The Bitcoin Standard

1. Bitcoin: The First Successful Digital Cash and Hard Money

Bitcoin represents the first truly digital solution to the problem of money, and in it we find a potential solution to the problems of salability, soundness, and sovereignty.

Revolutionary digital money. Bitcoin emerged as the world's first successful digital cash system, solving long-standing problems in computer science and economics. It combines the properties of physical cash (direct peer-to-peer transfers) with the advantages of digital transactions (fast, borderless, and divisible).

Hard money for the digital age. Unlike government-issued fiat currencies, Bitcoin has a fixed supply of 21 million coins, making it a form of "hard money" resistant to inflation. This scarcity gives Bitcoin potential as a store of value and hedge against currency debasement.

Key innovations:

• Decentralized network without a central authority
• Proof-of-work consensus mechanism
• Cryptographic security
• Transparent and immutable transaction ledger (blockchain)

2. Bitcoin's Unique Properties: Scarcity, Divisibility, and Transferability

Bitcoin is the first example of a digital good that is scarce and cannot be reproduced infinitely.

Digital scarcity. Bitcoin created the first example of digital scarcity through its fixed supply and mining algorithm. This makes it fundamentally different from other digital goods that can be easily copied.

Highly divisible. Each bitcoin can be divided into 100 million units called "satoshis," allowing for microtransactions and future scalability as the value of bitcoin potentially increases.

Global transferability. Bitcoin can be sent anywhere in the world within minutes, without requiring permission from banks or governments. This makes it particularly valuable for international remittances and in countries with strict capital controls.

Key properties:

• Fixed supply of 21 million bitcoins
• Divisible to eight decimal places
• Borderless transfers
• Pseudonymous transactions
• Resistant to censorship and confiscation

3. The Evolution of Money: From Commodities to Bitcoin

Money's primary function as a medium of exchange is what allows economic actors to engage in economic planning and calculation.

Historical perspective. The book traces the evolution of money from primitive forms (shells, beads) to precious metals, government-issued fiat currencies, and finally to Bitcoin. This history demonstrates how societies have sought increasingly salable and sound forms of money.

Attributes of good money. Throughout history, the best forms of money have shared certain qualities:

• Scarcity
• Durability
• Divisibility
• Portability
• Recognizability

Bitcoin as the next step. Bitcoin builds upon the strengths of previous forms of money while addressing their weaknesses:

• Digital scarcity (like gold, but easily verifiable)
• Programmable (allowing for advanced functions)
• Decentralized (resistant to government control)
• Borderless (facilitating global trade)

4. Bitcoin's Economic Incentives and Network Security

Bitcoin can be understood as a technology that converts electricity to truthful records through the expenditure of processing power.

Proof-of-work mining. Bitcoin's security model is based on economic incentives. Miners expend electricity and computing power to validate transactions and secure the network. In return, they are rewarded with newly minted bitcoins and transaction fees.

Difficulty adjustment. A key innovation of Bitcoin is its ability to automatically adjust the mining difficulty to maintain a consistent block time (approximately every 10 minutes). This ensures that increased mining power does not lead to faster bitcoin issuance.

Network effects:

• More miners = increased security
• More users = increased value and utility
• More developers = improved protocol and applications

5. Bitcoin as a Store of Value and Medium of Exchange

Bitcoin's comparative advantage may not lie in replacing cash payments, but rather in allowing for cash payments to be carried out over long distances.

Digital gold. Bitcoin's fixed supply and increasing difficulty to mine new coins make it a potential store of value, similar to gold. This property has attracted investors looking to preserve wealth in the face of inflationary government currencies.

Global settlement network. While Bitcoin can be used for everyday transactions, its true potential may lie in larger, international settlements. It could serve as a neutral, borderless system for high-value transfers between individuals, businesses, and even central banks.

Challenges as a medium of exchange:

• Price volatility
• Transaction fees (during periods of high demand)
• Confirmation times (10 minutes on average for first confirmation)
• Scalability limitations of the base layer

6. Scaling Bitcoin: Challenges and Potential Solutions

Bitcoin's capacity for transactions is far more than what the current number of central banks would need even if they settled their accounts daily.

Scalability trilemma. Bitcoin faces trade-offs between decentralization, security, and scalability. Increasing transaction capacity on the base layer could lead to larger block sizes, potentially reducing decentralization.

Layer 2 solutions. To address scalability while maintaining decentralization, developers are working on "second layer" solutions that operate on top of the Bitcoin blockchain. The most prominent example is the Lightning Network, which allows for fast, cheap micropayments.

Potential scaling approaches:

• Increased block size (controversial)
• Segregated Witness (implemented)
• Lightning Network and payment channels
• Sidechains
• Optimizations in transaction batching and signature aggregation

7. Bitcoin's Resilience Against Attacks and Alterations

Bitcoin exhibits extremely strong status‐quo bias. Only minor and uncontroversial changes to the code have been implemented so far, and every attempt to alter the network significantly has ended with resounding failure.

Decentralized governance. Bitcoin's lack of a central authority makes it resistant to changes that are not widely agreed upon by the community. This "status quo bias" protects Bitcoin's core properties.

Network security. The massive amount of computing power securing the Bitcoin network makes it extremely costly and impractical to attack. As the network grows, it becomes increasingly secure against potential threats.

Potential attack vectors:

• 51% attack (extremely costly and likely unprofitable)
• Government regulation or bans (difficult to enforce globally)
• Quantum computing threats (theoretical, solutions in development)
• Social engineering attacks on the community

8. The Future of Bitcoin: Potential Impacts and Challenges

Should Bitcoin continue to grow in value and gets utilized by a growing number of financial institutions, it will become a reserve currency for a new form of central bank.

Potential for disruption. If Bitcoin continues to grow and stabilize, it could have far-reaching effects on the global financial system:

• Challenge to central bank monopolies on money
• New models for international settlements
• Increased financial sovereignty for individuals
• Potential reduction in the power of inflationary government policies

Challenges and uncertainties:

• Regulatory responses from governments
• Competition from central bank digital currencies (CBDCs)
• Environmental concerns about energy consumption
• Adoption hurdles (user experience, education, infrastructure)

Long-term scenarios:

• Bitcoin as a global reserve asset
• Bitcoin as a niche store of value for a subset of the population
• Bitcoin's core innovations inspiring new financial technologies

Last updated: August 21, 2024