Elon Musk — Why His Proposal to Improve Dogecoin Won’t Work
By: Henrique Centieiro
Tags: Elon Musk, Bitcoin, Blockchain, Dogecoin

Elon Musk — Why His Proposal to Improve Dogecoin Won’t Work

Don’t get me wrong. I feel a profound admiration for Elon! However, maybe he is right only 99% of the time. After all, he is only human and not a Martian (yet) 🚀 , and his proposal to improve DOGE is just wrong. Henrique Centieiro Follow May 21 · 7 min read

The relationship between Elon Musk and Dogecoin has been generating many questions in the mind of pretty much everyone. One of my students from my Dogecoin Course, @pelavani, asked me on Twitter some very interesting questions regarding Musk’s proposal to increase the Doge blockchain's efficiency.

Here are pelevani’s questions:

And here are my thoughts 😊

Q: Elon recently said that Dogecoin should have 100 times higher transaction volume at 100 times lower fees. Is this possible with the current block size?

A: In blockchains, there’s this thing called the blockchain trilemma. There are these 3 important factors that need to be considered when deciding variables such as block time, block size, and cost.

The block time and block size have big impacts on security, decentralization, and scalability.

…and the question is: How can we have good scalability without compromising the security and preserving good levels of network decentralization?

To speed up the block time by 10X in the Dogecoin blockchain, we would have a block every 6 seconds instead of 60 seconds. There are 2 problems in doing this:

It would increase the blockchain size by 10X over time. Additionally, if at the same time we increase the block size also by 10x, it would then increase the blockchain size by 100x. This is really bad for decentralization.

Image this. Currently, anyone can run a full node on a laptop. We just need around 50 GB of free space to run the full node. This is good for decentralization because anyone can contribute with a full node, and anyone can verify all the transactions. In the Dogecoin network, there are currently around 1000 full nodes. Now imagine that we speed up the block by 10x and increase the block size by 10x. This is potentially 10MB blocks being created every 6 seconds… which in 1 hour could reach 6GB… and in one day it could be 144 GB… and 4.3 Terabytes in one month. To have this huge amount of data, we would need big data centres, and the blockchain would become more centralized. We can’t run Terabyte size nodes on a normal laptop.

The second problem of increasing the block speed by 10x, i.e. every 6 seconds, is that it would increase the chances of having orphan blocks. You can see more details about orphan blocks below. Orphaned blocks are discarded, and the miners won’t receive a reward for it. This is bad for the miners, and it could disincentivize miners to mine in the Doge blockchain.

Then we have the “increase block size by 10X”. What would be the consequences of this?

Increasing the block size by 10X, i.e. from 1MB to 10MB, would allow more transactions inside each block and consequently reduce transaction fees and improve the throughput. However, this would result in 2 problems: it would increase exponentially the blockchain's size, which we already discussed, resulting in a high degree of centralization. Additionally, a bigger block size is harder to broadcast. It’s easy to broadcast and update the nodes with a 1MB block size even if the node has a slow internet connection. However, the 10MB block size will probably be stuck if the internet speed of the nodes is not good.

In blockchains, it’s important to have a good degree of synchronization so that all the nodes can validate the transactions. Big block size will reduce this synchronization, and fewer nodes would validate all the transactions simultaneously.

To speed up the block by 10X and increase the block size by 10X would indeed drop fees by 100X but we would have a huge decentralization and security trade-off. The blockchain would become very centralized in a few nodes that have the capacity to run multi-terabyte size nodes. Probably these nodes would be big corporates.

This degree of centralization would then lead us to security risks. Because we have fewer nodes, it would be easier to attack those nodes. To hack 1000 full nodes is very, very hard to do. However, attacking 10 nodes get easier.

So…. yeah, Elon Musk's idea would probably not be ideal and it would actually kill Dogecoin (or any other blockchain).

Traditionally, when looking at security, scalability and decentralization, we can pick only two.

Q: No hardfork required for block size change?

A: A hard fork is an update that it’s not backward compatible. Nodes that update to the new protocol will no longer be compatible with the previous version and will create a new fork of the blockchain. Nodes that update to the new protocol cannot process transactions in the previous protocol.

A change of the block size would probably generate a hard fork because some of the miners would not agree with the change and they would generate 2 different blockchains: the blockchain with the original block size and the blockchain with the new block size.

Hard fork has no backward compatibility

All nodes must upgrade to the new version, or the blockchain will break into two

Nodes that do not accept the upgrade will not be compatible with the nodes that do

For example, Bitcoin has frequent updates that represent soft forks, and they are called BIP — Bitcoin Improvement Proposal. In 2017 however, there was a hard fork when some developers decided to propose to increase the Bitcoin block size from 1 MB to 8 MB. The nodes that continued to run the previous version continued running the Bitcoin protocol. The nodes that adopted the changes increasing the block size to 8 MB created a separate blockchain called Bitcoin Cash. This fork created two distinct blockchains: Bitcoin and a new blockchain, Bitcoin Cash.

Q: Are miner rewards affected by such a possible change?

A: This is another great question. If the block speeds up by 10X and we keep the Dogecoin block reward as 10 000 DOGE, then the miners would receive 10X more reward. However, this would also be 10X more inflation rate and it would debase the value of the coin and probably hurt the Dogecoin price. According to my calculations:

10 000 DOGE * 10 * 60 * 24 * 365 = 52 560 000 000 new dogecoin created every year

The current circulating supply (May 2021) is approx.. 130 Billion

52 billion / 130 billion = 40% inflation rate

The economic reward for the miners would be a bit messed up because we would increase the reward but it would also increase the money printing by 10X. In the scenario of speeding up the block creation by 10X, it would probably be good to cut the block reward by 10X too.

What are Orphan blocks?

Increasing the block speed by 10X would also increase the orphan block count.

An orphan block is a block that looks pretty similar to any other block, and it has all the components of a block, but it will not belong to the blockchain.

In the Bitcoin blockchain, orphan blocks are called orphan blocks.

Imagine that 2 different miners in different parts of the world, Ethan and John, mine the block height 163638 at the same time. Once they mine it, they will propagate it across the network. For a very brief period of time, there are 2 slightly different chains in the blockchain. However, Chloe, who is geographically closer to Ethan, received Ethan’s block first, and she was also the miner mining the next block, adding it to Ethan’s block. This means that the chain on the left will be the longest chain in the blockchain, and the block on the right will be orphaned. Chloe is then going to broadcast the new block 163639 to the network, and all the nodes will see that there’s a longer chain that should be considered.

In the blockchain, the longest chain always wins. This is called the longest chain rule. What happens to the transactions? Well, some of the transactions on John’s block were also included in Ethan’s block. Additional transactions will probably be included in one of the upcoming blocks.

In the Bitcoin blockchain, the orphan block is totally discarded and the work performed by the miner that mined that block is just useless work.

Orphaned blocks are one of the reasons why users are advised to wait a couple of confirmations in the Bitcoin blockchain.

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