About the 21 million bitcoins, the “dangerous” deflation and the unchangeable economic policy

Italian version here.

A total of 21 million bitcoins will be “coined” (some less in reality, as we have seen here) but this is only a number, a limit to Bitcoin’s inflation.

Let’s see why.

Bitcoin was created to be a single point of failure system, since it is decentralized. Attacking Bitcoin means attacking the entire network formed by users’ nodes that run the software on their system, so it becomes something extremely difficult to do.
When Satoshi created Bitcoin, however, in addition to the decentralization of the system itself, he also defined his economic policy.

Perhaps Satoshi was a black jack player and believed that the system would win on the dealer (the previous system) if it did not exceed 21; we’ll probably never know. The fact is that he decided to impose a maximum number and block reward halvings to act on inflation: every 4 years the amount of bitcoins in circulation is halved and the “production” will end when 21 millions are reached, so inflation will gradually decrease until it becomes deflation.

This choice is, as mentioned, political; you may like it or not. The fact that Satoshi set up the system in this way, even before starting with its Genesis Block, makes this choice the foundation. It cannot be changed, otherwise the entire building will fall.

Some people did not like this political choice, or maybe they simply wanted to experiment with another type of economic policy: altcoins were born with a different inflationary system. Above all, Monero and Ethereum are two examples of this.

What’s the difference?

This imposed limit (21 million for Bitcoin, 84 for Litecoin) does not exist. New coins can therefore be minted theoretically ad infinitum, with inflation theoretically in constant decline.

Why do I say theoretically?

Because not imposing a limit implies a choice not chosen: the “community” is given the opportunity to intervene politically on their money by changing this inflation in the future. But isn’t this similar to what States and banks currently do with fiat currencies? Where is the difference?

With Bitcoin this is not possible.

We wanted to create something completely different from the current fiat system. Something neutral. Will it work or not? We’ll see.

So the Bitcoin economic rules cannot be changed?

The only part of the apparently non-modifiable code is precisely that relating to Bitcoin’s economic policy. Let’s imagine the code as the Italian Constitution. The first part, Fundamental Rights, is not technically modifiable unless a civil war is made.

In Bitcoin, “civil war” means hard fork.

So, taking up the question again, no, the economic rules of Bitcoin are modifiable, but only by doing a hard fork of the code.

Risky forecast? This fork will fail. Why? If I told you that tomorrow you can have more bitcoins than you have now but the value of the single bitcoin will drop drastically, would you support the change to the economic policy? I won’t.

My node will provide support only for the chain whose economic policy has not changed.

Future deflation is a nightmare

There are those who are frightened by the reduction in inflation (which will become deflation from around 2140), because historically the periods of inflation close to zero correspond to stagnation of the economy, but there are points to think about:

  1. You won’t live until 2140.
  2. Inflation reduction is a problem for the current system, based on fiat currencies and not on scarce assets.
  3. 1 bitcoin is divisible.

If, for the first two points, you could provide important arguments such as: “I will live forever“, “I worry about my descendants“, “deflation was a problem even during the Gold Standard“, etc. on the third point I cannot be denied.

1 bitcoin is divisible and its basic unit is satoshi, from the name of its creator. 1 bitcoin = 100 million satoshi.

So we have plenty of value for everyone.

Yes, but this does not mean that there will not be a problem of deflation, given that the number of satoshis that will be put into circulation is also limited“.

Fortunately Bitcoin is digital and in computer science “miracles” can be realized. On blockchain you will not have more than 21 million x 10 ^ 8 units of value but on second layer these limit doesn’t exist.

If we need new units, because the fundamentals have become too scarce, we will be able to adopt subsatoshi.

It will therefore be possible to split even more bitcoins without having to touch the basic protocol (BP) or the rules of the LNP/BP suite, but only by acting on the “packages” transferred by the channels on Lightning Network.

The circulation of new units of value will therefore be a fact and will be possible without generating new money out of thin air.

 

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