Systemic Risks From The Rise of Crypto

[matthew2129]

On 11/12/2021 at 7:12 PM, TwoCitiesCapital said:

 

I think at the end of the day only a small percentage are worthwhile. And the longer I spend in the space, the more I trend towards Bitcoin remaining absolutely dominant and the space thinning. 

 

But most of them aren't PoW like Bitcoin, so the concept of them wasting electricity is no more valid than us talking on this forum wastes electricity. 

At current prices, BTC requires over $400M of inflows per WEEK(!) just for the price o fBTC to remain flat. Even if you DGAF about the environmental impact of PoW, PoW blockchains are a melting icecube that will become an increasingly smaller and smaller size of total crypto market cap going forward

[TwoCitiesCapital]

2 hours ago, matthew2129 said:

At current prices, BTC requires over $400M of inflows per WEEK(!) just for the price o fBTC to remain flat. Even if you DGAF about the environmental impact of PoW, PoW blockchains are a melting icecube that will become an increasingly smaller and smaller size of total crypto market cap going forward

 

I'd be interested to see how you came to that math, but I also don't think $400 million is terribly much for a 1+ trillion asset class. You're basically saying it needs to collect just 0.03% of it's current market cap in new inflows every week or just 1.5% of its market cap in inflows a year. For a global asset class that is growing in adoption quickly I don't think that is a high bar at all. 

 

I am open to being wrong about other Blockchains going to zero and BTC being dominant. BTC could remain the largest and most widely used and still lose dominance. All that requires is that other Blockchains also find some level of success and continue to grow - it doesn't require the demise of BTC. 

 

Given that the bulk of the BTC network is operated on cheap renewable energy in areas where it's not needed, or that have excess capacity, it's hard for me to understand the argument against it's energy intensity and why PoW is a bad thing. That's what provides a secure network and makes it insurmountably expensive to try to 51% attack it.

 

Anyone want to take a guess at what the energy intensity of the entire internet and its infrastructure is? Do we even care? No. We've long since determined it's worth it.  And it'll be the same for BTC if it continues on this trajectory of becoming a dominant global store of value and settlements network. 

[Fly]

On 11/19/2021 at 5:11 PM, matthew2129 said:

At current prices, BTC requires over $400M of inflows per WEEK(!) just for the price o fBTC to remain flat. Even if you DGAF about the environmental impact of PoW, PoW blockchains are a melting icecube that will become an increasingly smaller and smaller size of total crypto market cap going forward

 

Assuming miners sell all that they mine...

[JRM]

On 11/19/2021 at 6:24 PM, TwoCitiesCapital said:

Anyone want to take a guess at what the energy intensity of the entire internet and its infrastructure is? Do we even care? No. We've long since determined it's worth it.  And it'll be the same for BTC if it continues on this trajectory of becoming a dominant global store of value and settlements network. 

 

I came across a funny tweet today, but can't find the source: "Imagine you take a dump and every toilet in the world has to flush.  That's blockchain."

[matthew2129]

On 11/21/2021 at 10:05 PM, Fly said:

 

Assuming miners sell all that they mine...

Regardless of whether miners sell anything they mine, there's still a huge headwind compared to PoS, since miners get the new issuances instead of the token holders. PoS allows the token holders to keep the tokens for themselves. It's hard to compete with a business model that eliminates 99.9% of the expense of securing the network

 

In PoW the aggregate market cap needs to increase by at least the amount of the mining rewards just for your investment to stay flat. In PoS, the market price of the tokens can decrease by the amount of your staking rewards and you'd still be flat. 

Edited November 30, 2021 by matthew2129

[TwoCitiesCapital]

3 hours ago, matthew2129 said:

Regardless of whether miners sell anything they mine, there's still a huge headwind compared to PoS, since miners get the new issuances instead of the token holders. PoS allows the token holders to keep the tokens for themselves. It's hard to compete with a business model that eliminates 99.9% of the expense of securing the network

 

In PoW the aggregate market cap needs to increase by at least the amount of the mining rewards just for your investment to stay flat. In PoS, the market price of the tokens can decrease by the amount of your staking rewards and you'd still be flat. 

 

There is a hard-cap on BTC issuance making is disinflationary-to-neutral in the long-run. Maybe every so slightly deflationary given population growth and lost coins. So your 2nd point isn't terribly valid in the long-run in that mining rewards will trend towards 0.0000 BTC due to the increasing price of BTC and the lower block rewards after each halving until the cap is reached and a fixed fee is paid instead (which still trends towards individual satoshis as BTC price rises). And again, for a global asset class, the dollars you're talking about are a pittance in flows. 

 

The biggest PoS token out there will be ETH come January. And ETH is shooting itself in the foot by prioritizing ETH prices as opposed to network value and economic activity. The proposal to make ETH deflationary post-POS transition simply means that you're going to have a major shortage of a necessary input which was done solely to pump the price of ETH. ETH is more like oil in this regard - oil prices spike and economic activity shuts down. ETH prices spike and network activity/value crater because nobody wants to pay $200 to trade $3000 of ETH or to make a loan on Aave or to change stablecoins on Curv. I am personally feeling this as a staker in a few projects - I've not done a single transaction (including claiming rewards) on the ETH network in over 2 months due to how uneconomic it is to pay $100-300 to do anything. 

 

So the nearest competitor to BTC is shooting itself in the foot to pump its token price at the expense of its long-term success. The other PoS networks? If they can manager to leapfrog ETH and wrestle away its developer support, then we can discuss them. Until then, they're hyper speculative tokens with multibillion market caps and limited developer support. And until they leapfrog ETH, they also have to make an argument for why there should be more than 2 or 3 globally relevant blockchains - what do we benefit by fracturing the network any more? 

 

In this regard, if ETH fails than I think BTC might just take the cake now that it is also programmable for smart contracts. Why even have a 2nd blockchain at all if the entire network of smart contracts can be built on L2 BTC network from the start and avoid all of the scaling issues and input costs that ETH is currently facing? 

Edited November 30, 2021 by TwoCitiesCapital

[SharperDingaan]

Useful bit of math to keep in mind, re the BTC 21M hard cap.

 

Once all BTC have been issued, network POS activity results in NEW demand on the SAME total supply of satoshi. The MORE network transactional volume, the more demand - and the more BTC smartcontract functionality, the more network trabsactional volume. At 100M satoshi/BTC and BTC at USD 60K, a satoshi costs 6/100 of a cent (60K/100M) - no one is going to be concerned about transaction cost.

 

Every Euro 1/2c rise in the price of a Satoshi ... raises the price of a BTC by 500,000 Euro (100M x 0.005), or USD 565K at the current 1.13/1:00 FX rate. Producing a cost of 5 Euro/transaction, split between buyer and seller, were the miner to charge 1,000 satoshi per update. About the current cost of a credit card transaction, ie: affordable.

 

Simply buy/hold a BTC ETF, and you're pretty close to the deal of the century .......

 

SD

Edited November 30, 2021 by SharperDingaan

[matthew2129]

18 hours ago, TwoCitiesCapital said:

 

There is a hard-cap on BTC issuance making is disinflationary-to-neutral in the long-run. Maybe every so slightly deflationary given population growth and lost coins. So your 2nd point isn't terribly valid in the long-run in that mining rewards will trend towards 0.0000 BTC due to the increasing price of BTC and the lower block rewards after each halving until the cap is reached and a fixed fee is paid instead (which still trends towards individual satoshis as BTC price rises). And again, for a global asset class, the dollars you're talking about are a pittance in flows. 

 

The biggest PoS token out there will be ETH come January. And ETH is shooting itself in the foot by prioritizing ETH prices as opposed to network value and economic activity. The proposal to make ETH deflationary post-POS transition simply means that you're going to have a major shortage of a necessary input which was done solely to pump the price of ETH. ETH is more like oil in this regard - oil prices spike and economic activity shuts down. ETH prices spike and network activity/value crater because nobody wants to pay $200 to trade $3000 of ETH or to make a loan on Aave or to change stablecoins on Curv. I am personally feeling this as a staker in a few projects - I've not done a single transaction (including claiming rewards) on the ETH network in over 2 months due to how uneconomic it is to pay $100-300 to do anything. 

 

So the nearest competitor to BTC is shooting itself in the foot to pump its token price at the expense of its long-term success. The other PoS networks? If they can manager to leapfrog ETH and wrestle away its developer support, then we can discuss them. Until then, they're hyper speculative tokens with multibillion market caps and limited developer support. And until they leapfrog ETH, they also have to make an argument for why there should be more than 2 or 3 globally relevant blockchains - what do we benefit by fracturing the network any more? 

 

In this regard, if ETH fails than I think BTC might just take the cake now that it is also programmable for smart contracts. Why even have a 2nd blockchain at all if the entire network of smart contracts can be built on L2 BTC network from the start and avoid all of the scaling issues and input costs that ETH is currently facing? 

BTC reaching its 21M cap isn't going to help the headwind, the same flows will still be required to maintain the network, they will just migrate to transaction fees instead of mining rewards (either that or the network will become unsecure). 

 

Whether its Sol, or ETH achieving scalability through StarkNet or some other combo of scaling solutions, or some new blockchain that doesn't yet exist, idk. But im skeptical PoW will be around in any meaningful way 50 years from now