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From: Billy Tetrud <billy.tetrud@gmail.com>
Date: Thu, 30 Jun 2022 08:25:47 -0700
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To: Kate Salazar <mercedes.catherine.salazar@gmail.com>
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Subject: Re: [bitcoin-dev] Bitcoin covenants are inevitable
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@Alex
> The person who obtained greater economic utility from their two
transactions.

That is not the case. The economic utility gained by their two transactions
is probably almost entirely related to something other than bitcoin - the
nature of the specific transactions themselves. The value they got from
using bitcoin is the value they get from the properties of bitcoin when
compared against other competing things in the market (other currencies or
payment systems). Bitcoin's ability to finalize quickly, have no
counterparty risk, reduced 3rd party middleman fees, and the willingness of
that person to transact using bitcoin vs something else, to name a few.

My example was intended to make it very clear that the person who held
bitcoin over 10 years got more value from bitcoin itself, regardless of who
received more economic utility from their chosen transactions.

> Billy appeared to be indicating that the frequent movement of coins in
itself somehow produced utility

I was actually saying the opposite of that. My point, and the point of my
example I explained above, was that holders gain quite a bit of value from
bitcoin, and so bitcoin's value to its users is not derived solely from
transacting.

@Kate
> Pool operators are free to request larger fees from older utxos

You're absolutely right that whoever creates their block template can
decide how to include transactions. However, by doing such non-standard
things, they would lose money, so they are not incentivized to do that.
Keagan's point was about who pays for bitcoin's security. Right now it is
only transactors. And yet transactors are not the only actors who gain
value from the use of bitcoin. As such, the payment for bitcoin's security
is not spread proportionally to those who get value from the use of
bitcoin. It would certainly be ideal if bitcoin's security was paid for by
each actor proportionally to how much value they get from using bitcoin.
Worth it? Questionable. But ideal, certainly. You aren't going to get to
that ideal by expecting individual miners to altruistically lose money to
enact that ideal.

On Wed, Jun 29, 2022 at 3:44 AM Kate Salazar <
mercedes.catherine.salazar@gmail.com> wrote:

> Hey
>
> On Tue, Jun 28, 2022 at 10:43 AM Billy Tetrud via bitcoin-dev <
> bitcoin-dev@lists.linuxfoundation.org> wrote:
>
>> @Eric
>> >  People who transact are realizing the benefit of money - the avoidance
>> of barter costs.
>>
>> I'm very confident you're incorrect that holders don't receive any
>> benefit and you're certainly not correct that every spend is receiving the
>> same benefit. As I'm sure you're aware, one of the primary components of a
>> currency's value and purpose is as a store of value. Storing value happens
>> while you're holding it, not while you're spending it. Consider the
>> following two scenarios: one person holds onto 10 bitcoin for 10 years and
>> then spends those 10 bitcoins in some way in 2 transactions. Another person
>> spends 4 bitcoins to buy something, then sells it for 6 bitcoins, and then
>> buys something else for that 6 bitcoins and then never acquires any bitcoin
>> for 10 years.
>>
>> Both people spent 10 bitcoins over 2 transactions. Over that 10 year
>> period, only one of those people utilized bitcoin's utility as a store of
>> value. Who benefited more from their use of bitcoin?
>>
>> > Those who never transact, never realize any benefit.
>>
>> While that's true, its not relevant and basically a red herring. You need
>> to compare those who transact often and rarely hold, to those who hold a
>> lot but rarely transact. Its not helpful to consider those who throw their
>> bitcoin into a bottomless pit and never retrieve them.
>>
>> On an idealistic level, I agree with Keagan that it would make sense to
>> have "a balance of fees to that effect". I think doing that would be
>> technically/economically optimal. However, I think there is an enormous
>> benefit to having a cultural aversion to monetary inflation and the
>> consequences of convincing the bitcoin community that inflation is ok could
>> have unintended negative consequences (not to mention how difficult
>> convincing the community would be in the first place). There's also the
>> economic distortion that inflation causes that has a negative effect which
>> should also be considered. The idea of decaying utxo value is interesting
>> to consider, but it would not solve the economic distortion that
>> monetary inflation causes, because that distortion is a result of monetary
>> devaluation (which decaying utxos would be a form of). Then again, maybe in
>> this case the distortion of inflation would actually be a correction -
>> correcting for the externality of benefit received by holders. I'm
>> stream-of-consciousnessing a bit, but anyways, I suspect its not worth the
>> trouble to perfect the distribution of bitcoin blockchain security costs to
>> include holders. Tho, if I were to go back in time and influence how
>> bitcoin was designed, I might advocate for it.
>>
>
> Pool operators are free to request larger fees from older utxos, or from
> all utxos, or from newer utxos, at their judgement, looking at the
> blockspace demand census and at what the other pool operators are doing.
> This is not consensus, it's policy. It's not a technology problem, it's
> solved above in the social layer.
>
> If this kind of problem torments anyone, maybe miner decentralization hard
> forks are worth looking at, some already exist.
>
>
>>
>> @Peter
>> > demurrage and inflation have identical economic properties.
>>
>> The distortion of incentives is identical, however there is also the
>> effect it has on a currency's property as a useful unit of account.
>> Decaying utxos would mean that it would contribute substantially less to
>> market prices needing to change. I suspect this effect would be bordering
>> on negligible tho.
>>
>> On Thu, Jun 23, 2022 at 2:17 PM Peter Todd via bitcoin-dev <
>> bitcoin-dev@lists.linuxfoundation.org> wrote:
>>
>>> On Tue, Jun 21, 2022 at 01:00:07PM -0600, Keagan McClelland via
>>> bitcoin-dev wrote:
>>> > > The PoW security of Bitcoin benefits all Bitcoin users, proportional
>>> to
>>> > the
>>> > value of BTC they hold; if Bitcoin blocks aren't reliably created the
>>> value
>>> > of
>>> > *all* BTC goes down. It doesn't make sense for the entire cost of that
>>> > security
>>> > to be paid for on a per-tx basis. And there's a high chance paying for
>>> it
>>> > on a
>>> > per-tx basis won't work anyway due to lack of consistent demand.
>>> >
>>> > FWIW I prefer the demurrage route. Having something with finite supply
>>> as a
>>> > means of measuring economic activity is unprecedented and I believe
>>> deeply
>>> > important. I'm sympathetic to the argument that the security of the
>>> chain
>>> > should not be solely the responsibility of transactors. We realize the
>>> > value of money on receipt, hold *and* spend and it would be
>>> appropriate for
>>> > there to be a balance of fees to that effect. While inflation may be
>>> > simpler to implement (just chop off the last few halvings), I think it
>>> > would be superior (on the assumption that such a hodl tax was
>>> necessary) to
>>> > keep the supply fixed and have people's utxo balances decay, at least
>>> at
>>> > the level of the UX.
>>>
>>> Demurrage makes protocols like Lightning much more complex, and isn't
>>> compatible with existing implementations. While demurrage could in
>>> theory be
>>> implemented in a soft-fork by forcing txs to contain an output with the
>>> demurrage-taxed amount, spending to a pool of future mining fees, I
>>> really
>>> don't think it's practical to actually do that.
>>>
>>> Anyway, demurrage and inflation have identical economic properties.
>>> They're
>>> both a tax on savings. The only difference is the way that tax is
>>> implemented.
>>>
>>> --
>>> https://petertodd.org 'peter'[:-1]@petertodd.org
>>> _______________________________________________
>>> bitcoin-dev mailing list
>>> bitcoin-dev@lists.linuxfoundation.org
>>> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>>>
>> _______________________________________________
>> bitcoin-dev mailing list
>> bitcoin-dev@lists.linuxfoundation.org
>> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>>
>

--0000000000006f29c505e2abe326
Content-Type: text/html; charset="UTF-8"
Content-Transfer-Encoding: quoted-printable

<div dir=3D"ltr">@Alex<br><div>&gt; The person who obtained greater economi=
c utility from their two transactions.<br></div><div><br></div><div>That is=
 not the case. The economic utility gained by their two transactions is pro=
bably almost entirely related to something other than bitcoin - the nature =
of the specific transactions themselves. The value they got from using bitc=
oin is the value they get from the properties of bitcoin when compared agai=
nst other competing things in the market (other currencies or payment syste=
ms). Bitcoin&#39;s ability to finalize quickly, have no counterparty risk, =
reduced 3rd party middleman fees, and the willingness of that person to tra=
nsact using bitcoin vs something else, to name a few.=C2=A0</div><div><br><=
/div><div>My example was intended to make it very clear that the person who=
 held bitcoin over 10 years got more value from bitcoin itself, regardless =
of who received more economic utility from their chosen transactions.=C2=A0=
</div><div><br></div><div><div>&gt; Billy appeared to be indicating that th=
e frequent movement of coins in itself somehow produced utility</div><div><=
br></div><div>I was actually saying the opposite of that. My point, and the=
 point of my example I explained above, was that holders gain quite a bit o=
f value from bitcoin, and so bitcoin&#39;s value to its users is not derive=
d solely from transacting.=C2=A0</div></div><div><br></div><div>@Kate<br></=
div><div>&gt; Pool operators are free to request larger fees from older utx=
os</div><div><br></div><div>You&#39;re absolutely right that whoever create=
s their block template can decide how to include transactions. However, by =
doing such non-standard things, they would lose money, so they are not ince=
ntivized to do that. Keagan&#39;s point was about who pays for bitcoin&#39;=
s security. Right now it is only transactors. And yet transactors are not t=
he only actors who gain value from the use of bitcoin. As such, the payment=
 for bitcoin&#39;s security is not spread proportionally to those who get v=
alue from the use of bitcoin. It would certainly be ideal if bitcoin&#39;s =
security was paid for by each actor proportionally to how much value they g=
et from using bitcoin. Worth it? Questionable. But ideal, certainly. You ar=
en&#39;t going to get to that ideal by expecting individual miners to altru=
istically lose money to enact that ideal.</div></div><br><div class=3D"gmai=
l_quote"><div dir=3D"ltr" class=3D"gmail_attr">On Wed, Jun 29, 2022 at 3:44=
 AM Kate Salazar &lt;<a href=3D"mailto:mercedes.catherine.salazar@gmail.com=
">mercedes.catherine.salazar@gmail.com</a>&gt; wrote:<br></div><blockquote =
class=3D"gmail_quote" style=3D"margin:0px 0px 0px 0.8ex;border-left:1px sol=
id rgb(204,204,204);padding-left:1ex"><div dir=3D"ltr"><div dir=3D"ltr">Hey=
</div><br><div class=3D"gmail_quote"><div dir=3D"ltr" class=3D"gmail_attr">=
On Tue, Jun 28, 2022 at 10:43 AM Billy Tetrud via bitcoin-dev &lt;<a href=
=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" target=3D"_blank">bitcoin=
-dev@lists.linuxfoundation.org</a>&gt; wrote:<br></div><blockquote class=3D=
"gmail_quote" style=3D"margin:0px 0px 0px 0.8ex;border-left:1px solid rgb(2=
04,204,204);padding-left:1ex"><div dir=3D"ltr"><div>@Eric<br></div>&gt;=C2=
=A0

People who transact are realizing the benefit of money - the avoidance of b=
arter costs.=C2=A0<div><br></div><div>I&#39;m very confident you&#39;re inc=
orrect that=C2=A0holders=C2=A0don&#39;t receive any benefit and you&#39;re =
certainly not correct that=C2=A0every=C2=A0spend is receiving the same bene=
fit. As I&#39;m sure you&#39;re aware, one of the primary components of a c=
urrency&#39;s value and purpose is as a store of=C2=A0value. Storing value =
happens while you&#39;re holding it, not while you&#39;re spending it. Cons=
ider the following two scenarios: one person holds onto 10 bitcoin for 10 y=
ears and then spends those 10 bitcoins in=C2=A0some way in 2 transactions. =
Another person spends 4 bitcoins to buy something, then sells it for 6 bitc=
oins, and then buys something else for that 6 bitcoins and then never acqui=
res any bitcoin for 10 years.=C2=A0</div><div><br></div><div>Both people sp=
ent 10 bitcoins over 2 transactions. Over that 10 year period, only one of =
those people utilized bitcoin&#39;s utility as a store of value. Who benefi=
ted more from their use of bitcoin?=C2=A0</div><div><br></div><div>&gt; Tho=
se who never transact, never realize any benefit.</div><div><br></div><div>=
While that&#39;s true, its not relevant and basically a red herring. You ne=
ed to compare those who transact often and rarely hold, to those who hold a=
 lot but rarely transact. Its=C2=A0not helpful to consider those who throw =
their bitcoin into a bottomless pit and never retrieve them.</div><div><br>=
</div><div>On an idealistic level, I agree with Keagan that it would make s=
ense to have &quot;a balance of fees to that effect&quot;. I think doing th=
at would be technically/economically optimal. However, I think there is an =
enormous benefit to having a cultural aversion to monetary inflation and th=
e consequences of convincing the bitcoin community that inflation is ok cou=
ld have unintended negative consequences (not to mention how difficult conv=
incing the community would be in the first place). There&#39;s also the eco=
nomic distortion that inflation causes that has a negative effect which sho=
uld also be considered. The idea of decaying utxo value is interesting to c=
onsider, but it would not solve the economic distortion that monetary=C2=A0=
inflation causes,=C2=A0because that=C2=A0distortion is a result of monetary=
 devaluation (which decaying=C2=A0utxos would be a form of). Then again, ma=
ybe in this case the distortion of inflation would actually be a correction=
 - correcting for the externality of benefit received by holders. I&#39;m s=
tream-of-consciousnessing=C2=A0a bit, but anyways, I suspect its not worth =
the trouble to perfect the distribution of bitcoin blockchain security cost=
s to include holders. Tho, if I were to go back in time and influence how b=
itcoin was designed, I might advocate for it.</div></div></blockquote><div>=
<br></div><div>Pool operators are free to request larger fees from older ut=
xos, or from all utxos, or from newer utxos, at their judgement, looking at=
 the blockspace demand census and at what the other pool operators are doin=
g. This is not consensus, it&#39;s policy. It&#39;s not a technology proble=
m, it&#39;s solved above in the social layer.</div><div><br></div><div>If t=
his kind of problem torments anyone, maybe miner decentralization hard fork=
s are worth looking at, some already=C2=A0exist.</div><div>=C2=A0</div><blo=
ckquote class=3D"gmail_quote" style=3D"margin:0px 0px 0px 0.8ex;border-left=
:1px solid rgb(204,204,204);padding-left:1ex"><div dir=3D"ltr"><div><br></d=
iv><div>@Peter<br></div><div>&gt; demurrage and inflation have identical ec=
onomic properties.=C2=A0</div><div><br></div><div>The distortion of incenti=
ves is identical, however there is also the effect it has on a currency&#39=
;s property as a useful unit of account. Decaying utxos would mean that it =
would contribute substantially less to market prices needing to change. I s=
uspect this effect would be bordering on negligible tho.=C2=A0</div></div><=
br><div class=3D"gmail_quote"><div dir=3D"ltr" class=3D"gmail_attr">On Thu,=
 Jun 23, 2022 at 2:17 PM Peter Todd via bitcoin-dev &lt;<a href=3D"mailto:b=
itcoin-dev@lists.linuxfoundation.org" target=3D"_blank">bitcoin-dev@lists.l=
inuxfoundation.org</a>&gt; wrote:<br></div><blockquote class=3D"gmail_quote=
" style=3D"margin:0px 0px 0px 0.8ex;border-left:1px solid rgb(204,204,204);=
padding-left:1ex">On Tue, Jun 21, 2022 at 01:00:07PM -0600, Keagan McClella=
nd via bitcoin-dev wrote:<br>
&gt; &gt; The PoW security of Bitcoin benefits all Bitcoin users, proportio=
nal to<br>
&gt; the<br>
&gt; value of BTC they hold; if Bitcoin blocks aren&#39;t reliably created =
the value<br>
&gt; of<br>
&gt; *all* BTC goes down. It doesn&#39;t make sense for the entire cost of =
that<br>
&gt; security<br>
&gt; to be paid for on a per-tx basis. And there&#39;s a high chance paying=
 for it<br>
&gt; on a<br>
&gt; per-tx basis won&#39;t work anyway due to lack of consistent demand.<b=
r>
&gt; <br>
&gt; FWIW I prefer the demurrage route. Having something with finite supply=
 as a<br>
&gt; means of measuring economic activity is unprecedented and I believe de=
eply<br>
&gt; important. I&#39;m sympathetic to the argument that the security of th=
e chain<br>
&gt; should not be solely the responsibility of transactors. We realize the=
<br>
&gt; value of money on receipt, hold *and* spend and it would be appropriat=
e for<br>
&gt; there to be a balance of fees to that effect. While inflation may be<b=
r>
&gt; simpler to implement (just chop off the last few halvings), I think it=
<br>
&gt; would be superior (on the assumption that such a hodl tax was necessar=
y) to<br>
&gt; keep the supply fixed and have people&#39;s utxo balances decay, at le=
ast at<br>
&gt; the level of the UX.<br>
<br>
Demurrage makes protocols like Lightning much more complex, and isn&#39;t<b=
r>
compatible with existing implementations. While demurrage could in theory b=
e<br>
implemented in a soft-fork by forcing txs to contain an output with the<br>
demurrage-taxed amount, spending to a pool of future mining fees, I really<=
br>
don&#39;t think it&#39;s practical to actually do that.<br>
<br>
Anyway, demurrage and inflation have identical economic properties. They&#3=
9;re<br>
both a tax on savings. The only difference is the way that tax is implement=
ed.<br>
<br>
-- <br>
<a href=3D"https://petertodd.org" rel=3D"noreferrer" target=3D"_blank">http=
s://petertodd.org</a> &#39;peter&#39;[:-1]@<a href=3D"http://petertodd.org"=
 rel=3D"noreferrer" target=3D"_blank">petertodd.org</a><br>
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