This is the first deep, pioneering economics paper I've seen about Bitcoin and cryptocurrency: http://www.nber.org/papers/w24717 I really wish NBER working papers were ungated, so more crypto enthusiasts could read it.
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Cost of hardware is irrelevant. Amount of energy is also irrelevant. An external irreducible (energy) cost is required for confirmation. Confirmation cost is controlled by demand for confirmation (supply is capped). As in all markets, competition maintains return on investment.
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A 51% attack is not only possible, it’s inevitable once Bitcoin starts to really matter. Bitcoin doesn’t use hope as a defense. Fees rise on censored txs until the free market can overcome the censor’s ability to subsidize its operations, or it fails to do so.
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> A 51% attack is not only possible, it’s inevitable Let me make sure I understand... So you think 51% attacks are inevitable, and imagine a future where Bitcoin would go back and forth between being 51-percent-attacked (low fees) and censorship-resistant (high fees)?
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Yes - for some definitions of “hi” and “low”. And fees are the *only* thing that defends Bitcoin from censorship.
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Two points: (a) while I agree that fees will have to rise substantially to shoulder the bulk of security cost, surely you cannot ignore the sunk cost in mining equipments altogether?
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Investment in mining will be a lagging function of fees, true. But that sunk cost will also act as a strong barrier against attacks. Any analysis of majority attacks must consider cost of hardware (stock) - Budish did too. You can’t just look at fees (flow) alone.
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If you include cost of hardware in your analysis, then IMO 51% attacks are *not* inevitable.
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(b) If you think 51% attack are inevitable, then surely you must think Bitcoin is already a failed project. It is the only natural conclusion.
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