Topic: Study on marginalized risks of bitcoin based on the loss of the gold standard (Read 316 times)

Introduction

Gold standard is a favorable system, but it is unexpectedly eliminated by the government. Gold boasts unparalleled advantages. However, that cannot prevent the government from killing the gold standard. Below is a close look at how the gold standard is wiped out by the government step by step and how bitcoin should avoid repeating the tragedy.
 
Chapter 1 Gold as a natural currency
 
Gold has been the most time-honored and widely-used currency in the human history. Its advantages cannot be ignored.

There are 118 elements on the periodic table of elements. Gold, the No. 79 element, is adopted by humans as a symbol of honor and wealth. On the periodic table elements, there are elements in the gaseous state or the liquid state; elements whose form is unstable or which can go into combustion easily; elements who can do harm to human body; elements which are rare, hard to smelter and difficult to find by ancients. Excluding all the above elements, gold and silver are the only two elements left. In terms of stability, gold has an edge over silver because silver can be easily oxidized or vulcanized into a black color. Therefore, gold becomes the natural currency.

Featured by a stable chemical property, it means gold can act as an enduring transaction medium. To serve as currency, gold should be able to be split and cut for the convenience of carrying. Alas! Gold has all these characteristics. With a favorable physical ductility, gold can be molded into various shapes. Last but not least, gold is a rare existence in the natural world. It was generated by the explosion of new stars when fixed stars died. Up to date, humans have not yet developed the ability to make the element of gold. The only way for humans to obtain gold is to exploit gold mines on the earth.

All these characteristics have made gold the most successful currency in the world. Gold can be traced back to 5,000 years ago. Gold was once the most popular currency, leading to the emergence of the gold standard system. Despite of the many undoubtable advantages, the gold standard was still eliminated by humans in modern times. To put it more directly, gold was marginalized in terms of its currency position. Despite of the many undoubtable advantages, the gold standard was still eliminated by humans in modern times. To put it more directly, gold was marginalized in terms of its currency position.


 
Chapter 2 Elimination process of the gold standard by the fiat money

 In the human history, the gold standard system has three realization forms, namely the gold coin standard system, the gold bullion standard system and the gold exchange standard system. The three realization forms constitute the substantial process in which the gold standard system was encroached step by step. The symbolic case of marginalization of gold as a currency was the collapse of the Bretton Woods Systems. Since then, humans have entered the era of the fiat money standard system.

    The gold coin standard system refers to adopting gold coins as fiat standard coins. In other words, according to the gold coin system, gold is directly used as money, and currency manufacturing is not monopolized by the country. As long as one has the ability, he can exploit gold mines, smelter and make gold into gold coins. The gold coin standard system ruled for more than one century.

The gold bulletin standard system refers to replacing gold coins with bank notes. According to the gold bulletin standard system, bank notes can be equally exchanged into gold. In China, bank notes were mainly issued by old-style Chinese private banks, which promised to settle their issued currency according to the fixed exchange rate of gold and silver. The exchange had no limits and was free. To some extent, this could guarantee that bank notes were corresponding to authentic gold. If one made false promises, one would suffer risks of being squeezed. However, this still impaired the nature of gold as a rare existence because of a non-100% reserve fund system, enabling the total number of bank notes to overtake that of gold. Under the currency system, currency issuance institutions with the right to issue currency emerged. The issuance of currency was realized through the issuance of bank notes. This suggested that currency issuance started turning into a right.

The gold exchange standard system is a virtual gold standard system. The country required gold to be put in one place, such as the central bank, and then the country issued its domestic currency and promised to implement the fixed exchange rate of gold. If the government wanted to issue currency, it needed to purchase the equal amount of gold. To avoid abuse of the currency policy, the government pledged on national credit. This further destroyed the gold standard system. Currency issuance was monopolized by the government. The exchange rate based on the government guarantee was never realized in history.

The Bretton Woods System symbolized the peak of the gold exchange standard system. The US government in a dominating role promised to connect the USD with gold, clarifying that the price of one ounce of gold was equal to 35 USD. Later, governments all over the world issued their domestic currencies and connected them with the USD to guarantee a fixed exchange rate. If the US government wanted to issue the USD, it needed to get the same amount of gold. If other governments wanted to issue their domestic currencies, they needed to get the same amount of gold. The system greatly weakened the gold standard system. In this way, there were two anchors with the currency issuance right in principle, but in practice there were no anchors at all, because none had the right to check how much gold the Federal Reserve had. Governments all over the world did not have an institution to supervise the issuance amount of their currency.

Quite soon, the Bretton Woods System collapsed, and the US president announced stopping exchange between the USD and gold in 1971. The gold standard system was eliminated. Since then, governments all over the world have adopted the credit money standard system. The credit money standard system has existed for nearly half a month. Despite that, gold is still regarded a kind of currency, universally acknowledged in the international community. However, its position as a currency has been weakened, just having the value storage function.

The process for the credit money system to replace the gold standard system was to first turn gold from a currency in circulation into a currency of settlement. Later, its settlement function was also deprived of, which turned gold into a value storage currency.

Chapter 3 Risks of bitcoin to undergo marginalization of gold

Bitcoin simulates physical properties of gold in terms of design. It is also rare, endurable, separable and portable. After more than seven years of market selection, bitcoin has grown into an indispensable Internet currency. It has also found its applications in the offline economic life.

At present, development of bitcoin has encountered its bottleneck. The bitcoin block is too small to make room for more transactions. The bitcoin community is also hotly discussing about techniques to expand the transaction capacity of bitcoin.
 
Now, there are mainly two proposals for expansion of bitcoin. First, maintain the payment function of bitcoin, and directly refer to the onchain sacling with hard fork. Second, persist in turning bitcoin into a settlement network, build the second layer of network based on bitcoin and use the technique of side chain and lightning network to enhance the payment function of bitcoin.

There is nothing new in the world. Though bitcoin is still a leading technique, it is a representation of historical events. After the gold coin standard system was stably implemented for one hundred years, the gold coin standard system was altered by a group of wise bankers and private bank owners into the gold bulletin standard system. After two world wars, the gold bulletin standard system was turned by those led by the US government into the gold exchange standard system. After two world economic crises, the US government took little effort to completely eliminate the gold standard system, thus building the modern credit currency system.

Bitcoin has not yet developed for eight years, but it has been faced with the selection of “bitcoin standard system,” “bitcoin block system” or “bitcoin exchange system.”

Direct use of bitcoin is similar to the “gold coin standard system.” Here, the author gives it a new name, “bitcoin standard system.” In the lightning network, the main chain of bitcoin is expanded to the second layer of protocol, and the main chain just undertakes the settlement function, which is similar to “gold bulletin standard system.” Here, the author calls it by “bitcoin block standard system.” Use of the side chain to build a brand-new payment platform is similar to “bitcoin exchange standard system.” Here, the author calls it by “bitcoin exchange standard system.”

    When people used bank notes to replace gold coins as the currency in circulation, ease of use of bank notes was greatly highlighted compared with a pile of gold coins, and to print bank notes took less cost compared with mining, smelting and casting of gold coins. People were ready to use bank notes. However, there were no free banquets in the world. While enjoying the convenience brought by bank notes, people had to face the concentration of rights in banks. They obtained the right to issue currency and had some reserve fund. Apparently, the gold standard system was the only one to suffer from this. **In fact, people were deprived of their right to safeguard their private property.**
 
People take delight in using the lightning network and side chain to design a set of more convenient and cheaper payment network. They get not only convenient, but also cost reduction. People have to believe more block chain operators, the hub of the lightning network and the side chain platform. Maybe, we can confidently think that, with nodes, there will not be some reserve fund or cheats of the side chain platform and hub. However, more than a hundred years ago, developers of bank notes also promised so. Once users have to pay an expensive price to check their own accounts (the main chain settlement system must be expensive), users have lost their ability to verify their accounts. In this way, the ability of bitcoin to protect inviolability of the private property will be challenged.
 
If the bitcoin network turns from a payment network into a settlement network, it means the death of the “bitcoin standard system,” and the bitcoin will lose one of its three functions, namely payment, value storage and settlement, just like what had happened to gold several hundreds of years ago. With the increasing number of banks, more and more bank notes were printed, but the reserve fund rate was decreasing. Gold had to say goodbye to its settlement function. When bitcoin’s main chain is connected with various lightning networks and side chains, will the settlement function of bitcoin also be deprived of? Logically speaking, if the main chain settlement cost is too high, the market must find a cheaper way, such as connecting side chains with sub-side chains, or bridging two different lightning networks to achieve direct cross-chain settlement without the trouble of closing channel on the main chain. The last question is when bitcoin will be deprived of its value storage function.

 
Chapter 4 Failure of gold to protect the gold standard system and failure of the small block of bitcoin to protect the “bitcoin block system”

Gold boasts lots of natural advantages. It is a decentralized currency in real sense, but the gold standard system was still eliminated. Natural advantages and physical properties of gold could not protect the gold standard system, but humans could.

When Keynes challenged against the gold standard system, governments all over the world followed him. None wanted to stand out to protect the gold standard system or the protection force was too small. People were happy to see the increasing number of their paper coins and experience the convenience of paper coins, but were blind to the cost they paid for these.

Bitcoins are decentralized and can ignore enemies like governments. However, the truth was gold could not protect the “gold standard system” with its physical properties. The decentralization property of bitcoin will not be so powerful to outweigh physical properties of gold. Whether decentralization of bitcoin could protect itself relies on humans or talents which can maintain its decentralization instead of a religion-like small block. The small block refuses more users to join the “bitcoin standard system.”
In the human history, the “gold bulletin standard system” and the “gold exchange standard system” which offered more convenient but were also more complex were created by allowing fewer and fewer people to join the “gold coin standard system.” At last, governments used the credit money system to totally eliminate the “gold standard system.”

During the development process of bitcoin, will bitcoin repeat the tragedy of gold? The author thinks this will not happen, because people can avoid it by expanding its bigger block.

One after another world economic crisis reminded people of the gold standard system. Satoshi Nakamoto published “On brink of second bailout for banks” on The Times on January 3, 2009. Did it warn bitcoin fans that the “bitcoin standard system” was going to be eliminated?


Chapter 5 Not to refuse new techniques but not to let new techniques eliminate the “bitcoin standard system”

 Here, the author does not refuse the lightning network and the side chain. These techniques are great. However, if they are accepted at the cost of refusing bigger blocks, people will lose the “bitcoin standard system.” That is the least expected.

    Here, the author supports establishing various high techniques on bigger blocks. While enjoying high techniques, people can also use the backward “bitcoin standard system” to protect the foundation of their private property right.


Chapter 6 Conclusion

One after another world economic crisis has aroused people’s nostalgia of the gold standard. As it is stated above, Satoshi Nakamoto had warned bitcoin fans of the potential risk of losing the “bitcoin standard system.”

 
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