Author: Saifedean Ammous
About the book Bitcoin standard
Bitcoin standard: Since money was no longer backed by gold, state control has turned it from a means of rewarding the production of material goods to a means of encouraging loyalty to the government. Now central banks have virtually unlimited access to the “printing press”, and this deprives money of reliability, provokes financial collapses, inflation and most negatively affects the well-being of people.
The good news is that bitcoin can provide a censorship-free, cross-border alternative to centralized banking.
The bad news is that after a sharp rise, the price of bitcoin went down, and its further prospects are not so obvious.
And yet, despite the collapse of bitcoin and the decrease in the total value of all digital assets, Sayfiddin Ammous, professor of economics at the Lebanese American University in Beirut, is very optimistic about the world’s leading cryptocurrency. Read the summary of his book “The Bitcoin Standard” – you will plunge into the 2500-year-old fascinating history of money and evaluate whether it is worth investing in currency in the form of a coin and banknote program code.
about the author Saifedean Ammous
Saiffedean Ammous is a graduate of Columbia University and the London School of Economics, the author of numerous articles on blockchain and cryptocurrencies, and is currently a professor of economics at the Lebanese American University Business School in Beirut.
The book of Ammus is about money. The theme is as old as the world – and fashionable as ever. Because in the 21st century, money can exist not only in the form of coins and banknotes, but also in the form of program code. The topic of cryptocurrencies has fascinated investors and entrepreneurs, economists and journalists writing on financial topics. Will bitcoin become the global currency of the future or will it remain a tool for making “dark” transactions? Will the value of bitcoin steadily rise, or will it remain a volatile object of speculative demand for market adventurers? What makes bitcoin different from other recently spawned cryptocurrencies? Ammus discusses all these issues and invites the reader to form their own point of view.
Ammus reveals to the reader the history of money and explains why gold-backed money was the key to a stable economy. Criticizing the modern economic system dominated by paper money, the author emotionally proves that the unlimited access of central banks to the monetary “printing press” stimulates the coming to power of dictators, causes economic crises, inflation and military conflicts.
Having outlined the sad sides of modern monetary policy, Ammous offers the reader an alternative – bitcoin. Without going into boring technical details, the author explains what bitcoin is, where it comes from, how ownership of bitcoin is transferred, why it cannot be “hacked” or counterfeited, and why in the modern world it can become the digital equivalent of hard currency. Ammus also touches on the prospects of blockchain technology and explains why, in his opinion, this technology is suitable only for transactions with bitcoin.
Ammus’ book is interesting for anyone who wants to understand the pros and cons of modern monetary policy, assess the prospects for cryptocurrencies and investing in them, and learn how to keep a conversation on the topic of bitcoin and blockchain.
history of money
Bitcoin was invented in the digital age, but the challenge it seeks to solve – to create money that is under the complete control of its owner and retains its value over time – is as old as humanity itself. To understand bitcoin, one must first understand the role that money has played throughout history.
A commodity that is widely accepted as a medium of exchange is called money. This is the most important function of money. The main property of a product that turns it into money is marketability , that is, the ease of selling a product on the market at any time with a minimum loss in price. Throughout human history, various objects have been served as money – gold, silver, copper, salt, cattle, government banknotes.
To become money, a commodity must:
• easy to divide into small parts or combine into larger units;
• easy to transport;
• retain its value over time.
The second important function of money is to store value. In order for a commodity to retain its value, its available quantity must be limited for the period of time it is in the possession of one or another owner. Money that cannot be easily increased in quantity is called hard money . The hardness of money is determined by the ratio between its supply and supply , where the supply is the total existing amount of money, and the supply is the future production during a certain period. The higher the stock-to-supply ratio, the more likely the money will retain its value in the future.
The widespread use of the medium of exchange makes it possible to indicate prices in its units, which indicates the third function of money – to serve as a unit of account .
Gold, silver, and copper coins served as money for 2,500 years, beginning with King Croesus (546 BC), who pioneered the minting of gold coins, and ending in the twentieth century.
Gold is best suited for the function of money because it has a stable chemical composition, cannot be destroyed or artificially synthesized, and is mined from an ore that is quite rare. that day
In 312 AD e. Emperor Constantine undertook to mint gold coins with a gold content of at least 4.5 grams. These coins were called “solid”, they circulated in the Byzantine Empire for 1123 years and became known as the longest-lived hard currency in the history of mankind.
The history of the Roman Empire, the Byzantine Empire, Florence or Venice unequivocally indicates that a reliable monetary standard is a necessary condition for a healthy society. When money depreciates, popular unrest begins, corruption flourishes, and speculation in goods becomes more profitable than their production.
The development of the banking system and means of communication made it possible to carry out transactions with paper money and checks fully backed by gold, which, if desired, could be exchanged for gold. Under the gold standard, money is gold, and the state is responsible for minting gold coins or printing gold-backed paper money. It does not control the amount of gold in the economy, and people can exchange their fiat money for gold at any time.
Great Britain was the first country to adopt the gold standard in 1717. After the end of the Napoleonic Wars, other European countries began to adhere to the gold standard. The gold standard provided an unprecedented rise in capital that financed the industrialization, urbanization, and technological innovations that have shaped our modern lives. All these fundamental economic achievements would not have been possible without the role that gold has played in monetary policy.
Money under control
After the end of the First World War, the free market no longer determined what substance could serve as money. Instead, the decrees of governments and their monetary policies have shaped the economic realities of the world. Money, the amount of which is controlled by the state, is usually called fiat – from the Latin fiat , meaning “dec-ret” or “order”. Fiat money cannot be exchanged for gold, and the state can always increase their number in circulation.Controlling the amount of money in circulation allows governments to also control economic, political, and cultural activities in society. John Maynard Keynes, the founder of modern macroeconomic theory, was convinced that the state must necessarily influence economic processes by increasing government spending and depreciating the currency.
A new international financial system was created at the end of World War II at Bretton Woods in New Hampshire, USA, where representatives of the world’s largest economies signed an agreement according to which the US dollar was to be used by central banks as the world’s reserve currency. Other currencies were to be converted to dollars at a fixed exchange rate, and US dollars were to be converted to gold. To ensure the operation of the financial system, the central banks of the countries participating in the agreement transferred their gold reserves to the United States.
The financial system created at Bretton Woods is based on economists – adherents of Keynes, who considered the conduct of active financial and monetary policy as a natural function of the state. Each successive President of the United States, inspired by the teachings of Keynes, increased budget spending and the national debt, watching the fall in the purchasing power of the dollar.
In 1971, President Nixon announced the end of the convertibility of the dollar into gold, thus violating the US obligation to ensure this convertibility. Exchange rates between major world currencies began to be determined by the free movement of goods and capital and the foreign exchange markets.
When the link between fiat money and gold was broken, the amount of paper money in circulation skyrocketed. According to the World Bank data for 167 countries from 1960 to 2015, the amount of paper money increased by an average of 32.16% per year in each country. The increasing influx of paper money means the devaluation of the currency and the expropriation of wealth from their owners.
State control over the flow of money has transformed it from a means of encouraging the production of material goods into a means of encouraging loyalty to the government. Governments can confiscate money from banks, impose draconian taxes, and punish those who try to avoid them.
Having experienced the monetary policy of the state, the Austrian economist Ludwig von Mises (1881–1973) formulated the concept of sound money . According to von Mises, sound money is that which is freely chosen by the market and remains in the control of its owners, “without any forcible interference from outside.”
If the world economy were based on a reliable monetary system, that is, if the inflow of money were not under the control of the state, then everyone would have an interest in increasing productivity, and not in enriching themselves by manipulating money circulation.
For Keynes and his supporters, money is what the state declares as legal tender, and, accordingly, the state is free to do with it what it pleases. This means the freedom to print money to achieve the goals of the state.
According to the theory of money of the Austrian economic school, money is a market commodity that has a high degree of marketability and which does not lose its value over time. For the Austrian school of economics, which welcomes the use of gold as money, the absence of state control over the amount of money in circulation is a prerequisite for the reliability of money.
In its infancy, bitcoin already meets the criterion of sound money, as it is a product of the free market, highly tradable, and immune to government intervention.
The extent to which money can retain its value over time determines how much people value the present over the future, or their time preference.
Sound money retains its value for a long time, it stimulates people to think about the future and lowers their time preference . Low time preference is the engine of the development of civilizations, allows people to cooperate and live in peace. Sound money inspires investment , which Ammus defines as deferring rewards in order to produce more technologically advanced goods over the long term. Investment leads to an increase in production productivity.
One factor that influences time preference is the expected future value of money. The better money retains its value, the more it stimulates the investment of resources in future production, which leads to the accumulation of capital and a higher standard of living.If money loses its value quickly, then people save less. This leads to a decrease in the size of capital, productivity does not grow or decreases, which results in a freeze in wages. When people spend more and save less, they become more focused on the present in any decision they make, which Ammous believes leads to more conflict. Thus, civilizations thrive with secure monetary systems and collapse when their money depreciates, as can be seen beautifully in the history of the ancient Romans, Byzantines, and modern Europeans.
In the case of paper money, the amount of money is increased by expanding their inflow as decided by central banks. Saving rates in developed countries are declining, while individual and national debt is rising to previously unthinkable levels.
According to Ammous, Keynes is to blame for the fact that both economists and the public are convinced that debt has a positive effect on economic growth, while saving leads to a recession. Unlike Keynes, Ammus believes that under “healthy” capitalism, people lower their time preference and invest in the future, while “credit-fuelled mass consumption is as much the norm of capitalism as suffocation is an element of breath.”
The relative stability of value is also important for the accounting function of money. When money remains stable, it can serve as a reliable signal of changes in the prices of other goods and services, as it did with gold. Prices are the information system of economic production, transmitting data and coordinating complex production processes. Only in the presence of accurate prices, expressed in a universal medium of exchange , can participants in production reveal their competitive advantages and specialize in one or another type of activity. According to von Mises, socialism failed because it did not have a mechanism for market pricing.
The role of interest rates
Ammous notes that in the most important of the markets, the capital market, there is no market freedom. If there were a free capital market, then the availability of free funds would be determined by market participants using the market interest rate. However, in today’s economy, the availability of credit is determined by central banks, influenced by politicians, bankers and the military. If the state fixed prices for apples, then there would be either too many or too few apples. Similar phenomena are occurring in the capital market, only with far more devastating effects as they affect every sector of the economy.
As long as central banks manage the flow of money and interest rates, there will be a discrepancy between the amount of savings and the amount of free credit. If consumers save less money, then investors will have less capital. The printing of paper money cannot increase the real capital of society; it only devalues existing funds and distorts pricing.
Artificially low interest rates and an excess of printed money encourage investors to engage in production processes that require much more financial resources than are available. Due to pricing distortions, investors miscalculate the total cost of the project, and it suddenly becomes unprofitable. According to von Mises, such investments simply would not exist if central bank intervention did not distort the realities of the capital market. The simultaneous financial collapse of many businesses, causing an increase in unemployment, is called a recession. Recessions are an inevitable consequence of interest rate manipulation.
A healthy capitalist system cannot function without a free capital market, where the price of credit funds is determined by the balance of supply and demand. It is the intervention of central banks in the capital market that is to blame for economic crises, and not capitalism itself, as many “left” journalists and economists believe. Ammus notes that “putting central banks in charge of preventing recessions is as foolish as trusting pyromaniacs and arsonists to run a fire brigade.”
The role of exchange rates
In a modern economy, exchange rates are floating. When capital movements and trade are built on the flimsy foundation of floating exchange rates, every business must dedicate significant resources to studying the movement of currencies, a process that is essential and beyond the control of these businesses. The most incredible fact of the modern economy is the size of the foreign exchange market compared to the market for production. According to the Bank for International Settlements and the World Bank for 2016, the size of the foreign exchange market – $ 5 trillion a day – is about 25 times the size of world production.
The combination of floating exchange rates and Keynesian economics created the modern phenomenon of currency wars. Any country that is expected to slow down in economic growth can increase its gross domestic product and employment by devaluing its currency as well as increasing exports, while complaining that neighboring countries are doing the same.
Currency devaluation does not increase the competitiveness of exported goods; she simply offers them to foreigners at a reduced price, thus impoverishing the local population. The devaluation also makes all the other assets of the country cheap for foreigners. It is no coincidence that countries that depreciated their currencies severely after World War II were the hardest hit by the downturn.
Unreliable money makes it easier for governments to finance endless military operations, whereas under a reliable monetary system, state military adventures could only continue to the extent that they were supported by funds from the taxes collected. Many commercial firms are engaged in war as a business and are interested in continuing military operations and receiving money from the state military budget. These firms become so large that they can influence the media and research institutions, spurring sustained support for one war or another.
Unreliable money helps governments win popular support by investing resources in popular projects without reporting to the people the real cost of these projects. An increase in the money supply will be felt after a while, but then foreigners, national minorities or the previous government can be blamed for the depreciation of money. Unreliable money has always served repressive regimes. Stalin, Mao Zedong, Hitler, Pol Pot, Kim Jong Il all printed paper money to finance genocide and totalitarian mega projects.
With an unlimited supply of unreliable money, banks can take on excessive risks, knowing that the central bank will not let them fail to avoid a systemic crisis . Ammous notes that banking has become a business “producing risk-free income for bankers and creating risk-free income for everyone else.”
In a world where credit is distributed by central banks, it is easier for large firms to obtain financing at a low rate than their smaller competitors. That’s why, Ammous believes, the big junk food makers are thriving all over the world.
The practical implementation of Keynes’s theory of money led to the destruction of small businesses, the centralized distribution of capital and the destruction of market mechanisms necessary for economic production. All governments love Keynesian economics because it justifies their pursuit of power and wealth.
The only remedy for all these pathologies is reliable money.
What is bitcoin?
Bitcoin is a currency created without the participation of the state. It is a distributed software developed in the last decades in an attempt to create digital money. Under them, the author understands the means of payment, the offer of which does not depend on the political or economic plans of any state body, and the circulation of which can be carried out without the participation of any third authorized person (for example, a bank).
The Bitcoin network began functioning in 2009. It was launched by an anonymous programmer who took the pseudonym Satoshi Nakatomo. At first, bitcoins were a collector’s item among a small group of cryptographers. In May 2010, the first bitcoin purchase was made – 10,000 bitcoins were spent on two $25 pizzas. Bitcoin began to take on the function of money as more and more people became aware of its existence and saw it as a way to store value .
Bitcoin has the properties of tradability, reliability and independence from the state, that is, all the characteristics of reliable money. Bitcoin has been successfully circulating on the market for the past 9 years and has the prospect of replacing fiat money.
How does the bitcoin network function?
Each bitcoin transaction is recorded by each network member, and each network member has access to a common ledger of all transactions. This digital distributed ledger is open to anyone with internet access anywhere in the world. Anyone who joins the bitcoin network must generate a digital public address and a private key. When a bitcoin transaction is made, the sender of the bitcoins informs all network participants (or nodes ) about it, which checks if the sender has enough bitcoins to complete the operation.
When a member of the network transfers bitcoins to another member, all members of the network compete with each other for the right to update the ledger by adding a new block with records of the latest transactions to it. In order for a network member to add a new block, he must have powerful computing equipment to solve a complex mathematical problem. When a solution is found, it is very easy to check its correctness ( proof-of-work system ). After the correctness of the solution is confirmed by all network participants, a new block is added to the registry. A network participant who has attached a new block to the ledger is rewarded for their efforts in the form of new bitcoins. The process of generating new bitcoins is called mining, and network participants involved in mining are called miners .. Mining is the only way to increase the amount of bitcoins in the market, just like the only way to increase the amount of gold in the world is to extract it from ore. In addition to the reward for solving a mathematical problem, a network member who has attached a new block to the ledger receives bitcoins from the sender as a reward for services.
Each bitcoin holder has a mathematically encoded public address and private key, which are needed to verify the owner’s identity. Each participant in the network can verify the validity of a transaction by making sure that the sender of bitcoins has the corresponding private key. Having a private key is a prerequisite for owning bitcoins.
The total possible number of bitcoins is pre-programmed and cannot be changed. This is achieved by adjusting the level of difficulty of the mathematical problems that must be solved in the mining process when a new block is attached to the distributed ledger. In the past, gold became the best currency because it was difficult to mine. As for bitcoin, its supply in the market does not change, despite the increase in its market value.
The maximum number of bitcoins that can exist is 21 million. Each bitcoin can be divided into 100 million units, called Satoshi. The divisibility of bitcoin facilitates its circulation in the market, and its digital nature allows it to be moved around the world with unprecedented ease.
Bitcoin Network Independence
The Bitcoin network operates on the basis of the consensus of all its participants. It would not be an exaggeration to say that no one controls bitcoin. The only condition for joining the network is following the consensus rule. There is no central governing body or individual programmer who determines the direction of the bitcoin software. There is no corporate structure around the bitcoin network and all decisions are programmed and automated.
Miners are required to maintain consensus in order to receive rewards for using their computing power to solve mathematical problems. Other network participants are interested in maintaining consensus if they want their transactions to be included in the distributed ledger.
Due to the resilience of the bitcoin network, it is very difficult to make any changes to its economic parameters. The main advantage of bitcoin is not the speed, convenience or ease of transactions, but that it provides a stable monetary policy that no one can easily change. Therefore, bitcoins can be considered safe money.
Bitcoin network security
A global network of independent miners protects the integrity of the distributed ledger of bitcoin transactions. Miners have no other goal than solving mathematical problems in the process of mining and verifying transactions, and they are interested in keeping transactions clean. Programmers and hackers from all over the world have tried to hack the bitcoin network, but it continues to maintain its integrity.
The security of bitcoins is based on the difference between the cost of solving mathematical problems and attaching a new block, which is very high, and checking their validity, which costs almost nothing. Thus, a potential attacker loses interest in making a fraudulent transaction. If someone tries to carry out such an operation, then there will be a huge cost in computing resources and electricity, which are not compensated by the reward in bitcoins.
If several participants in the bitcoin network collude to compromise the integrity of the distributed ledger, then the value of bitcoins will drop to zero. The fraudulent transaction will be very expensive, and the stolen bitcoins will be worthless. Thus, the security of a distributed ledger of bitcoin transactions is built into its economy, even though the deception itself is worth more than its expected fruits.
Network members and miners benefit economically from bitcoin transactions. Miners invest the cost of computing equipment and electricity, receiving new bitcoins in return. Other network members invest in mining equipment and buy bitcoins from miners because they need digital money that grows in value over time. Such economic relationships are beneficial to all participants, which is why the bitcoin network is growing at an incredible rate.
Resistance to negative influences
In the media, it is not uncommon for bitcoin to receive either a distorted or negative assessment. However, this media attitude only helps bitcoin gain public attention.
In the public mind, bitcoin is often associated with drug trafficking and other crimes. So when the FBI shut down the Silk Road site (an online marketplace where you could buy and sell absolutely anything), many analysts expected Bitcoin to crash. However, he survived this event perfectly. Similarly, the Chinese government’s closure of an exchange where bitcoin was traded led to an increase in bitcoin trading volumes on other exchanges.
Bitcoin is the first currency that has a guaranteed low supply growth in the market. Macroeconomists, presidents, politicians and military dictators will have no control over the monetary policy built around bitcoin. Bitcoins cannot be confiscated or devalued by any authority.
Blocks with bitcoin transactions are added to the distributed ledger every 10 minutes. At the birth of the network, the miner received 50 bitcoins for adding a block to the ledger. Every four years, the mining reward is halved. Under this scheme, the number of bitcoins in the market will gradually increase at a decreasing rate, reaching a maximum of 21 million around 2140.
Calculations show that bitcoin inflows will grow by 27% over the next 25 years, while Swiss francs will grow by 169% and US dollars by 272%. These numbers show how successful bitcoin can be as a store of value. The inability to arbitrarily increase the number of bitcoins in the market explains the dramatic increase in its market value – about 573% per year.
The number of bitcoin transactions is also growing, from 32,687 in 2009 to 103 million in 2017. However, it is worth bearing in mind that even in a small town, there are approximately 300,000 ordinary monetary transactions per day, while 500,000 bitcoin transactions per day is the limit that the bitcoin network can handle. The limit on the number of transactions per day is due to the size of the transaction block, which is programmed not to exceed one megabyte. This situation suggests that bitcoin fans value it not so much as a means of payment, but for its ability to store its value.
The eternal problem facing mankind is how to preserve the value of a product produced by man for the future. According to Ammus, any natural resource or commodity is practically inexhaustible, given the necessary time to extract or produce it. When Americans began to view their home as a store of value, the supply of housing in the market increased so that property prices collapsed. As inflation rises, various kinds of “bubbles” indicate multiple attempts to find a reliable store of value. Before the invention of bitcoin, only gold more or less coped with this function.
Bitcoin is the first “commodity” whose supply is strictly limited. The only way to meet the growing demand for bitcoin is to use ever smaller bitcoin units and increase its market value.
With the invention of bitcoin, a new alternative mechanism for international settlements has emerged that does not require the participation of intermediaries and can function independently of the existing financial infrastructure. The bitcoin network allows the fastest way to make international payments in large amounts. Settlement within the bitcoin network is similar to settlements between central banks or large financial institutions, but without counterparty risk, exchange rate risk, and clearing delays.
Bitcoin is a neutral currency. It does not give any country the right to issue a global reserve currency, it does not depend on the state of the economy in a particular country, and it is not affected by the volume of trade denominated in it. The bitcoin network can make daily settlements between 850 central banks. If each central bank serves approximately 10 million customers, then these calculations could cover the population of the whole world.
Bitcoin continues to attract the attention of wealthy individuals and institutional investors, and it is possible that central banks will want to replenish their reserves with bitcoins. Bitcoin can also serve as a useful reserve for central banks under international sanctions or simply dissatisfied with a monetary system centered on the US dollar.
Can bitcoin serve as a unit of account?
The continued volatility of bitcoin does not allow it to perform the function of a unit of account. The situation may change if the value of bitcoin increases significantly and the number of people accepting bitcoin as a means of payment increases significantly. The volatility of bitcoin is caused by the fact that its supply in the market is limited and it does not respond to rising demand.
Visa or MasterCard payment systems use a centralized registry where all transactions are recorded. Visa can process about 3,200 transactions per second, or 100.8 billion transactions per year. The Bitcoin network, with its one megabyte blocks, can process a maximum of 4 transactions per second, or about 120 million per year. In order for the bitcoin network to reach the same bandwidth as Visa, each node in the network must add 800 megabytes of information to the blockchain every 10 minutes. This amount of computing power is completely unavailable to computers used for commercial purposes, either now or in the foreseeable future.
The idea that ordinary people would directly use the bitcoin network for their daily payment transactions is completely unrealistic , since this would mean that each member of the network must record all the transactions of all other members of the network, thus requiring “unbearable” computing power. In addition, it takes from 1 to 12 minutes for the transaction to receive the first confirmation of the participants in the bitcoin network, which is completely unacceptable for ordinary merchants and their clients.
In the future, small bitcoin payments will be made through a second layer: the online equivalent of a bank will issue some kind of bitcoin-backed tokens that will be held in an electronic “vault”. Information about the number of bitcoins in the “vault” will be publicly available to participants in the bitcoin network. This will allow you to make an infinite number of transactions online without incurring the costs associated with fixing transactions in the blockchain ( on-chain ). Already, most bitcoin transactions are not recorded in the blockchain, but take place on exchanges and other platforms where bitcoin is circulating.
In order for the volume of transactions with bitcoin to increase, it is necessary to have the capacity to process payments outside the blockchain ( off-chain ). More and more transactions are taking place outside the blockchain, turning bitcoin into a payment method rather than a means of payment.
How anonymous is bitcoin?
The bitcoin network registry is public and immutable. It will keep a record of each transaction for as long as the network itself is functioning. It is not entirely correct to talk about the anonymity of bitcoin; Or rather, he has a pseudonym. In principle, it is possible to trace the connection between an address on the network and a real person. It is easy to get rid of a phone or computer, it costs nothing to remove an email address or IP address, but it is not at all easy to destroy traces of the movement of funds to the address of the owner of a bitcoin. The blockchain structure used in the bitcoin network is not suitable for keeping secrets. In reality, it was the ability to trace bitcoin payments that helped the police identify and catch several online drug dealers.
Can the bitcoin network be shut down?
One of the misconceptions about bitcoin is the idea that it can be “turned off” by shutting down the communications infrastructure needed for bitcoin transactions. In fact, bitcoin is a software protocol that can be installed on any of the millions of computers scattered around the world. Bitcoin does not have any “weak link”, it does not require any material structure to function. Any computer that has the Bitcoin software installed can join the network and make transactions on it.
Is there a real threat to bitcoin?
The Bitcoin network is stable and reliable because all its participants adhere to the consensus rule, which makes it impossible for a participant or a group of participants to change anything in the system without the consent of the others. But the number of network nodes is so large that any coordination between them is practically impossible. Accordingly, the bitcoin network remains the same as it was originally designed.
However, if the cost of operating a network node increases significantly, then the number of nodes in the network may decrease. Such a development would mean that the network would effectively cease to be decentralized, and then a small number of participants could collude with each other for personal gain.
The demand for bitcoin is driven by the desire of people around the world to conduct financial transactions without political control and to have a store of value that is not subject to inflation. If governments continue to impose restrictions on remittances, and central banks continue to print money for political or economic purposes, the demand for bitcoin will rise, as will its value.
Is there a viable alternative to bitcoin?
After bitcoin was “released”, many programmers tried to create similar alternative “coins” ( altcoins). However, none of them has achieved significant success. For a digital system to function as digital money, it must demonstrate that it is beyond the control of any third party. Any alternative “coin” has a development team – they started the project, advertised it, and they have the opportunity to produce and accumulate “coins” even before the general public knows about them. These developers are famous people and it is impossible to convince the public that these alternative “coins” are not under their control. When programmers accumulate the majority of “coins”, they also own computer technology and the necessary expertise in software, then these “coins”, from a practical point of view, become a centralized money, and the interests of their developers determine the direction of development.
Thousands of unsuccessful attempts to imitate bitcoin once again confirm the uniqueness of its design.
Can blockchain be used without bitcoin?
Bankers, journalists and politicians who do not understand how bitcoin “works” are promoting the idea that “bitcoin does not matter, but the underlying blockchain technology has a great future.” The reality is that the blockchain technology used to authenticate and validate a distributed ledger is extremely complex and serves a single purpose: to create digital money and transfer it online without the participation of trusted intermediaries.
For any computing process to use blockchain technology, it must meet two criteria. First, the advantage of decentralization must be extremely profitable in order to justify the high costs of blockchain and the loss of efficiency. Second, the computational process must be simple enough so that the distributed ledger can be maintained on many nodes. As soon as the size of the blockchain grows, very powerful computers become needed to maintain it, which leads to the loss of the decentralization property. Thus, a centralized network consisting of several large nodes owned and operated by large organizations undermines the very meaning of decentralization.
Blockchain consultants have built blockchain prototypes for securities trading, asset registration, voting, and payment clearing. However, none of them has been commercialized because it would be much more expensive than the currently known and simpler methods based on existing databases and software.
The use of blockchain technology in regulated areas such as law or finance will lead to legal complications. It is also worth remembering that when an intermediary deals with payments, databases or contracts, any human or program error can be easily corrected. In a blockchain, if a new block has been approved and further blocks have joined it, it is almost impossible to reverse any transaction.
To date, the only successful application of blockchain technology has been the creation and maintenance of bitcoin transactions.
Top ten thoughts on one page
1. Safe money is money, the amount of which on the market does not depend on the will of the government, and they are not subject to inflation.
2. Gold and the gold standard were the best safe money.
3. Sound money is essential for a stable economic and political system and rising living standards.
4. Keynes and his macroeconomic theories, which justify state intervention in economic processes, are responsible for the growth of national debt in developed countries and regular recessions.
5. Bitcoin is digital money created and circulating without the participation of the state. The number of bitcoins is strictly limited.
6. Bitcoin has good prospects to become reliable money and become one of the world’s reserve currencies.
7. The Bitcoin network operates on the basis of the consensus of all its participants; is not controlled by any corporate or government bodies; cannot be “hacked” or “closed”.
8. The growth in demand for bitcoins is due to the fact that people see them as a “store of value”.
9. Bitcoins are unlikely to be used for everyday payments.
10. With the invention of bitcoin, an alternative mechanism for international settlements appeared, which does not require the participation of intermediaries.