Beyond the Doomsday Economics

This post is a review of the Bank of International Settlements working paper #765, by request. At first it doesn't look like anything that interesting to dive into but because there's a public request for a review here so hey why not.

First some background, by way of an apology over my own bias entering this review. Over the last decade there have been several medium profile research papers written with support by different international banking/finance/economics consortia, specifically about the possible implications of public ledger tech. Some have of course been better than others, but there some reason for this endeavor: there are indeed economic implications to the rise of public ledger tech that will affect the people in these institutions.

However, that's not the whole story of how these publications appear. Typically they are tasked and the authors motivation is not merely an objective view of what potential economic implications will be in play. Instead the authors have some idea that their employers will want to hear certain narratives, and so they present us with the narratives. Sadly, it is not often the case that either 1) the narratives reflect the actual economic implications of public ledger tech, nor that 2) the employers are motivated in the way that the authors expect they are.

The result is some lengthy paper dotted with specified soundbites designed to confuse or deflect analysis, with an occasional warning or wisdom, but mostly just somebody who has never typed a public address in their life let alone published a few dozen transactions telling you about why bitcoin doesn't work, and specifically neglecting to tell you the problem that it solves. Depending on how openly aggressive the attacks on public coin are in the speech or paper, eventually the boss will have a talk with the author and let them know: "we own a ton of these coins [who do you think buys up all the coins if not fiat issuers?], so thanks for thinking of us but tone it down a bit could ya"?

Some of the narratives have included the push to focus on "blockchain" instead of public currency, and even some less successful ones such as the push to refer to public coin as "private currency". That one didn't last long.

So you can see my bias here, as I started reading this thing I was curious about the latest narratives and focused on how the authors used the term "counterfeiters" to describe double spenders. It's clear that a successful double spend does not increase the money supply, whereas a successful counterfeit does increase the money supply, so it seemed this misnomer wouldn't stick.

And sure, I have some little nitpicks with language in this document but in the end it turns out that the authors have written a decent paper here about different ways to look at the double spend and security issues around 51% attacks.

In fact the approach in the paper is quite reasonable, in particular the breakdown of what is "finality" into three parts, legal, operational, and economic. It is an improvement over the single paragraph and formula that Satoshi included on the topic in his original whitepaper, and is well worth a read.

An even simpler approach to the cost of double spend analysis was outlined here The 0-conf double spend attack is really a separate topic, one that Peter Rizun recently addressed with experiments using the Bitcoin Cash network.

In the end, the "Doomsday economics" referred to is an issue that has in fact graced these pages on many occasions: the issue of the rapidly diminishing coinbase returns in the original bitcoin protocol and what that means for the security against 51% attacks and double-spends as we move forward.

The author is quite right: the rapid drop off implicit in the issuance schedule or money supply curve of the original BTC (and many other coins that copy it), that of a "halving" taking place every n blocks, leaves something to be desired.

Unfortunately the author stops short of suggesting other issuance schedules or curves that address this, such as the logarithmic issuance curve.

Indeed, perhaps the author would be interested to look at the money supply curve offered by Woodcoin, one which is neither the rapid drop off of the geometric series nor the continued inflation of the constant coinbase, nor the exponential growth of the discretionary issuance of fiat. The logarithmic curve is clearly superior according to the arguments of the paper under review, and it is a shame that none of the new coins of the last half a decade have adopted it. However it's certainly not the be-all or end-all of issuance schedules, a science that has yet to see the light of day. And we can see why not: people are still using discretionally issued private currencies. It's perhaps asking too much to ask for a science of efficient and sustainable public issuance schedules in this environment.

Patience dear reader. Papers like this one are signs that progress is being made.

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