Kyle's Blog
A Futuristic Endgame for Bitcoin
Jul, 2017
Disclaimer: I am a Bitcoin Maximalist, my views are based on a premise of Worldwide Adoption and not on the value of Bitcoin Vs FIAT.
Bitcoin as Sound Money:
Easily and as cheap as possible to fraction, so that the value transferred can easily be made correspondent to the value obtained. If you have a house, it is obviously impossible to buy coffee with it. You have to be able to “transform” the house value into something fractionable that represents it. Gold played its part for much of History but it can hardly be called adequately divisible. Then came certificates, bank notes, Gold Backed Currencies, etc… With Bitcoin, this problem not only does not present itself, but it is actually virtually costless to fraction. So there is little to no value leakage here. Bitcoin beats Gold, or any other Physical asset for that matter. Even a Dollar can only divide so far.
• Fungibility
Noone can argue that any Bitcoin cannot be substituted by any other Bitcoin, not only virtually costlessly, but seamlessly. There is no difference and there is no cost to users in determining its quality as a Bitcoin. It clearly beats Physical Gold in this aspect as there are different Gold Qualities according to purity and that bears a cost to determine. It is on par with Virtual Gold (the problem with Virtual Gold is that you only exercise effective ownership of its redeeming FIAT value at a certain point, if that.)
• Easy Transport
If we do not artificially limit Network capacity, it can be virtually costless to transfer Bitcoin given enough Volume. Even if it is not, it is a much better proposition that transferring Physical Gold.
• Store of Value
Given worldwide adoption and next to no inflation, it is the perfect store of value. Not because its value will be increasing vs FIAT (since we assume a FIAT free world) but because its purchasing power will always increase under a limited supply. So it can be argued it is miles ahead of Gold here. For the simple fact that even without inflation, its purchasing power would rise whereas Gold is pretty much just a Hedge vs inflation. You could say that Bitcoin not only has the capacity to store value, but actually increasing it, which should in Theory make result in a discounted price on an acquired good when you utilize it to transfer value.
• The cherry on the cake — Ownership
I cannot state enough how important this is and this is the most important quality that makes Bitcoin miles ahead of Gold or any other medium of exchange. Simply put, with Bitcoin, anyone and everyone can exercise effective ownership of Value, rather than a promise. This ownership also comes at virtually no cost to an individual compared to the security needed to ensure ownership physical assets. Again, this prevents a lot of inefficiencies and loss of value. And it also plays a major part in the Censorship Resistance to an extent. No one can hold you at ransom like what is done with Virtual Gold.
In a sane world, Bitcoin would do its job Better than Gold. Better yet, it would free Gold to its other relevant uses, rather than also being hoarded, which effectively inflates its price, which then gets reflected in the goods where Gold is necessarily present, thus increasing efficiency and bringing value to everything and everyone down the chain.
About Proof of Work:
I hear a lot of Gold Rush from users with PoW change to return to CPU and GPU mining. Artificially guaranteeing profitability of inefficient endeavors. Effectively subsidizing it.
Once you do this, you are creating regulation and outside incentives which for the most part, create inefficiency. Bar a lot of speculation or sudden steep increase of utility, Bitcoin price would have to fall. It’s the difference between Mining Gold and Mining Sand. Furthermore, the Higher it costs to Mine, the Higher it costs an attacker, so the higher cost arguably also increases security as far as I get it. It’s up to the miner to increase efficiency so he can maintain his returns. This has been done, in a free market, by specializing equipment, by pooling resources, etc…
Gold value, or anything else for that matter, is the intersection of minimum value the seller is willing to get for it and the maximum value the buyer is willing to pay for it. This sounds easy enough but the conclusions of many a post, point to an unclear understanding about this.
Because the minimum value a seller is willing to get for his good, is correlated to how much work he put into it, or the cost it took him to obtain it, price of goods, bar speculation or sentimentalism (aesthetic value) effectively encompasses Proof of Work. Digitally, this proof is achieved Cryptographically. Physically, although we are subject to falsification thus incur in costs to attribute authenticity, for the sake of argument lets assume that in a credible world it is safe to say that the existence of a certain good encompasses its Proof of Work.
If we want Gold, which we do, there is no reason to wish that the Gold Miner have no profit. Or otherwise, we wouldn’t get Gold. If the Gold Miner has no profit, it effectively means that we don’t want Gold. Or otherwise, he stops mining it, we still want Gold, the price rises and he mines profitably again. Since this is a Censorship free market, if he profits, so might others, which without barriers to entry would make it very difficult to sustain a monopoly.
The best about this is that people will look for efficiency. Bitcoin is making people think and be creative. Looking for better ways to spend energy in order to get Bitcoins. Let’s also not forget that for the most part, it’s in fact Energy expended that defines the price of something. Or the value of said energy. Gold was backed by energy, by the cost of labor it took to mine. We then decided that Gold had value to back something else, which is not entirely true if demand and supply is volatile. This is however, always true for Energy.
Also, you must take into consideration, that should we not attribute any value to Gold, then no one would mine it. Not even with slave work. As this slave energy could be used for other more valued labor. So, since the beginning of times, all true value is backed by Energy. Energy is the currency of the Universe and Satoshi Nakamoto clearly understood that by implementing his proof of work.
Those who argue against nature protection as an argument for proof of stake are in my view a little shortsighted and I will explain why I think so. Based on the premise that Bitcoin garners sufficient adoption, and that consequently its value rises, the incentive for innovation in clean and free energy is outstanding. I honestly envision an energy revolution through Bitcoin worldwide adoption, and expect someday that Bitcoin will eventually correspond to Kw/h.
The reason I expect this is that in a free market, Utility companies (like any other) will employ their effort in the most profitable endeavor, which might very well be Mining Bitcoin, except if they are otherwise paid enough not to mine it and rather supply that energy for a price, which can actually be lower than the actual value given Bitcoin’s properties as store of value.
All in all, I have always thought that a sound Currency would be an Energy Currency. Where you are awarded for your work rather than your capital, and furthermore, where you are more awarded for efficient work rather than amount of work.
About Decentralization:
In my opinion, Centralization is pretty decentralized in Bitcoin. There is very few cause for alarm. The system is prepared and expecting this.
My idea is that in a Free Market, such as Bitcoin, efficiency will always reign. So whoever can make the most out of the least amount of resources will thrive. Those that are lagging will fall behind. This should be embraced.
Of course that one has to take into account social responsibilities, but this goes without saying, and it is not a fight for Bitcoin but for the Law. It is obviously not ok to enslave 300 people to turn a windmill in order to mine Bitcoins, but Bitcoin is blind to this. Being a Free Market, we have the right and the opportunity to denounce and boycott in a secure and incorruptible manner. So efficiency will go so far as to what shall be socially accepted at any given time.
As of right now, it is more efficient to mine in China. This should not be feared. It is global competition. We are all being given value by Chinese subsidies on Energy. I actually think this is a perfect case of decentralization, as we users, can effectively move our Hashrate (and yes, in the end it is OUR Hashrate) where it will bring the most value to us. Should some Government interference somewhere be to our detriment, an opportunity will arise for other miners to take the place of the previous ones, and we might as easily relocate our Hashrate somewhere else, because an opportunity for profitability will arise.
This is done by users voting with their money. As soon as they think Chinacoin is compromised, they can relocate to VenezuelaCoin. The money will go towards the most efficient use of it.
The non speculative value of Bitcoin is in Hashrate and Usability. You shouldn’t fear a Monopoly in a Censorship Free Market. It just means someone is doing it better than anyone else. You just have to protect the blind mechanisms of no artificial barriers to entry other than efficiency. That way, if someone finds a way to do it better they can. Geography plays its part in decentralization.
The bigger picture is many of these companies which many now loathe, were the ones that put their money where their mouth is, and are the ones sustaining Bitcoin’s Value, through services provided and hashrate. It is not in our interest to undermine their efficiency.
The Market will work itself out. The users will put their capital where they think it is more efficiently used. In the end, Bitcoin is the perfect Democracy, as long as it remains a Free Market.
This is why I think no regulation is needed. It is a matter of choice. Do not Tax us all so that Joe can run a Mining Rig in his basement. Which equates to regulation. Efficiency is King. If anyone gets the whole market in a free market, which I sincerely doubt it, it just means they did it better. It is up to the users then to make a choice.
Do not change Proof of Work in order to create inefficiency for Miners. Rather work on increasing usability to the common person under the principles with which Bitcoin was designed.
I think Bitcoin has the ability to change the world as we know it, tip the scales in favor of the commons and we should not limit it at birth.