Wednesday, December 10, 2014

Bitcoin mining pools attacking each other for profit?

So after posting our new Bitcoin book, my buddy Tim Swanson alerted me to the problem of Bitcoin mining pools attacking each other.

Reminds me of the recent Tax Interaction Effect post, where I had to unearth the core of a counterintuitive result: in this case, the claim that not redeeming some of your solutions can increase your return.

I don't think I'm entirely there, but I at least have an analogy to understand the mechanics of the attack.

Bitcoin mining model:As you might know, mining is like buying a bunch of (positive sum) lottery tickets. A fixed reward is given out every hour, then divided equally among the winning tickets. Some people join into pools, where they buy tickets with the proviso that *if* it's a winning ticket, they share the winnings equally among all the tickets in their pool.

The attack: You use some of your money to buy tickets for someone else's pool (call it the "attacked pool", but hide and destroy the winning tickets for that pool.

The effect: There are fewer total wins per period. Each (non-destroyed) ticket gets a larger fraction of the hourly reward. The attacked pool gets a smaller fraction the reward.

My response/confusion: This increases the return to all winning tickets, not just those of the attacking pool, so the attacking pool effectively subsidizes all the others, and dilutes the value of its own tickets across the set of all players.

But maybe I'm missing something here.

Tuesday, December 9, 2014

Our new Bitcoin eBook is up!

Phew, been a while, eh? Well, Bob Murphy and I have a new free eBook up about the economics and mechanics of Bitcoin! Check the site for it, or, if you're too lazy, just go straight to the book itself.

Sunday, March 16, 2014

Tax interaction effects, and the libertarian rejection of user fees

Phew! Been a while, hasn't it?

I want to come back to the tax interaction effect (TIE) issue from previous posts, and go over what I think has been bothering me about the TIE-based argument against the carbon tax shift.

So, a high-speed review of why a carbon tax shift (CTS) is inefficient. The CTS, remember, involves a revenue-neutral reduction of taxes on capital (including land) and labor, replaced by a tax on carbon emissions -- specifically, those fuels that, when used, release carbon dioxide, in proportion to how much CO2 they release per unit.

Review of the argument

And why could it be inefficient? Well, the harm of a tax increases faster than its rate. To have a revenue-neutral CTS, you have to "focus" the tax -- i.e. raise the same revenue from a smaller class of goods. This necessarily means a higher tax rate on the "focused" goods, and therefore higher induced inefficiencies (compared to the broader tax). When you further note that these taxes will, in effect, "stack on" to the existing labor and capital taxes, then the inefficiencies are even higher -- that's the TIE -- and could even swamp the environmental benefit from the emissions reduction."

But hold on. Those very same steps are a case against any correspondence between "who uses" and "who pays", whether or not the payment is a tax! That's because you can always point out how "concentrating costs" leads to disproportionate inefficiencies, even and especially for textbook "private goods".

That is, you could likewise say, "if people have to -- gasp! -- pay for their own cell phones, at $300/each, then that scares away all the people who can't pay $300 (after paying labor taxes, remember!), so you can an efficiency loss there. Plus, anyone who can steal the phone has a $300 incentive too, so people invest in ways to steal them, and you have to pay for countermeasures. Those go up quickly with the price of the good.

"Therefore, the government should just tax everyone to cover the cost, and then hand out the cell phones for free."

Wait, that doesn't sound right ...

What's wrong with that argument? Well, a lot. So much that you probably already know the answer. It's for the very same reasons that many advocate user fees for any good that's excludable. Generally, whoever benefits should be the one to pay. ("Cuius lubido, eius sumptum." -- "Whose desire, his expense.")

As with those reasons in favor of user fees, you can make the exact same argument regarding the purported inefficiency of a CTS:

"Yes, you get inefficiencies every time you concentrate costs like that. And yes, they disproportionately stack with whatever taxes you already had. But you need the fee structure to work that way in order to align incentives. The one who uses the scarce resource -- whether a cell phone, or atmospheric dumping capacity -- should be the one to pay for it, as this leads them to economize on the use of that resource, and if possible, route around it. That remains doubly so when exempting them from the expense would lead to further penalization of every other class of socially-useful activity."

And that, I think, goes to the core of my original balking at the CTS/TIE argument.