The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Figure 15 extrapolates the growth rate of the main global reserve currencies' broad money supply and gold over the past 25 years into the next 25 years, and increases the supply of bitcoins by the programmed growth rates. By these calculations, the bitcoin supply will increase by 27% in the coming 25 years, whereas the supply for gold will increase by 52%, the Japanese yen by 64%, the Swiss franc by 169%, the U.S. dollar by 272%, the euro by 286%, and the British pound by 429%.

Hashing is a process that can take any stream of data as an input and transform it into a dataset of fixed size (known as a hash) using a non-reversible mathematical formula. In other words, it is trivial to use this function to generate a uniform-sized hash for any piece of data, but it is not possible to determine the original string of data from the hash. Hashing is essential for the operation of bitcoin as it is used in digital signatures, proof-of-work, Merkle trees, transaction identifiers, bitcoin addresses, and various other applications. Hashing in essence allows identifying a piece of data in public without revealing anything about that data, which can be used to securely and trustlessly see if multiple parties have the same data.

Public key cryptography is a method for authentication that relies on a set of mathematically related numbers: a private key, a public key, and one or more signatures. The private key, which must be kept secret, can generate a public key that can be distributed freely because it is not possible to determine the private key by examining the public key. This method is used for authentication: after someone publicizes his public key, he can hash some data and then sign that hash with his private key to create a signature. Anyone with the same data can create the same hash and see that it was used to create the signature; then she can compare the signature to the public key she previously received and see that they're both mathematically related, proving that the person with the private key signed the data covered by the hash. Bitcoin utilizes public key cryptography to allow secure value exchange over an open unsecured network. A bitcoin holder can only access his bitcoins if he has the private keys attached to them, while the public address associated with them can be distributed widely. All network members can verify the validity of the transaction by verifying that the transactions sending the money came from the owner of the right private key. In bitcoin, the only form of ownership that exists is through the ownership of the private keys.

In his masterful book, The Ultimate Resource, the late economist Julian Simon explains how the only limited resource, and in fact the only thing for which the term resource actually applies, is human time. Each human has a limited time on earth, and that is the only scarcity we deal with as individuals. As a society, our only scarcity is in the total amount of time available to members of a society to produce different goods and services. More of any good can always be produced if human time goes toward it. The real cost of a good, then, is always its opportunity cost in terms of goods forgone to produce it.

Until bitcoin's invention, all forms of money were unlimited in their quantity and thus imperfect in their ability to store value across time. Bitcoin's immutable monetary supply makes it the best medium to store the value produced from the limited human time, thus making it arguably the best store of value humanity has ever invented. To put it differently, bitcoin is the cheapest way to buy the future, because bitcoin is the only medium guaranteed to not be debased, no matter how much its value rises.

Megan

The non-aggression principle is the foundation of Rothbard's anarcho-capitalism, and on its basis, any aggression, whether carried out by government or individual, cannot have moral justification. Bitcoin, being completely voluntary and relentlessly peaceful, offers us the monetary infrastructure for a world built purely on voluntary cooperation. Contrary to popular depictions of anarchists as hoodie-clad hoodlums, bitcoin's brand of anarchism is completely peaceful, providing individuals with the tools necessary for them to be free from government control and inflation. It seeks to impose itself on nobody, and if it grows and succeeds, it will be for its own merits as a peaceful neutral technology for money and settlement, not through it being forced on others.

If the modern world is ancient Rome, suffering the economic consequences of monetary collapse, with the dollar our aureus, then Satoshi Nakamoto is our Constantine, bitcoin is his solidus, and the Internet is our Constantinople.

Based on the foregoing analysis, the real advantage of bitcoin lies in it being a reliable long-term store of value, and a sovereign form of money that allows individuals to conduct permissionless transactions.

Hypothetically, should bitcoin become the only money used around the world, it will no longer have large room for growth in value. At that point, demand for it will simply be demand for holding liquid money, and the speculative investment aspect of the demand we see today would disappear. In such a situation, the value of bitcoin would vary along with the time preference of the entire world's population, with increasing demand for holding bitcoin as a store of value leading to only small appreciation of its value.

For all practical intents and purposes, bitcoin is sovereign: it runs by its own rules, and there are no outsiders who can alter these rules. It might even be helpful to think of the parameters of bitcoin as being similar to the rotation of the earth, sun, moon, or stars, forces outside of our control which are to be lived, not altered.

Bitcoin is the only truly decentralized digital currency which has grown spontaneously as a finely balanced equilibrium between miners, coders, and users, none of whom can control it. It was only ever possible to develop one currency based on this design, because once it became obvious that it is workable, any attempt at copying it will have been a top-down and centrally controlled network which will never escape the control of its creators. So when it comes to bitcoin's structure and technology, it is highly unlikely that any coin that copies it could replace bitcoin.

Many less competent coders have gotten massively rich by repackaging Nakamoto's design with marketing and pointless buzzwords, but have all failed in adding any functional capabilities to it that have any real-world demand. The growth of these altcoins cannot be understood outside the context of easy government money looking for easy investment, forming large bubbles in massive malinvestments.

The bitcoin blockchain has placed a 1-megabyte limit on the size of each block, which has limited the pace at which the blockchain has grown. That limit allows simple computers to be able to maintain and run a node. Should the size of each block increase, or should the blockchain be used for more sophisticated processes such as those touted by blockchain enthusiasts, it would become too large to be run on individual computers. Centralizing the network over a few large nodes owned and operated only by large institutions defeats the entire point of decentralization.

It has proven impossible over eight years to find one other use case that is valuable enough to justify being distributed over thousands of node members while also being lightweight enough to allow for that decentralization. The first implication of this analysis is that any change to bitcoin's protocol that increases the size of the blockchain is highly unlikely to pass, not just for the reasons of immutability mentioned before, but also because it would likely prevent most node operators from managing to run their own nodes, and because they are the ones who decide which software runs, it is safe to assume a significant intransigent minority of node operators will continue to run the current software, holding their current bitcoins, making any attempt to upgrade the bitcoin software effectively just another worthless altcoin like the hundreds of others that already exist. The second implication is that all the “blockchain technology” applications being touted as revolutionizing banking or database technology are utterly doomed to fail in achieving anything more than fancy demos that will never transfer to the real world, because they will always be a highly inefficient way for the trusted third parties that operate them to conduct their business. It is outside the realm of possibility that a technology designed specifically to eliminate third-party intermediation could end up serving any useful purpose to the intermediaries it was created to replace.

A Schelling point is a strategy which individuals will use in the absence of communication with others because the point appears natural, and because they expect others to also choose this strategy. Given that there is no formal way of even assessing how many bitcoin nodes there are, the Schelling point for each node member is stick to the existing set of consensus rules and avoid defecting to a new set.