Bitcoin can never become a currency. Part 2: reward distribution.

[pixie85]

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.

[Petryakov]

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)

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.

[Petryakov]

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.

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).

[Petryakov]

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.

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

If we combine this statement with a later statement:

I anticipate there will never be more than 100K nodes, probably less.  It will reach an equilibrium where it's not worth it for more nodes to join in.  The rest will be lightweight clients, which could be millions.
At equilibrium size, many nodes will be server farms with one or two network nodes that feed the rest of the farm over a LAN.

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.

[Petryakov]

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.

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.

[Darker45]

~snip~

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.

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.

[qory]

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.

[deisik]

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)

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

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

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

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?

[BitcoinTurk]

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.

[Petryakov]

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.

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.

[abhiseshakana]

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.

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.

[mu_enrico]

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.

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.

[Petryakov]

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?

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.

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

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.

[Petryakov]

You can freely trade Bitcoin for fiat and vice versa

So why does it not destroy fiat?

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.

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?

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.

[deisik]

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 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

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

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?

[Hand7all]

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.

[mu_enrico]

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.

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.

[Petryakov]

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.

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.

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.

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.

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.

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.

[Petryakov]

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.

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.

[Petryakov]

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.

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

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.

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.