Is Bitcoin the Ultimate Digital Scarcity?

Is Bitcoin the Ultimate Digital Scarcity?

By paragism | paragism | 16 Jan 2021


Jamie Dimon, CEO of JP Morgan, shocked the world by calling Bitcoin a fraud in 2017. He said at that time that, “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Time really changes many things. Very recently, a JP Morgan report states that Bitcoin is competing with gold as an alternative asset and has the potential to reach $146,000 in the long term. Bitcoin was the best performing asset class of the last decade amidst numerous criticisms. Post pandemic, the king of cryptocurrency only received breathless headlines in the mainstream media and the price soared. The institutional money is flowing into Bitcoin and it is being regarded as a safe hedge against inflation.  There is a real corporate rush to convert the balance sheet cash reserve to a so-called volatile asset. Dimon has changed his mind and the wall street is changing its tune. With the new ATH of $41,940, Bitcoin surpassed the marketcap of Facebook some days back and entered the top 10 asset club of the world.

Gold is the cult safe-haven asset and the perceived value of gold has been established through ages. Satoshi Nakamoto created Bitcoin as peer-to-peer money but he wanted to create a ‘gold standard’. The whitepaper of Bitcoin states that “the steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation.” Bitcoin is often called ‘digital gold’ due to its scarcity model. 21 million maximum supply and programmed inflation of Bitcoin makes it an extremely scarce asset. Scarcity is the foundation stone of the essential problem of economics. When the means to fulfil ends are limited and costly, the demand keeps on increasing. Money is a scarce resource but today’s fiat money is the most manipulated financial instrument. The ‘gold standard’ of money was abolished everywhere to establish the authority of the governments on money but the authority became totalitarian control. Bitcoin came as radical money which wanted to give the power back to the people.

“One of bitcoin’s strengths – the most important in my opinion even – is the low degree of trust you need in others.” – Pieter Wuille

The Byzantine Generals’ problem describes a situation, where in order to avoid catastrophic failure of the system, the system's actors must agree on a concerted strategy but some of these actors are found to be unreliable. It is really a hard problem to solve. Imagine divisions of a Byzantine army attacking a city from different sides. Every division is led by a general and some generals want to attack the city whereas some generals want to retreat. In a particular division, there are a few lieutenants who need to abide by the decision of their commanding general. It is basically a leader-follower setup in the combat scenario. Now, the lieutenants also must agree to the decision of their general regarding attacking the city or retreating. The whole game becomes more complicated when there are bad actors. A lieutenant can sabotage or a messenger can send wrong communication from one general to another intentionally. The good actors in the game do what they are supposed to do technically but the traitors can create havoc. In an ideal algorithm, the bad actors won’t be able to influence the Byzantine army whatever they do. This is a thought experiment in computer science. Is it possible to create a consensus in a computer network of distributed nodes? Satoshi created Nakamoto Consensus in the Bitcoin whitepaper which dealt with ‘The Byzantine’s Generals’ problem. In a distributed ledger technology, the nodes must agree on the basis of predefined rules to assess a transaction before it is added to the database. The proof-of-work consensus algorithm on a Byzantine Fault Tolerance (BFT) peer-to-peer network was a pathbreaking invention. Bitcoin is a thermodynamically secured trustless money and its security model sets the technological benchmark for its digital scarcity. Yes, Bitcoin’s scarcity is defined by its codes but in this digital world, any data can be copied and it also threatens the digital scarcity. The blockchain of Bitcoin establishes referential scarcity where the reference is its ledger. The referential scarcity does not allow manipulation of data. It is a self-sustained 360-degree scarcity model.

Gold really took a long time to become such a widely accepted store-of-value. Bitcoin is volatile but how could it take birth with a stable price? The price discovery mechanism is still going on and it has gone through a journey from being called ‘Ponzi’, ‘Punt’ and its newfound acceptance. The no-coiner mistrust syndrome still persists and Bitcoin will take more time to establish itself as the ‘digital gold’. It is undeniable that the blockchain culture is still young and there is a polarization of thought regarding how digital scarcity leads to store-of-value. The proponents of some other blockchains argue that the extrinsic value of a network is derived from the utility and not scarcity but let us not forget the Quantity Theory of Money (QTM) which establishes the correlation of hyperinflation with the money supply. Bitcoin was envisioned as a ‘sound money’ and it had the root in the basics of economics. The network effect of Bitcoin is already happening with the exponential growth of the user base. Now imagine the scarcity model when Bitcoin will be ‘completely inflation free’. The next-generation financial revolution is bound to be digital and Bitcoin will play a big role. Let’s embrace the ultimate digital scarcity!

Note: This post was first published here for Cryptowriter in association with voice.com.

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paragism
paragism

Cypherpunk. Writing content which I love. Creeping on the blockchain. Founder - www.thecoinbuzz.com Twitter - @paragism


paragism
paragism

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