Declining Profitability For New Miners Threatens Bitcoin Decentralization

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Miner Centralization is hard to define. Mostly it is just confusing. Having already tackled a definition of Bitcoin centralization much to my satisfactionI was a little confused about the appearance of a new centralization and wanted to explore it. However, for any complaint to be meaningful, bitcoin mining minimum difficulty concentrating needs to be an improved alternative.

It bitcoin mining minimum difficulty concentrating that many of these complain-ers wanted the following:. The second definition is problematic because there are two classes of agent: Moreover, in Bitcoin, users would care about the mining equipment residing all in the same place, for reasons of theft. If one is going to commander a room full of equipement, it is not too much more difficult bitcoin mining minimum difficulty concentrating commandeer a slightly-larger room — violence has economies of scale.

Instead, if spread around the world, adversaries will find the equipment expensive to bitcoin mining minimum difficulty concentrating, sieze, and manage. So the concept is relevant. In this way I think the definition makes a unique contribution to the conversation.

In the very short term, this cost would be infinite — whoever controled this information, would in turn control the block creation process. On the other hand, let us assume that anyone-can-mine, and that they can do so using a magic spell. The magic drains electrical power, but creates valid Bitcoin blocks. These results seem consistent with Bitcoiner-concerns, and with a notion of mining centralization.

However, I am now going to argue that the first definition is logically incoherent, the second is unmeasureable, and the third is unalterable. As a result, it is probably pointless to talk about any of this. The gist of it is that fixed costs can be re-used, but variable costs cannot. For example, a pizzaria might have one oven, which it uses to cook many pizzas per day.

But you can fit more pizzas in it either at once or in rapid succession. The oven is a fixed cost, but the dough is a variable cost you need 1 dough per pizza. Similarly, the pizzaria may have only one cash register, because for statistics reasons patrons are unlikely to all need the register at once. This distinction is of tremendous importance to a specific producer, in realitywho actually has to optimize a given production-operation tomorrow. This individual will estimate the consumer demand for pizzas, tomorrow, and try to decide how much flour to purchase.

If opening a new store, s he will wonder what the size oven to buy. A sucessful businessman optimizes these choices, to minimize his total expenditures. After the costs have actually been minimized, the number s are set in stone.

This involves three operations: The distinction between fixed and variable costs is merely a tool which assists with the first operation. And I can prove it — notice that fixed costs are defined over an industry-specific time periodbeyond which all costs are Variable. In my opinion this is unhelpful. A capital-intensive operation high fixed costs usually has an edge: But it also has a disadvantage: A capital-intensive operation must pay for the capital!

In fact, capital is abhorrently expensive, given that every entrepreneur is effectively competing against all other entrepreneurs in the entire world simultaneously.

Instead of working at the mining facility, you can just go on vacation…and this is even before we discuss risks!

Industries with high fixed costs tend have few large producersinstead of many small producers. I agree that we should. And I look forward to returning to this question later. The latter, revenue-variance, is not an economy of scale. I look forward to expanding on this in a future post. So I suppose I will admit it is a fixed cost. On the other hand, I could give an opposite answer!

Imagine that full nodes offered a service to miners: Any node-runner who wished to sell this information, to subscribing miners, could do so. Well, what if pools charged a flat fee, instead of a percentage fee?

In a competitive market, this service would be offered at its marginal cost. Since it costs almost nothing for nodes to repeat information they already know, the service would cost almost nothing. Thus, it would not really be a cost at all, fixed or otherwise. Would the market, in fact, be competitive? This depends on the barriers to entry, ie the cost of creating a new full node which, ironically, is my own definition of Bitcoin Centralization.

Thus the barriers to entry are zero. A better question might be: This question is important, because a fixed cost can be a barrier-to-entry and these entry-barriers are anti-competitive. Miners do need to be connected to the internet, but any connection will do.

I refer to three developments: These mining bitcoin mining minimum difficulty concentrating allows blocks to be found, many times in a row, without miners downloading any block data. This puts all bitcoin mining minimum difficulty concentrating on an equal footing, regardless of their internet-speed at least, while the block reward is the dominant source of revenue.

However, any miners who do invest in greater connectivity, will see greater revenues, as they can more-quickly download-and-verify all preceeding blocks. Higher bandwidth miners have an edge, but they also have to pay for the bandwidth!

Thus, the situation is comparable to investments in newer ASIC bitcoin mining minimum difficulty concentrating, or a fancier cooling system. If we complain about bandwidth on these grounds, we run a strong risk of inconsistent complaining. It ships that way, I am sure, in bitcoin mining minimum difficulty concentrating to achieve scale economies in both the shipping itself, bitcoin mining minimum difficulty concentrating also in the cooling of the unit and the installation and operation of the equipment.

In the world of theoretical finance, a group of small users would form a corporation, and take advantage of economies of scale. To the extent that they are unable to do this, some users are prevented from mining. This is because difficulty adjustments will eventually bankrupt any miner who does otherwise.

In a bitcoin mining minimum difficulty concentrating, there is a natural barrier-to-entry that emerges from the competitive features of mining.

With these, small investors are equivalent to large investors. Generating power has returns to scale, of bitcoin mining minimum difficulty concentrating.

Therefore, your power is generated by a few large power plants. So, electrical power generation is a capital intensive, high fixed-cost operation with powerful economies of scale. This purchase is now a variable cost. But where does power truly bitcoin mining minimum difficulty concentrating If pools do anything miners dislike, miners can simply leave. And it is easy to create more pools, bitcoin mining minimum difficulty concentrating the existing full nodes come to think of it, perhaps it would be helpful if Bitcoin Core shipped with up-to-date pool software, to ensure that barriers-to-entry are always zero.

What of cheap batteries? Electricity is currently expensive to storewhich is why intraday electricity prices vary. But if storage were cheap, the battery could come loaded with cheap eletricity, to power the ASIC bitcoin mining minimum difficulty concentrating its lifetime.

Then a variable cost would become…variable-over-the-time-horizon-of-one-ASIC-lifetime. What if someone invents a solar powered ASIC, that lasts forever? Since the goal of the ASIC is to produce hashes, and each ASIC would only produce X hashes per time unit, the chip costs including power-source would be per-hash, and therefore variable.

Managerial concentration cannot be measured under adversarial conditions. Physical concentration is unalterable, as it is a function of the geology, civic infrastructure, and physics which are beyond the reach of computer programmers. There are many examples of phenomena changing when there are fewer agents, or when these agents have a greater ability to coordinate. Instead, I oppose this metric on grounds of epistemology. The reverse, however, is not the case the mob cannot effortlessly mimic the discipline of bitcoin mining minimum difficulty concentrating army unit.

In point of fact, everything we know about Bitcoin miners, and their blocks and their pools, is information that they have volunteered to us.

However, under adversarial conditions, we can never tell how many agents control the hashpower, be it 2 or 2, Worse, these imperceptible executors might, at any time, find it in their interest to deceive onlookers.

Greed is looking out for himself, and he wants to make as much money as possible. I find this assumption realistic, because if the army actually is is more effective in some way then the unruly mob, then the unruly mob will tend to resemble an army, anyway.

Greed doublespend, you ask? He can reorganize the chain at any time. Greed prefers to keep all of the new coins for himself, rather than undermine the system and the validity of his own wealth. This is partially because Mr. Greed can only use his fraud powers to reverse his own payments. And he can only do this for payments which are recent. Payments which have many confirmations, or which belong to channels that were opened a long time ago, are much harder to steal back.

More about this later.

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