[Bitcoin is inherently volatile]

Original Post: https://bitflate.org/post/2022/05/15/luna-collapse-hightlights-the-need-for-bitflate.html

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to unlock the Medium of Exchange use case.

The crypto market crashed again. The crash centered around the Terra ecosystem which consists of the Luna token, the Terra (UST) stablecoin, and Luna Foundation Guard’s Bitcoin reserve. The Luna token and the Bitcoin reserve are supposed to provide backing for the UST stablecoin. However, when the peg failed, the market went into a death spiral. The Terra ecosystem could not withstand the speculative attack. It collapsed. The future of a decentralized stablecoin remains elusive. We can’t create stability on unstable foundations. The Luna token has no value beyond trust in the system. Bitcoin is inherently volatile. We have seen the lessons of the DAI stablecoin and the UST ecosystem. The collapse of Luna highlights the need for an inflationary cryptocurrency.

Bitcoin is inherently volatile

Bitcoin is inherently volatile due to its limited and disinflationary supply. Bitcoin’s use case is a Store of Value. The system incentivizes people to hold bitcoins. In the long term, Bitcoin gains value and rewards holders. However, in the short term, it is an instrument for speculation. Its price is affected by market trading. Bitcoin is stuck with the Store of Value use case. The Luna Foundation Guard (LFG) made a rational choice by building up their reserves. The Luna token is backed by nothing. A Bitcoin reserve can provide some support. However, the Terra community underestimated the inherent volatility of Bitcoin. Given enough capital, it is not difficult to conduct a speculative attack on Bitcoin’s price.

The Terra ecosystem is centralized

A centralized ecosystem introduces a single point of failure. The LFG wanted to live up to its promise of a pegged UST/USD. The consensus algorithm increased the supply of the Luna token to shore up the price of UST. This drives down the price of the Luna token. By following the market, the algorithm is prone to manipulation. When the algorithmic adjustment failed to halt the crash, the LFG leadership panicked. They sold the Bitcoin reserve to defend the peg. The sale of Bitcoin exacerbated the crash of both Bitcoin and the Luna token. The ecosystem made mistakes by trusting a centralized consensus algorithm and a centralized organization.

Stability through Constant Inflation and Proof of Work

We have seen failures of algorithmic stablecoins. An algorithm following the market will be manipulated by the market. We need to rethink our approach. To create a stable system, we need to make the market follow the coin. The algorithm is constant inflation. The market needs to follow the coin. We don’t need a company or a foundation to manage the ecosystem. The system needs to be decentralized. Proof of Work is a proven and decentralized consensus. Bitcoin is the Store of Value. An inflationary Proof of Work cryptocurrency can unlock the Medium of Exchange use case. In the short term, it may be volatile due to the supply constraint. In the long term, it may provide ways to create a stable monetary system.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to unlock the Medium of Exchange use case.

Original Post: https://bitflate.org/post/2021/12/28/state-crypto-mining-farms.html

Recently @JasonPLowery disclosed on Twitter his intention to push for a ‘US Hash Force’ within the DoD. The reason being dominating energy expenditure is merely an evolved, peaceful form of power projection.

Assuming cryptocurrencies are here to stay, I think there’s a lot of sensibility to the notion that any military will inevitably formulate some form of a hash force as it’d prevent disempowerment from increasing cryptocurrency reliance in their economies.

Though, understandably, many crypto advocates are not a fan of this idea. They think the military should leave crypto mining (namely bitcoin) to the free market.

The main points against this proposal seem to be:

• Not wanting more mining competition
• Unwilling to accept as a form of tax allocation
• Optics

Maybe the adoption rate is hindered if the US military were to automatically sustain an obscene proportion of the network’s total hash rate. Collectively, sentiment towards bitcoin could change if the free market shifts focus to where they have a competitive advantage - including other countries (presuming they won’t compete if they can’t compete just like China is choosing not to partake if they can’t win). Lastly, it creates somewhat of a paradox to use tax money to fuel what can be used to, well, avoid taxes (in some cases) - cue regulation.

However, I don’t think these reasons are enough to say it won’t or shouldn’t happen. The real question is the timing of its execution.

If bitcoin ends up being pegged to the USD, for globalization purposes, it doesn’t matter if bitcoin itself is or isn’t adopted. As in, the US will be able to print more USD so the globalization vector could be (even more so) through USD.

That being said, monetary policy adoption of bitcoin in other countries shouldn’t be deterred. Given that, I think the most strategic path the US can take is to usher all ally countries to set up such infrastructure first (towards bitcoin) and instead choose to focus energy resources on mining Bitflate instead.

Why?

• “More bang for their buck”
• Adopting a system that gets increasingly more fair over time can be a virtue signal for ensuring the survival of a system that gets increasingly less fair over time (i.e. Hybrid Coins). In this way, the US can claim territorial dominance in the same domain without obstructing fostering cultural ties and ideologies. More importantly, the ever-expanding supply of Bitflate both subdues the concern of increasing centralization and provides a more substantive reason to periodically increase the budget towards such an initiative.

Having said that, perhaps the US could move faster on such an initiative funding it through individual varying state budgets as opposed to directly through the DoD but with the assistance & approval of the DoD. Under such a system, the incentive to be efficient with the state’s expenditures and the payoff for increasing state revenue would be amplified. Not to mention, it could be easier to execute (temporary) social welfare airdrops with individual state responsibility as opposed to a program implemented on a federal level.

The benefits of a strong and capable military definitely shouldn’t be taken for granted; though, because individuals mesh “defense” & “violence”, they could perceive the US military’s direct involvement in cryptocurrency mining (before necessary) to be just like if Marlboro decided they’re going to dominate the marijuana industry.

Nevertheless, it’s likely to be imperative that every country that intends to remain relevant in the next millennia pursues the formation of a ‘Hash Force’.

[Deflationary Currencies Are an Economic Weak Link]

Original Post: https://bitflate.org/post/2021/11/27/why-fixed-supply-tokens-cant-be-currencies.html

Deflationary pressures and the crypto community itself are preventing fixed supply tokens from becoming true currencies.

As some of you may have noticed, the term cryptocurrency is something of a misnomer. Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.

There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.

Deflationary Currencies Are an Economic Weak Link

Bitcoin is far from the first fixed-supply token. For centuries, humans have relied upon currencies backed wholly or partially by gold – and it has always caused problems.

Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

Abandoning the Gold Standard

A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

Bitcoin’s Similarities to Gold

Bitcoin, in many ways, represents an attempt to return to the gold standard. It has a fixed, diminishing supply. In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

The Crypto Community Doesn’t Actually Want BTC To Become a Currency

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Some projects are working toward these goals, notably Nano (XNO). However, only time will tell if these projects will gain the support they need.

Original Post: https://bitflate.org/post/2021/11/27/including-bitflate-in-the-conversation-for-pegging-the-USD-to-BTC.html

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

First off, one might think how can you compare such a relatively unheard-of small market cap project (as of November 2021) to the feat bitcoin could provide strengthening the USD — let alone given it’s a Bitcoin software fork. It seems like a ridiculous ‘pipe dream’.

The mentation is largely derived from psychology and probabilistic reasoning for businesses and nation-states to adopt bitcoin on a monetary policy level.

Bitcoin has been an anchor for cryptocurrency; serving as the most popular store of value. Deemed the ‘father’ of cryptocurrency it ushered in various approaches to perfecting digital equity and money.

Though we’ve now reached a point where we’re somewhat building circular use-cases with each coin.

Network & transaction efficiency have shown that it doesn’t change the desire to use cryptocurrencies as actual currency. Coins are often only ‘spent’ if it’s necessary for access to their offered service(s). Volatility and desire for an ROI often supersede a coin’s intended use-case.

Bitcoin advocates have compelling reasoning for why bitcoin should be pegged to the dollar. It’d take bitcoin out of its investment bubble and plausibly, immensely ‘strengthen’ the dollar. This would be extremely useful for mitigating inflation if it negated the second-order effects of issuance — allowing for greater magnitudes of yearly issuance. While these are compelling inferences there’s some practical reasoning for why it’d be illogical.

Since bitcoin can be infinitely divisible the assessment that there won’t be any to go around decades or centuries down the road isn’t valid. What this means is the continuation of uneven distribution is limitless.

Achieving relative fairness for future generations would be impossible. The world isn’t fair so while that reasoning alone doesn’t substantiate an effective counterargument it may hint at a future possibility.

Say in 2200 how will society feel about the individuals, families, institutions, and companies that are fortunate to adopt bitcoin in the early years? Will the disparity in wealth be so great it causes a revolt to the extent of pursuing an ‘unpegging’ of BTC to the USD?

The next concern, the world’s heavily reliant on leveraging debt and credit to operate. When all bitcoin is mined the asset will likely be purely deflationary. If true, financial institutions in the U.S. might be hesitant or unable to issue long-term loans (i.e. mortgages) with a fixed APY or APR in their country’s unit of account; assuming those who take loans, for the most part, still earn and make payments in USD.

While there could be precautionary measures taken, bitcoin’s susceptibility to phases of hyperbolic growth could inadvertently bring about volatility to the USD — perhaps even temporarily causing deflationary periods. If price stability is desired, institutions could end up favoring other fiat currencies in times of uncertainty (such as the COVID-19 pandemic). The ascertainment that at a certain market cap/price milestone BTC price volatility will meaningfully and lastingly subside is flawed based on the expectation “bigger players” will incrementally onboard.

For bitcoin to be pegged to the USD it has to make sense for how the world functions and the future.

In my view, mixing Bitflate with bitcoin into sidechains (hybrid coins) addresses the aforementioned issues for bitcoin to be more appealable as a solution to annealing the USD — prolonging the dollar’s tenure as the global reserve asset.

Bitflate is unique in that it conflates ‘inflation’ and ‘issuance’. While they’re commonly misconstrued as the same thing and very much aren’t, they’re related as bitcoin is with scarcity and deflation. On assets whose supply is precisely calculable, the cause-effect with supply and money-value is more closely correlated.

Bitflate, with a 7% yearly increase of its supply, effectuates a dynamic where it’s liable to be utilized as a medium of exchange. This contrasts with bitcoins biggest strength and flaw — absolute scarcity.

If nation-states pursued the path of hybrid coins, they’d have less of an ability to perpetuate mass market manipulation than with bitcoin alone; potentially avoiding catastrophic negative sentiment that’d occur.

The expected compulsion to not hold onto Bitflate over time would cause bitcoin to be more susceptible to undergoing transactions outside the investment markets. Collectively through the years, this could cause a much greater range of distribution that’d otherwise happen.

Moreover, hybrid coins would be better suited to serve a world so heavily reliant on debt and credit by providing financial institutions a more viable framework for lending in bitcoin.

Ultimately, the Fed would have increased flexibility in its ‘toolbox’ incorporating Bitflate alongside bitcoin. To compel overall economic spending they could change the ratio of the sidechain mix to include more Bitflates and vice-versa when tapering is necessary.

“The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation” [1].

Given the need for inflation to maintain a functioning economy, it’s worth considering the appeal Bitflate has to offer.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

[How much energy?]

Original Post: https://bitflate.org/post/2021/05/21/inflation-and-security.html

The Bitcoin bull market is here again. Everything is up like, Bitcoin’s price, the total network hash rate. As usual, the amount of criticism has also gone up. The energy FUD around Bitcoin gets louder. Bitcoin’s price directly impacts the amount of energy used in mining. The energy debate is black and white. Supporters argue that Bitcoin is an efficient monetary system, likely the most efficient. Critics argue that energy usage is wasteful. The existing system is way more efficient.

How much energy?

We know that any system consumes some amount of energy. The question is how much energy is efficient. It’s hard to compare Bitcoin and the existing monetary system. Bitcoin bull, Michael Saylor, recently discussed the topic on Twitter. Saylor claimed that the cost of securing the Bitcoin network is 1%. Future efficiency improvement can bring that cost to 0.1%. If Bitcoin is a 100 trillion dollar asset class, the security cost would be $100 billion at 0.1% and $1 trillion at 1%. Comparing this to running the banking system, military, Bitcoin would be more efficient at 0.1%. But it’s hard to decide when the cost is 1%. The difference is significant. A group of crypto researchers (Hasu, James Prestwich, Brandon Curtis) also published a model which recommends 1% inflation for security. Here’s the paper.

Bitcoin reward system is disinflationary. It inflates less and less. And eventually, Bitcoin’s supply has zero inflation. At that point, the incentive for miners transitions to a fee market. Miners no longer have block rewards. They collect transaction fees to pay for mining costs. At 0.1%, the fees may be too low to sustain miners. At 1%, the fees may be too high for Bitcoin users. The difference between 0.1% and 1% is significant. We don’t know the answer. The real cost of running a global monetary system may be higher. It could be 2%, 3%, or 4%. Anything higher than 1% is probably going to make Bitcoin too expensive and too inefficient.

Perpetual money machine

Bitcoin is a perpetual monetary system. It is a Ponzi scheme. It is self-contained and self-sustained. It relies on its rewards and fees to operate. There’s little external influence. That is good for decentralization. But we don’t have a good way to assess the price and the costs of running the network. If the price remains purely speculative, it could go up as high as people can imagine. The cost of mining would also go up as high as we can afford. It’s the Bitcoin Price Paradox. Bitcoin’s critics make a good point. Unfettered speculation can lead to disastrous energy spend.

Inflation and security

Bitcoin is an interesting money experiment. It seems to show that there’s a relationship between inflation and security. A self-contained monetary system needs some inflation to secure itself. It’s a perpetual motion machine. It needs to produce new rewards. As it grows, the amount of reward needs to increase. Otherwise, the system will deflate and collapse. The amount of inflation needed is related to the cost of securing the system. Gold has a 1.5% inflation rate. It didn’t work very well as money. The cost of mining and securing gold is more than the reward. Gold is net deflationary. One can argue that Bitcoin is digital. It’s more efficient than gold. So it needs less inflation. But Bitcoin will eventually have zero inflation.

The US Fed has an inflation target of 2%. This rate may work if the US dollar is a self-contained monetary system. But it is a global reserve currency. The 2% target rate may be too low. It creates to trade imbalance as countries are willing to trade goods for currencies. Trade imbalance leads to a distorted economy and political issues in the US. The long-term M2 average growth rate is 7%. Here’s the data. That seems to be the real inflation rate. One can argue that the USD system is inefficient. It requires a large bureaucracy, a banking system, and a military for security. So the rate of 7% includes high overhead costs. An efficient rate should be lower. If the system becomes more efficient, we can bring the rate down to 4-5%.

We can also model inflation based on the human population growth rate. If the population grows between 1.5% to 2% with 1.5% to 2% as the overhead cost, the long-term average money inflation would be somewhere between 3% and 4%. Bitcoin supporters are likely too optimistic. The system may not rely on less than 1% to sustain itself. Critics may be wrong about energy usage. A monetary system needs 3% to 4% inflation to sustain itself. Bitcoin’s energy usage within or below that range (1.5% to 2%) should be acceptable.

[Energy spend is good]

Original post: https://bitflate.org/post/2021/05/14/solving-the-crypto-energy-challenge.html

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

The crypto market is on fire. Hashrate keeps reaching an all-time high. The energy debate has made a big comeback. The Xinjiang Bitcoin mining outage in April crashed the market. The incident spotlighted the inconvenient fact that a lot of Bitcoin mining energy is not coming from renewable sources. Elon Musk published his concern on Twitter: Bitcoin increases the use of fossil fuel. Bitcoin supporters and critics continue to battle over the issue.

Bitcoin is a unique invention. It offers a future where we can enjoy more freedom. Since its invention, Bitcoin remains a highly speculative asset. The Store of Value use-case becomes increasingly entrenched. However, supporters and critics view Bitcoin through different lenses. For supporters, Bitcoin is the ultimate future. For critics, Bitcoin is madness. Mining is the hot button topic because it uses real-world energy. Energy spend makes Bitcoin real. But it can damage the environment through increased use of fossil fuel. Bitcoin is money. Money embodies the ultimate fear and desire of humans. Supporters and critics are increasingly polarized.

Energy spend is good

Throughout history, humans have gone through different kinds of money. We’ve used gold as the ultimate form of hard money. It exists in the physical world. The Gold Standard is the Standard for thousands of years. Without a reliable Proof of Work system, it is impossible for humans to effectively agree and collaborate. Bitcoin presents a new paradigm. Being completely virtual, there are ways for us to minimize mining damage to the environment. With gold, we have to mine where the gold is. With Bitcoin, we can consciously select renewable sources for mining.

Supporters of Bitcoin and decentralized cryptocurrencies see the Proof-of-Work mining system as the holy grail. Energy spend is the proof. It is the way to reach a decentralized consensus. An alteration will lead to centralization and broken trust. We must not go back to previous consensus models. We cannot abandon the Proof-of-Work system. We need to work on using renewable energy sources. Some Bitcoin advocates, like ARK Invest and Square, claim that Bitcoin can help the world transition to renewable energy sources. We’d need to see how and when these advocates would spin up mining rigs.

Energy spend is bad

The free market is very efficient at driving down costs. But it doesn’t always give us the most desirable system. The cheapest source of energy is often the most polluting. That’s what we mostly do. We dig up some fossil fuel from the ground and burn it. We are supposed to become more conscious of the environment. We need to become more efficient at usage. We need to switch to less polluting and renewable energy sources.

These changes take consensus, regulations, and time. The world is slowly moving away from using fossil fuels for electricity generation and transportation. Meanwhile, Bitcoin appears. In many ways, Bitcoin is reversing the renewable energy trend. It consumes an enormous amount of energy. Experts have studied and debated about renewable energy used for Bitcoin mining. Bitcoin mining is a free market. Energy comes from where it is abundant and cheap. A sizable amount of the energy comes from fossil fuels like coal and gas. Energy usage remains one of the most heated aspects of Bitcoin.

Alternative models

Cryptocurrency designers have studied the Proof-of-Work system. They have proposed alternative models. Some cryptocurrencies, like Litecoin, use different hashing algorithms. Litecoin’s algorithm, scrypt, consumes less energy than SHA256. The Ethereum community is in the process of moving to a Proof-of-Stake consensus model. That would eliminate energy usage. The drawbacks of Proof-of-Stake are well known. It appears to have centralization issues of existing monetary systems.

Chia uses a Proof-of-Space-and-Time consensus model. This PoST system gives rewards to participants, aka farmers, based on how much space they are allocating. This system doesn’t require energy burn. But it requires farmers to contribute storage. PoW is OPEX (operating expenses). PoST is a CAPEX (capital expenditures). Farmers need to buy more and more hard drives to participate in farming. A CAPEX system does not consume much energy. But it consumes more resources to produce hard drives.

Driving payment adoption as a solution

Energy consumption is neither bad nor good. Bitcoin’s price is related to mining energy consumption. The higher the price goes, the more energy we’d spend. Bitcoin’s price is a distraction. The Ponzi-like price scheme draws people into an endless debate. Supporters will not give up the Proof-of-Work system. Critics will keep attacking Bitcoin’s energy consumption. Both sides cannot settle the debate because they view the issue from their narrow perspectives.

Bitcoin is a digital commodity. It lives in the virtual realm. It has no connection to reality. Its price is entirely speculative. In theory, the price can be infinite. See The Bitcoin Price Paradox. We don’t have infinite energy. Instead of lauding or rejecting Proof-of-Work energy spend, we need to figure out how much energy spend is appropriate.

The key to solving the energy debate is payment adoption. When people can use cryptocurrencies for payments, we can compare them with the existing systems. Payment adoption will let us gauge how much crypto transactions cost. At that point, we can decide how much energy we need to spend to operate cryptocurrency networks.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.