The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

I believe this will be the ultimate fate of Bitcoin, to be the “high‐powered money” that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as… well, as Bitcoin based purchases are today.8

Gold, on the other hand, has maintained long‐term stability, but it is relatively unstable in the short term.

In its essence, proof‐of‐work involves network members competing to solve mathematical problems that are hard to solve but whose solution is easy to verify. All Bitcoin transactions verified in a ten‐minute interval are transcribed and grouped together into one block. Nodes compete to solve the PoW math problems for a block of transactions, and the first node to produce the correct solution broadcasts it to network members, who can very quickly verify its correctness. Once the validity of the transactions and PoW are verified by a majority of the network nodes, a set quantity of bitcoin is issued to reward the node that correctly solved the PoW. This is known as the block subsidy, and the process of generating the new coins has been referred to as mining, because it is the only way that the supply of coins is increased, in the same way that mining is the only way to increase the supply of gold. On top of the block subsidy, the node that correctly solved the PoW also gets the transaction fees included by senders. The sum of the transaction fees and the block subsidy is the block reward.

Process of validating block

And in fact, even if such an attempt succeeded, the honest nodes on the network can effectively go back to the record of transactions before the attack and resume operation.

It is no exaggeration to say nobody controls Bitcoin, and that the only option available to people is to use it as it is or not use it.

The implementation of a technology called Segwit could result in a quadrupling of this daily capacity, but it is nonetheless becoming clear that there will be a hard limit to how many transactions can be processed over the Bitcoin blockchain, due to the decentralized and distributed nature of Bitcoin.

The biggest scope for scaling Bitcoin transactions will likely come off‐chain, where many simpler technologies can be used for small and unimportant payments.

Should Bitcoin's growth continue it is only natural to see the number of off‐chain transactions increase faster than the on‐chain transactions.

By its very nature, Bitcoin's blockchain structure is not ideal for privacy.

Further, it is extremely difficult to foresee such privately issued currencies rise to the status of a global currency when they have a visible team behind them.

No single altcoin has demonstrated anything near Bitcoin's impressive resilience to change, which is down to its truly decentralized nature and the strong incentives for everyone to abide by the status quo consensus rules.

“Blockchain technology,” to the extent that such a thing exists, is not an efficient or cheap or fast way of transacting online.

The only advantage that it offers is eliminating the need to trust in third‐party intermediation.

In other words, to remove the need for trust, the processing power to run a simple currency and database software needs to be increased roughly by a factor of 2 trillion.

First, the gains from decentralization need to be compelling enough to justify the extra costs. For any process which will still require some form of trust in a third party to implement any small part of it, the extra costs of decentralization cannot be justified.

There are many easier and less cumbersome ways of recording transactions, but this is the only method that eliminates the need for a trusted third party.

The advantages lie in individual sovereignty over the protocol, censorship‐resistance, and immutability of the money supply growth and technical parameters. The disadvantages lie in the need for much larger processing power expenditure to perform the same amount of work.

If the third party remains, then all of that processing power is a pointless waste of electricity.

What cannot happen is Bitcoin's blockchain benefiting the intermediation it was specifically designed to replace.

A non‐Bitcoin blockchain combines the worst of both worlds:

It is no wonder that eight years after its invention, blockchain technology has not yet managed to break through in a successful, ready‐for‐market commercial application other than the one for which it was specifically designed: Bitcoin.

For any currency controlled by a central party, it will always be more efficient to record transactions centrally. What can be clearly seen is that blockchain payment applications will have to be with the blockchain's own decentralized currency, and not with centrally controlled currencies.

Decentralized Autonomous Organization (DAO).

Ethereum is the second largest blockchain after Bitcoin in terms of its processing power, and while the Bitcoin blockchain cannot effectively be rolled back, that Ethereum can be rolled back means that all blockchains smaller than Bitcoin's are effectively centralized databases under the control of their operators.