In 2009 Satoshi Nakamoto conceived Bitcoin, an electronic payment system based on cryptographic proof instead of trust. Bitcoin allow to make payments over a communications channel without a trusted party. In this post I will try to explain why its design choices are sound and fair.
Unless you are living on mars, you cannot avoid the amount of bad economic news on mainstream media, i.e. governments promoting either banks bailouts or bankrupt corporations too big to fail, hence running on larger and larger deficits, incresing taxes while cutting to the bone their services to population.
We are turned into thinking that the only way to escape our doomsday scenario is creating money i.e. a money expansion.
But have you ever though about real beneficiaries and consequences of money expansion?
In our world, central bankers are the "system administrators" of the money system. In the process of money expansion, the pseudo-money issued as debt by the private bank is typically referred to as “credit”. Banking authorities make a distinction between deposits and loans in the same way they distinguish between “money” and “credit.” In the nonphysical fractional reserve blip-based money system, the distinction is invalid. Creation of credit is equivalent to the creation of money. Whoever has or is given the authority to create credit has the authority to extract wealth from the economy by that same mechanism.
So when a central bank creates money, new shares of the economy are issued, but they are owned by private bankers at the expense of the ownership of all other shareholders (i.e. money holders, taxpayers, citizens of any nation whose debt is denominated in any private currency). Via mere money manipulation the private bankers own a greater real share of the entire economy (e.g. GDP denominated in dollars). The tragic absurdity of the situation has reached epic, international, worldwide proportions.
Indeed, the government has delegated its responsibility of ensuring public monetary integrity to private bankers. But the arrangement has devolved and degenerated to negligence and abdication. Those bankers have reneged on the implicit promise of providing monetary integrity. Their system correctly meticulously keeps track of ‘blip’ ownership and its transfer except, via the delegated ownership and administration of the blip-system, the private bankers can arbitrarily create and own new ‘blips’, under the guise of specious, distorted, and flawed economic science!!
We can conclude that the term expansion of the money supply is specious and misleading, lacking information on to whom specifically the money is supplied. The terminology is far more accurately called dilution (totally analogous to secondary stock offerings) or “debasing the currency”. It’s a secondary money stock offering backed by the entire country’s assets (underwritten and paid for by all citizens, taxpayers, and money holders).
In a fair system, private entities cannot create and own blips at the expense of the public. However, that is not the case with the fractional reserve banking system, with its intrinsic privately-owned expansion.
Thus the design decision to have a totally fixed number of 'blips', or coins in the Bitcoin parlance, avoid the currency debasement and allow the phenomenon of deflation.
Deflation in the modern economic vocabulary is synonymous with calamity or disaster. But a deflation may be a natural process whereby an increasingly efficient economy distributes the gains to all money holders -—an “emergent” interest system requiring no centralized or bureacratic administration, or possibility of ulterior manipulation.
Infact if money stock is kept constant, all money holders effectively gain interest without keeping their money in banks based on increased purchasing power from a global economic temperature increase. It’s also compatible with the use of commodity currency such as gold.
The idea of maintaining price stability per se may be a specious economic doctrine, given the fact that if GDP is increasing and prices are stable (and any interest payments are lower than the GDP increase) then money holders are losing purchasing power. By analogy of money as stock shares, it’s analogous to the idea of a company that has increased market value but shareholders’ stock prices remain constant.
Deflation therefore can be a sign of a healthy economy with highly secure scarcity integrity!
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.
The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
What has occurred is an unequivocal corruption in the integrity of the money. Somewhere along the line, the promise of integrity has been trashed.
We find that the government is erected partly to protect scarcity-unit ownership and regulate legal and illegal scarcity-unit transfer, is at the same time colluding with the money powers.
Money is a representation means for scarcity. Holders utilize it precisely for that property. Any entity that can allocate scarcity-units without exerting economic work by definition has debased such units relative to all other holders.
What a fair system really requires is scarcity integrity. All systems devised so far can be debased. However, debasement is not necessarily an intrinsic property of any of them. Clearly, a fair public money system must at the very minimum be either publicly-owned fractional, where there is legislative control over the reserve ratio, or fully-backed, in which case ownership of the unbacked fraction is irrelevant (there is no unbacked fraction). Fiat currency is unsound, but not in the sense that it will inevitably lead to total loss of value. Loss of value occurs at the discretion of whoever can effectively manipulate the reserve ratio via scarcity-unit creation and ownership unilaterally and clandestinely, concealed from other holders (i.e. without their consent).
As concluded, privately-owned fractional banking is not a fair system because, in short, it facilitates private confiscation of public property, represented by the public money. However, it is not necessarily unsound in the sense that it is unstable or will always collapse. Collapse occurs as reserve ratio tends to 0. With negligent, malignant, greedy etc. administration, money moves through the “backing continuum” from full, to fractional, to fiat. But even private expansion owners would presumably seek to avoid r = 0. Privately-owned fractional banking can be quite sound.
Apparently, the unrecognized dichotomy of fairness vs. soundness lies at the heart of much economic theory. One does not necessarily imply the other.
Bitcoin can have at most 21 million of coins, no more, (maybe less for technical reasons). Nobody can create and add coins out of thin air, but you can divid a coin up to eight digits. Coins are distributed gradually as a reward to nodes contributing to the integrity of the system.
The blip-system with totally fixed number of blips owners that are the participating node in the system, issues blips based on any arbitrary but agreed-on criteria to the money holders, such as work or tangible assets. This is done gradually. It seems counterintuitive, but such a system is inherently feasible and practical.