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From: "Eric Voskuil" <eric@voskuil.org>
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Date: Wed, 2 Mar 2016 11:01:36 -0800
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Subject: Re: [bitcoin-dev] Hardfork to fix difficulty drop algorithm
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> A 6 month investment with 3 months on the high subsidy and 3 months on =
low subsidy would not be made=E2=80=A6

=20

Yes, this is the essential point. All capital investments are made based =
on expectations of future returns. To the extent that futures are =
perfectly knowable, they can be perfectly factored in. This is why =
inflation in Bitcoin is not a tax, it=E2=80=99s a cost. These step =
functions are made continuous by their predictability, removing that =
predictability will make them -- unpredictable.

=20

Changing these futures punishes those who have planned properly and =
favors those who have not. Sort of like a Bitcoin bail-in; are some =
miners are too big to fail? It also creates the expectation that it may =
happen again. This infects the money with the sort of uncertainty that =
Bitcoin is designed to prevent.

=20

e

=20

From: bitcoin-dev-bounces@lists.linuxfoundation.org =
[mailto:bitcoin-dev-bounces@lists.linuxfoundation.org] On Behalf Of Tier =
Nolan via bitcoin-dev
Sent: Wednesday, March 2, 2016 10:08 AM
Cc: Bitcoin Dev <bitcoin-dev@lists.linuxfoundation.org>
Subject: Re: [bitcoin-dev] Hardfork to fix difficulty drop algorithm

=20

On Wed, Mar 2, 2016 at 4:27 PM, Paul Sztorc via bitcoin-dev =
<bitcoin-dev@lists.linuxfoundation.org =
<mailto:bitcoin-dev@lists.linuxfoundation.org> > wrote:

For example, it is theoretically possible that 100% of miners (not 50%
or 10%) will shut off their hardware. This is because it is revenue
which ~halves, not profit.

=20

It depends on how much is sunk costs and how much is marginal costs too.

If hashing costs are 50% capital and 50% marginal, then the entire =
network will be able to absorb a 50% drop in subsidy.

50% capital costs means that the cost of the loan to buy the hardware =
represents half the cost.

Assume that for every $100 of income, you have to pay $49 for the loan =
and $49 for electricity giving 2% profit.  If the subsidy halves, then =
you only get $50 of income, so lose $48. =20

But if the bank repossesses the operation, they might as well keep =
things running for the $1 in marginal profit (or sell on the hardware to =
someone who will keep using it).

Since this drop in revenue is well known in advance, businesses will =
spend less on capital.  That means that there should be less mining =
hardware than otherwise.

A 6 month investment with 3 months on the high subsidy and 3 months on =
low subsidy would not be made if it only generated a small profit for =
the first 3 and then massive losses for the 2nd period of 3 months.  For =
it to be made, there needs to be large profit during the first period to =
compensate for the losses in the 2nd period.


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</o:shapelayout></xml><![endif]--></head><body lang=3DEN-US link=3Dblue =
vlink=3Dpurple><div class=3DWordSection1><p class=3DMsoNormal><span =
style=3D'font-size:11.0pt;font-family:"Calibri",sans-serif'>&gt; =
</span>A 6 month investment with 3 months on the high subsidy and 3 =
months on low subsidy would not be made=E2=80=A6<o:p></o:p></p><p =
class=3DMsoNormal><o:p>&nbsp;</o:p></p><p class=3DMsoNormal>Yes, this is =
the essential point. All capital investments are made based on =
expectations of future returns. To the extent that futures are perfectly =
knowable, they can be perfectly factored in. This is why inflation in =
Bitcoin is not a tax, it=E2=80=99s a cost. These step functions are made =
continuous by their predictability, removing that predictability will =
make them -- unpredictable.<o:p></o:p></p><p =
class=3DMsoNormal><o:p>&nbsp;</o:p></p><p class=3DMsoNormal>Changing =
these futures punishes those who have planned properly and favors those =
who have not. Sort of like a Bitcoin bail-in; are some miners are too =
big to fail? It also creates the expectation that it may happen again. =
This infects the money with the sort of uncertainty that Bitcoin is =
designed to prevent.<o:p></o:p></p><p =
class=3DMsoNormal><o:p>&nbsp;</o:p></p><p class=3DMsoNormal><span =
style=3D'font-size:11.0pt;font-family:"Calibri",sans-serif'>e<o:p></o:p><=
/span></p><p class=3DMsoNormal><span =
style=3D'font-size:11.0pt;font-family:"Calibri",sans-serif'><o:p>&nbsp;</=
o:p></span></p><p class=3DMsoNormal><b><span =
style=3D'font-size:11.0pt;font-family:"Calibri",sans-serif'>From:</span><=
/b><span style=3D'font-size:11.0pt;font-family:"Calibri",sans-serif'> =
bitcoin-dev-bounces@lists.linuxfoundation.org =
[mailto:bitcoin-dev-bounces@lists.linuxfoundation.org] <b>On Behalf Of =
</b>Tier Nolan via bitcoin-dev<br><b>Sent:</b> Wednesday, March 2, 2016 =
10:08 AM<br><b>Cc:</b> Bitcoin Dev =
&lt;bitcoin-dev@lists.linuxfoundation.org&gt;<br><b>Subject:</b> Re: =
[bitcoin-dev] Hardfork to fix difficulty drop =
algorithm<o:p></o:p></span></p><p =
class=3DMsoNormal><o:p>&nbsp;</o:p></p><div><div><div><p =
class=3DMsoNormal>On Wed, Mar 2, 2016 at 4:27 PM, Paul Sztorc via =
bitcoin-dev &lt;<a href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" =
target=3D"_blank">bitcoin-dev@lists.linuxfoundation.org</a>&gt; =
wrote:<o:p></o:p></p><blockquote style=3D'border:none;border-left:solid =
#CCCCCC 1.0pt;padding:0in 0in 0in =
6.0pt;margin-left:4.8pt;margin-right:0in'><p class=3DMsoNormal>For =
example, it is theoretically possible that 100% of miners (not 50%<br>or =
10%) will shut off their hardware. This is because it is =
revenue<br>which ~halves, not profit.<o:p></o:p></p></blockquote><div><p =
class=3DMsoNormal><o:p>&nbsp;</o:p></p></div><div><p class=3DMsoNormal =
style=3D'margin-bottom:12.0pt'>It depends on how much is sunk costs and =
how much is marginal costs too.<o:p></o:p></p></div><div><p =
class=3DMsoNormal style=3D'margin-bottom:12.0pt'>If hashing costs are =
50% capital and 50% marginal, then the entire network will be able to =
absorb a 50% drop in subsidy.<o:p></o:p></p></div><div><p =
class=3DMsoNormal style=3D'margin-bottom:12.0pt'>50% capital costs means =
that the cost of the loan to buy the hardware represents half the =
cost.<o:p></o:p></p></div><div><p class=3DMsoNormal =
style=3D'margin-bottom:12.0pt'>Assume that for every $100 of income, you =
have to pay $49 for the loan and $49 for electricity giving 2% =
profit.&nbsp; If the subsidy halves, then you only get $50 of income, so =
lose $48.&nbsp; <o:p></o:p></p></div><div><p class=3DMsoNormal =
style=3D'margin-bottom:12.0pt'>But if the bank repossesses the =
operation, they might as well keep things running for the $1 in marginal =
profit (or sell on the hardware to someone who will keep using =
it).<o:p></o:p></p></div><div><p class=3DMsoNormal =
style=3D'margin-bottom:12.0pt'>Since this drop in revenue is well known =
in advance, businesses will spend less on capital.&nbsp; That means that =
there should be less mining hardware than =
otherwise.<o:p></o:p></p></div><div><p class=3DMsoNormal>A 6 month =
investment with 3 months on the high subsidy and 3 months on low subsidy =
would not be made if it only generated a small profit for the first 3 =
and then massive losses for the 2nd period of 3 months.&nbsp; For it to =
be made, there needs to be large profit during the first period to =
compensate for the losses in the 2nd =
period.<o:p></o:p></p></div></div></div></div></div></body></html>
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