Wednesday, March 2, 2011

BitCoin: a rube-goldberg machine for buying electricity

From ξFin

With the EFF’s announcement that they would being accepting BitCoin donations, the alternative money community began to take a larger interest. I certainly did, and found that there are good and bad things about this form of money. In the end, BitCoins create a perverse incentive to consume energy to “create money.” Here is why.

What is a bitcoin and how do you create one? — A BitCoin is created whenever a user’s computer churns though a SHA-256 hash repeatedly from a hash until it results in a number less than a given number. Statistically, hash functions are supposed to have very unpredictable content–that is what makes them secure. Whenever a BitCoin client churns through a hash starting from a given number issued to the network, it burns CPU time (and thus energy). The probability of getting a hash to be “less than” a given 256-bit number is quite low. Successfully determining how many SHA-256 rounds it takes for a particular nonce to hash to a number lower than some value is called the “proof of work.” If while your computer receives a new “block” from the network (meaning another computer successfully won some BitCoins), your computer must start over with a new nonce.

How much energy does it require to mine the average BitCoin? — With my “older computer,” the hash rate averages around 2000 khps on a microprocessor going full-bore consuming about 65W. The current difficulty shows that a new BitCoin can be mined by a computer at this speed on average every 113 days. So, 113 days × 24 hours = 2712 hours. 2712 hours × 65W = 176280 Wh or 176.28 KWh. The average cost of a KWh in the United States is 10.45 cents. So we’re looking at spending $18.42 to create 50 BTC (at the moment). So the electrical cost is about $0.36/BTC. BitCoins are trading now already at values below this, so I can only assume that they’re being sold at a loss or others may be externalizing the costs of electricity and not taking this into account. If you were to pay your electric bill in BTC, you would have a positive feedback loop (always a bad thing) that consumes more energy to earn money to pay back the power company. It doesn’t matter how efficient your processors are—you’re spending more money to make money.

Now I understand the motive to why BitCoin is like this: it is to prevent run-away inflation– the number of BitCoins that will ever be available to the world is limited to X million. If BitCoins are lost due to corruption or data loss, they can never be recovered. (Clue in the Greifer who writes a trojan horse that seeks out to destroy unprotected wallet.dat files!) While the BitCoin FAQ claims that it is a misconception to say that BitCoins gain their value via the electricity used to generate them, as there is no other way to feasibly generate a BitCoin other than the mass consumption of electricity, I don’t agree with this assertion. Once a BitCoin is generated, you still have the problem of a market that still must determine their “value”–does it cost you 25 BTC for a sandwich or 2.5 BTC for a sandwich? With an absolute fixed quantity of BTC to be created (until about the year 2140) and a specification that says that BTC can be subdivided down to the 0.00000001ths (not that any client supports this at this time, most mandate the limit of hundreths of a BTC are the smallest subdivisions) we have a currency that will devalue itself almost as easily as the Zimbabwean dollar, except by using progressively smaller and smaller subdivisions of a BTC. Should we be using BitCoin 10-decades from now, we’ll still reminisce how it used to be that 10 BTC would have bought you a nice meal, and so on.

So what use is BitCoin? — BitCoin is driving a lot of people to think about the problems of creating transactions that cannot be interfered with by third parties, without fees, etc. The “Timestamp Server” concept and distribution of publicly “spent” transactions (to prevent double-spending) is still a valid concept. Anonymity in transactions is still something desirable, but I don’t believe that you can achieve it via near-anonymous digital signatures online.

In the end, the artificial creation of the limited number of possible BitCoins via this “proof of work” (doing millions of SHA-256 hashes over and over) is madness. All you really need is to have “proof of limitation” without the politics—was the market restrained from creating too much money too fast? BitCoin’s use of a procedural solution is the wrong track when all you need do is define a constraint via a formula and apply it as needed over time, instead of everyone continuously spinning a hash function and wasting electricity. Keep the transactions public, cryptographically sign them, and audit them with a money model and you’ll be able to keep much of what is good about BitCoin. And of course, use a “commodity” the people can intuitively understand, something like… time.

for more info about Bitcoin


  1. Great article Mira Luna,

    only one point I would like to make, regarding

    "...we have a currency that will devalue itself almost as easily as the Zimbabwean dollar, except by using progressively smaller and smaller subdivisions of a BTC. Should we be using BitCoin 10-decades from now, we’ll still reminisce how it used to be that 10 BTC would have bought you a nice meal, and so on."

    You've got the idea, bitcoin will change in value. Each coin will be more and more subdivided so you can still use it to buy something with it.

    Technically, that's not called devaluation but appreciation, meaning each whole unit of bitcoins will become worth more and more. It isn't a good thing for users, as prices will continually change.

    The only ones to gain from this forced change in value are going to be the early adopters who may sit on a pile of bitcoins and can buy - in case the currency really does take off - they will be able to buy a car for a whole coin, rather than a sandwich...

  2. "It isn't a good thing for users, as prices will continually change. "

    Sheer folk economic idiocy. Users benefit because they can purchase more - not just of a particular good but of all goods they desire. Price decreases are single handedly responsible for the uplifting of billions of people out of centuries of subsistence farming and poverty. Accumulation of capital and wealth for the common man were made possible because the cost of production of immediate needs (food, shelter) were lowered through division of labor and specialization.

    Psychologically dealing with lowering prices is a total non-issue. No on has a problem seeing the price of HDTV's, computers, and cell-phones going down. The only reason it doesn't happen in the rest of economy is because of the destructive inflationary regime of fiat currency.

  3. So while in some frames bitcoin is claimed to be a currency, in reality it is designed to mimic a precious metal. Just like there is a finite amount of gold in the Earth, there will be a finite amount of bitcoin. Fiat currencies replaced gold as current money for very specific and natural reasons. But gold is still considered a viable means for storing value as evidenced by its use by governments and the price of gold on the various exchanges. Granted gold and other precious metals' value fluctuates more than the dollar, but it still has its use... whether or not you agree with it. Such will be the same with bitcoin.

  4. And yeah you got the Zimbabwe comparison backwards. The Zimbabwe dollar became devalued because the central bank effectively created an infinite unlimited supply of ZWD by demonstrating a willingness to print more of it whenever government employees threatened to go on strike. Bitcoin is the opposite in that there is a hard limit of 21 million, ever. It will not devalue due to inflation in the long term, it will deflate in the long term. Every one gets hung up on the whole 21 million not being enough. In this regard it is better to think of it as gold. There is a finite amount of gold as demand increases for gold its value increases because supply is fixed. And thats okay. If you plan to use gold as a medium of exchange you will just have to take that into consideration. So too with bitcoin.

  5. The author did not correctly understand how bitcoin works.

    Proof-of-work is not used to 'create' bitcoins. It is used to decentralise the network. Miners get bitcoins as a reward for helping the network to work. The best way to convince yourself of that, is to consider that according to the protocol, bitcoin generation in time will decrease no matter what, even if total CPU power keep increasing.

  6. I can't believe people write about bitcoin without basic understanding of economics.

  7. FYI another article on bitcoin, also responding to some concerns raised here

  8. Ridiculous article. The author misunderstands almost everything about bitcoin.

  9. the article was just an excuse. everyone is going to remember him as the first guy to compare bitcoin mining to rube goldberg machines. doing research so you have something to say would just slow you down and someone else woulda beat him to this snazzy title

  10. I'm entertained. All currency is the same, they are correct. . its based on trust. I just don't understand why its so difficult to trust the first currency which is completely open. Not sure if it will be bitcoin in the end. . but i do believe one of these online currencies will prevail. . till countries punish those who use the currency.

  11. Bitcoin is a scam for the gullible, greedy and idiotically paranoid. Thus you cannot reason with them, especially the internet as they all think they have the economic vision of Warren Buffet. These are the same idiots quoting Rand without ever reading the whole book.

    Proof of concept: Unnecessary need for anonymity. If you have the strength of conviction for your words then there is nothing to hide.

  12. When the BitCoin people talk about moving the decimal point to support the future deflation of the currency, they're just deluding themselves that they aren't creating "more money," they would just love to fantasize that their 50BTC will be worth "zillions" in the future.

    If your money deflates from 21 million coins and you "allow" the decimal point to be moved 10 places, you've effectively created 21,000-trillion absolute units of BitCoin and the "early" adopters end up being conveniently rich.

    Over time, people will start relabeling the harder to use units---who is going to say 0.005 BitCoin when its easier to say 5mBTC or 0.000005 BitCoin when its easier to say 5μBTC ? This that funny-money? This has already been proposed on the BitCoin forums and it turns a potentially great idea for money into a game of Calvinball.