The Bitcoin Standard
Transcript By: Bryan Bishop
The bitcoin standard as a layered scaling solution
Saifedean Ammous (via skype) (saifedean)
Hello, everyone. Can everyone hear me? Okay, wonderful. You can’t see my slides, can you. You have to share the screen if you want them to see your slides. How do I do that? Where is that? This is new skype, I’m sorry. Thank you everyone for inviting me to speak today. It would be great to join you, but unforutnately I couldn’t make it.
I want to describe how I see bitcoin scaling and what this means for bitcoin security and for the role of government and intervention in bitcoin. I’m going to skip a lot of the content in my book; if you want to learn more, pick up my book.
The main concept of my book is about the hardness of money. I will briefly describe by what I mean saying hard money. Whenever humans have used something as money, it is always hard to produce. It’s the case with seashells and any time that something is hard to produce, interacting with something not hard to produce, the thing harder ends up as money. Things easy to produce fall into what I call the easy money trap. It’s easy to produce more of them, so the value of them shrinks, and people storing value in them will have little value in the future.
Bitcoin is interesting to me because it’s the hardest money we have ever invented. It’s reliably scarce. Some things might change the supply like yesterday’s bug but the chances of that happening are far less than the chances of the US dollar supply changing. The interesting thing about bitcoin is that no matte rhow much people demand it, there’s no way to increase the supply. They don’t make more of it. The production of bitcoin becomes more expensive and it has a limit. It makes it more secure.
In history, and this is discussed in my book, money is a winner takes all market. The demand for a store of value is winner takes all. Altcoiners like to talk about silver and how there was gold and then there was silver. The demand for silver crashed in the 1870s. Hard money is not a niche that a good can remain… some people make the analogy that bitcoin will be esperanto, always a niche language. I don’t think that’s valid. There’s no reason for someone to learn an extra language like esperanto, it’s a need that is far less pressing than people having a hard money. I think the demand for hard money is going to be enormous and overwhelming. The limitation on demand will not be limited; it’s winner takes all market. Even if people don’t move to bitcoin, their wealth will drop as the wealth of bitcoiners will rise. I’m not trying to sell bitcoin here- I’m jus ttalking about the economic reality over time. There might be crashes and there might be drops, but over the coming decades bitcoin will attract a lot more wealth.
The limit of bitcoin is onchain scaling. The most– the highest capacity we have seen bitcoin perform regularly was 500,000 transactions per day. That’s obviously nowhere near enough for everyone in the world to use it. There are block space optimizations to allow people to have payments. You can use many different ways of optimizing on-chain scaling, but there’s an absolute minimum for a payment which is going to be 34 bytes. You run into this hard limit. You can’t make a payment with less than 34 bytes. If you assume 2 megabyte blocks, and 34 byte transactions, you have 8.5 million transactions per day, which is not enough for the whole world to do on-chain transactions.
If bitcoin continues to refuse to die, and the demand increases, there’s no way that everyone will be using on-chain transactions. This much is clear to everyone except bcashers. If we try to increase the blocksize, then you can’t realistically solve this problem without also increasing the cost of running a node and ruining the decentralization of the network.
This is similar to gold at the end of the 19th century- everyone wants to use it, and it’s too inconvenient to store it, it’s inconvenient to cut up gold coins and combine them. The solution was the gold standard- which was fiat, where the gold didn’t move, but financial instruments around gold could move. Each movement of gold was a settlement or netting transaction for thousands of transactions using fiat paper notes that were backed by gold. We see something similar with bitcoin today; exchanges, casinos or betting services are using bitcoin and they move far more bitcoin off-chain than they do on-chain. Casinos and betting services- you send them bitcoin once, and then each gamble is registered internally but not on the blockchain. In the beginning, SatoshiDice was using scarce blockchain space for their rolls. Many of these transactions, you’re trusting the casino anyway, even if you can verify afterwards with just-dice HMAC thing anyway.
Lightning is another example of how scaling is happening, where you transact using bitcoin transactions. The bitcoin is locked up in the channel. Opendime is a physical scaling solution. Multisig and custody are also emerging as a way to get around the limitation of scaling.
Even today, where bitcoin has not taken over the world, the majority of bitcoin transactions don’t use the bitcoin protocol and they are on exchanges or whatever. So we already see a “bitcoin standard” emerging. Over time, we can see that bitcoin transactions can increase but only marginally. Bitcoin off-chain transactions can increase exponentially.
So is this going to have gold’s fate? We saw how the gold standard worked out for gold. About 1/6th of all gold is controlled by central banks, and the market for gold is not allowed to assume a monetary role, and government money has replaced it. Bitcoin faces this as a risk. We can only appreciate bitcoin’s value proposition and its technological breakthrough as being better abled to resist that threat, because of decentralization. When we discuss decentralization of bitcoin and other blockchains, we talk about the cost of running a node. Under the gold standard, running a “full node”, e.g. a bank able to perform final settlement of gold is extremely expensive. Physically moving gold around, shipping it, and securing it, and insuring it, this is all cost. You remember when Germany tried to repatriate the gold from the US, it cost many millions of dollars to move it around and it took years to do that.
The high cost of settlement of gold and of running a full node on bitcoin is what made gold banking centralized. Eventually we started seeing that within a city we had a city-wide bank, and then a nation wide bank, and then a global bank. We only have one central bank in the world if you want to think of the US Federal Reserve. There’s no way to move money around the world without having the Fed being able to censor you through the traditional financial system. This is a product of gold’s expensive clearance. With bitcoin, the advantage of bitcoin is that transaction costs are much lower- even if the transaction fees rise by 1000x over where they are today, it’s still far cheaper to move $1 billion of BTC than it is to move $1 billion of gold. You can multiply bitcoin transaction fees by 10x or 10000x and it will still be cheaper. A bitcoin standard is going to be far more decentralized than gold; the cost of running a bitcoin full node is less than the cost of running a gold full node. It will be far harder for governments to confiscate bitcoin than they did gold.
Eric talked about gold standard being a form of fiat… but note that the government was only able to do that after they confiscated gold. Many people confuse my book as a call for governments to start buying bitcoin or gold. I think this is a big misconception. The subtitle of my book is that bitcoin is the decentralized alternative to central banking. The more I think about it, the less I think it’s likely that central banks will hold it as an asset. The mental model of central bankers is that they are the last people who would understand bitcoin, and they are completely immunized with Keysian economics. I don’t see this emerging as a central bank asset. Bitcoin will continue to grow as an alternative to central banking. It is the only viable alternative to central banking. The only way I can send the money from here to China is by going through the federal reserve, or through bitcoin. We will see a financial system built around bitcoin, backed by bitcoin transactions, and it will largely be free of government intervention.
Will government fights it? That’s a question I can’t answer. Will they succeed in it? I can’t answer that either; only time will tell. Bitcoin’s unique value proposition or its unique breakthrough is that it’s a far stronger technology for resisting the government’s approachment on money, that’s it for me, thank you very much.