Topic: Bitcoin can never become a currency. Part 2: reward distribution. (Read 758 times)

All your reasoning about Bitcoin taking over fiat can be reduced to and is essentially a tautology, like A is better than B because A is better than B, couched as a question, i.e. is A better than B if A is better than B?


It is not a technical issue

You can't resolve the internal, innate inconsistency and antagonism between money functions. Put differently, you can create a good store of value (e.g. gold) and you can create a good medium of exchange (e.g. the American dollar). WTF, you can even create a so-so currency somewhere in between. But you can't create a currency that would outshine everything out there both as a good store of value and as a good means of exchange. You can only hypothesize or theorize about this kind of money at your leisure time

You seem to refer to technical issues of Bitcoin. It will be difficult due to drastically inferior user experience, as Bitcoin is obviously not up to the task to compete with conventional payment infrastructure on the consumer level. Solving all technical issues takes a great effort and i've been racking my brain for quite a long time trying to develop a solution to all problems simultaneously.

The truth is, however, that even leaving all technical issues aside, Bitcoin cannot reach the initial goal due to the inherent problems of its economic model, which we are discussing in this thread.

What’s the problem? Simply put USD against the national currency of any shithole country and USD will surpass the latter in any aspect.

Bitcoin itself could be such a currency, had we solved all technical issues. Simply make a cryptocurrency that provides:

1) free transactions;

2) no censorship;

3) 10 seconds finality;

4) scalability;

5) financial privacy.

If you are referring to the underlying principle of Gresham’s law, which states that people prefer to dispose of a less valuable asset in the first place, this will hold in many scenarios and certainly produce an effect on the subject of discussion as well. This, at the same time, doesn’t necessarily lead to the outcome that Gresham’s law predicts.

Moreover, all known modern currency substitution scenarios showed preference for good money in the long run. We saw many cases of dollarization, but I’ve never heard of bolivarization or rupeezation. You can also check out the political crisis in Venezuela and see that even Bitcoin, with all its flaws, was capable of substituting the national currency for transactional purpose to a certain extent.

Here’s an extract from an article on dollarization of Cambodia


Where is Gresham’s law?

     This kind of topic really never gets old. It still pulls my interest no matter how predictable the answer would be or the views of most of the people who indulge in a conversation regarding this topic. What I like about this post though is that it is made easier to understand for dummies like myself. My opinion about this still stays the same as always though; that bitcoin will be very difficult to use as a day to day currency similar to fiat. That's just how I see it. dogecoin is a good candidate though, although I don't know if others would agree.

Edit: I liked the post so I'll be giving a merit. Hope to see the continuations of this topic soon.

You again come up with mutually exclusive starting conditions

There is no good medium of exchange on par with fiat currency that would be at the same time as good a long-term store of value. Basically, you have just invented a perfect money, instantiated it (which you can't), and then pitted it against a real fiat currency that is always inflationary and thus can't be a good long-term store of value. Indeed, the fiat currency would lose and collapse, but this approach is meaningless as one can always imagine something perfect, not possible in real life, and ignore this fact

That example holds both required properties. First, a tobacco of different quality is exchanged at the same rate per weight or, in other words, has equal nominal value. Second, tobacco can be alternatively used for its intrinsic value: just be smoked. That’s why whenever a smoker gets his hands on a high quality tobacco, he leaves it for himself to smoke, and uses a lower quality tobacco for further exchange. As the circulation continues, good money is literally burned and only bad money is left in circulation.

Gresham’s law’s practical implementations involved commodities mostly, but it also worked with a pair of paper/commodity money. I can’t recall any practical example of two paper currencies in the fiat era though.


Money is the most convenient MoE, but on certain occasions other assets can provide some benefits that can make them acceptable as payment, given that they are sufficiently liquid.

For example, we are both traders using the same broker. I owe you some $, but I don’t have any free cash, only stocks. I offer you to choose from a list that I’m ready to trade and you pick up a stock that you wouldn’t mind adding to your portfolio. This may look like simple barter, but there are some interesting details:

1)   You do not actually need the exact stocks I offered and wouldn’t buy it on a regular occasion.

2)   You found them liquid (easily and quickly converted into other assets without a loss of value), which is why you accepted my offer.

3)   The exchange happened, because in that particular case stocks featured a lower cost of transport per unit of value than cash (had I converted them into cash, I would lose more on conversion. The same goes for a reverse conversion on your side), so we lost less value during the transaction.

Roughly the same can be applied to a transfer in BTC. In most cases, money is better to transfer value, but sometimes payment in BTC provides certain benefits and we both agree to use it for exchange. The ideological motive also plays a significant role for BTC.

A more common example is bearer instruments. Since they provide anonymous transfers and can pack a large value in a small volume of paper, they are often used as MoE in illicit activities, although their role tends to diminish, as they are oppressed by the AML legislation.


Indeed, MoE and accounting functions distinguish money from other assets. The boundary, however, is not strictly predetermined. For example, according to Keynes, when an economy is caught in a liquidity trap, money and bonds become near-substitutes. We can also launch an inverse scenario, making non-cash assets perform the MoE function. Here is an interesting thought experiment on the matter.

It is the effect that counts here

And this effect is present even when two fiat currencies are competing against each other that don't have any intrinsic value (other than transnational utility). You may argue that it is not Gresham's Law, and you would probably be right, technically speaking. However, if there is such a thing or phenomenon as "bad money driving good money out of circulation" (irrespective of the form of money, i.e. whether it is sea shells, hard currency, fiat, or whatever), we have to deal with it somehow and give it a name

I heard Gresham's "law" is for commodity money with intrinsic value, like tobacco. Mr. Free to choose said (sorry, I forgot the link/source) in the past tobacco was widely used in the US as money, and in the end, people spent the low-quality tobacco and saved the high-quality tobacco. This behavior droves out high-quality tobacco out of circulation.

If that "law" can be applied in fiat, then Indonesian Rupiah will push better money out of circulation, and you guys will use IDR! I'll be happy if that happens, lul.

Could you give me one example in the present era?

I never bought something other than using currency (physical + digital + virtual) and Bitcoin.
CMIIW, MoE is the most substantial factor in determining whether something is money or not.

Fiat doesn’t collapse, because there is no asset to compete with. Normal inflation has nothing to do with that.

All right, let’s approach it from another side. A fiat currency is the only perfectly liquid medium of exchange, which is why it stays at equilibrium with better value-storing assets. Normally, the distribution is the following:

1) We use money for transactional purpose, because other assets are not widely accepted, conveniently transferred and because of the legal tender.

2) We use money for short-time savings, because commonly the rate of inflation doesn’t bother us at a short distance.

3) We use money for long-term savings in a less liquid form but with interest (a saving account) in small amounts.

4) We use other specific assets for long-term savings when the value is high.

Money has limited value storage capabilities, but value-storing assets are not as liquid, which is why both are in demand. Everything changes when we add another asset with the following properties:

1) It is equally good as a medium of exchange.

2) It is a good long-term value storage.

In its current state, Bitcoin doesn’t satisfy the first condition, which is why nothing happens. In my thought experiment, I assumed that it actually became a currency, hence was capable of performing the transaction function on par with fiat.

Now imagine that we have an exchange rate of a fiat currency (FT) and Bitcoin (BTC) set to 1:1 initially. You get payed 100 in FT and I get paid 100 in BTC. Say we both spend 80 and save 20. We both can spend our money equally, because they are equally accepted. When it comes to savings though, I can easily keep it in deflating BTC, while you do not wish to keep it in inflating FT and seek to convert it into BTC.

When I’m paid next time, I assume the following: I can spend 80 and keep 20 of my BTC as usual, but I can also spend 60 and sell 20 to you for 22 FT. You will accept an unequal exchange, because otherwise you risk losing more as a result of FT’s devaluation. With the help of speculations, I gain 2 extra FT to spend, which is why it’s a bargain for both of us.

You go to your employer and say that you no longer agree to get only 100 FT and demand to pay you either 100 BTC, or 110 FT, because BTC is appreciated more. Your employer agrees and pays you 110 FT next time. He also raises the price of his goods in FT by 10% to compensate for the growing payroll. Besides, he is aware that the market exchange rate of BTC/FT shifted by 10%.

You get your 110 FT and want to repeat the previous exchange, but I no longer agree to sell 20 BTC for 22 FT. I’m aware of the prices’ correction and such an exchange in no longer profitable, which is why I demand 24 FT for my 20 BTC. You conclude that it’s better to pay 24 now, than to wait until it grows to 26. The next time you get paid, you just go and straight exchange all your FT into BTC, because it can lose value before you will be able to spend it. How are you going to escape the spiral now?

The problem is that it’s a one way train. BTC is always demanded by FT holders, but BTC holders have no interest in FT, because FT can give you nothing that BTC cannot. With an infinite demand for BTC, there is no equilibrium where the exchange rate can stabilize, which leads to the depreciation of FT down to zero.

Why doesn’t it ever happen? Because there is always a two way demand between different assets. First, we buy a value-storing asset for money, but then we have to exchange it back to spend the value. When a demand comes from both sides, the exchange rate balances around an equilibrium.

I hope now it is clear, I won’t be able to find strength to explain it anymore.


No, for God’s sake, please, leave poor Gresham alone. The process I refer to is only temporary. The Bitcoin’s velocity will drop, while fiat is still capable of satisfying the transactional demand at least to some extent. As the fiat currency inflates and dies, bitcoins will return to the circulation, because there will be no alternative left.

My gold or my farmland never become a currency still I traded them then what will be the problem to occur if I try to trade bitcoins for dollars or for another product/services. I mean bitcoin never need to be a currency to exist along with us; it can be what it is today forever to exist with us and to serve us. I read by 2014/2015 itself some European countries started considering bitcoin as digital property. I guess that must be the most appropriate perception on bitcoin.

Not able to become as a pure currency will not block any of bitcoin's growth in my opinion. By considering through the high volatile nature of bitcoin, I guess it is most suitable to be considered as a property. Probably after bitcoin may attain a stable price like how gold is doing these days, maybe bitcoin will start existing as a currency but till then we will keep using/spending bitcoins for whatever purposes we need regardless of it is a digital asset or anything.

And how's the "demand for Bitcoin to the saving side" is going to hurt fiat?

Moreover, the conclusions you arrive at should hold true even without Bitcoin. According to your assumptions and premises, any fiat currency should quickly collapse just because it is inflationary as inflation causes an increase in money velocity, the latter pushes inflation rates even higher, and the hyperinflation death spiral sets in. But it doesn't happen in real life unless the government goes nuts with printing money, and then it is just hyperinflation caused by excessive money printing that has little to do with changes in money velocity


Which is otherwise known as Gresham's Law. People will save Bitcoin and spend fiat, with bad money driving good money out of circulation under your hypothetical circumstances

I don’t think it’s correct to mess with money aggregates here, we will simply end up comparing apples and oranges. Although it’s said that money aggregates are classified according to liquidity, it seems a different flavor of liquidity, more in the sense of accessibility. It’s like money is absolutely liquid itself but is packed into different containers, each of which obstructs our access to the money inside to a different extent. The harder it is to pull the money out of the container, the higher M it gets.

According to this approach, money in the narrow sense is an aggregate that provides near-instant access to the money inside, which is usually M1. We also have a notion of Money Zero Maturity, which also coincides with the logic of accessibility. If we apply the same logic to Bitcoin, we can state that its natural form (a record in the blockchain) is close to M1, because it is accessed almost in the same way as a common demand deposit account. We can also ponder on the LN form of Bitcoin, but i'll leave it to someone else.

At the same time, we cannot compare Bitcoin directly to an M1 fiat currency supply, because it has an obviously lower liquidity (in the sense of convertibility into other assets in a given economic zone).


A lot of sufficiently liquid assets can be used as a MoE, which doesn’t make them money. Legal tender is not necessary, just a wide acceptance. The problem is that something tending to be a SoV cannot be money in the modern times. Gold performed both functions simultaniously, but that was long ago in a completely different setting. Nowadays, we cannot go back and adopt a similar asset as money, the economy won’t accept it under normal conditions. It's only possible in some extreme situations.

That’s true. The described scenario is a thought experiment that can unlikely occur in practice, as it is based on a number of unrealistic assumptions. Bitcoin will unlikely go this far to compete with national currencies. I needed a model that neglected all other Bitcoin’s flaws and assumed that Bitcoin is equally liquid to a national currency to show that the scarce supply alone was reason enough not to try to adopt such an asset as money.


No, you just didn’t get it right. I did’t not refer to the overall “money velocity.” We have two separate monetary supplies: fiat and BTC, each with its own metrics. Currencies are exchanged at a market rate (there is no legal tender law setting a hard ratio.) Under such conditions, the demand for the fiat currency will tend to the spending side, while the demand for BTC will tend to the saving side. This disproportion will lead to the increase in velocity of fiat’s circulation, which will start a hyperinflation feedback loop ultimately leading to the extermination of the fiat currency.

I can’t say for sure what will happen to the velocity of Bitcoin meanwhile. It would be reasonable to say that it should decrease, as BTC tends to be hoarded, but spending cannot be cut to zero. As the hyperinflating fiat currency will lose the ability to satisfy the transactional demand, more and more Bitcoins will be transacted. We can assume that Bitcoin’s velocity may be low initially, but then will slowly increase until BTC completely substitutes the fiat currency. This depends on multiple conditions (mostly, the behavior of the aggregate demand), so I don’t find it safe to make any strict presumptions, which, anyway, are unnecessary.


Ironic is a relevant word here. I was aware of the erroneous application of Gresham’s law to cryptocurrencies within the community, so I left a little sarcastic reference. It shouldn’t be taken seriously. I also stated that it wouldn't work in that situation, just didn't want to delve deeper and extend an already long post.

In fact, equally liquid to bonds, stocks and other financial assets that are traded on the free market.


I surely will. I just need to explain some premises not to turn it into another discussion about the reasons why Bitcoin cannot achieve the same.

If I got it right, you are talking about the speculative motive for the demand for money, which is a notion of Keynesian liquidity preference theory. The scarce supply of Bitcoin stimulate people to hoard BTC and speculate on the price fluctuations, which I addressed in Part 1. We can improve on that. What we cannot do is to get rid of operations with money derivatives, as they are a product of an off-chain legal framework. So, if someone takes our coin and packs it into some derivatives, which then are traded on the free market, this is just out of our reach.

Bitcoin was, but didn’t turn out to be in the end. I’d say that Satoshi’s ideas were embedded, but not fully embodied in Bitcoin. The idea of a decentralized independent currency was truly incredible. I was shocked and excited when I first learned about Bitcoin and its capabilities, which is why I wish that idea to be fully implemented in the initial form. Bitcoin is a brilliant solution, which gave a start to a whole new industry. Being the first of its kind, however, leads to inevitable mistakes. Satoshi foresaw many problems but made some mistakes too. Now, after many years, we can study all emerged problems and propose a solution to them.


What you listed are early projects that cannot be considered a serious improvement, just minor alterations of the same concept. We can also add anonymous coins like Zcash, Monero and others. They introduced a number of good useful technologies and actually made a huge contribution to the industry, but at the same time didn’t progress much toward creating a widely adopted currency.

After the creation of Ethereum, everybody turned to a decentralized virtual machine concept and I didn’t see any serious attempts to come back to the initial concept and create a platform solely for payments.


You are terribly wrong about this. It is extremely hard to create a solution for all problems at once. I’d say nearly impossible. The scalability issue alone is a problem that no one managed to solve properly. And we have a bunch of other problems of equal importance. We actually had to revise literally everything we now about decentralized SMR systems and build a protocol completely from scratch. It took two years just to design the system.

It depends on how strict your view about money. If it's so strict, then Bitcoin is "near money" or M3.
It's more "hard money" (not about politics) or "sound money" compared to fiat currency.
Moreover, it can be used not only as SoV but also as MoE, although limited.

Perhaps what you mean is about Bitcoin to be the legal tender or currency, well at the moment, it's unrealistic because, for that to happen, countries need to abandon their fiat currencies.

The difference between the real and investment sector is the fluctuation of exchange rates, transfer prices and times.
The investment sector needs volatile prices in order to achieve profits, these fluctuations in prices are what makes digital currencies attractive as investments.
The real sector needs constant exchange rates and faster and cheaper transfers, which will happen soon.

I went and checked that thread

To sum it up, Bitcoin could only destroy fiat in "your own imagination". You basically assume that the fiat currency would depreciate due to increases in money velocity, but how can it increase if people won't be spending their bitcoins? In other words, you set up mutually exclusive initial conditions, i.e. explicitly asserting that people will hoard bitcoins and implicitly assuming that they are going to spend them. Then you proceed to draw an impossible conclusion, which is Bitcoin destroying fiat. However, in that case you wouldn't even need Bitcoin as any fiat should quickly deteriorate on its own for just being inflationary. You see, there are huge holes in your reasoning


It's utterly ironic that you yourself appeal to "good old" Gresham’s Law in your first post in exactly the same sense I used it here. How come?

You can freely trade bonds for fiat and vice versa. You can do the same with stocks, options, Dali’s paintings and whatever else. You answered this question yourself: Bitcoin is not a currency; it’s a speculative/investment/hedging asset. The fact that someone called it a cruptoCURRENCY doesn’t make it such.


There is no such extension of Gresham’s law anywhere except your own imagination. We cannot apply Gresham’s law because we do not have good money and bad money and we do not have legal tender (or any other ways to set an equal nominal value). We only have money and Bitcoin.

Money by definition is the most liquid asset or an asset that is accepted in exchange for all other assets. The key property is absolute liquidity: you know that you can use money to purchase anything you need without the need to convert it into intermediary assets. Bitcoin is not accepted as such, and thus cannot be considered money.

If we assume that Bitcoin somehow managed to become money (which is unrealistic), it will destroy the fiat currency according to the scenario that I described in my previous post.

I see no contradiction there. Despite there are preconditions for a loan to be issued (namely, sufficient reserves and a request from a borrower), a decision to create money (issue a loan) is made at will. There is no automatic trigger that dispenses money to the borrower’s account. The bank may accept or reject the request at its discretion and there is no tool to force any of the outcomes. The same goes to the borrower and his will to repay the loan, thus destroying money.

I don’t know why you call it automatic when almost every decision is made by choice. I think it’s more correct to say that the system is game theory based, being a combination of economic incentives that drive rational parties to a desired behavior. The problem is that the system is not sustainable in an adversarial environment and relies not only on rational but also on honest (lawful) behavior. Dishonest rational players can easily abuse the system to their benefit, which is why a supervisor is required to prevent an abuse.


CBs are there for that reason, indeed. The point is that you state that the system is automatic, but, in fact, in cannot work without a CB manually managing the monetary base. The fractional reserve system allows to create new money only to the extent bounded by a reserve requirement. If we reach the upper boundary, then what? The adjustment of interest rates is done by expanding or contracting the monetary base (for example, Fed’s OMO), which is a crucial condition for the entire system to work properly. The system cannot sustain without CBs and their constant manual control of the monetary base.

As for blockchain systems, it is possible to implement an algorithm that will resemble the principles of modern monetary systems. The developers of stablecoins have already introduced some concepts. For example, you can look at Saga, which is based on a fractional reserve model and can adjust the supply according to the market demand. The problem is that such projects still rely on governance and off-chain sources, as they are sharing the same shortcomings with conventional fiat systems, which is why they are not fully-fledged cryptocurrencies.

Perhaps it cannot become a currency, but it certainly can become useful money. And with Bitcoin's nature, not only it is scarce, but also it can be pretty damn liquid too.

Criticizing Bitcoin is not that interesting though because the argument of the limited supply, transaction cost, reward distribution, etc., is pretty much known. And yet, if people still use Bitcoin, it is not going to disappear anytime soon.

It's probably more interesting if you try to explain what is your idea, about your system, about the ideal cryptocurrency in your mind. Preferably about the economy so you can post it here.

Nice writings by the way.

As a battering ram dominance of fiat money with all the damage. Crypto practitioners should learn that the main function of cryptocurrency should only be greasing the transaction. Cryptocurrency must be able to improve the weaknesses of fiat that are made into commodities. In a capitalist economic system, money is also seen as a commodity. Therefore, according to the capitalist economic system, money can be traded with excess both on the spot and on hold. From the perspective of the capitalist economic system, money can also be leased.

Money should not provide direct use, which means that if money is used to buy goods, then goods that will provide benefits are not money. So money must become public goods. Stockpiling of money causes money not to circulate, causing economic congestion and money becomes unproductive. Hoarding of money mentally will give birth to the miser, arrogant, greedy, and lazy. Monopoly & hoarding of money means withdrawing money while from circulation means slowing the circulation of money. This means minimizing the occurrence of transactions, so the economy becomes sluggish.

Well, Satoshi called it a peer-to-peer electronic cash system and positioned it as an alternative to conventional payment systems. Creating decentralized money was a brilliant idea, which is why I (and many others in the community) wanted to see at as a currency. At some point, I completely realized that it cannot handle the burden and now I'm expressing my arguments. I don't mind Bitcoin staying a speculative asset, although I would be happier to see the initial ideas embodied.

I have already mentioned about my personal opinion on this subject and stated that Bitcoin will not be a base currency accepted by the whole world. Yes, cryptocurrency technologies are becoming more and more important in our lives day by day, and technology continues to be digitalized day by day, but there is a situation that if the use of cryptocurrencies increases, the central banks of many states will already release the digital of their currencies and thus Bitcoin will not be able to become a currency again. According to today's markets, the fiat currencies that we use will be cryptocurrencies, and the cryptocurrencies that we use today will be an investment tool similar to digital stocks.

I know what Gresham’s Law is about. That's why I mentioned its extension


You can freely trade Bitcoin for fiat and vice versa

So why does it not destroy fiat? Maybe, exactly because of the extension of Gresham’s Law, that bad money drives out good money from circulation? It's ironic that you try to appeal to the natural outcome of this extension (Bitcoin not being widely used as a means of payment) to support the opposite claim, that Bitcoin would dispatch fiat currencies. However, no one can stop us from analyzing your proposition theoretically, "in vitro". Could you name just one killer feature of Bitcoin that would render the fiat currency useless as a currency?

You give too long explain about bitcoin but I don't get what most important with your point discussion, I think every one know what is bitcoin and how profitable bitcoin as investment assets, but now bitcoin bring bad era with lower price always start from new year until middle year bitcoin look lazy how to wake up on higher price.

Bitcoin was exactly that project. Satoshi's ideas are embodied nowhere else but in his/her/their creation which is Bitcoin. However, those same ideas and creation were so incredible that they themselves caused a very coveted BTC as a result.

I wish you luck. But this one is not a road less traveled. Toying with this exactly same idea in the not-so-distant past were shitcoins. Bitcoin Cash claimed to be the project carrying the original ideas of Satoshi. And then came Bitcoin SV. This is not to count other shitcoins which are not forks of the original. And all in a span of a decade.

Finally, it seems to me that the creation of an embodiment of Satoshi's ideas is not as hard as selling it to the public. The source is right there, tweaking here and there is a bit easy, but good luck telling the people yours is the real epitome of Satoshi's philosophy.

It's a problem if we want to embody the initial ideas behind Bitcoin, but it's not if we accept it as it is. I don't see a problem about Bitcoin becoming a specific asset for value storage. I found a problem in the fact that for many years noone tried to develop an actual cryptoCURRENCY: a decentralized blockchain dedicated to being a payment system that would account all the problems emerged and provide a solution to them. That's why I started it myself.

I see now, thanks for sharing the link, haven’t seen it before.

If we combine this statement with a later statement:


It still looks like he was talking not about ASICs, but rather about common servers (like multi-GPU rigs) but entirely dedicated to mining. At the same time, the reference to 100k nodes as an equilibrium shows that he still saw the concept being developed as egalitarian, meaning that mining would professionalize, but a lot of people would still be involved. I guess the truth is somewhere in the middle: he foresaw the professionalization of mining, but not to the extent that it actually reached.

Anyway, it doesn't actually change anything about the subject of my post.

Well, I'm actually trying to say that Bitcoin is not a currency at all, but rother a specific non-cash asset, which is why we can apply neither Greshem's, nor Thier's law when we compare Bitcoin to a fiat currency. If we assume, however, that Bitcoin somehow becomes a currency and is widely accepted for payments on par with the fiat currency, then Thier's law comes into play and Bitcoin destroys the fiat currency (I descrided that scenario in Part 1).

But Gresham’s law cannot be applied to “two currencies, which are freely exchangeable at market rates”. That’s is an incorrect interpretation of the law’s setting. Gresham’s law can be applied to two variations of commodity money that are enforced to be accepted at the same exchange rate by a legal tender law. At the same time, one of the assets has more commodity value (good money) than the other (bad money). It can be also extended to similar occasions where there are two identical assets of the same nominal value but differing in intrinsic value, which is clearly not our case.

Lets consider a simple example. Say 10 grams of gold cost $1. We have $1 coins that weight 10 grams and are pure gold. That’s our good money. The government melts a fraction of these coins and creates new $1 coins that also weight 10 gram but consist of 50% gold and 50% copper. The newly minted bad money has an obviously lower intrinsic value, but the government, using legal tender, forces merchants to accept in on par with good money. Good money starts being hoarded, because people will apparently prefer to get rid of a less valuable asset in the first place, which drives good money out of the circulation. In time, the price of gold starts to grow tending to $2 for 10 grams (because dollar’s commodity value was reduced by half) and people start melting good money to sell it as a commodity, because in this case they get more value than the face value of a coin. That’s how bad money inevitably destroy good money.

It’s easy to see why we cannot apply that law to Bitcoin: it’s “face” value is determined by an open market and it has no intrinsic value to be melted for.

If we create a setting where two currencies (BTC and a national fiat) are widely accepted as a medium of exchange (in other words, are equally liquid), BTC will destroy the fiat currency, which happens according to Thiers' Law. I actually modelled that scenario in Part 1, you must have missed it.

The premise that “Bitcoin is a worthy speculative asset, and it is not a good idea overall to spend your capital on everyday needs” shows where you took the wrong path. Indeed, Bitcoin is a good speculative asset, which is why it is not equally liquid to fiat, which is why it is not a currency, which is why neither Gresham’s, nor Thiers' Law can be applied to the pair Bitcoin-fiat under normal conditions. These are not two different money representations (good and bad) but a money and a speculative asset. It’s the same as applying Gresham’s law to bonds or securities. The premise that Bitcoin will be prefered for savings as a better value storage is correct, but it has nothing to do with Gresham’s law. In fact, Gresham himself likely new nothing about inflation and fiat money, as he lived in 16th century.

BTW, I’ve just checked out your link. You seem to worry about fractional reserve and the appearance of derivatives that will inevitably screw everything up. I mostly share your concern and I believe that a fractional reserve system shouldn’t be built on top of Bitcoin, at least on the scale of currently available systems. I also addressed that matter in Part 1. Furthermore, I suppose that a blockchain platform that is meant to be an actual currency should not support Turing-complete scripts.

It already is a currency. OP is probably referring to a gobal currency that many investors hope to see.

Anything that is used as an universal exchange token is a currency even if it's used in a sandbox. For instance linden dollar is a currency.

https://www.mail-archive.com/[email protected]/msg09964.html


If Satoshi wanted Bitcoin to be distributed equally, he'd design something other than PoW, because PoW rewards those who have the most resources. Even with CPU or GPU mining people build farms if mining is profitable, to the point where regular consumers find it harder to buy that hardware for its direct purpose.

You put forward contradicting claims

First, you say that "endogenous money is ... created by banks at their sole discretion" (which, in my view, pretty well counts for automatic money creation, just in case). Then you assert that it is destroyed "only when the loan is repaid". I guess you can't have money created by banks at will (read, arbitrarily), while at the same time destroyed only when the loan is repaid (emphasis added). As you hint at, banks can create money only when a loan is taken (whether it is prime, subprime, or otherwise is a different matter). Exhaustively simple logic, isn't it?


And how this disproves my point that CB's are there to maintain the health of such a system?

Why do people insist on making bitcoin a currency anyway? I do not even need to realize the reward distribution part and the volatility to actually know that I do not want bitcoin to be a currency. I want it to be a digital currency that is niche and used by few hundred thousand people (at most 10 million) all around the world and that's it. You guys are trying to make it public so that everyone in the whole world uses it and becomes a currency all because you want the price to go up as well, with bitcoin being used that much it would be able to get a lot of demand and that demand will cause the price to go up.

I do not want anything like that, it makes no sense to want something like that, I rather see the price stay here forever without changing just so I could avoid all the troubles being a currency would bring.

But it is. Endogenous money is not created automatically; it is created by banks at their sole discretion. It is not destroyed that way either; it happens only when the loan is repaid, which depends on the will of the borrower. Banks are known to blow bubbles and borrowers are known to become insolvent.

Without a regulating authority, a fractional reserve system is unsustainable. Banks will inevitably blow a bubble, which will burst, result in a bank run and a total collapse. This actually happened systematically in 19th-20th centuries and led to the emergence of CBs. Could we survive the 2008 crisis without the Fed’s QE program? Unlikely.

Conventional methods of the monetary policy (controlling the interest rate) as well as unconventional (“printing” new base money) are crucial to the modern finance system and are an actual reason why it is so flexible and sustainable. That is a huge advantage over any blockchain design, for we cannot allow manual control at that scale.

Don’t know for you guys, but I think I’m already tired of seeing this topic. I don’t even have the strength to finish reading everything you have written here. And moreover I am not even expecting Bitcoin to replace fiat, it will still be there as a primary method of transaction and bitcoin will serve as a secondary method. Someone already explained this by using the game industry; there are mobile games, although a lot of people love playing games on their smartphone, mobile games still didn’t replace the T.V and computer games. So, that’s how we should be seeing Bitcoin, it’s not here to replace anything, but to provide other means.

When gold is not yet becoming as a currency then I guess it is too early to expect for the case of bitcoin, lol . I know gold is not meant for electronic transfer whereas bitcoin is; but that alone cannot make it a suitable means for payments. If bitcoin cannot be a currency then I guess people will not having any problem to have it only as store of value.

A store-of-value along with easy electronic transfer functionality definitely will be used for payments by at least 10% of its adopters and rest may only use it as asset. Still this is enough for bitcoin to attain Billion dollar value in next 50 years and to be adopted by more than half of world population.

We already discussed this matter in the past (here, for your reading pleasure)

Someone has come up with exactly the same reason there, namely, Thiers' Law. However, Gresham's Law, or its proper extension, still persists if we consider two currencies, which are freely exchangeable at market rates. Thiers' Law basically describes a situation when one currency fails as money, i.e. no one wants to accept it. In that case people simply refuse to transact in it, and thus no free exchange is possible. Obviously, this is not the case here. Bitcoin is a worthy speculative asset, and it is not a good idea overall to spend your capital on everyday needs, Gresham's Law or otherwise (read, it is Thiers' Law which is not applicable here)

What are these conclusions based upon? I didn't come across Satoshi's view on ASICS. As far as I remember, he had disappeared before all that stuff emerged. The text of the original paper clearly shows that he wasn't aware at the time, otherwise it would have been mentioned.

Much better than Bitcoin as a value storage or a hedging asset? No. In fact, an absolute crap in this role. Much better for investors, who will gain x100 in the first year? No. In fact, a poor investment in long terms. Much better as a currency? Yes, and that's the point. Not only an altcoin itself, but a novel economic model that can be implemented elsewhere, given that the required technical properties are also met.

You see, the problem of altcoins is that they are, as you say, busy selling themselves, instead of trying to solve real problems. It's easy to provide better speed or scalability than Bitcoin, which is why everybody claims "we have 1000 TPS instead of 7" or "finality in 1 minute instead of 60". The quintessence of shitcoin ideology was TON with its ridiculous 1 million TPS and 1,7 billion USD raised for, in fact, an inept Polkadot rip-off with unknown purpose.

I didn’t see any adequate project that was devoted to embodying the initial ideas of Satoshi and creating a cryptocurrency that could actually be used for payments on the consumer level instead of granting x100 to investors.

I tend to agree to this gresham's law isn't that applicable for bitcoin as it talks only commodity money which on part of bitcoin isn't one of, Most probably the opposite of that will work on bitcoin. This is a non-ending discussion if both of you guys would not agree that bitcoin is only an alternative currency, just face check the reality of currencies. Ideally we can have a cryptocurrency to be used by the whole world, what's not ideal is that we are pushing it to be a non-centralized one, we are pushing too hard for bitcoin.

That's correct, except that we cannot apply Gresham's Law to Bitcoin. It only works with commodity money and only given that the price of both good and bad money is set exogenously. In our situation Thiers' law is more appropriate, which states the opposite to Gresham's Law.

Okay then. Though I don't really see why you would need to expound on technical features to explain its economic basis in a couple of words


It's not done manually

And that's the whole thing about fiat currencies and why they are so interesting. They are unique in their capacity to automatically readjust the money supply as required by the economy via creating as well as destroying what has become known as endogenous money. And while we are at it, you can't match this supply manually anyway as it is simply impossible technically. The central bank changes interest rates, that's true indeed, but it is only to oversee and maintain this self-regulating mechanism

The article basically sums up how Bitcoin instead of being a cryptocurrency, became a speculative asset, an investment of sorts. It's basically the problem of adoption that has bothered Bitcoin for as long as possible now, and why we don't really see much merchants actually accepting payments via BTC except for a select few.
Isn't that the problem itself? With how miners incentives last a few decades, they would of course try to get the best profit out of them. Hence creating the idea of Bitcoin being an asset to invest in, and in such, those that would buy the said asset would also try to sell it for as high as possible, creating the problem of them storing the coins in the long term instead of actually using it to buy something from others.

Simply saying, when compared to the current situation where fiat is used to buy an item, crypto is supposed to replace fiat from the system but instead, it became the "item" that is used to exchange for fiat.

All right, I am not saying you have invalid points. But, to cut the story short, is this "Bitcoin can never become a currency" series going to end up with an alternate cryptocurrency which is, as has been claimed by thousands of other altcoins, much better than Bitcoin itself?

I have only read little portions of altcoin ANN threads and altcoin whitepapers and I can remember albeit vaguely that a great many of them seem to start with Bitcoin's flaw, imperfection, shortcoming, lack, or, in other words, with what Bitcoin is not. And they leverage on this and get themselves busy selling just that as though they have a much greater battle than providing the people an alternative to the crumbling fiat.

You are jumping the gun with this question. I’m going to write a large post devoted solely to the issuance model and the supply control. It is complicated and cannot be outlined without explaining some technical features of the platform.

As far as I understand, what you are talking about is the ability to maintain stable prices (or it’s more correct to say stably inflating prices) in the CB-controlled economies by expanding or contracting the money supply according to the fluctuations of the demand. It cannot be matched simply because it’s done manually, while we cannot afford it in a decentralized blockchain system. I can propose an algorithm, however, that serve roughly the same goal, at the same time fully maintaining decentralization and independence. I cannot claim that it’s equally efficient until it’s tested in practice, but at least, it’s something to start with.

Besides, we do not need to surpass conventional fiat infrastructure in all aspects. We can build a system that will surpass fiat from one point of view, but will be inferior from another. We just need it to be competitive overall.

Satoshi was perfectly aware that mining farms and ASICs will emerge, and he didn't view it as a problem, because Bitcoin never had a goal of making 1 CPU = 1 vote or distributing coins equally. Saotshi knew that those things are harmful because they create vulnerabilities, and PoW is a better system because it's backed by game theory.

A currency doesn't need to be distributed to people intentionally, if its good people would exchange their old currency for it. This is how it happened with banks, PayPal, paper money, metal money and all the other types.

The short answer is, fiat currencies are purposefully inflationary

The long answer is that Bitcoin has been made deflationary, due to a hard cap, coin loss, hoarding, or whatever. In the view of Gresham's Law, Bitcoin is good money to be stashed away, while fiat is bad money to be spent shortly. So whenever there is a choice to be made between what to spend and what to save, the choice is evident and straightforward, so there is no need to name it here


At first glance it kinda makes sense

I mean a fee for a service and all that stuff. However, when you think about it, a currency in and of itself is purely utilitarian, and as such, it works better when you don't have to pay for it. And aside from the block reward, the miners are also collecting transaction fees, and these are no going anywhere, at least as long as Bitcoin itself stays with us (read, the incentive has been built in for good as well)

The answer is given directly in the post. The ratio of the real/financial markets shows the perception of an asset as transactional/speculative. To a certain extent, all assets, including cash, are involved in speculations. However, if in 90% of transactions an asset is exchanged for real goods and in 10% for other assets, this looks like a medium of exchange or a currency. In the opposite situation, the asset looks more like a speculative non-cash asset that cannot be considered a currency.


Yeah, it helps make the system secure and doesn’t help reach the initial goals for which the system was created. That’s what I’m saying.

And how is it supposed to work?

Could you please outline the economic model it is based on? You don't need to delve into technical details, just give us a general outlook from an economic point of view. To give you a lead, please explain how it stands against modern fiat currencies which feature a built-in feedback loop that allows them to automatically readjust to the monetary needs of the underlying economy. Fiat is unbeatable in this regard, and no algo-based cryptocurrency could come close

I think those "problems" can be addresses in a more simple manner. The simpler solution is usually correct.


1 - The problem is that Bitcoin simply turned out too attractive to perform money functions and became a hedging and speculative asset instead.

All fiat currencies can be speculative assets. Why bitcoin can't? There is a whole financial market called Forex, which is based on fiat currency trading pairs such as USD/EUR.


2 The second problem lies is in the model of the system’s support and particularly in the reward distribution scheme proposed by the creator.
The reward distribution is basically a fee paid for a service (securing the network, through mining). The incentive will last only a few decades, which will also generated new coins and properly distribute them alogn the years.

Part 1 that covers the problem of the scarce supply is here.

Satoshi Nakamoto created a truly groundbreaking concept of the first fully decentralized and independent payment system. Its design, however, wasn’t flawless and there were some inherent problems that didn’t allow the platform to become what it was conceived.

We have already analyzed the first major problem, which lies in the scarcity of the supply. Satoshi supposed that limited emission would make Bitcoin much more attractive in contrast to constantly inflating fiat currencies and we cannot state that he was wrong about that. The problem is that Bitcoin simply turned out too attractive to perform money functions and became a hedging and speculative asset instead.

The second problem lies is in the model of the system’s support and particularly in the reward distribution scheme proposed by the creator.

How it was conceived

In the original paper, Satoshi describes a peer network in which each node contributes available CPU power for a time-stamping service. Nodes are not decoupled from miners and the author unlikely envisioned mining as a separate professional activity. That can be seen from the description of the network functioning, where all nodes are prescribed to participate in PoW.

Satoshi denotes the described concept of a Sybil resistant timestamp network as a one-CPU-one-vote system. It was likely expected that each participant would run a node on his PC that would keep the record of the database and perform the required hashing work. In such a scenario, the platform looks purely egalitarian: participants play an equal role in the system support and have the same chance to obtain a reward.

In fact, the described egalitarian model is a matter of equal importance to the concept of decentralization itself. Not only the system gained the ability to progress in a trustless permissionless setup, but also the distribution of trust became almost absolute.

At the same time, the initially proposed model had one significant shortcoming: the reward was granted to a single winner of the lottery for each block. Given the total number of participants reaching a hundred, a node would get a reward each 16 hours in average, which is sufficiently frequent. If we raised the number of participants to a hundred thousands, however, the gap would expand to almost two years, which makes the incentive for participation rather dubious.

How it turned out

As we all know, during the early stages the system worked roughly as Satoshi described, but the appearance of ASICs and mining pools changed everything. The efficiency of ASICs drove CPUs out of mining and the emergence of mining pools accumulated trust in the hands of a small group of actors.

To date, we can claim that Bitcoin nodes have split into two different types:

1) Blokchain keepers: nodes that only keep the record of the blockchain and provide information to other nodes upon request.

2) Miners: nodes that perform hashing and participate in the block production.

Nodes that store the blockchain are all that is left from the original concept. Mining turned into a professional activity that requires a meticulous approach to marginal efficiency and is not affordable for ordinary users with consumer-level hardware. The initial egalitarian concept thereby turned completely elitist.

The emergence of mining pools caused the centralization of power and severely reduced the distribution of trust, but on the other hand, provided a solution to the problem of too low chances of getting a reward: the reward for a block is now distributed among the participants of a pool, instead of being granted entirely to a single miner who found an appropriate hash.

How it affects the economy

Now let’s investigate how this all affects the economy of the platform. In my previous post, I proposed two approaches to modelling a crypto economy. While researching the scarcity of the supply, it seemed more convenient to consider Bitcoin as a secondary currency powering the national economy.

In the case at hand, however, it looks better to stick to the second approach. Say Bitcoin forms its own virtual borderless economic zone. Of course, it’s not a fully-fledged economy, as Bitcoin doesn’t power entire production cycles and, what’s most important, wages and taxes are not paid in bitcoins. With some restrictions, however, we can assume that Bitcoin powers a separate economy and count certain variables including GDP. Assume that Bitcoin’s economy consists of two main sectors:

1) Financial sector, which is formed by operations of exchanging BTC into other financial assets.

2) Real sector, which is formed by operations of exchanging BTC into goods and services.

The ratio of these components tells us to what extent BTC can be perceived as a currency. If the real economy prevails, we can conclude that BTC is more of a currency than a non-cash financial asset and vice versa. Apparently, the growth of the real GDP of Bitcoin indicates its adoption as a currency, and if we want to proliferate Bitcoin and achieve the initial goals of Satoshi, we should find a way to support the real economy and reduce the influence of the financial sector.

The growth of the real GDP can be induced from different sides:

1) Merchant side.

The appearance of goods that can only be bought for bitcoins will trigger the response from consumers, who will seek to obtain bitcoins to buy the desired goods. The problem is that business always follows the path of least resistance, so they will only offer payment methods that consumers prefer. It is highly unrealistic that a merchant will agree to lose customers only in the name of Bitcoin’s prosperity.

Setting Bitcoin as an alternative payment option seems more realistic, but it won’t bring the desired result: most ordinary users can obtain BTC only by exchanging fiat money for them on exchanges, which is pointless, since they could also just use fiat money directly to buy the desired goods.

The only relevant situation is the distribution of goods that cannot be sold for cash or there are other obstacles to using conventional payment methods. This is why the major part of Bitcoin’s real economy is currently formed by the darknet market.

2) Consumer side.

A much more realistic way to achieve the same result is to ensure that consumers accumulate a significant number of bitcoins, which will trigger the instant response from business in the form of increasing supply of goods ready to be sold for BTC.

At this point, we address the problem of Bitcoin’s reward distribution. For this scenario to be realized properly, both following conditions should be met simultaneously:

• A large number of consumers should obtain coins on a regular basis. Merchants will add BTC as an optional payment method only if it provides a notable increase in sales. This can only be achieved if issued coins are dispersed among the majority of users and not concentrated in the hands of a minority group.
  
  We need a number of the recipients of coins reaching hundreds of thousands or even millions for this concept to work properly. Even if the award of each user will be insignificant, the total number of distributed coins will incentivize business to attract coin holders.
  
  
• Each consumer should obtain an insignificant number of coins. If the worth of the obtained BTC becomes comparable to users’ income, users may start preferring saving BTC, for they are a better value storage than fiat money due to the scarce supply model. After accumulating a significant amount of BTC, users may turn to speculations and will unlikely consider BTC a means of payment. The speculative motive will prevail over the transactional motive, which will launch the development of the financial sector instead of the real economy.
  
  To start the desired scenario, users should get the amount small enough not to be considered a significant investment and not to let the user overcome the initial reluctance to get involved with exchanges. Only in such a case, the likelihood of Bitcoin to be used for payments will be high enough to launch the growth of the real economy and overcome the speculative stage.

How it could be applied to the initial concept.

Had the initial egalitarian concept worked, it looks like it would have contributed to the proliferation of Bitcoin as a means of payment: as bitcoins accumulated in the hands of consumers, merchants would have likely started accepting BTC as payment. However, as was mentioned, before mining pools emerged, the reward for a block had been granted to a single user.

Considering a 10 minutes average block time, it would take too long to distribute coins among a sufficient number of users. Besides, with the growth of the user base and the corresponding growth of the value of BTC, the value of the reward for each block would likely exceed the boundary where it starts to be considered a substantial investment and becomes subject to hodling.

Given the absence of an algorithm that could disperse coins among the majority of users, we can conclude that the initial concept couldn’t launch the desired scenario and the system would likely end up in the same state as it currently is.

How it could be applied to the current situation.

Although mining pools allowed to distribute the reward for each block between multiple participants, hence fixing one the problems described above, the appearance of ASICs changed the approach to the system support entirely.

Since mining turned into a professional activity, instead of consumers, miners became businessmen themselves. For this reason, we cannot expect them simply spending all earned BTC without considering the most potential profit and hence the involvement in speculations.

In fact, this problem is intrinsic to the concept of PoW and any implementation of a PoW-based blockchain will share the same fate. Even systems with hashing functions that are optimized for GPUs, hence allowing to mine efficiently on a pretty standard hardware, require professional approach, as the most common rigs, which contain 6-8 graphics cards, are not something an average user can easily afford. Moreover, PoW protocols proved to favor players with higher hashing power, which further obstructs the participation of amateurs.

As miners got completely separated from users and formed a small elite cast, there is no incentive for the development of a real economy: miners prefer maximizing profits instead of simple spending and common users can obtain BTC only in exchange to fiat, which is irrational in most cases, unless we speak about illicit activities where BTC starts to provide notable benefits.

Under such conditions, the real economy of Bitcoin is sustained only by the darknet market and a small number of enthusiasts who behave irrationally to support the ideas of Satoshi and the concept of decentralization as an opposition to conventional fiat systems.

Conclusion

To become a fully-fledged currency, Bitcoin should power a real economy instead of the financial sector. This can be achieved by the distribution of bitcoins among a large number of consumers who will be ready to spend BTC for goods and services, which should trigger the response from business and lead to the subsequent growth of Bitcoin’s real GDP.

Unfortunately, neither the initial model, nor the current implementation features an appropriate mechanism of coin distribution. As miners adhere to the professional approach, we cannot expect them to behave as ordinary consumers. Caring about the maximization of profits, miners prefer speculative behavior, while users simply have no ways to obtain Bitcoins apart from exchanging fiat money into them. Without a sufficient demand, business has no incentives to sell goods for BTC.

Combining the stated arguments with the conclusions from Part 1, we can state that, due to several fundamental flaws, Bitcoin couldn’t succeed in embodying the initial ideas of Satoshi and becoming a global peer-to-peer electronic cash system. Instead, Bitcoin became an investment asset or a hedging tool and will likely stay in this role from now on.

P.S. Can we fix it?

Yes. And no. We cannot adjust Bitcoin to meet the required properties, for it would take a major architecture reconsideration, after which Bitcoin would stop being itself. At the current stage, it doesn’t seem possible. Besides, Bitcoin has already occupied its niche and became a specific financial asset for value storage, so there is no need to bother it.

At the same time, it is possible to create a cryptocurrency that can have a potential of becoming a worldwide-adopted means of payment, thus embodying the initial ideas of Satoshi. That’s what I have been working on for the last two years, and that’s what I’ll describe in my next posts.

The original article was published on Medium