Philosophy & Economics of Bitcoin

Andrew M. Bailey, Bitcoin Policy Institute

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Week 9: Financial Security

Lecture: Secure the Bag

Key Themes

• The main kinds of monetary security, and how they are achieved in the cases of gold, physical cash, and digital sovereign currencies such as the US dollar
• The costs and benefits of bitcoin’s approach to security through energy, and who bears them
• The difficulty of comparing security expenditure for a transparent system like bitcoin’s with traditional monetary systems
• The proper approach to determining whether bitcoin’s approach to security is wasteful, and who gets to decide

Focal Readings

• Resistance Money, Chapter 9: 'Security Through Energy'
• Budish, ‘The Economic Limits of Bitcoin and Anonymous, Decentralized Trust on the Blockchain’ (full paper here)
• Warren, Bitcoin - A Game-Theoretic Analysis (selections)
• Carlsten, et. al., 'On the Instability of Bitcoin Without the Block Reward'

Secondary Readings

• Koomey and Masanet, ‘Does not compute: Avoiding pitfalls assessing the Internet’s energy and carbon impacts’
• de Vries, 'Bitcoin's Growing Energy Problem'
• Sai and Vranken, 'Promoting Rigor in Blockchain Energy and Environmental Footprint Research'
• Rudd, '100 Important Questions about Bitcoin’s Energy Use and ESG Impacts'
• Song and Aste, 'The Cost of Mining Bitcoin Has Never Really Increased'
• Bruno et al., 'Can Bitcoin mining increase renewable electricity capacity?'

Reflections

• 125 words or less: what kinds of security services do bitcoin miners provide, and which ones do they not provide? Who provides the latter? How are other dimensions of monetary security achieved in bitcoin, that is? Who pays for those latter services?
• 100 words or less: in your own words, define the notion of bitcoin’s security expenditure. How could we tell, in your opinion, whether it was wasteful? (Be sure to specify who the relevant ‘we’ is in your answer)
• 125 words or less: who pays bitcoin miners for their services? Be careful in your answer to distinguish proximate from ultimate payees, and be careful not to assume that newly issued coins introduce new (previously unknown to market participants) dilution of extant bitcoin supply. Why does this question matter? What is the significance, in other words, of the ultimate sourcing of bitcoin miner revenue?
• 100 words or less: prepare exactly two critical discussion questions about any of the focal readings. For each question, be sure to include a specific quotation or citation to indicate how the readings prompt it, and one sentence about why it matters.

Practicum

• Find some physical sovereign currency. Identify, on your own and without consulting any sources, its security features. What attacks or risks do they secure against? Now look it up, and see if there are any you missed. Now hazard a guess: how much does it cost to implement these security features, whether on a per-unit basis, or in aggregate? Who pays?
• Using your full bitcoin node, try mining a block yourself. Carefully observe and record what happens. The goal here is not to discover a new block on your own. It is, instead, to gain greater insight into how mining actually works. You may, if you like, try joining a mining pool.

Schedule

Friday 15 March
Readings	Read Chapter 9 carefully and in its entirety.
Reflections	Complete one of Reflections 1-2 and one of Reflections 3-4, and submit by midnight before class.
Tuesday 19 March
Readings	Read the short Budish reading carefully; skim the longer one (full version) if you want more.
Practicum Assignment	Complete the first Practicum assignment; post your findings to our Practicum document by midnight before class. We will discuss and implement the second Practicum assignment together in class.