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When Bitcoin Melts The System, Prosperity Steps In

“Overcome by the giddiness that flying lent him, Icarus soared into the sky, but in the process, he came too close to the sun, which due to the heat melted the wax.”

The Legend Of Icarus

Jacob Peter Gowy‘s “The Flight of Icarus” (1635 to 1637).

Central banking, along with fractional reserve banking — two inseparable evils of monetary policies — have been distorting market price signals for the last 50 years. 

In 1971, the Nixon Shock corrupted the global monetary system by fracturing the final linkage between gold and the U.S. dollar. Fiat currencies were unleashed, issued and managed by central banks. Over the years, delusional interventionism enabled by politicized narratives to serve a middle class convinced into believing central manipulation is in their best interest, has brought fiat currencies’ purchasing power to its knees. 

Today, savers are penalized, while speculators and spenders are rewarded. This tendency to be punished by lowering one’s time preference feels alienating to many. It just doesn’t feel right. Yet, few are capable of putting a finger on why that is, including banking professionals and money managers whose salaries depend on not understanding it. 

With a dysfunctional monetary system that doesn’t hold value over time, many artificial distortions arise in all markets. Like a cancer metastasizing in its host, fiat currencies are the initial viral load that contaminated all territories governed by the fiat dogma, spreading the pandemic of central and fractional reserve banking.

A Misunderstood Sister

It is a well understood yet underappreciated fact that money accounts for 50 percent of the value of all transactions globally, and therefore a broken money can have severe repercussions, as it tricks every user into misleading economic calculus, ultimately leading to a distorted, apathetic and broken society. The logical construct behind the dissection of today’s evils is actually very simple: money is broken; fix the money, fix the world. 

Time is an invariably forward passage common to all humans, agnostic of status, wealth, ethnicity or location. We only have so much of it. Money is an instrument to store time for later use, ready for trade with other specialized individuals. With money acting as a neutral good for trade, everyone is more productive with their special craft — the beauty of the specialization of labor! All voluntary and peaceful human action that emerges as part of a free society is enabled by money, a neutral good for exchange within a capitalistic society, a system built on the ability to accumulate capital for later productive use and to do good around oneself. 

What happens if money decays faster than time, melting away the time people have accrued? How is the common man affected psychologically by a devaluing currency? How do assets behave when people store their savings using them to preserve their wealth? How are industries and markets structurally influenced when being close to money production is highly profitable? How will narratives around inflationary, “growth at all cost” compare to peaceful deflationary realities where individuals earn more by waiting patiently? What happens when sound money is finally restored to the people using free and open tools such as Bitcoin? 

In this brief exploration, we will raise fundamental questions around national monetary manipulation with fiat currencies, their effects on life, business and psychology and how a global monetary melting led by Bitcoin will drastically shift the world toward sustained deflation — the ultimate step toward unrestrained prosperity and abundance. Hop on! 

Saving Is Freedom

People save to plan for future uncertainty and enjoyment. A dad may want to save to feed his family tomorrow in case of an unplanned job loss, or to organize a family trip for the next holiday. A young person may want to save to build a business. Saving is the essence of all human life. It allows one to construct a well-balanced life. Without savings, a man is bound to get stuck on a never-ending hamster wheel, chasing his shadow. 

Savings are the root of all capital accumulation, that serve as the base of life and investing, which leads to productivity improvements, if done well. Doing more with less is great, and that’s what life is all about, starting with biological evolution. A more productive dad can spend more time with his kids and wife. A more productive fungus has more room to grow and take over a larger territory. That’s all pretty basic, yet fundamental. 

When money decays over time and fails to hold value, something odd happens. 

People feel the need to spend it quickly,  because they can get more with it immediately, compared to holding it for later use. Holding a devaluing money presents a penalty to a responsible saver. Better spend it and buy other goods and services, or invest it in yield-generating assets to preserve wealth over time (or to at least offset the inflation rate). 

The root problem lies in the forceful decision of spending, instead of voluntary saving. With monetary inflation, people will tend to buy things they don’t need and invest in stuff they don’t understand. The resulting artificial demand for goods and services is unnatural and triggers many ills such as asset and consumer price inflation. Industries end up being built by producers responding to these artificially stimulated price signals, which cause systemic malinvestment, the scale of which we have yet to fathom. 

Industries Built On Fiat Vice

Governments today measure economic development with a national metric called the GDP, which necessarily relies on consumption of goods as one of its primary drivers. Consumption means spending, which lowers savings, and, because saving is the basis of investing via gradual capital accumulation, it is easy to see how flawed a focus on GDP is. 

Two great evils have emerged from fiat currencies and government-led measurements of economic progress: consumerism and short-sighted financial engineering. 

Entire industries have been built on a delusional vision for mankind corrupted by debt-fuelled consumerism. Overzealous application of financial engineering is the atrocity pushing the boundaries of exuberance when it comes to enslaving our lives: buy things we don’t need (consume) with money we don’t have (debt). 

If people were consuming less because money was holding value over time, would advertisers spend around $700 billion per year to promote goods and services? Would social media platforms be tracking their users and manipulating individual views as much as they are to serve advertising giants? Would the world’s best software engineers spend their precious time architecting machine-learning models to optimize online ad spend? Would the smartest pool of talent spend outrageous hours in financial services, losing the most precious hours of their youth with little societal benefit to show for it?

Global banking is estimated to be worth roughly $5.3 trillion. As one of the most well-paying industries, banking and financial services are attracting millions of workers, accounting for around 23 percent of the total global workforce, including talented software engineers and developers with the ability to horizontally move to other industries. Creating a massive industry, the growth of banking is a direct result of the corrupted fiat currency system, which incentivizes the construction of ever more complicated financial engineering schemes. All this to protect wealth from centrally induced inflation deemed necessary by those who benefit from its existence, which for everyone else ultimately only serves to increase systemic risk until an eventual rupture leads to socialized losses — bail outs. 

Facebook, Google, YouTube and Amazon are advertising companies — under the semblance of speech-enhancing global social networks — receiving close to 40 percent of the global ad spend. Roughly $618.7 billion was spent by advertisers on these platforms last year alone, which incentivizes these companies to track their users as much as they possibly can to serve their paying customers: advertisers. Talented engineers are attracted to these companies, not to support free speech at a massive scale as social media could allow, but because the pays are indeed quite generous, with a median pay of a quarter million dollars at Google

In a sense, banking and advertising are truly important industries, which most definitely can add value to the world but have been corrupted by the evil of fiat monetary inflation, to the point that benevolence is no longer possible. Advertising and banking are dominating global economic activity, while they ought to be supporting well-functioning free markets. 

A Dark And Invisible Beast

First and foremost, monetary inflation is an expansion of the money supply. Monetary inflation renders all previously existing circulating units less valuable by diluting their presence in the total supply. 

Currency holders lose purchasing power due to inflation, which encourages them to get rid of it, as we just discussed, affecting many aspects of life such as time preference. Instant gratification feels good, and intrinsically, all biological organisms enjoy pleasure in the short term, knowing that long-term pain may occur as a result. Take a night out with friends drinking: sipping that extra glass of bourbon is undeniably enjoyable in the moment, but the next morning may not be so pleasant. 

Rationally, if someone knows that saving money for later use will render this money more valuable, the incentive to not spend it right away is strikingly obvious. What happens then? Demand for unnecessary items may contract as people reduce their spending. People may start thinking twice about their willingness to spend the money they earned with hard work. “Do I really want to buy the latest pair of Nikes or the newest iPhone?” This simple shift of mindset seems inconsequential at first, but it leads to a rippling societal change — a complete reversal of current norms plagued by over-consumption of frivolities. 

Allowing someone to reflect before making a decision to deny future wealth appreciation is a fundamental restructuring of the individual psyche. Delayed consumption lends space to think rationally, preventing superficial consumption. Instead of consuming life in the short term, one invests in their life for the long term. How does reliable and scarce money affect the human psyche? How does an individual change when exposed to delicate scarcity as opposed to extravagant abundance? What happens to a society protected by incorruptible assurances of sound money? 

A Reversal Of The Human Psyche

“A rolling stone gathers no moss.” Living a carefree life that is not built on solid foundations is unstable. Like a stone in the forest under the trees, the moss that accumulates is synonymous with a fresh and healthy environment, where time passes. A stone that tumbles in the river at the mercy of currents will not accumulate any moss — a torrential existence of misery. 

Individuals are no different. Stability and prosperity come from a foundation built on a secure shelter, a decent nutrition, a healthy lifestyle, a loving family, caring friends, incorruptible values and generous savings for cold rainy days. Not having that unshakeable foundation can lead to a life of misery with no meaningful accomplishment. 

All valuable things are scarce, and money is no different. Something abundantly available has little value. Water in an ocean doesn’t have much value, but in a deserted area, it can mean life or death. As individuals are exposed to truly scarce money, over-consumption stops. 

Today, this phenomenon is observed in reverse, fuelled by massive consumer and corporate debt levels, the polar opposite of low time preference. People are spending their future in the present by neglecting the burden of debt, and borrowing large sums of money to pay for items they cannot afford. 

Education in the U.S. is an obscene illustration of that for young adults, with 44 million students collectively owing $1.6 trillion of debt for their university degrees. American mortgage debt is nearing $10 trillion, which is propping up the real estate market in an unsustainable fashion. In total for the U.S. alone, consumer debt reached $14 trillion, while the corporate debt market hit $10.5 trillion earlier this year. Prior to the massive wave of stimulus led by governments all around the world, the sovereign debt market already hit an all-time high of $66 trillion, more than approximately 80 percent of global GDP. Overall, global debt-fuelled growth is a symptom of an illness in the money that we use globally, no different to the effect felt by individuals.

As mentioned earlier, a man with sound money lowers his time preference, facing the irrefutable scarcity of his storehold of wealth. As his savings appreciate in value over time, he can wonder about what he should be spending his time and money on next. He is now allowed to think before acting, instead of running on life’s proverbial treadmill. Getting rid of superfluous possessions is the number one priority. Leaving behind a life of frivolous spending hidden by the vicious ornament of “carpe diem,” this newly born man discovers the timeless prosperity of stoicism. Patience, devotion and loyalty suddenly emerge from the dust as strong values upon which he can build his reasoning. 

Learning to appreciate the beauty of things around him, this man’s heart fills with love and empathy for others around him who are still on the treadmill. Few things truly matter, and chief among those that do are his family, his health and his life’s work to make things better around him. Sound money changed him. A fast life of abundance filled with comfort and certainty now feels shallow and miserable. Progress made through work, pain and love allows him to tackle uncertainty and find stability in the chaos of life. As he delays his own gratification to plan for his family or entrepreneurial venture, he reduces his consumption, accumulating liquid reserves. Savings allow him to be free, and because they are appreciating in purchasing power over time, the more patient he is, the more reward he inevitably reaps. 

What happens if this effect on the individual spreads to society? As people demand less of products and services under a bitcoin standard, but also reduce their speculation in asset classes to preserve their wealth, a global deflation flourishes, allowing individuals and families to attain increasing purchasing power, further driving society toward prosperity.  

A Global Delflationary Repricing 

When consumer behavior shifts, producers undoubtedly adapt their output to meet the new demand. If there is a demand shock, prices will plummet until buyers are found, such that producers can distribute their past production, and re-adjust their upcoming production cycle to meet lower demand levels. Producing less, entrepreneurs and organizations can focus on quality over volume, which should create more value for the buyers, perhaps willing to pay more for the products and services they are receiving, bringing prices back to an equilibrium. 

In a society with sound money, where monetary production is locked away from the greedy minds of faillible humans, such as is the case with bitcoin, consumption slows down. As mentioned, faced with inalterable scarcity, individuals understand the cost of instant gratification. Suddenly, frivolous spending seizes to be common, because it ends up being so costly in the future. When cash reserves appreciate over time, products and services become more affordable, and individuals along with businesses end up spending later to enjoy a higher purchasing power. 

Inflation may turn negative. Many investment strategies built on the mandate to preserve wealth and capital for the long term may turn obsolete as a result. Positive real returns today represent a key driver for long-term portfolio managers who are mandated to protect capital from inflation erosion over multiple decades. What happens when inflation turns negative? In such a scenario, cash doesn’t lose purchasing power. The well-known “cash is trash,” popularized by hedge fund superstar Ray Dalio, becomes a slogan of the past. Suddenly cash is restored with a fundamentally important property of sound money: a lasting storehold of wealth.

In a sound money society, cash is not only the most liquid saleable asset acting as a medium of exchange and measure of value, but it acts as a store of value. Anyone willing to solely preserve wealth over time and have access to liquidity to meet short- and medium-term obligations only has to hold cash. For trillions of dollars of capital parked in assets to preserve wealth over time, this represents a drastic shift. Bitcoin is the instrument which may turn the world upside down, reversing investment strategies for many asset managers across the world. 

As Bitcoin maintains a steady cadence in its process of monetization, it will continue to absorb a material amount of wealth from the fiat legacy paradigm, plagued with inflation and currency debasement, until total collapse. Some would argue that such a particular view is extreme, while others would maintain that it is absurd and ignorant not to hold it. As this process proceeds and bitcoin attains unfathomable levels of market value, asset classes such as real estate, gold and equities will be repriced. Fundamental valuation models for the classes of assets exist today, and are well understood. Undeniably, today, most of these asset classes are deemed to be overpriced by multiple investment managers looking to find value in underpriced assets. Truth be told, most of these assets have accrued a monetary premium, which emanates from their respective utility as decent storeholds of wealth. 

An asset that is understood by the market as a viable store of value is relatively scarce compared to the currency from which the saver is trying to find protection, while also being quite durable over time. Real estate is an asset class estimated to be worth $280 trillion and owes a material amount of this aggregate market valuation to the storehold of wealth use case. Indeed, many investors are parking capital in buildings of popular capital cities to preserve their wealth, often leaving their units vacant, as is the case in Vancouver. In other words, the utility of real estate, as a good for shelter, is not leveraged in this scenario, but only in the fact that urban properties are relatively scarce and durable in politically stable jurisdictions. 

Equities behave according to the same principles. As a market of roughly $90 trillion today, they are mostly well understood with valuation models such as price-to-earnings ratios. Generally speaking, over a certain threshold, based on the industry and other factors, a company will be deemed overpriced or undervalued. Most equities today are used in diversified, 60/40 portfolio allocation strategies to preserve wealth against the erosion of fiat. Fixed income markets are another massive segment used for wealth preservation, especially T-Bills which are deemed “risk free” by some market participants. 

What happens when investors withdraw from these asset classes to hold wealth-preserving cash? Most likely, a massive burst will follow. The monetary premium accrued over years of weak fiat currencies will be shifted back by a sound money standard, pushing investors outside of risk-on positions to preserve wealth. Investment will be made to derive a return on capital, not only to beat inflation from fiat currencies. 

In its early phase of monetization, Bitcoin as the global monetary base may capture significant portions of the aggregated monetary premium accrued by different asset classes over the last decades of fiat currency experimentation. As these asset classes are repriced by markets, free of artificial fiat monetary inflation, purchasing power will be restored to the people.   

One may wonder how long it may take for bitcoin to become the world’s dominant numeraire — the underlying unit of measurement of value that we collectively use to price assets and consumer goods. How much will markets such as real estate, stocks and gold shrink by, if Bitcoin absorbs their cumulative monetary premiums? How will consumption patterns change for individuals and businesses evolving under a deflationary Bitcoin standard? How will humans refocus their time and energy if massive industries such as advertising and financial services are reduced by 30 percent? What about 70 percent? Will humans get to Mars much quicker if the best talent can focus on rocket engineering instead of ads optimization? 

All these are fascinating questions that we may attempt to answer another time.

The post When Bitcoin Melts The System, Prosperity Steps In appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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The Great Plague Of Shitcoinery

And the inescapable ravage of modern seigniorage…

Originally, seigniorage, also spelled “seigneurage,” came from the Old French language, stemming from the right of the lord (seigneur) to mint money — profiting tremendously from money creation. It was a bygone prerogative of lords and the crown to extract a fee, the “brassage,” from the bullion brought to the mint to be coined or to be exchanged for coins that would be used for commerce. Individuals could bring their precious metals, usually silver and gold, and the crown’s mint would stamp a coin out of the metal to be accepted by merchants. This privilege was exclusively reserved for armed elites with legislative and executive powers. 

Today, seigniorage is a common way for governments around the world to generate revenue without levying conventional taxes, which are less popular with their electorates. The modern lords of money printing are central banks working in tandem with commercial banks and governments issuing debt in a fractional reserve banking system. National fiat currencies, such as the U.S. dollar, euro or yen, are protected by legal tender laws, meaning they are recognized as an appropriate instrument to settle any monetary debt in some jurisdiction. It is also typically demanded that residents of the respective territories use these currencies to pay their taxes and trade in the country. Fiat currencies are only used because people have no other choices that are legally available. Under the fiat monetary system, the cost of currency issuance is close to zero, which is very profitable for the national issuers, as there is no longer any limit on the quantity of money that can be created, further shrinking the value of the existing currency in circulation, and annihilating the purchasing power of the currency holders — people like you and me.

Monopolies Vanish

Enter Bitcoin in 2008, revealed to the world as an open-source monetary mint divorced from any central control, in a dark corner of a cypherpunk internet forum. Just as Johannes Gutenberg pierced through the Church-controlled monopoly of written knowledge by inventing the printing press, Satoshi Nakamoto annihilated the State-controlled monopoly of money production. While Gutenberg’s invention eventually unlocked the Siècle des Lumières with an unfathomable amount of intellectual and cultural rebirth, Nakamoto’s invention may lead to even more radical societal upheaval. 

Language and money are both essential ways by which humans collaborate peacefully, and ought to be free from central manipulation. As free markets are cleansed of artificial constraining forces, productive individuals and businesses may discover novel ways to bring about freedom, peace and prosperity to our fellow human beings, but that is outside the scope of this article.

With a reasonably short existence of only slightly over 10 years, Bitcoin is oftentimes characterized as old technology, which has already become obsolete. Many narratives were constructed around the internet’s native monetary protocol, in an effort to give legitimacy to alternative competing offerings, supplied by private companies and individuals. Are these projects genuinely competing with Bitcoin on the premise of their monetary superiority? What makes a money valuable, and can a money that is digital ever be trustworthy and reliable? Is the current paradigm around fiat currencies and alternative digital currencies, colloquially,  “shitcoins,” that different? If bitcoin is only getting started in its monetization as a money for the people by the people, what are potential avenues of evolution in the next 10 to 20 years? Is shitcoinery a novel phenomenon, or is history simply repeating itself? Could shitcoinery be an overhyped technology bubble fed by greed, high time preference and the wrong technology heuristics? 

In this brief essay, we will try to dissect the fundamentally flawed nature of alternative digital currencies, observe bitcoin as a pragmatic monetary evolution in contrast to shitcoinery’s “technology revolution” narratives and will attempt to demonstrate that Bitcoin is not only the only genuine possibility of divorcing money from the State, but that this paradigm shift is already quite advanced and inevitable. 

An Old Demon

Still unbeknownst to most, alongside acting as a society-altering force for good, Bitcoin also revived a multi-millenium phenomenon on a global scale — the irresistible desire of a select few to control money production. As has history proved repeatedly in many distinct cultures and territories, controlling money production is extraordinarily profitable for the issuer. It is now easier than ever to become a money producer, and distribute it to many millions, if not billions, of people. To this day, more than 7,000 alternative digital currencies have been created (and counting), claiming their pseudo-monetary superiority to Bitcoin, or outright defrauding uneducated buyers with fake narratives. 

Creating an alternative “cryptocurrency” today only takes a few minutes, which severely diminishes the barrier of entry for money producers. Armed with cunning marketing discourse, global distribution platforms on the internet and sometimes fraudulent artificial market manipulations, these “cryptocurrency issuers” can trick individuals, businesses and investors into believing their worthiness. Most of these projects, if not all, are misguided or directly coordinated scams on a global scale that is causing pain. The global market value of alternative cryptocurrencies equates to roughly $100 billion at the time of this writing, which represents a material malinvestment from developers, entrepreneurs, researchers and investors. Only one class of people benefit from shitcoinery in the long term: scammers leveraging information asymmetry in the marketplace. 

Let’s be clear: Free market participants should be allowed to build businesses on whatever they please, as long as fraud is out of the equation, and consistently called out. Gambling within cryptocurrency exchanges, commonly referred to as “shitcoin casinos,” has been one of the most profitable business models around bitcoin, but was rarely qualified with the right amount of risk disclosures to market participants. Hiding information from consumers buying products and services is the real issue at heart. No amount of regulatory oversight will prevent consumers from being defrauded until people understand that the market for money is unique. The market for monies is the only market in the world that is a zero-sum game, and is simultaneously winner-take-all in terms of the eventual dominant form of money. Someone has to lose on one side of the trade, and because money makes up 50 percent of every single transaction globally, broken money markets can be a massive problem, which emanates severe negative consequences.

A Storm Of Confusion

Global disinformation, traditional market distress and financially-squeezed young generations crumbling under the burden of debt, are a favourable combination for the legitimization of shitcoinery. Fake information and outright lies about the promise behind alternative digital currencies are predominant, with gatekeepers manipulating the masses of retail consumers who are uneducated about financial services and monetary history. With a rising distrust in legacy financial markets, digital native generations — Gen Z and Millenials ,most notably — are turning a blind eye to legacy banking and want an out quickly. Under the habits of the Nanny State, entitled generations are removed from self-responsibility, thinking they can “make it big” overnight and turn out a quick profit to retire at 25. With fragile economic fundamentals, recent retail-led stock market maniac run ups have been another striking example of such phenomena.

Shitcoinery appeals to the inner, most nefarious human trait from which most are too proud to admit they suffer: greed. Greed can rot the mind and turn an honest person into a short-sighted, self-serving and mindless sheep, following the herd that is getting rich without them. Greed originates from our internal fear of facing an uncertain future, and shitcoinery is the glass from which one drinks the brew of aspirational eternity, promising a delusional abundance of wealth, a complete mirage. 

Without diving into the technicalities of multiple implementations of shitcoins, it appears correct to postulate that most, if not all, of these cryptocurrencies, networks, protocols or outright Ponzi schemes are flawed by design. The fundamental axiom of trust lies in pure decentralization, which is an inescapable binary measure, and not a spectrum, as most shitcoiners would preach. A system is decentralized, or it is centralized. Centralization can oscillate on a spectrum with relative distribution, such as master-and-slave relationships in a computer network, but that is irrelevant to the subject at hand. Closing the loop, most developers working on shitcoins have immeasurable control over the monetary policy of their implementations, which requires trust, a requirement that was nullified by Bitcoin more than 10 years ago. 

A Brutal Monetary Darwinism 

Bitcoin was published as an attempt to construct a global monetary mint using the internet, cryptography, network computing and systems infrastructure. Nothing is new in Bitcoin, and most technologies used to build and run the protocol have been around for multiple decades. Everything was battle tested before. A common misconception is assuming that Bitcoin is the first attempt at creating digital cash. Many more attempts came to life in the past, and subsequently perished. 

Whether it is E-Gold, Digicash, Liberty Reserve or B-Money, many implementations were developed over the years, each adding their contributions to the edifice that is Bitcoin. The fundamental difference between Bitcoin and shitcoins lies in its absolute decentralized nature, its immaculate conception and its mysterious inventor. Bitcoin has no head to chop, no management team to bully and no central point of failure. It adapts to its environment, as hostile as it can get, and gets more resilient with protocol updates that respect its uncompromising assurances. Bitcoin is akin to a living organism trying to survive the test of time — the purest form of universal anti-fragility. 

“The genius of Bitcoin, in inventing a digital currency successful in the real world, is not in creating any new abstruse mathematics or cryptographic breakthrough, but in putting together decades-old pieces in a semi-novel but extremely unpopular way,” reads an influential 2011 essay on the technology. :Everything Bitcoin needed was available for many years, including the key ideas.”

Battles in the money market aren’t about incremental technology features, but fundamental monetary properties. Bitcoin is a pragmatic monetary evolution, which contrasts with shitcoin issuers misrepresenting a delusional technology revolution. Shallow narratives around “decentralizing the web” or “fixing supply chain traceability” are promoted as substitutes to failed attempts to legitimize some projects in the field, which were doomed to fail at birth. Often, unnecessary complexity is used to confuse people and leverage the greed factor we discussed previously. 

Money as one type of good (different from consumer and capital goods) competes over soundness, which is a combination of objective properties that make a neutral, good, useful medium to be useable as money. The single best money is a good that is completely useless for any other thing, which has no intrinsic value, and that’s great. Besides the monetary premium it accrues from its monetization, people realize naturally that a monetary good is a trustworthy mechanism to store, exchange and measure value. The Austrian Economics school of thought would disagree with this premise, defending the argument behind the “Regression Theorem,” but that is a debate for another time.

Shitcoins promote “get rich quick schemes” with incredible returns and shallow narratives, by moving fast and breaking things, defending the unattainable morality that competition in free markets must exist to let participants freely choose what is best for them. Controversial in the field, this position should trivially be refuted by the simple axiom of truth: lies are fraud, fraud is theft and theft should not happen. Bitcoin appeals to individuals with low time preferences, which is to say, individuals who think long term and want to find safety in sats (1 BTC is divisible into 100,000,000 satoshis). Bitcoin isn’t a “get rich quick scheme” but a “don’t get poor slowly” one, acting as a weapon of defense against the world’s most singular evil: monetary inflation.

Think long term, choose Bitcoin and opt out. Be greedy, and find the evils of high time preference and degenerate gambling, which have been rotting the hearts, souls and minds of humans since the dawn of time.

In the end, there is no escaping it: Bitcoin is inevitable, and shitcoins will perish in a brutal monetary darwinism. Choose wisely.


This is a guest post by Thibaud Meréchal. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post The Great Plague Of Shitcoinery appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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A Monetary Layer For The Internet

ARPANET’s First Mark Into Networked Computing

Created in February 1958, the Advanced Research Projects Agency (ARPA) was a response to the Soviet launch of Sputnik 1, the first artificial Earth satellite, to research and develop projects in technology and science beyond direct U.S. military applications.

Bob Taylor, an ARPA computer scientist, convinced a colleague to support a research project using funding from a ballistic missile defense program. Following three years of research, the ARPANET project was launched as the first network to connect two geographically-distinct computers.

On October 29, 1969 at 10:30 p.m. PT, the first successful message, “LO,”was sent from UCLA in Los Angeles to Stanford University in Silicon Valley. The message was supposed to be ‘“LOGIN”’ but the system crashed. Over seven years later, Queen Elizabeth II was sending her first email from a computer installed in the U.K.

Unbeknownst to most, ARPANET was morphing into a small but fast-growing global communication network.

Source: Wikimedia

Rising Computer Network Protocols

The ARPANET was the first public implementation of TCP/IP, two major protocols that now form an integral part of the Internet Protocol Suite. Taken together, this suite constitutes what we know as “the internet,” the global interconnected network that hundreds of millions of humans use daily without ever being aware of it. As additional computer nodes joined the ARPANET in different countries, novel technologies were developed to make the growing network more usable, most notably through standard network protocols.

Public computer protocols were created to govern how data is created, exchanged and interpreted between clients and servers on the same interconnected network, including Simple Mail Transfer Protocol (SMTP) to send and receive emails, File Transfer Protocol (FTP) to exchange and read files or Hypertext Transfer Protocol (HTTP) to structure and display web pages that we browse today.

HTTP is one of the most well-known public protocols. It turned ARPANET into the World Wide Web that is now commonly called the internet or the web and established a standard for computers to communicate on the application layer of the internet, having built on other layers of public protocols and open-source technologies.

The Internet’s Onion Shape

The internet is built in layers, first abstracted in a framework called the Open Interconnection System (OSI) model, which was later reinterpreted by a simpler version based on the TCP/IP architecture. The OSI model is a logical construction that defines network communication used by various computer systems that interact with each other.

As the internet morphed into a more sophisticated global network of computers, the OSI model was published to help decouple seven distinct layers of public protocols useful in the creation, exchange and interpretation of data flows.

As a hierarchical system, public computer network protocols coordinate how data moves across the internet’s seven layers. Each layer is solely responsible for performing assigned tasks and transferring completed tasks to the next layer for further processing.

This clear specialization ensures performance, reliability and scalability of the internet.

The internet is a multi-layered global distributed network of computers that we use every day for many things without ever questioning its existence. Though only 20 years old, the internet powers an immense amount of trades between an ever-growing number of consumers, companies and nations, accounting for roughly $28 trillion in 2016.

Long before Amazon was a thing, in 1972, students from Stanford and MIT conducted the first ever online transaction using ARPANET. The first good ever sold on the internet was marijuana. Many projects followed as commercial and academic attempts to create electronic cash making commerce native on the internet. All incommensurably failed from the late 1980s to the early 2000s, including B-money, Digicash, Hashcash and bit gold.

Technology capacity limits, regulatory hurdles and centralization particularly prevented mainstream digital currencies from ever taking off.   

The Missing Monetary Layer Of The Web

Regardless, for users to directly trade with geographically-distinct neighbors on the internet, one essential component has been absent until now: a monetary layer to store, exchange and measure value natively on the web without being required to use legacy financial institutions.

Over two decades, failed attempts at creating digital money paved the way to a reckoning and the silent launch of an open-source software project on a cypherpunk mailing list, back in 2008. Satoshi Nakamoto was the pseudonym of an unknown individual or group who posted about the Bitcoin project with a link to the white paper explaining how it works.

The project was initially understood as yet another doomed attempt to construct a digital currency by the disillusioned cypherpunk community. And without anyone’s permission, Bitcoin slowly emerged and diligently grew to become adopted by a small group of computer researchers, cryptographers and engineers curious to decipher the technology.

Fast forward 11 years: Bitcoin proved to be resilient to attacks, bugs and serious technical and political crises. There are hundreds of developers actively working on this project worth more than $200 billion in monetary base. Bitcoin’s latest running software (0.20.0 released in June 2020) has created and maintained the world’s first form of absolute digital scarcity. Without ever breaking the integrity of its underlying ledger, it does not rely on trusted third parties to verify that everything is running well.

Everyone and anyone can take the role of verification on the Bitcoin network. This had never been achieved in the past. Bitcoin solved a multi-decades long problem in computer science called the Byzantine Generals’ Problem, which highlights the complexity of coordinating untrusted nodes in a distributed network.

LNP/BP As Public Network Protocols

Bitcoin is growing into the internet’s native monetary layer. Functioning as a suite of public network protocols, referred to as LNP/BP, Bitcoin has undeniably scarce units of value. It is a network of storable, movable and quantifiable value. What does LNP/BP stand for? 

As a self-contained economic system on the internet, Bitcoin is powered by energy and protected by a global network of computing power that voluntarily regulates the integrity of Bitcoin’s ledger and its digitally-scarce monetary units. That self-organized configuration is unbreakable and decentralized like the internet itself.

Together, the Bitcoin Protocol (BP) and its Lightning Network Protocol (LNP) are joining the ranks of other open network protocols akin to TCP/IP. The Bitcoin Protocol has movable units of scarce value that can flow within its network, similar to the Internet Protocol (IP). The Lightning Network Protocol (LNP) acts as a second layer built on top of BP, which permits nearly instant, cheap and anonymous exchanges of data packets on BP, similarly to how the Transfer Communication Protocol (TCP) does it with the Internet Protocol.  

LNP/BP is the Bitcoin suite of protocols — responsible for the rise of a native monetary layer of the internet, adding a division to the TCP/IP model’s current stack. Bitcoin represents the world’s first bytes of data with an intrinsic financial value priced by the physical world, in the form of energy, protected by the First Law of Thermodynamics

Software now has a built-in price tag. Code is valuable without any specific application because of its remarkable scarcity. Scarcity isn’t a concept that is limited by physical boundaries anymore. Scarcity can provably be digital, and is actually the first and only form of absolute scarcity discovered by mankind, which questions its provable existence in the analogue world. Absolute scarcity now exists in the most intangible form—bits—the portmanteau for digital binary digits.

A Silent Monetary Evolution 

Bitcoin is agnostic about any human inventions such as legacy institutions, governments, central banks or corporations. Internet users can simply acquire, trade, hold and use bitcoin as they see fit. No single entity controls the protocol. It is governed by open-source software, which is voluntarily run by tens of thousands of independent node operators.

Computer nodes in the network play two roles around Bitcoin’s ledger, called the timechain, by either writing or reading transactions. Bitcoin’s timechain is a chain of blocks, which transcribes a suite of bundled transactions that are recorded sequentially by one set of computers called miners.

Often referred to as “the blockchain,” which is more appropriate for other cryptocurrencies desperately trying to mimic Bitcoin, the term “timechain” is more accurate to describe Bitcoin’s ledger as it ties to the original semantic used by Bitcoin’s pseudonymous creator, Satoshi Nakomoto.

A Free Market Of Rational Volunteers

Miners are powerful computers with specialized hardware dedicated toward writing transactions to Bitcoin’s ledger. In a public computational contest, vast amounts of energy are expended by miners to brute-force random alphanumeric strings in an effort to guess a random code — akin to a digital lottery.
Bitcoin miners’ contributions to the network are measured as hash rate, which is a function of the total computational power allocated to the network, which is currently hitting new all-time highs at approximately 125.2 EH/s.

Once that random code, called a “nonce” is found by a computer in the network, it proves that the miner has completed enough work in the form of energy and time expenditure. This is commonly referred to as Proof of Work, which allows all computers in the Bitcoin network to verify that the system stays fair and honest.

The lucky computer (or mining pool, as they often combine computing power for efficiency) can then gather a batch of unconfirmed transactions from a queue called the “mempool” and bundle them into a block to permanently write that block of transactions into Bitcoin’s ledger.

To be granted permission to write on Bitcoin’s ledger, there is no shortcut such as political influence, hierarchy or seniority. Each participant adding information to Bitcoin’s ledger needs to earn it through proven work that they must demonstrate to the network using the random nonce.

In return for their service to the network, miners receive a block reward, including a subsidy with new bitcoin (currently 6.25 bitcoin per block), as well as transaction fees paid for by users seeking Bitcoin transaction settlement. This is the only way for new bitcoin to be issued. It must be earned via provable energy expenditure.

Since 2018, Bitcoin has shifted the world into an era of exahash computing. If one were to gather the 500 top supercomputers, altogether they would only represent 1.6 percent of Bitcoin’s hash rate. It is dwarfing the world’s computing horsepower by multiple orders of magnitude, creating a robust computational defense mechanism, preventing malicious actors from controlling the network and double spending bitcoin using the majority of the hashrate, which is an attack often referred to as a 51 percent attack.   

A Self-Managed Computing Organism  

Bitcoin’s ledger is secured and managed by cryptography. On average, a new block of transactions is added every 10 minutes, no matter what happens in the world. Each time, this creates new bitcoin on the network, in the form of a block subsidy for the lucky miners. The block subsidy used to be 50 BTC, which was halved according to the protocol specifications in 2012, in 2016 and in May 2020, bringing the current block subsidy to 6.25 BTC per block today. This process is called halving.

Halving events happen every 210,000 blocks that are added to Bitcoin’s ledger. It is the only rule that controls the issuance of new bitcoin. It will continue roughly every four years until all 21 million bitcoin are mined, which should happen approximately in the year 2140.

The discovery rate of bitcoin slows down over time, until it ultimately turns to zero. No new bitcoin will be found after that moment in time. As new adoption increases demand, the number of bitcoin goes up, which incentivizes participants to join. Opportunistically, new miners are attracted to the Bitcoin network to mine blocks of transactions and receive the valuable block reward.

As more computers join the network and produce a larger collective hash rate, Bitcoin is automatically adjusting the difficulty of the mining lottery. Roughly every two weeks, or 2,016 blocks, mining either becomes harder or easier based on how much hash rate there is at this given time. It is the most reliable way to have Bitcoin blocks mined roughly every 10 minutes, keeping the issuance schedule highly stable and predictable, regardless of the network’s aggregate hash rate.

Toward Universal Financial Integrity

Since its first block mined on January 3, 2009 by Satoshi Nakamoto, Bitcoin has been up 99.98 percent of the time, and has never validated a malicious or wrong transaction, which is unprecedented for legacy financial institutions.

This is only possible because verifying Bitcoin transactions is very accessible. While writing new transactions on the ledger is extremely costly, reading them to verify the integrity of the ledger is easy and accessible to all.

Full-validating nodes can be operated on computers less powerful than what many people have at home or at work, making it trivial and affordable to verify the history of the Bitcoin transactions. Anybody can run them. This makes Bitcoin an impenetrable fortress of security as everyone can check every single transaction that ever happened in Bitcoin. It’s an openly auditable ledger.

Miners and full-node operators voluntarily run a version of the Bitcoin software that is compatible with the majority of the network. This maintains a general consensus on the shared rules of the network such as the block size, which dictates how many transactions can be included in a block by miners. Large miners are incentivized to grow the size of blocks to include more transactions, gaining additional fees and making it more costly for newcomers and small participants. Full-node operators choose voluntarily to run a version of the software to keep block size small to make verification accessible to everyone.

Miners have to be compatible with full-nodes to have the mined blocks be verified and approved. If Bitcoin’s block size grows, more powerful computers are required to run full-nodes with extra memory and bandwidth, which will centralize verification, adding a level of trust in the system, especially around miners. Bitcoin’s current block size is approximately 2 MB (with a theoretical block size of 4 MB with the SegWit upgrade), and has been challenged many times in the past. The most serious attack was in 2017 under the form of a hard fork, called Bitcoin Cash, or Bcash (BCH), which copied Bitcoin’s software and transaction history, and adjusted the code to raise the block size up to 8 MB.

Deviations such as Bcash are the unavoidable by-product of the open-source nature of Bitcoin, which lets anyone create forks of Bitcoin’s timechain, though the market continues to value these forks at a substantially discounted value.

Liberating Modern Capital Markets

As the internet liberated free information between global peers, Bitcoin is liberating capital exchange, creating open, fair and social markets in which anyone can participate. New companies exclusively built on Bitcoin’s base layer and/or Lightning are making it safer and easier for sovereign people to opt-out of the legacy banking system.

As trust-minimized agents, companies building on Bitcoin and Lightning are pushing for reasonable adoption with ethical principles and a core focus on security, usability and sovereignty. Whether working on non-custodial private key management, Lightning channel capacity distribution, protocol implementations, or peer-to-peer Bitcoin exchanges, Bitcoin native companies make the capital flow from the legacy banking system into Bitcoin possible.

Bitcoin native companies are creating massive economic upside potential for this new internet monetary layer and will be building a Bitcoin-based economic system in the next 20 to 30 years with almost no doubt.

This is a guest post by Thibaud Marechal of Knox. Opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine. This article was originally published on Medium.

The post A Monetary Layer For The Internet appeared first on Bitcoin Magazine.

Source: Bitcoin magazine