Since I've been forced to take yet another look into BitCoin and
algorithmic (high frequency) trading within a short timespan, I began to
wonder how they would work together. What precisely would happen to
BitCoin if we had tens to tens of thousands of high frequency traders
(thousands of transactions per second per trader) within the network?
I haven't been able to come up with any substantive claim about what
that would lead to, but it at least seems possible that we could hit
some limits within the distributed log algorithm which could lead to
significant economies of scale in producing new blocks. Even if we
actively sparsify the history -- simply knowing about what to start the
process with could be bandwidth heavy, and keeping up with all of the
eventually false block chains given that bandwidth could necessitate
very high end hardware with an unusual, mainframe-kind I/O-cycles
balance. If that were to happen, it could centralize the verification
activity to a degree that is amenable to takeover, for simple economic
reasons. Alternatively, the distributed algorithm could simply become
choked to a degree via bandwidth constraints (not processing cycles)
that would lead to enough time inconsistency within the cloud to make it
almost impossible for it "to prune the bush into a stalk".
Do you think something like this could happen? Is it a viable failure
scenario? I fear this especially because the incentive payment for block
creation isn't in any way divisible between those who tried, which means
that winner takes all, and so that with very high rates of transactions,
only highly centralized and massive scale processing plants can expect
to reap a benefit from block processing which is statistically within
usual financial timescales.
(That is, the reward from contributing processing power to the system
isn't divisible, unlike BTC's themselves. I can't for example run a low
power mining operation and expect to get .000001 BTC in a reasonable
time, whereas somebody with more power statistically will have it in a
shorter time. That's a clear benefit to scale, because people do not
have infinite liquidity, and aren't risk neutral.)
(And yeah, this is mostly about economics still. But since BitCoin is a
cryptographic protocol, this stuff speaks to the threat model and the
incentive design which is integral to why the protocol is designed the
way it is. Thus, also to now the protocol should be developed to
reincentivize better.)
--
Sampo Syreeni, aka decoy - [email protected], http://decoy.iki.fi/front
+358-50-5756111, 025E D175 ABE5 027C 9494 EEB0 E090 8BA9 0509 85C2
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