How an Open Source Software Project Created the Most Advanced Form of Money Ever - Dr. Saifedean Ammous

What is used as money presented by Dr. Saifedean Ammous at Bit Block Boom.

Blog post by Cousin Edgar Stumblefield.

Outline

  • Anything can be used as money if its held as a store of value and usd in exchange

  • But rising monetary demand raises the price of the money

  • Rising price incentivizes more production of money

  • Excess production brings the price down, making it a useless store of value

  • Only things that are hard to make succeed as money in the long term

What have humans used as money?

  • Cattle

  • Rare seashells

  • Glass beads in areas that can't produce them

  • Metals initially by weight

  • Precious metals & coins

  • Government money

What do they all have in common (when they work)? Hard to make

People in third world countries try to get their money on American currencies because those currencies are hard to make.

Bitcoin has been the hardest money to make EVER. The supply growth rate slows down substantially as time goes on. Gold supply increases at a very slow rate because it is hard to find, and expensive to mine. There has never been a year where gold production has gone above 2%. Bitcoin is even less than that.

Bitcoin's monetary uniqueness

  • The more something is chosen as a store of value the more its production increases at the margin…

EXCEPT BITCOIN

  • When Bitcoin is chosen as a store of value, its value goes up, but more production is not possible
  • Instead: the difficultiy of mining new bitcoin increases, making Bitcoin harder to produce!
  • This incentivizes more processing power to produce Bitcoin, making the network more secure.

Even if everyone uses Bitcoin, there is only going to be so much Bitcoin that will be available. When more people start to mine Bitcoin, the difficulty adjustment kicks in. No risk of overly increasing the supply just because more people are using it.

How secure is Bitcoin

  • Bitcoin is an all-conquering juggernaut positive feedback loop of economic incentives:

Demand for store of value → Price rises → Mining becomes more profitable → More processing power goes to mining → Network becomes more secure → (back to start)

Bitcoin has never been hacked (accounts, etc. perhaps), but there is has not been one transaction that was validated that turned out to be fraudulent.

The longer the network goes on with it not being hacked, the more people will trust it leading to more people wanting to use it (even with the increase in value, Bitcoin still is not being hacked).

Bitcoin has positive feedback loops all over.

How Secure is Bitcoin

  • The processing power to secure only 500,000 transactions per day:
  • 31.3 Ex-hashes
  • approx. 4 million x the world's top supercomputer
  • approx. 400,000 x the world's top 500 supercomputers combined
  • 4 trillion x your laptop
  • The same transactions can be done on a single computer. But Bitcoin does it without relying on anyone or anything

If someone was trying to use hash power to hack the network, many more others are using hash power to secure it.

  • No single point of failure
  • No single piece of critical hardware of infrastructure
  • No single critical individual or organization

Bitcoin's monetary uniqueness

  • The hardest money ever invented
  • Available worldwide for anyone with an internet connection
  • Purely voluntary, does not need regulation, enforcement, or police
  • Chosen and valued freely on the market: sound money

No government told anyone that you have to accept Bitcoin at a certain value. Bitcoin grew in acceptance and value freely on the market without forcing anyone to do so.

What is Bitcoin good for?

1.Store of Value:

  • First strictly scarce liquid asset
  • Only two things are genuinely scare: time and bitcoin
  • For the first time, you can store the value produced from your time in a store of value that nobody can create more of
  • Our most advanced technology for transferring the value of time into the future

It was once feared that nickel and zinc would run out during a short period of time. Both are now produced fairly easily. Your time on earth is limited. It can be limited, but eventually it will run out. During that time, many things can be produced.

The easier it is for something to be produced, the lower the store of value. Bitcoin is like the engine that has no inefficiency. There is only going to be so much Bitcoin that will ever be produced. Bitcoin is the best system for transfer of value into the future.

Anyone that has held Bitcoin for more than 2 to 3 years has done well.

  • A decentralized, free market alternative to central banks & gold
  • This is not speculation or a prediction
  • The Bitcoin Standard is already securely operational
  • The majority of Bitcoin transactions do NOT happen on the Bitcoin blockchain, they are settled off-chain by payment processors, exchanges, and websites utilizing Bitcoin

To get around high transaction fees, if two people want to transact between each other, it does not have to be broadcast to the whole network, the transaction can be done off chain. There is no limit of how many second layer transactions there could be.

Back when there was a true gold transaction, there was not that many people that carried gold. Very few traded in their paper currency for the gold equivalent.

What would a Bitcoin Standard look like?

  1. Low time preference
  • Easy money loses value & encourages short-terminism and consumerism
  • Hard money gains value & encourages long-terminism and capital accumulation
  • Easy money = artificially low interest rate = incentive to borrow more and save less (if a bank has 1% interest, people are less likely to save)
  • Hard money lowers time preference, but does not eliminate it (ex: 10 Megabyte Hard Drive for 3,495 in 1980 ; you would not wait 30 years to buy it for much less)
  • Time preference is always positive
  • People will still spend, but less frivolously

Low time preference “initiates the process of civilization”

Hard money → Saving → Capital → Higher productivity → Better material living standards

  • Time preference is not just an economic factor
  • Once material needs are met, humans can focus on flourishing beyond survival

The golden age of innovation:

Hot and cold running water, indoor toilets, plumbing, central heating

Electricity, internal combustion engine, mass production

2- Limited government

  • Capital is no longer physical, but informational
  • Political exit replaces voice (democracy)
  • Government's territorial monopoly counts for little
  • Governments will have to compete for the productive
  • Withering of the nanny and managerial states
  • Return to classical liberal limited government
  • Beyond that, government based on consent (Anarchism)
  • Swissification of the world
  • The role of the family and local community is likely to increase

3- Functioning price mechanism: capitalism's information

Switzerland had no unemployment under the gold standard

Unemployment increased as soon as they moved to easy money

This occurrence is opposite of what the Keynesian theory states.

  • The twentieth century un-invented one of the humanity's most remarkable achievements: a global neutral money

Website: Saifedean.com

Email: Saifedean@gmail.com

Dr. Saifedean Ammous is Assistant Professor of Economics at the Lebanese American University, and Foreign Member of the Center on Capitalism and Society at Columbia University. He is the author of The Bitcoin Standard, the first serious academic treatise on Bitcoin, and has been researching Bitcoin and blockchain technology as an academic and consultant for 7 years.

 

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