Peercoin University (Community Review & Feedback)

General
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Excuse the delay, comments on Chapter 7 below. Original paras followed by amended ones in italics:

7. Bitcoin’s Lack of Sustainability

There are a set of rules coded into the protocol that govern Bitcoin’s supply. One of the rules states that only a maximum of 21 million bitcoin can ever be mined. Once the final block reward is mined, no more coins will be produced. Since block rewards act to subsidize costs so that miners always have an incentive to continue producing new blocks, this rule has massive implications for the future security of the network. How will miners be compensated for producing blocks and security for the network once the last coin is mined and block rewards come to an end?

There are rules coded into the protocol that govern Bitcoin’s supply. One of the rules is that only a maximum of 21 million bitcoin can ever be mined. Once the final block reward is mined, no more coins will be produced. Since block rewards subsidize costs so that miners have an incentive to continue producing new blocks, this rule has massive implications for the future security of the network. How will miners be compensated for producing blocks and security once the last coin is mined and block rewards come to an end?

Voluntary User Transaction Fees

The answer is that block rewards are not the only form of compensation that miners receive. Users of the network also pay transaction fees to miners in order to get their transactions included in the blocks they produce. So miners are always receiving two forms of compensation, block rewards generated by the network itself and fees paid by users of the network who transact with their coins.

The answer is that block rewards are not the only form of compensation that miners receive. Miners also receive transaction fees from users of the network in order to get their transactions included in the blocks that miners produce. So, miners are always receiving two forms of compensation: block rewards generated by the network itself; and fees paid by users of the network.

Users can pay any size fee they want. A user paying a larger fee provides financial incentive for miners to prioritize and process their transaction more quickly, but naturally most users will elect to pay the lowest possible fee that they can get away with.

Users can pay any size fee they want. A user paying a larger fee provides financial incentive for miners to process their transaction more quickly, but most users will elect to pay a lower fee.

Block Reward Halving

Rather than coming to an abrupt halt, block rewards are designed to be gradually phased out over a long period of time. Instructions are coded into the protocol that detail a schedule where block rewards automatically halve every 210,000 blocks, which occurs about every four years.

Rather than coming to an abrupt halt, block rewards are designed to be phased out gradually. Instructions are coded into the protocol to automatically halve block rewards every 210,000 blocks, which occurs about every four years.

I don’t follow the next paragraph: is the 50 bitcoins the actual amount, or is it a random figure to illustrate the principle? How can it reach zero if it is being halved?

The original block reward for example was 50 bitcoins, which was reduced to 25 after four years, then 12.5 and will continue to reduce in half every four years until it reaches zero. The last block reward will be mined around the year 2140, which provides a long transitionary period of many years for miners to switch from block rewards solely to user transaction fees.

The Tragedy of the Commons

Phasing out automatic, network generated payments in favor of user provided transaction fees may sound great in theory, but the reality has turned out quite different. The major problem with this model is the tragedy of the commons, which is a term used to describe a situation in a shared-resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action. A commonly cited example of this is the collective destruction of the environment by self-interested individuals attempting to use it as a resource in order to achieve personal economic success for themselves.

Phasing out automatic network payments in favor of transaction fees may sound great in theory, but the reality has turned out quite different. The problem is the “tragedy of the commons”, whereby individual users, acting independently and in their own self-interest, exploit a collective resource contrary to the common good of all users. A oft cited example of the tragedy of the commons is the collective destruction of the environment by self-interested individuals attempting to achieve personal economic success.

In Bitcoin the common shared resource is the blockchain and the security of the network itself. Users have a personal financial incentive to spend as little on transaction fees as possible, however this self-interest has the effect of damaging the very system they are so reliant on.

In Bitcoin, the common shared resource is the blockchain and the security of the network itself. Users have a personal financial incentive to spend as little on transaction fees as possible; however, this self-interest has the effect of damaging the very system that they operate in.

[Delete this para, as what it explains is dealt with comprehensively in the para below] As block rewards continue to reduce in size over time, miner compensation increasingly needs to be made up with user transaction fees. Without an appropriate level of fee compensation by users of the network, miners will not be able to afford the massive costs associated with mining, leading to the eventual shut down of their operations as funding runs low.

Short-Term Behavior Sabotages Long-Term Security

While users do care about the long-term health of the network they operate on, their immediate concern is saving as much money in fees as possible. Unfortunately this normal and predictable human behavior works against the financial interests of the miners who secure the network for them. In the future, if voluntary user transaction fees are not enough to sustain network security in the absence of block rewards, then unprofitable miners will continue to drop out until a majority of the hashing power is controlled by a few people or even one large mining pool, which will put the network at serious risk for a double spend attack.

While users do care about the long-term health of the network, their immediate concern is saving as much money in fees as possible. Unfortunately this normal and predictable human behavior works against the financial interests of the miners who secure the network. In the future, if voluntary user transaction fees are not enough to sustain network security in the absence of block rewards, then unprofitable miners will continue to drop out until a majority of the hashing power is controlled by just a few people or even one large mining pool, which will put the network at serious risk from a double-spend attack.

Therefore it is a completely acceptable and legitimate question to ask if proof-of-work consensus will continue to be viable as a blockchain security protocol. It may still be secure right now, but due to the inherent flaws designed into the system that security may not be sustainable in the long-term.

Therefore, it is realistic to ask whether proof-of-work consensus will remain viable as a blockchain security protocol. It may still be secure right now, but due to flaws inherent in the system, that security may not be sustainable in the long-term.

Security is Dependent on Price

Another factor to consider is the price blockchain tokens are valued at on the market. Since miners are compensated by Bitcoin’s native token, their profitability is highly dependent on the price it fetches on the market. In times of price appreciation, miners don’t have as much to worry about because the coins they earn are sold on the market for high valuations and maximum profit.

Another factor to consider is the market price of blockchain tokens. Since Bitcoin miners are compensated in their native token (i.e. Bitcoins), their profitability is dependent on its price. In times of price appreciation, miners don’t have so much to worry about because the coins they earn are sold for high valuations.

In times of price depreciation though, the market may not value the coins highly enough in order for a miner to be able to pay for their overall cost of operation. Proof-of-work network security is therefore also dependent on the market price of a blockchain’s native token. A token that is performing poorly on the market makes it difficult for miners to earn a profit, which can put the network at risk if too many miners drop out because of unprofitability.

In times of price depreciation, however, the market may not value coins highly enough for miners to be able to pay their costs of operation. Proof-of-work network security is therefore part-dependent on the market price of blockchain tokens; this can put the network at risk if too many miners drop out because of unprofitability.

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This is not the major reason, if the price comes higher and higher, people will gather here and be fascinated by PPC automatically, now peercoin falls down around rank-200 in the marketcapital, and will trend down continually, this is the truth. Digtal virtual currency redefine currency to “general equivalent goods”, if one good has no user, it will die out immediately. wake up man…

We need big “whale” and help them make profit, big “whale” attracts user…

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@wolfcrafts, this article, plus the new documentation site, the educational articles Buckkets has been writing as well as the redesigned website (which is under heavy construction at the moment) will all act as supporting infrastructure for new users.

Of course this isn’t the only thing we’re working on. Developers are working on modernizing the Peercoin codebase to bring it up to date and current with Bitcoin, something we haven’t seen in many years.

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8. Bitcoin’s Lack of Scalability

No change to first paragraph

Next paragraph:
However time has shown that blockchain technology is not capable of scaling to worldwide use, at least by itself. An intense debate has been raging in the crypto community for years now about the best way to scale the blockchain to higher usage levels. The core argument is about whether to increase the size of blocks.

Time has shown, however, that blockchain technology is not capable of scaling to worldwide use, at least in its present form. A debate has been raging in the crypto community for some years about the best way to scale the blockchain to higher levels. The core argument is about whether to increase the size of blocks.

The Block Size Limit

One of the rules coded into the protocol states that the size of each block can only be one megabyte or less. Since blocks contain transaction data, it follows that as users increase the number of transactions they perform on the network blocks will get closer to being full. Once a block contains enough transactions in it that the space it takes up equals 1MB, that block is considered full and no more transactions can be added to it. Any transactions over the block size limit would have to wait for the next block in order to be added.

One of the rules coded into the protocol is that the size of each block can be no more than one megabyte. Since blocks contain transaction data, blocks will fill as users increase transactions on the network. Once a block contains enough transactions to reach 1MB, no more transactions can be added to it. Any transactions over the block size limit must wait for the next block to be added.

At a 1MB block size, the Bitcoin network is restricted to the point where it can only support about seven transactions per second. This block size limitation prevents the blockchain from being able to scale to support worldwide usage levels. In order to solve this problem, one faction in the Bitcoin community wanted to increase this limit so that the blockchain could support a higher capacity of transactions per block. However the other side rejected this proposal because they feared it would further centralize the network.

At 1MB block size, the Bitcoin network can only support about seven transactions per second, and this prevents the blockchain scaling to worldwide usage levels. One proposal in the Bitcoin community is to increase this limit, so that the blockchain can support a higher capacity of transactions per block. However, others in the Bitcoin community believe that this will further centralize the network.

Limit Increases & Centralization of Full Nodes

I am inclined to remove this entire section (eight paragraphs), it explains the problem of increased volume, but this is self-evident and has been described earlier. It is important to maintain “pace” and so I would go straight to "2017 Bitcoin Chain Split"

2017 Bitcoin Chain Split

In 2017 the block size debate came to a head when two arguing factions inside the Bitcoin community decided to split the network into two separate blockchains that each followed different rules. Both blockchains contained the same exact history of transactions, but diverged at the block where the split occurred.

In 2017 the block size debate came to a head when the two opposing camps decided to split the network into two blockchains that each followed different rules. Both blockchains contained the same history of transactions, but diverged at the block where the split occurred.

The first blockchain remained the same at a 1MB block size and continued to be called Bitcoin. The second blockchain however increased the block size from 1MB to 8MB and became known as Bitcoin Cash. Supporters of each network went their separate ways with Bitcoin Cash supporters following the philosophy of scaling with block size increases and supporters of the main Bitcoin network following an alternative scaling philosophy.

One blockchain retained the 1MB block size and continued to be called Bitcoin. The second blockchain increased the block size from 1MB to 8MB and became known as Bitcoin Cash. Supporters of each network went their separate ways: Bitcoin Cash supporters following the philosophy of scaling with block size increases; and supporters of Bitcoin following an alternative scaling philosophy.

I don’t follow the reference to an alternative scaling philosophy. Suggest changing philosophy to “solution”.

Developers on the main Bitcoin chain realized they had a problem on their hands. The block reward reduction schedule was already set in motion. It would only be a matter of time before reductions in the block reward started to negatively impact miners, so developers needed to solve all these problems quickly or risk network security being affected. Ultimately developers intentionally chose to keep the 1MB block size limit for reasons that will become clear shortly.

Developers on the main Bitcoin chain had a problem on their hands. The block reward reduction schedule would at some point negatively impact miners, so developers needed to solve all these problems or risk network security. Ultimately, developers intentionally chose to keep the 1MB block size limit for reasons that will become clear.

Transaction Fee Market

When the Bitcoin network is too congested with transactions and blocks are full, there needs to be a way for a miner to decide which transactions to include in a block. There is limited space available, so it becomes necessary to pick and choose which transactions get priority over others. The Bitcoin network has a transaction fee market which takes over when blocks reach 1MB. When blocks are full, users realize that it will be difficult for them to get their transactions included and added to the chain, so they voluntarily begin to increase the transaction fees they pay to miners.

When the Bitcoin network is too congested with transactions and blocks are full, miners need to decide which transactions to include in a block. There is limited space available, so it becomes necessary to choose which transactions get priority. The Bitcoin network has a transaction fee market which takes over when blocks reach 1MB. When blocks are full, users realize that it will be difficult to get their transactions added to the chain, so they increase their transaction fees to miners.

A higher transaction fee is more profitable for miners, so they will be more likely to include transactions from users with higher fees first over transactions with smaller fees. In this way users of the network enter a bidding war in order to get the attention of miners. The highest bidders paying the largest fees will be the first ones to get their transactions included in new blocks. The lowest bidders however will need to wait until a miner decides to include their transactions.

A higher transaction fee is more profitable for miners, so they will be prioritise transactions with higher fees over those with smaller fees. In this way users of the network enter a bidding war for the attention of miners.

Block Size Limit Solves Block Reward Halvings

Bitcoin developers eventually had the realization that this transaction fee market was the solution to their decreasing block rewards. Once again, miners need to be able to stay profitable in the future once block rewards have been reduced to nothing and users are not a reliable fallback option as they are unwilling to voluntarily increase the fees they pay. Therefore the only way to ensure miners get properly compensated is to create a situation where users are forced to pay more in fees. Bitcoin developers have brought about this very situation by deciding to artificially limit the block size to 1MB.

Bitcoin developers eventually realized that this transaction fee market was the solution to decreasing block rewards. Miners need to be able to stay profitable when block rewards are reduced, and so the only way to ensure miners are properly compensated is to create a situation where users are incentivised to pay more in fees. Bitcoin developers have brought this situation about by limiting the block size to 1MB.

Was the 1MB block Size limit Satoshi’s idea? This makes it sound like it was implemented subsequently

I suggest the next two paragraphs (commencing " With this artificial limit in place" and “This block size limit”) are removed, as they restate what has been explained.

Block Size Limit Impacts Network Usability

This model solves the issue of decreasing block rewards so that miner provided security is retained, however at the same time it also creates new problems. As mentioned before, Bitcoin was originally designed as a peer to peer digital replacement for cash. By limiting the block size, this original vision Satoshi had for the network is no longer possible through use of the blockchain alone.

This model solves the issue of decreasing block rewards so that miner provided security is retained, but at the same time it creates new problems. Bitcoin was originally designed as a peer to peer digital replacement for cash. By limiting the block size, this vision is no longer possible through use of the blockchain alone.

The Bitcoin community for example once advertised the blockchain as having lower fees than credit card networks. With the implementation of a fixed block size limit however, this core benefit of lower fees is completely eliminated when blocks are full. When this occurrs, users of the network are forced to pay outrageous fees in order to transact with their coins.

The Bitcoin community for example once advertised the blockchain as having lower fees than credit card networks. The implementation of a fixed block size limit means this advantage of lower fees is eliminated when blocks are full, and users of the network are forced to pay sometimes exorbitant fees in order to transact.

The next two paras can be merged

While the block size limit has solved the problem of decreasing block rewards, this solution effectively destroys the utility of the blockchain as a medium of exchange during periods where network traffic is considerably high. The network can operate well under normal conditions, however an extreme rise in price causes trading on exchanges to spike. At the peak of a price bubble like this, network congestion is usually at its highest.

Transaction fees will ultimately spike during conditions like this due to a fight over limited block space. This extreme rise in fees negatively impacts the user experience by preventing users from being able to make smaller transactions without significant cost to them. Not only does the block size limit raise fees to unaffordable levels during periods where trading is at its peak, but it also does not solve the scalability problem. A 1MB block size does nothing to support higher usage levels.

While the block size limit solve the problem of decreasing block rewards, the resultant transaction fees will ultimately spike during extreme price rises; at the peak of a price bubble, network congestion is at its highest due to a fight over limited block space. This extreme rise in fees negatively impacts users by preventing them from making smaller transactions without significant cost. Not only does the block size limit increase fees to unaffordable levels during peak trading, but it also does not solve the scalability problem. A 1MB block size does nothing to support higher usage levels.

Bitcoin as a Settlement Network

Bitcoin developers however recognized beforehand the negative impact this block size limit would have on the usability of the network, therefore they put plans in motion to solve these remaining issues by using an alternative solution. At some point the realization finally dawned on developers that it was just not possible for blockchain technology to directly facilitate worldwide transaction volumes.

At some point, bitcoin developers realised that it was not possible for blockchain technology to facilitate worldwide transaction volumes, due to the block size limit, and so made plans for an alternative solution.

Rather than attempting to engineer changes into the blockchain that would eventually centralize it like block size increases, it became obvious to developers that the purpose of the blockchain itself needed to be refocused to that of a settlement network. In this model, the blockchain itself acts more as a settlement layer for high value transactions.

Rather than attempting to engineer changes into the blockchain that would eventually centralize it, it became obvious to developers that the purpose of the blockchain needed to be redirected to that of a settlement layer for high value transactions.

Secondary Layers & Off-Chain Transactions

At the same time, secondary layer technologies are built to function on top of the blockchain. These secondary networks are designed to work in conjunction with the underlying blockchain in order to take full advantage of its decentralized and trustless security. They benefit the overall network by providing additional functionality that the blockchain is unable to perform alone by itself.

The purpose of the blockchain as a settlement layer is that secondary layer technologies can be built on top of it. These secondary networks are designed to take full advantage of the blockchain’s decentralized and trustless security. They benefit the overall network by providing functionality that the blockchain is itself unable to perform.

Secondary layers for example allow users to make lots of transactions instantaneously at low cost without the requirement of needing to wait for miners or new blocks. This is possible because transactions that are performed on layer 2 networks exist completely outside of the blockchain.

For example, secondary layers allow users to make transactions instantaneously at low cost without needing to wait for miners or new blocks. This is possible because transactions that are performed on “layer 2” networks outside of the blockchain.

Transactions performed directly through the blockchain for example are expensive and slow. They are processed on the blockchain and are therefore considered on-chain transactions. Transactions performed on layer 2 networks however are quick and inexpensive. They are processed off the blockchain and are therefore considered off-chain transactions. On-chain transactions are stored in the blockchain history by a miner. Off-chain transactions however are not stored in the blockchain history at all.

Transactions performed directly through the blockchain are considered “on-chain” transactions. Transactions performed on layer 2 networks are processed off the blockchain, and are quick and inexpensive. On-chain transactions are stored in the blockchain history by a miner. Off-chain transactions are not stored in the blockchain history at all.

The Lightning Network & Payment Channels

The primary example of this technology is a layer 2 solution being developed for Bitcoin called the Lightning Network. A user will make an on-chain transaction by first depositing some coins into a special address that is associated with the Lightning Network. The user then opens what is called a payment channel, which allows them to securely transact with other users of the Lightning Network. All transactions are performed off-chain and balances are kept track of by the Lightning Network.

The primary example of layer 2 technology is the Lightning Network, being developed for Bitcoin. A user will make an on-chain transaction by first depositing some coins into a special address associated with the Lightning Network; the user then opens a “payment channel” which allows them to transact with other users of the Lightning Network. All transactions are performed off-chain and the Lightning Network keeps track of balances.

A user can perform as many off-chain transactions as they want as long as they pay intermediaries on the network a small fee in order to route their transactions where they need to go. Finally, once a user is done making payments on the Lightning Network they finish by closing their payment channel. Closing a channel has the effect of settling by recording the final changes in balance on the blockchain.

A user can perform as many off-chain transactions as they want so long as they pay intermediaries on the network a small fee to route their transactions to where they need to go.

In this way, it allows users the ability to bypass expensive miner fees by performing the majority of their transactions instantly off the blockchain on secondary layer networks. In this situation the blockchain itself is used mainly to synchronize balances from time to time whenever a payment channel is closed and changes need to be recorded.

In this way, the Lightning Network and other layer 2 solutions allow users to bypass expensive miner fees by performing the majority of transactions on secondary layer networks. The blockchain is used to synchronize balances whenever a payment channel is closed and changes need to be recorded.

This is what is meant by the blockchain becoming a settlement layer. Transactions are conducted off the blockchain, thereby preventing the chain from bloating and growing in size too much. Those off-chain transactions are then totaled at some point in the future and settled by permanently recording the changes into the ledger.

This is what is meant by the blockchain becoming a settlement layer. Transactions are conducted off the blockchain, thereby preventing the chain from bloating and growing in size too much. Off-chain transactions are periodically totaled and permanently recorded on the ledger.

Blockchain as a Base Layer

Lightning is also only one example of a layer 2 network. Another that exists is called Failsafe Network. There will be other examples as time goes on and improvements are made. Eventually features and improvements will build on each other to the point where we will have layer 3 networks and beyond. All future layers however are completely dependent on the security of the base layer blockchain. Without a secure base layer acting as a solid foundation, everything built on top of the blockchain will eventually collapse.

Lightning is only one example of a layer 2 network; another is Failsafe Network. There will be other examples as time goes on. Eventually features and improvements will build to the point where we will have layer 3 networks and beyond. All future layers remain completely dependent on the security of the base layer blockchain. Without a secure base layer acting as a solid foundation, everything on top will be jeopardised.

Satoshi’s original vision of a peer to peer cash system where all transactions are conducted on-chain is no more, at least when it concerns the main Bitcoin chain. Developers have instead elected to focus on an alternate scaling solution that limits the amount of on-chain transaction volume. Let’s sum all this up in order to understand the reasoning behind the decisions of the developers.

Satoshi’s original vision - a peer to peer cash system where transactions are typically conducted on chain - is no more, at least with regards to Bitcoin. Developers have instead focused on an alternate scaling solution that limits the amount of on-chain transaction volume.

Putting it all Together -
The above paragraphs explain effectively the situtation, so I suggest removing this summary section entirely (five paragraphs)

Fee Competition Between Miners & Secondary Layers

It may seem like this finally solves the main problem, however there is still a major flaw that is being overlooked. The flaw is that proof-of-work based blockchains are inherently incompatible with layer 2 networks. The flaw is also in developer’s thinking that miners will continue to be properly compensated in the future.

It may seem like this finally solves the main problem; however there remains two major flaws. The first is that proof-of-work blockchains are inherently incompatible with layer 2 networks. The second is the belief that miners will continue to be properly compensated in the future.

Any transaction being conducted on a layer 2 network results in some amount of fees not going to miners. Instead small fees are paid to intermediaries operating on the layer 2 network who routes transactions where they need to go. In reality, miners and layer 2 networks are in direct competition with each other for earning transaction fees.

Any transaction being conducted on a layer 2 network results in small fees paid to intermediaries operating on the layer 2 network, rather than miners, who route transactions to where they need to go. Miners and layer 2 networks are thus in competition for earning transaction fees.

This is not even the main problem though. Regardless of whether intermediaries on layer 2 networks earn fees from users or not, it is a fact that any off-chain transaction results in a miner who doesn’t get paid. Miners can only be paid from users conducting on-chain transactions, therefore it is a fact that layer 2 networks leech off of miner profits.

But this is not the main problem. Regardless of whether intermediaries on layer 2 networks earn fees from users, it is a fact that any off-chain transaction results in a miner not being paid. Miners can only be paid from users conducting on-chain transactions.

As layer 2 networks develop further in the future and become easier to use, more people are going to be drawn to using them for their cheap fees and instant transaction times. There will come a point in the future where not enough users are making on-chain transactions and miners will suffer because of it. This will result in the further centralization of miners as they become unprofitable and quit, which will place the network at risk for a double spend attack. Bitcoin developers see layer 2 networks as their savior, however they could just as easily be their death sentence.

As layer 2 networks develop in the future and become easier to use, more people are expected to use them for their cheap fees and fast transaction times. There will come a point where not enough users are making on-chain transactions to make mining profitable. This will result in a reduction in miners’ numbers, and thus a further centralization of mining; this will place the network at risk for a double spend attack. Bitcoin developers see layer 2 networks as their savior; however they could just as easily be their undoing.

Conclusion on Bitcoin & Proof-of-Work

This section (consisting two paragraphs) summarises what has gone before - I suggest it is not necessary. Instead, I think there should be an extra paragraph or two expanding on the last one above (commencing “As layer 2 networks develop further”). This is because this paragraph explains Bitcoin’s Waterloo, and therefore should be given much more weight.

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I am talking about the first block reward and each time it halved. I added on to the paragraph here to make it more clear…

By the way I am currently on your last set of edits above on chapter 8. Much of what you’ve suggested has already been incorporated into the first two posts.

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I have changed this text below to what is shown in the second quote.