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Offline monsterer

Proof of stake represents unbiased value proposition?
« on: November 28, 2014, 12:21:55 PM »

Just thinking aloud to myself. Here are my assumptions:

* Bitcoin price is backed by mining electricity cost
* Speculators cause wild fluctuations around this price
* The actual usefulness* of bitcoin as a payment system adds extra value increasing the price

So, if you take away (or at least reduce the massively) the mining cost, what you're left with is the actual usefulness* of the currency backing the price and speculation around that value.

Therefore, POS (and by association DPOS) systems are valued almost solely on the usefulness of the currency.

Thoughts?

* Usefulness of a currency I'm broadly defining as the sum of all things you can do with it, like paying for bills, products, keeping your money safe, etc etc
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Offline speedy

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Re: Proof of stake represents unbiased value proposition?
« Reply #1 on: November 28, 2014, 12:47:12 PM »
First assumption has been debunked - mining costs only forces miners to sell, it does not create a minimum price at which they will sell, i.e. "back the price".

Online Frodo

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Re: Proof of stake represents unbiased value proposition?
« Reply #2 on: November 28, 2014, 12:47:41 PM »
* Bitcoin price is backed by mining electricity cost

I heard this argument often but it is simply wrong. The price of BTC is not determined by the resources used/wasted on mining but the other way around. Just the fact that miners burn electricity would not stop BTC price to go to zero. But declining price would stop miners.

Very simple example: I could create a bitcoin fork and rent a big mining farm to mine it. Would it gain any value by doing that? No. It just secures the network but that's it. I can do the same by using other consensus algorithms that don't waste real world resources.

* Speculators cause wild fluctuations around this price
* The actual usefulness* of bitcoin as a payment system adds extra value increasing the price

So, if you take away (or at least reduce the massively) the mining cost, what you're left with is the actual usefulness* of the currency backing the price and speculation around that value.

Therefore, POS (and by association DPOS) systems are valued almost solely on the usefulness of the currency.


This should be the same for every crypto. Value is based upon it's momentary "usefulness" + speculation. The fact that a crypto is POW does not increase the price by itself. It leads just to a different valuation because of speculation. (people believing in POW and not POS, DPOS etc.)

Offline monsterer

Re: Proof of stake represents unbiased value proposition?
« Reply #3 on: November 28, 2014, 02:22:19 PM »
I forgot to say that in POS, the backing is usually from the IPO investment, rather than not having one at all.

I'd like to see where it was debunked that POW mining cost affects the price?
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Online Frodo

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Re: Proof of stake represents unbiased value proposition?
« Reply #4 on: November 28, 2014, 02:51:20 PM »
I'd like to see where it was debunked that POW mining cost affects the price?

POW mining affects the price sure, but it can only lower the price due to selling pressure by miners. It can never guarantee a minimum price and therefore "back" a currency. It simply doesn't create any value.

Online Chuckone

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Re: Proof of stake represents unbiased value proposition?
« Reply #5 on: November 28, 2014, 02:58:17 PM »
I forgot to say that in POS, the backing is usually from the IPO investment, rather than not having one at all.

I'd like to see where it was debunked that POW mining cost affects the price?

I'd like to see a justification that POW mining creates demand (which is what determines the value), when as Frodo stated, it just creates selling pressure by miners.

Offline monsterer

Re: Proof of stake represents unbiased value proposition?
« Reply #6 on: November 28, 2014, 03:34:30 PM »
POW cost sets the selling price. Miners have no incentive to sell at a loss.
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Offline bytemaster

Re: Proof of stake represents unbiased value proposition?
« Reply #7 on: November 28, 2014, 03:35:05 PM »
I forgot to say that in POS, the backing is usually from the IPO investment, rather than not having one at all.

I'd like to see where it was debunked that POW mining cost affects the price?

I'd like to see a justification that POW mining creates demand (which is what determines the value), when as Frodo stated, it just creates selling pressure by miners.

Initially all miners are buyers because there is no market for it.  The margins on initial mining are like 99% which means there is little sell pressure.   Mining is marketing and free samples / give aways.   This does create demand initially.   But eventually free samples lose their effectiveness.     
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Offline bytemaster

Re: Proof of stake represents unbiased value proposition?
« Reply #8 on: November 28, 2014, 03:35:29 PM »
POW cost sets the selling price. Miners have no incentive to sell at a loss.

Sure they do for anyone who understands Sunk cost.
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Offline monsterer

Re: Proof of stake represents unbiased value proposition?
« Reply #9 on: November 28, 2014, 03:38:33 PM »
Sure they do for anyone who understands Sunk cost.

Care to enlighten me? :)
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Offline Troglodactyl

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Re: Proof of stake represents unbiased value proposition?
« Reply #10 on: November 28, 2014, 03:39:47 PM »
This assumes they're mining regardless of cost.  The price is set by anticipated usefulness, and miners will only mine if that anticipated usefulness exceeds the cost of mining.

If the anticipated usefulness drops after they've mined some, they may sell at a loss to reduce their losses.

Offline monsterer

Re: Proof of stake represents unbiased value proposition?
« Reply #11 on: November 28, 2014, 03:51:23 PM »
This assumes they're mining regardless of cost.  The price is set by anticipated usefulness, and miners will only mine if that anticipated usefulness exceeds the cost of mining.

If the anticipated usefulness drops after they've mined some, they may sell at a loss to reduce their losses.

I see what you mean. In that case they're incentivised to take a loss 'now' to mitigate risk of holding and losing more... But the price is still bound to oscillate around the mining cost.
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Offline Troglodactyl

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Re: Proof of stake represents unbiased value proposition?
« Reply #12 on: November 28, 2014, 03:54:20 PM »
This assumes they're mining regardless of cost.  The price is set by anticipated usefulness, and miners will only mine if that anticipated usefulness exceeds the cost of mining.

If the anticipated usefulness drops after they've mined some, they may sell at a loss to reduce their losses.

I see what you mean. In that case they're incentivised to take a loss 'now' to mitigate risk of holding and losing more... But the price is still bound to oscillate around the mining cost.
Only to the degree that the mining cost correlates to the anticipated utility, I would think.

Online Frodo

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Re: Proof of stake represents unbiased value proposition?
« Reply #13 on: November 28, 2014, 04:18:40 PM »
This assumes they're mining regardless of cost.  The price is set by anticipated usefulness, and miners will only mine if that anticipated usefulness exceeds the cost of mining.

If the anticipated usefulness drops after they've mined some, they may sell at a loss to reduce their losses.

I see what you mean. In that case they're incentivised to take a loss 'now' to mitigate risk of holding and losing more... But the price is still bound to oscillate around the mining cost.

True, but not because mining cost determines price but price determines mining profitability and therefore difficulty.

A price drop for a GPU minable coin will result in miners switching to other coins. This leads to difficulty adjustment which makes it again profitable to mine. So regardless of actual price mining will always be exactly above break even. (from a purely economical standpoint; very similar to a Nash equilibrium) But as you see that doesn't mean that mining pushes the price up.

It get's more complicated once you have specialized hardware. So if BTC drops miners won't stop mining (as long as price is high enough to pay more than electricity cost) because they have to pay for their ASICs. Hence in this scenario it is very well possible that price is quite a bit lower than the price at which mining is break even. Which means, as Bytemaster said, they sell at a loss longterm.

 

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