1. The discussions of 51% attacks seem overblown because it's wrong-way risk for the attacker. Any 51% attack would delegitimize the currency (unless the currency has reached a point of adoption that is far away from where we are today). So, to your point, a 51% attack would probably need to be done in conjunction with a short, but who is your counterparty in the short? The logistics of getting a payout seem tricky to pull off.
2. You talk about Eth gas fees leading to centralization. If I understand right, your argument is basically that lower-dollar accounts have a higher velocity ... sort of analogous to how sales taxes are regressive because poorer consumers have higher marginal propensity to consume, whereas rich people can invest their money and pay lower taxes on capital gains (ignoring income taxes in this analogy) Even if we take this argument at face value, doesn't Bitcoin have same dynamic? Fees are paid on a per-transaction basis (increasingly so as Bitcoin asymptotically approaches its hard cap), so the accounts that transact more frequently get eaten away. (Yes, the issuance of new Bitcoins is dilutive for everyone in proportion to current ownership, but more on that below.)
3. Your discussion of what happens when Bitcoin rewards go down is really interesting, including your note that fees are not static but instead a dynamic marketplace. If I am understanding correctly, issuing new Bitcoin is akin to inflation, so all users are paying "hidden gas fees" in the same way inflation is a "hidden tax" on the middle class. Similarly, as Bitcoin new issuance approaches zero, the "hidden gas fees" go away and will likely get replaced with higher real gas fees: this is akin to shifting the tax burden away from fiat inflation to higher sales taxes.
4. You write: "No physical input is required to “earn” ETH, whereas it is required to earn BTC." I mean, if you accept the argument that those who have fiat currency have earned it by adding value for others in society, then converting fiat to ETH is actually arguably a better required input cost than solving useless math problems, no?
5. The thing that blows my mind about Bitcoin setup (that I had not realized until reading this article) goes back to Bretton Woods. When Bretton Woods was being negotiated, the final compromise reached was GOLD>>USD>>FX, whereby FX was convertible for USD, which in turn was convertible for gold. Keynes proposed the Clearing Union, with all currencies exchangeable to a centralized currency that was in turn exchangeable for an underlying commodity basket. In practice, when the US left the gold standard, the dollar has served as exchangeable for oil (i.e. energy) at a not-too-quickly-depreciating price. With Bitcoin using energy as an input, THAT IS EXACTLY WHAT BITCOIN IS. The price of mining a marginal Bitcoin is reflective of the cost of energy that goes into mining it, and thus it will be difficult for Bitcoin not to move with the cost of energy ... and when we talk about inflation, we are really talking about the cost of energy. (This is a loose/new thought so feel free to poke holes ... it's an analogy but not sure it's airtight.)
I completely understand and agree that RELATIVE to ethereum, bitcoin is a much better candidate to become digital gold (notably the credible neutrality and distribution fairness). However I still see two reasons that will make it hard for Bitcoin ever to become digital gold:
1. The public nature of the ledger makes means that certain coins can become "dirty coins" (like Mt Gox) which risks reducing the fungibility of asset and making certain coins illegal to own in a way that would be much harder to conceive for gold. The best bull case here is that Bitcoin becomes a currency for money laundering or for trade used by nations not friendly to the US.
2. You discussed the fairness of the initial distribution as allocation to miners. Yes, this may be fair from a moral perspective and a credible neutrality perspective. From a practical perspective, however, an idealized digital gold would have a distribution that mirrors the distribution of current gold reserves. This would have meant a "drop" to central banks in proportion to how much gold they currently have. Similar to the "dirty coins" note above, since central banks do not currently own Bitcoin, the success of Bitcoin will likely involve going to war with central banks rather than operating through their existing infrastructure (like gold did for so many years), which will likely make its adoption much more difficult.
Loved this. Thoughts / comments:
1. The discussions of 51% attacks seem overblown because it's wrong-way risk for the attacker. Any 51% attack would delegitimize the currency (unless the currency has reached a point of adoption that is far away from where we are today). So, to your point, a 51% attack would probably need to be done in conjunction with a short, but who is your counterparty in the short? The logistics of getting a payout seem tricky to pull off.
2. You talk about Eth gas fees leading to centralization. If I understand right, your argument is basically that lower-dollar accounts have a higher velocity ... sort of analogous to how sales taxes are regressive because poorer consumers have higher marginal propensity to consume, whereas rich people can invest their money and pay lower taxes on capital gains (ignoring income taxes in this analogy) Even if we take this argument at face value, doesn't Bitcoin have same dynamic? Fees are paid on a per-transaction basis (increasingly so as Bitcoin asymptotically approaches its hard cap), so the accounts that transact more frequently get eaten away. (Yes, the issuance of new Bitcoins is dilutive for everyone in proportion to current ownership, but more on that below.)
3. Your discussion of what happens when Bitcoin rewards go down is really interesting, including your note that fees are not static but instead a dynamic marketplace. If I am understanding correctly, issuing new Bitcoin is akin to inflation, so all users are paying "hidden gas fees" in the same way inflation is a "hidden tax" on the middle class. Similarly, as Bitcoin new issuance approaches zero, the "hidden gas fees" go away and will likely get replaced with higher real gas fees: this is akin to shifting the tax burden away from fiat inflation to higher sales taxes.
4. You write: "No physical input is required to “earn” ETH, whereas it is required to earn BTC." I mean, if you accept the argument that those who have fiat currency have earned it by adding value for others in society, then converting fiat to ETH is actually arguably a better required input cost than solving useless math problems, no?
5. The thing that blows my mind about Bitcoin setup (that I had not realized until reading this article) goes back to Bretton Woods. When Bretton Woods was being negotiated, the final compromise reached was GOLD>>USD>>FX, whereby FX was convertible for USD, which in turn was convertible for gold. Keynes proposed the Clearing Union, with all currencies exchangeable to a centralized currency that was in turn exchangeable for an underlying commodity basket. In practice, when the US left the gold standard, the dollar has served as exchangeable for oil (i.e. energy) at a not-too-quickly-depreciating price. With Bitcoin using energy as an input, THAT IS EXACTLY WHAT BITCOIN IS. The price of mining a marginal Bitcoin is reflective of the cost of energy that goes into mining it, and thus it will be difficult for Bitcoin not to move with the cost of energy ... and when we talk about inflation, we are really talking about the cost of energy. (This is a loose/new thought so feel free to poke holes ... it's an analogy but not sure it's airtight.)
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I completely understand and agree that RELATIVE to ethereum, bitcoin is a much better candidate to become digital gold (notably the credible neutrality and distribution fairness). However I still see two reasons that will make it hard for Bitcoin ever to become digital gold:
1. The public nature of the ledger makes means that certain coins can become "dirty coins" (like Mt Gox) which risks reducing the fungibility of asset and making certain coins illegal to own in a way that would be much harder to conceive for gold. The best bull case here is that Bitcoin becomes a currency for money laundering or for trade used by nations not friendly to the US.
2. You discussed the fairness of the initial distribution as allocation to miners. Yes, this may be fair from a moral perspective and a credible neutrality perspective. From a practical perspective, however, an idealized digital gold would have a distribution that mirrors the distribution of current gold reserves. This would have meant a "drop" to central banks in proportion to how much gold they currently have. Similar to the "dirty coins" note above, since central banks do not currently own Bitcoin, the success of Bitcoin will likely involve going to war with central banks rather than operating through their existing infrastructure (like gold did for so many years), which will likely make its adoption much more difficult.