Is Bitcoin's fixed supply incompatible with proof-of-work?

No, I’m far from confused. I just fail to see the point of your analogy. You can repeat yourself as many time as you wish, as arrogant as you want. And you can leave as many obvious fallacies of yours unanswered as you can.

Credit is not a product if it’s printed from thin air. Printing money is not analogous to fulfilling demand for toilet paper. I pointed out this in my first answer.

Thanks for the conversation!

No, you’ve totally missed the point: arbitrarily calling toilet paper “money”, and accepting it for payment at your cafe, doesn’t mean that there is some magical economic reason for there to be zero inflation in supply of toilet paper from that time forward.

If credit would come from people who already have money there would be no inflation.

Again, no… you are missing an important number of caveats to that. If the economy was stagnant (not growing or contracting) and was not cyclical (i.e., there were no seasons, no weekend or school holidays) and demographics were fixed an unchanging - then that might be true.

For example, supply chain shocks could lead to a shortage of certain goods - for example, the war in Ukraine might lead to shortages in grain, cooking oil, energy, fertilizer, etc. That will lead to price increases regardless of the money supply. If workers demand higher wages to offset higher expenses - that would lead to long term inflation.

So that idea is actually very, very wrong - there would still be significant inflation (or perhaps deflation) because the economy is not static.

(That dynamism in the market is also why central planning tends to not work out very well: it’s not like a calculation that you can solve once, you have to keep solving it over and over again.)

I wasn’t calling toilet paper money. You did, when you made the analogy between toilet paper demand and credit demand. You made the analogy between product demand and credit demand which eventually doesn’t stand. I pointed out why it doesn’t stand, and since then I patiently listening you repeatedly saying that I don’t understand. I understand what you are saying. You are saying that credit is supply for the demand for money. I understand that you are saying this, but that doesn’t make it true. Credit in it’s current form is stealing from the public. Contrary to your understanding it’s not given by people who have money already. It’s just printed. Basically you are saying “counterfeiting money” is fulfilling the demand for money. Printing money from thing air is only different in it’s legal background. It’s legal if banks do it, it’s illegal if the general public does it.

Oh man. Why don’t you refine your own false statements instead of teaching me things that I already know. That was an overly simplistic answer to your completely false statement: “The supply of money comes from people who already have money and are looking for an economic return on it.”

My statement needed some refinement, while your statement is simply not true.

I’m here to learn. I’m listening. Believe it or not, I’m trying to pull as much knowledge out from this conversation as I can. Talking me down doesn’t help that.

In your place I would refine your false statement before talking me down. That would make this conversation much more useful and enjoyable.

That’s basically the whole thread - crypto is not currently acting like a currency - nor is the current path leading is in that direction.

It’s an asset, it’s useful, it grants a variety of rights but it is lacking some key elements that make a good currency - and some features of its design mean it will never make a good currency.

If crypto was ever going to become a currency, we’d have to tease apart the coin into two pieces: one part that got more valuable as the network gets more valuable, one part that acts as a store of value and price stability.

(That could actually happen at some point, with the consent of the wider community - but it’s not just going to happen.)

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I’d restate that as “a claim on a basket of assets that can be trivially, and without risk, exchanged for $1 is essentially identical to $1.”

but that’s the upshot of it - an IOU that is redeemable for a dollar can fill a demand for money in almost the exact same way as an actual dollar.

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Unfortunately the actual thread supposed to be about something else. :slight_smile: Sorry @7.4d4 !

If this conversation is about the taxonomy of ADA I can agree to disagree. If I understand you correctly you say that price stability is the requirement that ADA fails to meet, and that’s why it can not be called a currency. I don’t see a sharp boundary between stable and not stable currencies. So called stable currencies are not perfectly stable, prices fluctuates and on the long run usually in one direction: upwards. So it would be more honest to call them more stable assets. Also the stability needs a point of reference. Stable compared to what? (If you choose ADA as the point of reference you will find USD very unstable! My bad…)

So it’s fuzzy. Is USD more stable than ADA? Sure. But it’s not stable at all, and I don’t see the theoretical obstacles why ADA can’t improve in that department. I don’t see fixed supply as a theoretical obstacle. (I thought this thread is about that…) I think fixed supply has its challenges but since it is much easier to reason with I’m very confident that we will come up with solutions.

Shouldn’t we dedicate a separate thread to this conversation? "Is ADA a currency? Will it ever be?"

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Don’t be sorry. I have found the entire sidetrack quite interesting.

Maybe I should read more into it.

That’s because there isn’t one; there’s not some magic switch that suddenly makes something a currency or not; within a market, you can look and say empirically that one asset is doing better than some other asset at fulfilling the goals of a currency.

This kind of comes back to “why do currencies fail?”

There are certain attributes that make some currencies better than others, and over time better currencies will replace worse ones. One of those is price discovery: two parties need to agree that some the exchange is fair.

For example, you might want to sell your house. or buy a house. or take out a loan to buy a house.

So one pricing strategy might be to go out and other recent sales of similar houses have been in the past. If there is a large and liquid enough market, you might get a pretty good idea of the value. If the prices were in peak daily power prices, in avocados and in shares of Theranos stock → you might have no idea what a fair value is.

In physics, you have a similar concept of a frame of reference. Of course, you can use any arbitrary frame of reference that you like, but some choices (“the center of mass”), might make the whole system easier to understand. Different systems can have different frames of motion too, it’s not like there is a particular choice of coordinates that works for everything.

I find that useful when looking at economies - it’s not some universal absolute, but it’s not totally arbitrary either. I’d call that contextually true.

I think the CAPM model (capital asset pricing model), market portfolio and SML (security market line) is a really useful way to think about this. It’s an approximation for sure, you are throwing out some detail to make what is left stand out; but very useful to think about what makes “what would be the ideal -risk free- asset look like?”

To draw an analogy with physics - this might not be a bad thing. The center of mass of the whole system can be moving - for example the sun can be moving through galaxy, but if I am working on orbital dynamics in the solar system, then the center of the sun might be a good choice to work with, not the center of the galaxy. or universe.

If you are still with me, you can probably guess I would say that best currency is the one that most closely reflects the average return across the entire economy. (That doesn’t mean it’s true - economists make careers disagreeing about stuff like this.)

An asset that runs counter-cyclical to the economy (cough gold cough) might be a particularly poor choice of a unit of measure (aka, a currency) - although it might still have value in diversifying the risk of a portfolio.

Hey, thanks for the very clean explanation! Nevertheless I would like to stress that the concepts you’re explaining needs no clarification for me. As you probably already found out I am not a financial expert so I might lack the professional language but I know what I am talking about.

Despite my discontent towards the fiat system I still use it as a frame of reference for valuation, since I have no other choice at the moment. What I am trying to understand - among a bunch of other things - if ADA can or can not evolve into a practical currency.

The “fixed supply leads to extreme volatility” and “in deflation people will stop consuming goods” type of jedi tricks doesn’t work on me. Yet I am pretty interested in new problems fixed supply will introduce: like your student loan example! I see it as a problem to be solved and not a deal-breaker, since credit contracts can provide flexibility. A credit must be priced in an inflationary system too. I am also very interested about the design decisions you were mentioned earlier that seem to steer ADA away from the currency use case.

It might be strange why I am so fixated on fixed supply, and if you think that the fiat system is morally sound, if you don’t see the problems it causes in the lover 90% of the general public, I don’t expect you to be even interested, not to mention motivated. A new design can only be judged against its alternative. Why would you want to solve all the problems of building an electric car if you are perfectly happy with combustion engines?

I am also very interested to hear any proposals for a fair and decentralized inflationary system.

Fair and decentralised don’t go good together. You need some form of centralisation to protect the rights of everyone and especially the not so lucky ones (and everyone has some risk of becoming one of them, even if this risk is also not distributed very fairly).

Good path to a fairer system would be to elect governments that tax the shit out of the rich and use that to finance climate-resilient public infrastructure, (regularly inflation-adjusted) universal basic income, and social security systems for all the risks – illness, disability, … – that will not and can not be covered by the UBI for everyone.

That all has very little to do with the monetary system, which in my opinion is neither the problem nor the solution.

I can say the opposite with confidence: fair and centralized don’t go good together either. Of course it depends on the definition of fair. In North-Korea 99 percent of the people lives similarly shitty lives. I guess it’s not a huge stress to say that even the lowest 1 percent in the US lives a better life than that 99 in NK. So which society if more fair?

I’m living in a country with huge centralization effort and it’s terrible. It’s a really unhealthy feedback loop, where they spend tax and other funds on political propaganda to make the people reelect them. An it works, despite the fact that they are ruining education, healthcare and the overall economy. Inflation is over the roof. Nothing is decentralized anymore. They are waging a war against the civil sector that tries to do the social duties of the government instead of the government.

All that said I know that there are Scandinavian countries where it works what you are saying.

I don’t think that the monetary system can solve all social problems. But I strongly believe that it’s something that has a lot to do with how a society works. Maybe it shouldn’t, but currently money is such a central element of our thinking that it does.

Ideally, the token emission should occur at a similar rate as economic growth - as the economy grows you get more coins, but the coins do not become more valuable. That’s probably doable on chain, or at least more doable.

Inflation is an interesting way to do this; one of the issues with very high inflation is that it is very much like very high tax rates (except without the accounting games.) To the extent that you do need taxes, going after the total wealth rather than income, or housing or transactions.

This may be more a language issue, but I tend to consider “decentralised” as bringing the problem closer to the people affected. Not that there is no one to make decisions, but narrowing the scope to the problem to as small a group as possible. decentralised to me is like “having many specialized centers” rather than “having no centers” or “having only a single center”.

In a distributed network, that’s all peer-to-peer, everyone is responsible for everything; everyone is a generalist.

In a centralized network, one group is responsible for everything.

in a decentralized network, you are specializing, getting one group to focus on one problem and another group to focus on another problem.

The point of that is that you may need a group to make decisions about rights conflicts (so distributed is out), but a single central group can’t balance everything with one size fits all answers - so the fairest way may be decentralized.

Another way to talk about that is “decentralized” is more like a competitive marketplace, where you have a degree of personal choice. It’s sort of like the cathedral (centralized), the bazaar (decentralized) and "having to individually talk to your nearest 40 neighbors to see if you can find anyone who wants to swap “two eggs” for a “slightly used felt hat” (distributed)

(That’s not necessarily the language used by the everyone; I often see “decentralized” used in other ways as well.)

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Yeah, that would be only possible if we would emit credit into the economy after the growth is measured - if that’s possible at all. But we do it the other way around: we emit credit into the economy in the hope that it will result in economic growth. If it’s not, oops, poor people suck, but who cares! This incentivizes financing from credit, while at the same time we limit the access to credit for the poor. Why? Because they are poor! How is it that you don’t see this?

Tell me why it would be so terrible, if prices would reflect the efficiency of the economy? (What you call growth, but it’s efficiency really.) Because people would stop eating? Because we would be unable to agree on interest rates? That’s where the growth prediction would come in handy! Let’s say we expect 2% growth, so instead of 5% interest we would ask for 3%! Voila!

What do I miss? Why do you ignore every line I’m trying to explain what I see. Not what I think. What I perceive everywhere around me. Poor people are suffering from inflation while lenders and borrowers of huge credits are getting richer without the real possibility to fail.

Yeah, quiet interesting and totally opaque and totally unfair. You have to communicate taxes, it’s much more than accounting games. Inflation is communicated as a force of nature. Inflation can have other causes than overprinting money, so the accountability of government is much-much lower than raising taxes.

Why don’t you weight in the negative side of the fiat system into the conversation?

Yes, banks can emit credits by just, well, crediting them on the debitor’s account and, in a way, “print” money doing so. But just because it is “out of nothing” doesn’t mean it’s risk-free for them. Too many failing credits are a problem for them and it’s by far not only the poor people taking the risk.

Who these banks are depends on your society. In the German banking sector, a lot of them are not shady Dr. Evils, but public banks owned by towns and counties or cooperatives owned by their customers.

Your argument stands on this “money printing” as the only cause for inflation. Is it, though? The current rise in prices seems to be much more rooted in pandemic, war, and failing supply chains than in abstract “money printing”.

Would an inflation-free currency really help the poor? If they don’t get salaries that enable them to make a living it doesn’t matter if they don’t get them in – more or less – inflating fiat or in inflation-free cryptos.

Who will be the powerful people who get to decide who gets credit in crypto world? Maybe, a few were not that rich in fiat and got lucky entering the right crypto early enough. But a lot will just be the same people that already were rich and powerful in fiat.

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Thanks! Before anything else I would like to make it absolutely clear that I’m not talking about some evil conspiracy. I think the current system is what we all grew into, that’s what we know and we all know that it somewhat works. The mantra of “we need inflation” is just burned into our minds to such extent that it’s painful to think out of the box. But I think we should, because I think we can do better. Not perfect, but better.

The question is how 10% inflation impacts a rich family and a poor. The difference is dramatic. For a banker too many failing credits are causing smaller bonuses, maybe a job switch, worst case a government bailout :slight_smile: . Is that comparable to what those credits caused to people living from salaries? I’m really not a fan of black and white pictures but I find the contrasts of the consequences in this case pretty striking.

Yep, and most of the large “evil” corporations are owned by everyday people indirectly through pension funds and/or stocks. I’m aware. I’m not trying to point fingers, I’m trying to uncover the design weaknesses of the current system. Credit is printed, profit stays at the lender and the borrower, but the risk is at the general public. This is not 100% true. The bigger the credit is the truer my statement gets, never reaches 100% but converges pretty nicely.

No. I’m pretty aware that price fluctuations are caused by changing efficiency of the economy, which can decrease of times like war, pandemic, etc. But don’t pretend that inflation is not a constant phenomenon of the fiat system from its very inception. And don’t forget that the general efficiency of the economy also grows constantly which supposed to counteract inflation.

Why are you saying they wouldn’t get salaries? Does people working in the crypto sector doesn’t get salaries? How come? From what? Oh my, people are spending their precious crypto to finance work? That is impossible, I must say…

Probably those who owns money they want to lend.

Some for sure. Surprisingly enough that’s a good thing in my book, because that means that people that are the beneficiaries of the current system switched to ctypto and made me rich! :smiley: Jokes aside, I think the current system has a unhealthy feedback loop, which is not present in fixed supply. The feedback loop of capital is still there, but what I’m talking about is capital squared, because pure capital has a much healthier risk distribution IMO.

Anyway I don’t think that the top dogs will be the first to risk their fortunes in crypto, so if this thing will prevail some redistribution of wealth will occure inevitably. How we as a community will manage this is still one of the most interesting question!

I am not convinced that a fixed supply is the best system. But, I am also not convinced that an inflationary system is necessary. The current inflationary system is what we are used to and so we judge competing systems through this lens. Furthermore, we have never had the option to build systems that didn’t rely on human judgement, control and manipulation, until blockchain technology was invented.

A thought experiment:

Imagine there was a computer AI oracle that was able to tell you accurately what percentage of the total world wealth you possessed at any instant. You could then assess every investment or commercial transaction you made with this information in mind.

In such a scenario, people would still buy “stuff” that depreciates in value because they have a need for it and assess that their life would be overall better or more enjoyable with the “stuff”. On the other hand, people would be more discerning about their investments because they would want to be likely to increase their overall “world wealth percentage”. This would incentivise investment in ventures likely to generate real positive returns. Such investments would be more likely to provide net benefit, as assessed by society, since they are valued as determined by their demand.

You could argue that this might make people less likely to make risky investments which could lead to less innovation. However, we might be biased in our thinking here because we only know our current system which incentivises greater risk taking due to underlying inflation. Currently people seem to be investing in almost anything rather than just leaving their money in the bank to suffer inflation. For example, the endless cycle of increasing leverage and bidding up house prices does not provide any extra societal wealth and in fact causes harm through worsening demographics.

I think one of the primary benefits of cryptocurrencies is that they provide more transparency about the total token supply. Cryptocurrencies provide everyone with a closer approximation of the “total world wealth assessment oracle” service, whether the token supply is inflationary or not. Maybe cryptocurrency system inflation is therefore less important because you can still accurately calculate your percentage of the total supply at any instant from the blockchain. Maybe cryptocurrency based systems will cause thinking to change over time. For example, in assessing how much that motor vehicle will cost you in terms of a reduction in your “total wealth percentage”.

The current financial systems enables some elite individuals to have asymmetric information and control in relation to this “total world wealth”. For example, the large international banks are the only ones that can look deeply into the Eurodollar system where the banks create the money and only they get to see the ebbs and flows of money. These people have asymmetric information and they use this to increase their wealth and power.

Nothing in life is every going to be totally fair and I don’t expect blockchain to fix everything. But, blockchain does level the playing field significantly with regard to the information associated with “money” and transactions. More importantly, blockchain removes the ability of the select few to have outsized control over the issuance of the “money”.

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A fun and very interesting side tracked post. The thing I’m most thankful about Bitcoin is that it really brought me and many of us to think about what money is? And to think about economy and to see how messed up the world is.

What is then money? It is certainly a collective hallucination because it doesn’t really exist. However it has a function, it is the social contract over which we keep the accounting of what each one of us has received from society and how much we owe to it. You need a society for money to function, on a desert Island, no matter your dollars, gold or Bitcoin, you are miserably poor and you only get what you can build/make yourself.

We instantiate the function of money over a “technology” and we have tried many. Seashells, stones, glass, metals, accounting. What matters is to keep the accounting fair, because we humans have a sense of fairness. If it is fair we go along, if it ain’t we go mad. Money metals worked very well as they kept human greed in control. Accounting and our fiat system requires massive regulators and it still gets out of control, there is always some group that has privileged access to manufacturing money without engaging on the fair trade with society.

The true reality of society, is that it doesn’t benefit from money manufacturing. Gold miners add no value to society by bringing more gold, what they do is skew the accounting as there are now more currency units pursuing the same amount of goods and services in society. They create inflation, thankfully natures keeps them in check as getting gold is hard, and that is why it became a good monetary metal. Our current fiat system is flawed in that we have a system where making new money has no cost, and so it is made, thus inflation is rampant and life gets really expensive, because you can’t keep up with the money manufacturer. Society wins when people offer goods and services and trade them for money. Innovation in productivity brings more goods and services increasing supply and thus bringing prices down. That innovation is rewarded as it captures a bigger market share due to lower prices and high supply, and the rewarded new rich person gets to spend their money in society however they prefer.

Fixed supply has nothing to do with economics, neither does inflation, they are the rules of the game. However, every engineer knows that dealing with a closed system is a lot easier. If the money supply is fixed it is a lot easier to make for yourself a mental model of the share of the wealth and when to consider yourself paid. Second best is constant loss/gain, you just build your frame of reference around that. We have a system where the loss is not constant and the “input source” of money is unfair, the game is rigged. There is a narrow group of actors that, at will, increase the money supply without any opportunity cost. A gold miner may fail in his pursuit, a central bank will always create more money risk free, and so they do. The market is “slow” to price things in, we can adjust to gold supply increase, we have a really hard time adjusting to deliberate/spontaneous/uncertain change.

What Bitcoin did, is to open up the possibility to choose again a new system. It becomes a personal vote which brings full opportunity cost back to the game. Making Bitcoin always costs, loaning it has risk. Cardano is another system. Creating ADA was free for some insiders, making more is not possible, loaning it has risk. You choose the game you want to play. In both cases the game might not be fair, but it is clear. Choose your opponent, choose your battles.

Bitcoin’s store of value story is horrible. It means you currently cannot measure the value of anything and instead of willing to transact, you want to store value. That is why gold doesn’t “perform” on booming economy. That is not a great outlook for society, but it is where we are, and we might very well need it to bring back some sanity to our world. We need to go to world where people actually produce things. Where you recognize that having food and a roof over your head is way more valuable than your money, gold or Bitcoin. We really don’t want money, we want what money can buy, and the more money there is the less you can buy with it. Money is a collective hallucination, it is completely useless until you spend it. Yet we focus so much on Money instead of creating value for society.

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I think I can go along with that mostly. I still feel uncertain whether a fixed supply could cause a tendency to under-invest.

The big problem I see with the current system is: It is opaque and manipulated by the few who have access to its inner workings and asymmetric information.

I just wanted to highlight your next statement because it distils a benefit of fixed supply so clearly:

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