world is worse off for it.

Would it be best to completely disregard the mining infrastructure as a fungible service provider? That's up to you, but the market sure doesn't and they're the ones who will make the ultimate adoption decisions.

[atlanticcrypto]

I also don't want this to devolve into a "save the miners" thread. I care less about what an incentive schedule looks like than I do that one actually exists and is conformed to.

Want to target a 10 ETH block reward by June 30, 2019? Cool.

Want to target a 1 ETH block reward by Jan 16 2019 at 7:02am? Cool.

I am happy to do anything in my power to help find the best possible path, just keep it from being arbitrary.

[atlanticcrypto]

@MicahZoltu something has been gnawing at me regarding your fungibility comment. How many users do you think the mining reward system has brought into the eth ecosystem? I'm gonna guess it's a heckuvah lot. Do you believe that staking will incentivize as many new entrants as the current PoW structure? Those involved in staking will have already entered.

[MicahZoltu]

I strongly suspect that the vast majority of ETH miners aren't actual users of the system. Most of the miners I have met just mine the most profitable coin and either hold it (just because they are also speculators) or convert it to some other currency and then hold that (or spend it). I don't believe mining brings in a significant number of meaningful participants, where meaningful are people who actively use the platform for something interesting.

It is worth noting that at the moment, Ethereum users consist of:

1. Developers.
2. Speculators.
3. Ponzi scheme players.
4. Gambling players.
5. CryptoKitties players.
6. DAI users.

How many miners do you think only know about Ethereum because they started mining it, then once they had some ETH they went looking for ways to use that ETH and found something like (3), (4) or (5)? I suspect very few personally, but this is just speculation. Over time I hope to see more useful dapps on Ethereum, but at the moment there isn't much meaningful to do on Ethereum so it is hard to argue that mining "brings in ETH users".

[atlanticcrypto]

I can tell you that there are extremely serious institutional investors who look at mining as a way to begin investing in different coin networks. They look at the current slate of "startups" and ICOs and cannot get comfortable with the level of transparency or governance in place, and find the best way on an "introductory" basis to invest capital is through building mining assets. As soon as their assets begin producing, most, if not all, begin investing in other more risk oriented projects. It's definitely a gateway for material investment capital.

[siong1987]

@Njcrypto one of the more thoughtful analysis i have seen: https://gist.github.com/djrtwo/bc864c0d0a275170183803814b207b9a

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