A brief discussion on the mechanism design of Bitcoin
The fierce “arms race” of Bitcoin network has triggered concern over its fairness. At the beginning of its birth, every individual could mine the Bitcoin easily with a personal computer. According to Hal Finney, an early partner working with Satoshi, he gained thousands of Bitcoins within a few weeks which were mined by his personal computer. But nowadays Bitcoin has become the “private mine” of mega mining corporation and professional miners who own lots of ASIC devices, which seems to be unfair. People also worry that Bitcoins are concentrated in the hands of a small group of people, which hinders its promotion. The Coase theorem states, however, that with zero or little transaction cost and clear property rights, the market could reach its Pareto efficiency of resources allocation, no matter to whom the property is given at the very beginning. The whole system would also be fair if the ownership of the rights of property is set reasonably at the beginning.
Satoshi did take a thorough consideration when designed the Bitcoin mining mechanism. He then was confronted with two options: one allocating Bitcoins to all users according to the number of the nodes, namely one-IP-address-one-vote; the other allocating Bitcoins to the miners according to the computing power, namely one-CPU-one-vote. He chose the latter considering the security of Bitcoin network. He wrote in the White Paper that “If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs.” Miners obtain Bitcoins by processing transaction data, which could be considered as an incentive mechanism. In retrospect, however, miners should put in their computing power to obtain Bitcoins which could be deemed as a public resource. Since the security of Bitcoin network is proportionate to the network’s computing power, the computing power put in by miners are used to ensure the security of the network, enabling normal users to trade safely without putting in any computing power. This is fair to both the users and the miners.
Although the initial allocation of Bitcoins is designed by the protocol, it is the market that decides the final allocation. Users possess the right to collect the computing power from miners and this right could be sold, which means miners “pay” the computing power to users in exchange for the ownership of Bitcoins in the block. On the other hand, miners possess the right to obtain the Bitcoins in a block and this right could also be sold, which means users could purchase Bitcoins from miners without putting computing power. If the computing power paid by miners is higher than the revenue generated by mining, miners would put in less computing power; correspondingly if the expense paid by users to purchase Bitcoin is higher than the mining cost, more and more users would join the mining industry. The market would reach equilibrium at the end and a highly-efficient allocation between computing power and Bitcoins would be realized.
In the first days after Bitcoin was created, transaction cost is almost zero and some special users could realize certain goals with small-amount-transaction. For example, Wikileaks coded some secret files in the blockchain with huge quantities of small-amount-transactions; Gambling websites like SatoshiDice informed their users of the gambling results (or even sent commercials)with small-amount-transactions. These actions has put more burdens on the overstuffed blockchain. Apprently those users who overuse the small-amount-transactions have taken too much public resource and a transaction tax imposed to them is necessary and reasonable. This Pigouvian-Taxes-like design could reduce the junk transaction to a huge extent and equalize the private cost and social cost of the transaction.
The rule of levying the transaction tax of Bitcoin is calculated to be economical. It discourages trivial payment, which means that if the output of a payment is less than 0.01BTC, a transaction fee of 0.0001BTC should be collected; A payment with bitcoins of longer history and more amount is prioritized; The trade data is “weighed” and a fee is collected for each kilobyte. As a unit tax, the transaction tax could be levied relatively ideally with the adjustment of deft mathematical algorithm, and consequently those special users who do lots of small-amount-transactions must refrain due to the expensive cost, while normal users could still keep the cost edge compared to traditional ways of payment. Even if there may be some inaccuracy, micro-adjustments could still be made by updating the protocol.