October 20, 2020

Do not fear the Reaper

Concerns about the long-term viability of a hard cap on Bitcoin supply exaggerated, but not for the reasons you probably thought.

In the crypto industry (in general, other than Bitcoin)There is a popular belief that more or less educated bitcoiners are either too naive or simply do not take the trouble to think about issuing Bitcoin in the long run. In a nutshell, bitcoin skeptics consider it unlikely that Bitcoin could generate enough fees to compensate miners alone, and that ultimately the emission cap in the protocol will have to be lifted. And based on this argument, they feel it is wrong to characterize the Bitcoin supply as truly fixed. Of course, this argument is usually meant to justify monetary discretion (the ability to manipulate supply) in other cryptocurrencies. And invariably these critics argue that the “correct” release rate for new coins in the long run should be non-zero.

I think this argument is clearly wrong. In this post, I will explain why I think so, even though the basic premise that there are not enough fees alone to keep the network safe seems a reasonable concern. Finally, I will explain why I believe that bitcoiners have nothing to worry about in this regard, regardless of whether the volume of fees is enough in the end or not.

A small note on the amount of issue

First of all, I will point out the obvious: strict limitation of the amount of emission is not necessary for the value of anything. A commodity with an ever-increasing supply may well be valuable as long as there is some demand in the world for this asset. All commodities other than Bitcoin have this property and they definitely have a non-zero value. Second, for a good to have a non-zero value, the total supply of that good, whether physical or digital, need not be known down to the smallest increment. Gold is considered by people as a reliable store of value, but the volume of its supply is known only approximately. Of course, the level of audibility of Bitcoin is fundamentally higher, since it is not tied to physical realities, while a bug in the program code can arbitrarily increase the supply - so we need to monitor this carefully. This article is not about the merits of severe emissions caps or its role in maintaining the value of a unit of a good or asset. No, I want to talk to you about the relationship between hard caps and the very nature of Bitcoin.

I put aside any predictions here.regarding the security budget of Bitcoin in the long term. I think it's very likely that Bitcoin will be able to keep the network secure in the long term solely through fees, but I won't be discussing that today. Moreover, any general statements about certain thresholds corresponding to current security spending, which hypothetical future Bitcoin fees should fit into, do not make any sense. There is nothing particularly iconic about today's security spending - it is only derived from unit price and release rate. Historically, Bitcoin has remained secure with a fairly wide range of security costs, from $ 0 to $ 54 million / day.

The inflationist dilemma

Let's get back to the key point. Critics often point out that Bitcoin have to increase the volume of emissions, which means that its current disinflationary nature is illusory. To concretize the argument in question, let's reduce it to a syllogism:

  1. (Premise) There is a possibility that one of the features of bitcoin (a predetermined emission schedule) could develop into a vulnerability over time.
  2. (Premise) Specific change will be required to address this vulnerability (increasing emissions beyond the predefined level).
  3. (Premise) If one of the functions of your system is guaranteed to change in the future, you cannot reliably call this function a solid component of the system.
  4. (Conclusion) Bitcoin Today includes a future mandatory change, and therefore it cannot be said that it has the property of a limited supply.

I acknowledge the possible validity of the premise(1), although I consider these long-term consequences not only unpredictable, but not at all as obvious as Bitcoin critics paint them. Premise (3) is trivially true. But I reject points (2) and (4) completely. There is no guarantee that even in the event of massive blockchain reorganizations due to security deficits, bitcoiners will offer to bring back supply inflation. There are many alternative non-inflationary safeguards, from institutionalizing mining to coordinated counterattacks and soft forks to reverse large-scale reorganizations. And I also reject (4) clause, conclusion, because, as I will say later in this article, the system that introduces additional supply inflation is a fundamentally new system and cannot be considered like the "Bitcoin" that Satoshi described and how we are. we know today.

Bitcoin as it stands does not contain no assumptions of its creator or communityregarding the conditions under which his proposal would have to deviate from a predetermined trajectory. Although an alternative version of Bitcoin with any changes, including deviations from the existing emission schedule, can be created, this version will have no more rights to be called Bitcoin than any other forks that changed important features of the original system, such as Bitcoin Cash.

Thus, to claim that Bitcoin containsusers' assumption about the possibility or necessity of future changes in the emission volume is incorrect. While Bitcoin, created by Satoshi, may still fail for a variety of reasons, it cannot deviate from the given emission schedule, because such a deviation would mean creating a completely different, separate asset. Finally, if the transition from Bitcoin Satoshi (that is, what we call "Bitcoin" today) to a new asset is necessary, this in itself in no way means that this event will be traumatic.

The system that we call "Bitcoin" todaycannot undergo changes in the emission schedule, because it is an integral part of the protocol, asset and system. This is one of the very few properties that Satoshi has clearly stated and written into the protocol code without any ambiguity or ambiguity. And in the eyes of the wider community, the 21 million coin supply cap is also perceived as an inherent feature of Bitcoin. Ask a bitcoiner to describe the system, and he will inevitably mention both scarcity and 21 million units. There is no doubt that the system called "Bitcoin" has always contained a principle condition regarding the rate of issue, and that this condition still exists in the dominant concept of an asset today.


Take this passage from the Bitcoin Whitepaper, the first description of its system:

As soon as the total volume of money supply reaches a predetermined maximum, the only source of incentives for work on the blocks will remain commissions, while free from inflation.

Pay attention to the words “in advancepre-installed ". Satoshi determined the number of coins before the protocol was published and activated, and his whitepaper clearly states that this number cannot be changed after launch. Satoshi has already calculated how miners will receive income when all coins are issued and Bitcoin is stopped.

Let's now turn to the description of Bitcoin from the first version of the bitcoin.org website:

The total supply will amount to 21,000,000 coins. It will be distributed among the nodes when they produce blocks. Every 4 years, the block reward received will be halved.

  • first 4 years: 10.500.000 coins
  • next 4 years: 5,250,000 coins
  • next 4 years: 2.625.000 coins
  • next 4 years: 1,312,500 coins
  • etc.

Here Satoshi also describes the "main properties" of Bitcoin, one of which sounds like No mint or other trusted parties (no "mint" or other trusted parties). In order to comply with the principle of absenceany trusted parties, including those with special powers in relation to monetary policy, must adhere to a predetermined emission schedule. Establishing a rate of inflation that could respond to changing circumstances would mean that some trusted actor must make the appropriate choice. Satoshi was clearly not ready to agree with this.

Satoshi reiterates his commitment to tight emissions caps in subsequent posts on BitcoinTalk (a VPN might come in handy here):

Otherwise, Bitcoin would not havethe final limit of 21 million coins, because there should always be some minimum generation reward. In a few decades, when the block reward stipulated by the protocol becomes too small, transaction fees will become the main compensation for [miners].

There is not the slightest ambiguity as to whether the volume of supply is an essential property of Bitcoin. The Bitcoin emission schedule cannot be changed because Bitcoin, in many ways, and there is this emission schedule. As a result of any of its changes, we get something different, which is definitely not Bitcoin.

Many bitcoiners may disagree with me onon this issue, believing that we should take a more moderate stance and make our Bitcoin concept more flexible, while retaining more room to respond to potential contingencies, including by changing the issuance schedule. I do not think so. I believe that Bitcoin will be much more specific and easier for us to reason about if we can agree on its most essential properties. It is this kind of intransigence that has until now served as protection against capture and perversion by projects that tried to replace Bitcoin, but failed to reproduce its vital qualities. The greatest danger to Bitcoin is not even outright failure (it has become too important for the community to simply give up and accept defeat), but rather a conceptual blur. While adhering to a firm vision of what Bitcoin is, we retain a specific concept to strive for and around which we need to rally our forces.

Bitcoin reserves your right to create a successor

However, this does not mean that bitcoinersdestined to simply waste the doomed chain if Bitcoin should ever suffer some fatal vulnerability. While this is hardly news, it is probably worth bringing this point in the current context. If Bitcoin Satoshi does lose its popularity, then the units of account of any worthy successor will be automatically distributed among the owners of Bitcoin. This maneuver is not unlike Ethereum's upcoming transition to a new consensus protocol. Ethereum 2.0 will have little to do with Ethereum 1.0, except for the name and the fact that ownership of version 1.0 of units of account entitles you to a proportional stake in the new version of the network. While Bitcoin Cash and other similar forks failed, in terms of distribution, they were on the right track. Any worthy successor to Bitcoin must be built on top of the pillar of investment and thermodynamic security that Bitcoin has accumulated and provides it with such resonance and variance. A fair launch of a new network is hardly possible today - the stakes are too high, and large investment funds will capture all the available supply to the "public", which makes the situation almost indistinguishable from a premine. The only way to replicate a truly fair distribution of Bitcoin is to inherit from it.

So ultimately if Bitcoin Satoshifails, then so be it. It will be a glorious defeat. A worthy successor, of course, will have to incorporate the accumulated work of miners worth $ 19 billion into the new network and continue development based on the fairly distributed set of Bitcoin UTXOs. A fair launch is just as important a protocol characteristic as an emission schedule. Thus, bitcoiners do not need to worry. They own not only today's bitcoins, but also the coins of all its viable followers, if for some reason Bitcoin v1 fails.

A few goodbye thoughts

I'll leave you with this. There is no optimal non-zero rate of issue of money. The rate of emission, or the rate of dilution, is a political, not a technical issue. There are always constituencies that will benefit from the increased flow of new units of account - groups close to the protocol that can potentially use a new flow to benefit: the Cantillon insiders. Conversely, there will always be groups that resist the new issue, because they already own a stake in the existing supply and are not interested in diluting the value of their capital. All discussions about monetary systems ultimately boil down to a conflict between those who benefit from the free issue of monetary units and those who suffer from it. Only the way to end these political strife isto remove from the agenda the freedom to change monetary policy at its own discretion, as Satoshi did. Any positive rate of output of units of account is completely arbitrary, and inflationists can always prove that a small increase in output will bring a large profit (for example, to finance an infrastructure project). Thus, anti-inflationists who advocate some non-zero emission regime will always be open to attacks from inflationists, and the emission rate will always be a bargaining chip in the political game. Shortly speaking: you cannot adhere to a stable non-zero rule regarding the issue of money, because there is no stable non-zero equilibrium in this regard.

Bitcoin breaks this vicious circle completelyeliminating any discussion about monetary policy and initially setting a tight emission (or vesting) schedule. The rules of the game were determined even before the first block was found. No one can complain that he was mistreated or that the pace of Bitcoin issuance took him by surprise. Due to the beauty of the PoW algorithm, the issue of units of account is a competitive market process, with no special privileges to the insiders of the protocol. Thus, the real novelty and innovation of Bitcoin is, among other things, that it completely eliminated the freedom to manipulate monetary policy from the equation.

No other monetary system has done this.before, and as far as I can tell, nowhere has this been done since. I have never come across an alternative to Bitcoin, about which one could reliably claim that it does not allow changes in its monetary policy. This uniqueness of Bitcoin is important and must be preserved. Establishing discretionary powers in the monetary system is completely commonplace - this is how any government and central bank operates. In the case of other cryptocurrencies, we are essentially just being asked to replace central banks with teams of protocol developers. But it's essentially the same old story, and I'm not particularly interested in it.

Bitcoin - Bitcoin Satoshi,Bitcoin-with-21-million-units of account is a grand, daring experiment to eliminate monetary discretion, the freedom to manipulate monetary policy. And this is the only any kind of innovative financial project in this area. All other systems are simply high-tech reproduction of what we already have: monetary arbitrariness that allows elites to use the new emission of money in their own interests. And if the Bitcoin experiment fails, then so be it. We will collect the pieces and move on, and Bitcoin will be replaced by a worthy successor, which, however, will have to be called something else. But for now, we should definitely be clear about the key differences and stay true to the founding principles of Bitcoin. Without this, we have nothing.