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 - decoy@iki.fi, http://decoy.iki.fi/front +358-50-5756111, 025E D175 ABE5 027C 9494 EEB0 E090 8BA9 0509 85C2 _______________________________________________ cryptography mailing list cryptography@randombit.net http://lists.randombit.net/mailman/listinfo/cryptography ----- End forwarded message ----- -- Eugen* Leitl <a href="http://leitl.org">leitl</a> http://leitl.org ______________________________________________________________ ICBM: 48.07100, 11.36820 http://www.ativel.com http://postbiota.org 8B29F6BE: 099D 78BA 2FD3 B014 B08A 7779 75B0 2443 8B29 F6BE