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decide what to do, if anything about the "↓price↬↓mining↬↓price" death spiral #95

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zookoatleastauthoritycom opened this Issue Feb 13, 2015 · 8 comments

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zookoatleastauthoritycom commented Feb 13, 2015

Is there anything that Zcash could do to make this less of a risk?

http://ideas.4brad.com/would-bitcoin-fall-cliff-if-it-dropped-100#comment-15801

  1. (fact?) Proof-of-Work mining, because it offers no barrier to entry, drives the marginal revenue of a miner down. Miners exit when the marginal revenue < their marginal costs (which we're mostly assuming is electricity, although cooling might be a big component of marginal cost, too). Therefore, eventually the surviving miners are those which have a low marginal cost (let's think in terms of marginal cost per hash instead of per time or per unit of equipment or whatever), but even they, the survivors, also have low marginal revenue, because the way they drove their more cost-sensitive competitors out of business was to increase the system-wide difficulty, harming their own marginal revenue as well as everyone else's.

    In short: we can expect that in a mature Proof-of-Work system there are huge swathes — maybe even a large majority — of the mining power perched on the edge of marginal profitability.

  2. (fact) The market price of the coin can swing up or down.

  3. (fact) Brad's first observation: if the price drops below some threshold, some fraction of those marginal miners will shut down to avoid marginal costs. (This is a fact because almost all of these miners are not hobbyists/enthusiasts — they are pros with their eyes on their bottom line. For a nice video of what professional Bitcoin mining was like a year ago: https://www.youtube.com/watch?v=K8kua5B5K3I .)

  4. (fact) If a substantial fraction of miners shut down, the average block confirmation time increases proportionally, until the next difficulty adjustment. E.g. a 90th percentile of 35 minutes instead of 23 minutes, if 2% of the mining capacity is exiting every day; I got these numbers from Dave Hudson's good blog post on the topic: http://hashingit.com/analysis/41-waiting-for-blocks .

  5. (speculation) If the block time increases, proportionally fewer coinbases are given out to miners, and perhaps miners are currently selling all their fresh coinbases, which puts downward pressure on the price, so if they do that less then there will be a reduction in downward pressure on the price. Thanks to Dave Hudson's blog for mentioning this speculation, and also Gwern above alludes to a similar consideration when he points out that longer block times mean a slower rate of dilution of the monetary base.) I don't have an opinion on whether this would be a significant factor.

  6. (fact) If the average block confirmation time increases, the time to know that a payment to you is confirmed increases proportionally. E.g. a 90th percentile for 6-confirmations of 143 minutes, instead of 93 minutes (ibid).

  7. (fact) If the average block confirmation time increases, the transaction bandwidth limit could be reached, so that transactions that come with no or low fees take even longer, or stop being serviced entirely and average transaction fees go up. (According to Dave Hudson, Bitcoin typically currently has 30% of its txn capacity in use: http://hashingit.com/analysis/39-the-myth-of-the-megabyte-bitcoin-block .)

  8. (speculation) Because of point 7, average transaction fees could rise enough to make mining more profitable again. I'm skeptical of this.

  9. (speculation) Because of point 7, people could switch to alternatives away from Bitcoin, reducing demand for it and further depressing its price. I'm skeptical of this, too. :-)

  10. (speculation) Brad's second observation: due to some combination of 3, 4, 6, and 9, if the mining power drops, this could cause a further drop in the price of the coin. I'm not sure what I think of the likelihood of this.

So, here's why this is potentially important: if 10 happens, then the combination of 3 and 10 would make a strong positive feedback loop that simultaneously crashes the price of the coin and the performance of the transaction processing system.

I think this is worth worrying about.

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nathan-at-least Feb 16, 2015

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I realize that while this systemic problem will exist in all PoW currencies, side-chain conversion mechanisms will be important in a short term.

Consider a scenario where if ZC has a distinct PoW (so capital investment in other Bitcoin/altcoins does not transfer capacity well), and the ZC mining economy has not been driven to low margins, and there's a one-way peg conversion, then should Bitcoin experience this systemic feedback spiral, BTC holders might use the peg en masse on the bet that ZC will be a more stable economy.

However, if that happens, what is the effect on the ZC economy, including mining? There will now be a rapid growth in supply, so the returns from mining drop, and the exchange price to non-BTC currencies will probably drop, right? (I have low confidence in my economic predictions...)

If ZC miners are already at low margins, this might induce the same spiral within ZC!

In fact, if ZC miners are at low margins, and there's a sudden influx through the peg for any reason it may trigger a similar feedback spiral.

These kinds of imaginations give me the gut feeling that linking more and more sidechains to a multi-cryptocurrency umbrella network will make the whole ecosystem less stable.

For contrast, imagine a scenario where ZC mining margins are low, and there is no peg from BTC, and now the mining death spiral triggers in Bitcoin. Now the only influx into ZC is through market exchanges, and there's no change in ZC supply, so the ZC/BTC exchange rate should go up. This moves ZC away from a similar dynamic by increasing the mining margins. This is the opposite effect compared to the world with the one-way peg!

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nathan-at-least commented Feb 16, 2015

I realize that while this systemic problem will exist in all PoW currencies, side-chain conversion mechanisms will be important in a short term.

Consider a scenario where if ZC has a distinct PoW (so capital investment in other Bitcoin/altcoins does not transfer capacity well), and the ZC mining economy has not been driven to low margins, and there's a one-way peg conversion, then should Bitcoin experience this systemic feedback spiral, BTC holders might use the peg en masse on the bet that ZC will be a more stable economy.

However, if that happens, what is the effect on the ZC economy, including mining? There will now be a rapid growth in supply, so the returns from mining drop, and the exchange price to non-BTC currencies will probably drop, right? (I have low confidence in my economic predictions...)

If ZC miners are already at low margins, this might induce the same spiral within ZC!

In fact, if ZC miners are at low margins, and there's a sudden influx through the peg for any reason it may trigger a similar feedback spiral.

These kinds of imaginations give me the gut feeling that linking more and more sidechains to a multi-cryptocurrency umbrella network will make the whole ecosystem less stable.

For contrast, imagine a scenario where ZC mining margins are low, and there is no peg from BTC, and now the mining death spiral triggers in Bitcoin. Now the only influx into ZC is through market exchanges, and there's no change in ZC supply, so the ZC/BTC exchange rate should go up. This moves ZC away from a similar dynamic by increasing the mining margins. This is the opposite effect compared to the world with the one-way peg!

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zookoatleastauthoritycom Feb 16, 2015

Update on Brad's Blog:

http://ideas.4brad.com/would-bitcoin-fall-cliff-if-it-dropped-100#comment-15812

I was just discussing this with Tara Vancil, and she pointed out that inasmuch as Bitcoin has value as a medium-of-exchange (not just as a store-of-value) then this should exert upward pressure on the market price, even in the face of declining mining power. I think this is a really good point. The part about Brad's Doomsday Scenario positive feedback loop in which ↓mining-power causes further ↓price assumes (explicitly) that the price is determined solely or primarily by "speculators" (i.e., by people valuing Bitcoin as a store-of-value).

Now, Tara's observation doesn't totally assuage my concerns about Brad's Doomsday Scenario. It could still be a Doomsday, although perhaps not as complete or permanent of a Doom as it would be without value as a medium-of-exchange. Perhaps I dimly intuited this earlier, and that's why I included point 7 in #95 (comment), which suggests a way that this Doomsday Scenario could cause Bitcoin to lose value as-a-medium-of-exchange, too.

zookoatleastauthoritycom commented Feb 16, 2015

Update on Brad's Blog:

http://ideas.4brad.com/would-bitcoin-fall-cliff-if-it-dropped-100#comment-15812

I was just discussing this with Tara Vancil, and she pointed out that inasmuch as Bitcoin has value as a medium-of-exchange (not just as a store-of-value) then this should exert upward pressure on the market price, even in the face of declining mining power. I think this is a really good point. The part about Brad's Doomsday Scenario positive feedback loop in which ↓mining-power causes further ↓price assumes (explicitly) that the price is determined solely or primarily by "speculators" (i.e., by people valuing Bitcoin as a store-of-value).

Now, Tara's observation doesn't totally assuage my concerns about Brad's Doomsday Scenario. It could still be a Doomsday, although perhaps not as complete or permanent of a Doom as it would be without value as a medium-of-exchange. Perhaps I dimly intuited this earlier, and that's why I included point 7 in #95 (comment), which suggests a way that this Doomsday Scenario could cause Bitcoin to lose value as-a-medium-of-exchange, too.

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daira Mar 5, 2016

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Having read that thread, I really strongly think we should reconsider #143 (Change block reward to smooth asymptotic function).

This would interact with the founders' reward, but not in a particularly complicated way or that contradicts anything we've publically committed to — it would be straightforward to ensure that the founders still get 10% of the eventual monetary base, over a ~4-year period.

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daira commented Mar 5, 2016

Having read that thread, I really strongly think we should reconsider #143 (Change block reward to smooth asymptotic function).

This would interact with the founders' reward, but not in a particularly complicated way or that contradicts anything we've publically committed to — it would be straightforward to ensure that the founders still get 10% of the eventual monetary base, over a ~4-year period.

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zookozcash Mar 6, 2016

Note that the discontinuities in block reward are only one thing that could arguably trigger a "↓price↬↓mining↬↓price" spiral. Anything that changes the price of the currency could trigger the same. So regardless of whether we smooth out the discontinuities in the reward curve, we should still try to prevent the "↓mining↬↓price" leg of the spiral, which means making it so that a dropping mining power does not result in a worse service (e.g. long delays between blocks, and the attendant capacity problems if blocks are near capacity).

zookozcash commented Mar 6, 2016

Note that the discontinuities in block reward are only one thing that could arguably trigger a "↓price↬↓mining↬↓price" spiral. Anything that changes the price of the currency could trigger the same. So regardless of whether we smooth out the discontinuities in the reward curve, we should still try to prevent the "↓mining↬↓price" leg of the spiral, which means making it so that a dropping mining power does not result in a worse service (e.g. long delays between blocks, and the attendant capacity problems if blocks are near capacity).

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zookozcash Mar 9, 2016

#147 might help with this problem, by reducing the impact of points 6 and 7 from #147

zookozcash commented Mar 9, 2016

#147 might help with this problem, by reducing the impact of points 6 and 7 from #147

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zookozcash Mar 30, 2016

Okay, I think our answer to "what to do about the death spiral" is #147, at least as far as the "Zcash 1.0 (Frontier)" release goes. I can't think of anything else that we could possibly do to help with this issue, so I'm going to close it.

zookozcash commented Mar 30, 2016

Okay, I think our answer to "what to do about the death spiral" is #147, at least as far as the "Zcash 1.0 (Frontier)" release goes. I can't think of anything else that we could possibly do to help with this issue, so I'm going to close it.

@zookozcash zookozcash closed this Mar 30, 2016

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zookozcash commented Aug 8, 2017

People worrying about the Death Spiral on Bitcoin: https://steemit.com/bitcoin/@belerophon/the-black-swan-that-could-turn-bitcoin-upside-down

aayanl pushed a commit to aayanl/zclassic-addressindexing that referenced this issue Aug 23, 2017

Merge pull request #95 from z-classic/fix-redeems
Allow reedeeming of previously replay protected transactions
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