Dogecoin part II

This post originally appeared on reddit.com/r/dogecoin, and was added to my official tech blog for posterity. or something.


Hey shibes, /u/arrdem back again with more science and musing on the future of our beloved coin. last time, I talked in generalities about the impact of ASICs on the price of DOGE and their impact on the dogeconomy in general. Today I'd like to go into some more depth on ASICs, proof of work, proof of stake and the future of DOGE as we look ahead and think about long term valuation. I got some amazing feedback and insightful comments, which I thought warranted a follow up article. So here we go!

From last time

Last time when I wrote, I mentioned the dogecoin block schedule and pointed out that the rate at which we are issuing DOGE is such that most of the second and third generations ASICs which are being manufactured targeting Scrypt coins will never see "high" returns per block simply due to the impending halvening(s).

On valuation

An open question for cryptocurrencies is where do we derive valuation from? What justifies Bitcoin's standing $500 prices? The Bitcoin crowd looks to Austrian economics and the fact that Bitcoin is asymptotically finite resource as the sources of their valuation.

Now I'll confess that I'm a skeptic of both Bitcoin and Dogecoin as they stand today. As a computer scientist, Bitcoin is fascinating because the blockchain and proof of work which Satoshi introduced is a viable solution to the Two Generals Problem. This article gives a good summary of the significance of this discovery. So what does this mean? It means that the Bitcoin protocol which underlies Bitcoin, Dogecoin and all the others represents a fundamental advance in the design of distributed systems. That this advance is used to implement a distributed, verifiable "value" (coin) store or cryptocurrency is just the first of many problems which I expect to see revolutionized by cryptocurrency derived software. Namecoin is a fascinating example of the wider value of the blockchain technology.

So the blockchain itself as a technology is interesting. What does this actually mean for cryptocurrencies? It means that cryptocurrencies are potentially the ultimate value refuge. If we assume that there is no heartbleed scale flaw in Bitcoin derived networks which allows for private keys to be stolen and we assume that coin holding entities are capable of securely storing their private keys it is impossible for computational power less than 51% of the coin network to steal coins. However at the magic 51% tipping point a malicious majority can start writing fake transactions into the blockchain and generally ruin everything.

Another reason to hope for the value of the coins is that they provide more secure transaction capabilities than credit cards do. As we were reminded with the Target hack, in order to process one credit card transactions, companies who accept credit cards need enough information to process an arbitrary number of arbitrary sized trasactions. The cryptocurrencies do much better at this, as it is impossible for a payment recipient to "charge" repeatedly. Thanks to multiple signature transactions we've even solved the escrow problem, although escrow providing payment processors for coin based purchases still need to mature.

The last significant source of value I see is the low transaction costs. I happen to be DLLAzkmxUypWnF6TvdmCVwaDrro1isqiWh, and knowing that address anyone with the dogecoin client and spare doge can throw some my way at a marginal cost per transaction of $0.00 no matter how large the transaction compared to the 5% and 10% fees chared by other online payment processors such as Square and the existing credit card companies. This means that as we see with DOGE the community can at near zero marginal cost donate to causes anywhere in the world, further increasing the potential impact and reach of previously centralized crowdfunding efforts.

In the shadow of the moon

Now there's a dark underside to the blockchain techology: the proof of work function which Satoshi presented. The blockchain only functions because any entity who wishes to intern records in the blockchain must perform a significant and fundimentally worthless computation in order to prove their honesty. Bitcoin uses the sha256 hash function, we use the Scrypt hash function. Some coins, such as Primecoin have taken an interesting approach to the fundamental worthlessness of the sha256sum and Scrypt computations by trying to use scientific computing problems as proofs of work.

Primecoin is in an interesting place, because verifying primality of a number or number sequence is comparatively easy. Other proposals especially for protein folding based coins, are ultimately doomed because the difficulty of verifying a solution to some folding problem is equivalent to solving it in the first place. This means that verifying blocks and the transactions encoded therein is exceedingly slow and hard, which decreases the micropayment utility of the coin.

However, mining is ultimately a network mechanism for securely processing transactions. It has a cost and no value. The per block reward mechanism first used in Bitcoin is a mechanism for purchasing the mining power required to securely process transactions by inflating the coin and expecting that miners will speculate against the future value of the coin to justify their mining costs. Note that this is fundimentally circular. The initial miners are highly rewarded for supporting the network at its most vulneralbe, with miners who join only after the coin has achieved some modicum of stability being less strongly rewarded.

This fundamental "get in early" reward for mining is why we see altcoins or shitcoins pop up and die right off either having been maliciously 51%'d as may have been the case with Arouracoin. What we seem to be seeing with the price of DOGE is that the BTC/MH/Hr return of mining DOGE isn't high enough to attract new miners. Using data from http://liteshack.com/ We're sitting at about ~30% of the script hashing power not pointed at Litecoin, and ~19% of the total Scrypt hashing power. This means that, as /u/listlesscraig pointed out on my original post, we could very easily as a coin be crushed by a malicious 51% attack should someone on the Litecoin or Wafflepool side of things decide that they really really had it in for us.

So what does this mean? It means that in order to be secure as a coin, our hashrate needs to increase significantly. We either need to pay more for mining, or we need to decrease our dependance on mining (more on that later).

With the block 200001 halvening about 48hrs out, we'll see the per block reward drop to 125000Ɖ. At current market prices (115 satoshi as of this writing) that pegs our per block reward at 0.14375BTC/block, or $71.88/block. So at our current network hashrate of a 62.449GH average, which means we're effectively paying a 0.0000000023BTC/Kh/min price for our hashing power. In comparison, mining Litecoin pays out at 0.00000000304BTC/Kh/min by my math. As our return is lower than LTCs and new hyped alts (shitcoins) are even higher, I think it's clear that we are unlikely to see Wafflepool or other significant sources of hashing power come back without a price jump into the 200s at least.

Now I can sit here and run numbers, but clearly DOGE while featuring an awesome community is not at present a high ROI coin which means we are not accumulating the hashing power needed to secure ourselves against potential machinations of present whale miners ignoring the potential threat of future ASICs.

Now, some people including /u/GoodShibe have been known to call for community mining effort. However he's the good shibe and I'm the math shibe. On average, the current generation of graphics cards can do about ~360KH/s, so if we assume that every subscriber on this subreddit has a "real" graphics card, that gives us a combined hashrate of 28,395,000KH/s, which is 44.75% of the current network hashrate. Assuming that error due to shibes rocking hundred GPU rigs and shibes who CPU mine average out, I think this number makes it clear that as a community we can't raise the hashing power that we "need" to armor ourselves against the potential machinations of whales and pools.

Adjusting launch window

As we can't raise the raw hashing power that's required to maintain our beloved coin and our market valuation continues to fall, it seems to me that there are two plans of action. The first is to try to raise awareness of Dogecoin through publicity stunts like Doge4water and Dogecar. I hope that these both prove to have been positive forces in the long run. Ultimately however, Dogecoin is only as useful as Bitcoin or Litecoin is if we can only tip each other, donate and hoard. Payment processor adoption and getting businesses to start accepting cryptocurrencies are the real way to secure and increase our long term valuation.

In the short term we need to secure ourselves as well so we can get to the long term. Clearly as a community we don't have the kind of hashing power we need to do it ourselves with the "classical" proof of work structure, so I suggest that we look elsewhere, especially to proof of stake.

Proof of stake is an alternative transaction verification scheme under which "miners" mine not on the basis of how much computational power they have, but on the basis of how many coins they control. This means that the mining operation can be much less computationally expensive, and that a 51% attack is impossible except from an entity with a significant stake in the coin who would stand to loose much in the fallout from DOGE's destruction.

By adopting proof of stake, we would make it much more difficult for a wild whale to crush us whether out of malice or by accident. However most importantly we increase our own perceived security and stability which clears the way for more adoption down the road.

Afterward

I look forwards to seeing what you think of this piece. Frankly I ran the numbers as I wrote it, and I must say I'm saddened by coming to a largely negative result.

If there's interest, I'll try and do another analysis piece speculating on the price of DOGE and our required hashrate through halvenings, but that's for another day.

^d