So I've been meaning to put these shower thoughts down for a while, I'm interested in having a civilised chat about some potential downsides of bitcoin's 21million fixed supply. There's probably a little overlap in these points but I think they do warrant writing about each on their own. These are all in the post 21-million world - i.e. when no new bitcoin is being minted and miners are solely relying on tx fees.
In this world there is no more inflation and the only adjustment in total Bitcoin is caused by people losing their keys. In this sense Bitcoin can be considered a deflationary currency.
- Flat/Deflationary monetary = flat/inflationary uncertainty
Over time the number of 'lost' coins will only increase. However, there is no on-chain proof that coins are lost. I could declare my coins lost today and tomorrow use my private key to send them somewhere.
If satoshis coins were to move, I was imagine bitcoin's value would take a big hit as the market anticipates a flood of tokens. The number of potentially 'active' coins has just increased.
These 'lost' coins are an element of uncertainty in bitcoin. And this uncertainty only grows as more coins are lost. While uncertainty can be priced in, can a market price in ever growing uncertainty?
- Spend Vs hodl
I'm somewhat concerned that bitcoin becomes a stagnant currency as holding onto it through deflationary events will only increase your share of the pie. I know this is a typical argument for inflationary currencies so don't need to labour this. Are we convinced that inflation doesn't help money move (and that that is a good thing) as most economists seem to agree?
- Value Vs Hashpower disconnect
Bitcoins security comes from the amount of Hashpower working on the network. And that Hashpower is paid for by mining rewards and transaction fees.
Mining rewards provide an incentive that is directly related to the price of Bitcoin. If bitcoin is worth more, the reward is larger and visa versa.
At 21million there are only transaction fees. The transaction fees are set by the market's demand for transactions - aka the activity of the network. This means miner rewards are not tied to the value of Bitcoin. If bitcoin becomes a digital gold, with an enormous market cap, but relatively low transaction activity, then tx fees fall, mining power falls and it becomes open to attack.
If bitcoin were to continue to mint new coins, miners could be incentivsed proportionally to the value of Bitcoin - this would act as a tax on all holders of bitcoin to ensure its ongoing security. Is that a bad thing?
No comments:
Post a Comment