1. The discussions of 51% attacks seem overblown because it's wrong-way risk for the attacker. Any 51% attack would delegitimize the currency (unless the currency has reached a point of adoption that is far away from where we are today). So, to your point, a 51% attack would probably need to be done in conjunction with a short, but who is your counterparty in the short? The logistics of getting a payout seem tricky to pull off.
2. You talk about Eth gas fees leading to centralization. If I understand right, your argument is basically that lower-dollar accounts have a higher velocity ... sort of analogous to how sales taxes are regressive because poorer consumers have higher marginal propensity to consume, whereas rich people can invest their money and pay lower taxes on capital gains (ignoring income taxes in this analogy) Even if we take this argument at face value, doesn't Bitcoin have same dynamic? Fees are paid on a per-transaction basis (increasingly so as Bitcoin asymptotically approaches its hard cap), so the accounts that transact more frequently get eaten away. (Yes, the issuance of new Bitcoins is dilutive for everyone in proportion to current ownership, but more on that below.)
3. Your discussion of what happens when Bitcoin rewards go down is really interesting, including your note that fees are not static but instead a dynamic marketplace. If I am understanding correctly, issuing new Bitcoin is akin to inflation, so all users are paying "hidden gas fees" in the same way inflation is a "hidden tax" on the middle class. Similarly, as Bitcoin new issuance approaches zero, the "hidden gas fees" go away and will likely get replaced with higher real gas fees: this is akin to shifting the tax burden away from fiat inflation to higher sales taxes.
4. You write: "No physical input is required to “earn” ETH, whereas it is required to earn BTC." I mean, if you accept the argument that those who have fiat currency have earned it by adding value for others in society, then converting fiat to ETH is actually arguably a better required input cost than solving useless math problems, no?
5. The thing that blows my mind about Bitcoin setup (that I had not realized until reading this article) goes back to Bretton Woods. When Bretton Woods was being negotiated, the final compromise reached was GOLD>>USD>>FX, whereby FX was convertible for USD, which in turn was convertible for gold. Keynes proposed the Clearing Union, with all currencies exchangeable to a centralized currency that was in turn exchangeable for an underlying commodity basket. In practice, when the US left the gold standard, the dollar has served as exchangeable for oil (i.e. energy) at a not-too-quickly-depreciating price. With Bitcoin using energy as an input, THAT IS EXACTLY WHAT BITCOIN IS. The price of mining a marginal Bitcoin is reflective of the cost of energy that goes into mining it, and thus it will be difficult for Bitcoin not to move with the cost of energy ... and when we talk about inflation, we are really talking about the cost of energy. (This is a loose/new thought so feel free to poke holes ... it's an analogy but not sure it's airtight.)
I completely understand and agree that RELATIVE to ethereum, bitcoin is a much better candidate to become digital gold (notably the credible neutrality and distribution fairness). However I still see two reasons that will make it hard for Bitcoin ever to become digital gold:
1. The public nature of the ledger makes means that certain coins can become "dirty coins" (like Mt Gox) which risks reducing the fungibility of asset and making certain coins illegal to own in a way that would be much harder to conceive for gold. The best bull case here is that Bitcoin becomes a currency for money laundering or for trade used by nations not friendly to the US.
2. You discussed the fairness of the initial distribution as allocation to miners. Yes, this may be fair from a moral perspective and a credible neutrality perspective. From a practical perspective, however, an idealized digital gold would have a distribution that mirrors the distribution of current gold reserves. This would have meant a "drop" to central banks in proportion to how much gold they currently have. Similar to the "dirty coins" note above, since central banks do not currently own Bitcoin, the success of Bitcoin will likely involve going to war with central banks rather than operating through their existing infrastructure (like gold did for so many years), which will likely make its adoption much more difficult.
1. Agree, which is why I see any potential 51% attack being mounted by a non-financial attacker, probably an issuer of a competing money that wants to solidify their competitive position.
2. It's not the fees that centralize the supply, it's the staking rewards. The analogy I would make is to interest rates: "takes money to make money."
3. Sure, I get what you're saying, my only amendment would be to say that with bitcoin nothing is hidden, everything is transparent. We know exactly the schedule upon which new bitcoins will be issued from now until the final satoshi has been issued (~year 2140), and always have since genesis block. The monetary network is rules based, transparent and enforced by code. The fee market is not precisely predictable; it will always be a function of demand to process new transactions on the bitcoin blockchain.
4. That is today, as both BTC and ETH are monetizing (whether either or both will continue to monetize going forward is unknown). If you imagine a world on a bitcoin standard or an ethereum standard, in 100 years time when fiat has been relegated to the history books, THEN the only way to acquire BTC will be to offer something of value to the economy ("work"), whereas ETH will be able to be acquired as a function of previously acquired ETH.
5. I have thought about this and think there is probably something there (petrodollar vs. electrodollar), but don't really have anything more useful to say on the matter other than I think the value of bitcoin moving with the cost of energy better describes the network at maturity, i.e. in a hyperbitcoinized world where bitcoin has already accrued all the monetary premium, rather than the world we currently live in where bitcoin is accruing monetary premium (i.e. monetizing).
1. It is true that bitcoin ownership is pseudonymous via public wallet addresses, not anonymous. That said, my understanding is that today it is wallets that are marked as dirty, not coins, or, more precisely, satoshis (technically, a satoshi is the atomic unit of a bitcoin; bitcoins are just 100,000,000 satoshis). That could change with ordinals, which is the inscription of information on a satoshi. Ordinals are a new discovery/invention as of January 2023 and are a hot topic of debate in the bitcoin community, with the primary fear being they might damage satoshi fungibility. On the other hand, once a satoshi has been inscribed it is immutable, so the concept of a satoshi that cannot be marked dirty because it has already been inscribed w a dog jpeg exists. One point is that, even before ordinals, satoshis were not perfectly fungible because each one contained metadata such as the block it was mined in. So you could imagine a world where some satoshis were considered more rare, or valuable, than others. For example, this satoshi was mined in the genesis block, this was the last satoshi ever mined, etc etc. I'll grant it remains to be seen how this plays out, and if non-fungibility is a threat to bitcoin's adoption as money.
2. So, bitcoin is not literally digital gold. That is just a useful, relatable analogy. It's something different. If you want digital gold, you can literally tokenize gold. In fact, I actually view pushing the adoption of tokenized gold as the best shot governments and central banks have at competing with bitcoin and preserving their current relative wealth. It would represent a return to the gold standard, but the supply of gold IOUs could be publicly audited and thus the temptation to issue more IOUs than gold you have (what happened with fiat money on the gold standard) would go away. Alas, a top-down decision to return to the gold standard would mean government's giving up their power to issue currency, and so I don't view it as likely. More likely, to me, is there is a bottom-up adoption of bitcoin, because such a thing is possible (and happening!), and a bitcoin standard is forced upon governments by the people.
Just to clarify #2 and #3 above - optically those gas fees seem high, but those gas fees are actually in the same ballpark as historical inflation data ... so it's really just about a tax on the velocity of money at that point
Loved this. Thoughts / comments:
1. The discussions of 51% attacks seem overblown because it's wrong-way risk for the attacker. Any 51% attack would delegitimize the currency (unless the currency has reached a point of adoption that is far away from where we are today). So, to your point, a 51% attack would probably need to be done in conjunction with a short, but who is your counterparty in the short? The logistics of getting a payout seem tricky to pull off.
2. You talk about Eth gas fees leading to centralization. If I understand right, your argument is basically that lower-dollar accounts have a higher velocity ... sort of analogous to how sales taxes are regressive because poorer consumers have higher marginal propensity to consume, whereas rich people can invest their money and pay lower taxes on capital gains (ignoring income taxes in this analogy) Even if we take this argument at face value, doesn't Bitcoin have same dynamic? Fees are paid on a per-transaction basis (increasingly so as Bitcoin asymptotically approaches its hard cap), so the accounts that transact more frequently get eaten away. (Yes, the issuance of new Bitcoins is dilutive for everyone in proportion to current ownership, but more on that below.)
3. Your discussion of what happens when Bitcoin rewards go down is really interesting, including your note that fees are not static but instead a dynamic marketplace. If I am understanding correctly, issuing new Bitcoin is akin to inflation, so all users are paying "hidden gas fees" in the same way inflation is a "hidden tax" on the middle class. Similarly, as Bitcoin new issuance approaches zero, the "hidden gas fees" go away and will likely get replaced with higher real gas fees: this is akin to shifting the tax burden away from fiat inflation to higher sales taxes.
4. You write: "No physical input is required to “earn” ETH, whereas it is required to earn BTC." I mean, if you accept the argument that those who have fiat currency have earned it by adding value for others in society, then converting fiat to ETH is actually arguably a better required input cost than solving useless math problems, no?
5. The thing that blows my mind about Bitcoin setup (that I had not realized until reading this article) goes back to Bretton Woods. When Bretton Woods was being negotiated, the final compromise reached was GOLD>>USD>>FX, whereby FX was convertible for USD, which in turn was convertible for gold. Keynes proposed the Clearing Union, with all currencies exchangeable to a centralized currency that was in turn exchangeable for an underlying commodity basket. In practice, when the US left the gold standard, the dollar has served as exchangeable for oil (i.e. energy) at a not-too-quickly-depreciating price. With Bitcoin using energy as an input, THAT IS EXACTLY WHAT BITCOIN IS. The price of mining a marginal Bitcoin is reflective of the cost of energy that goes into mining it, and thus it will be difficult for Bitcoin not to move with the cost of energy ... and when we talk about inflation, we are really talking about the cost of energy. (This is a loose/new thought so feel free to poke holes ... it's an analogy but not sure it's airtight.)
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I completely understand and agree that RELATIVE to ethereum, bitcoin is a much better candidate to become digital gold (notably the credible neutrality and distribution fairness). However I still see two reasons that will make it hard for Bitcoin ever to become digital gold:
1. The public nature of the ledger makes means that certain coins can become "dirty coins" (like Mt Gox) which risks reducing the fungibility of asset and making certain coins illegal to own in a way that would be much harder to conceive for gold. The best bull case here is that Bitcoin becomes a currency for money laundering or for trade used by nations not friendly to the US.
2. You discussed the fairness of the initial distribution as allocation to miners. Yes, this may be fair from a moral perspective and a credible neutrality perspective. From a practical perspective, however, an idealized digital gold would have a distribution that mirrors the distribution of current gold reserves. This would have meant a "drop" to central banks in proportion to how much gold they currently have. Similar to the "dirty coins" note above, since central banks do not currently own Bitcoin, the success of Bitcoin will likely involve going to war with central banks rather than operating through their existing infrastructure (like gold did for so many years), which will likely make its adoption much more difficult.
1. Agree, which is why I see any potential 51% attack being mounted by a non-financial attacker, probably an issuer of a competing money that wants to solidify their competitive position.
2. It's not the fees that centralize the supply, it's the staking rewards. The analogy I would make is to interest rates: "takes money to make money."
3. Sure, I get what you're saying, my only amendment would be to say that with bitcoin nothing is hidden, everything is transparent. We know exactly the schedule upon which new bitcoins will be issued from now until the final satoshi has been issued (~year 2140), and always have since genesis block. The monetary network is rules based, transparent and enforced by code. The fee market is not precisely predictable; it will always be a function of demand to process new transactions on the bitcoin blockchain.
4. That is today, as both BTC and ETH are monetizing (whether either or both will continue to monetize going forward is unknown). If you imagine a world on a bitcoin standard or an ethereum standard, in 100 years time when fiat has been relegated to the history books, THEN the only way to acquire BTC will be to offer something of value to the economy ("work"), whereas ETH will be able to be acquired as a function of previously acquired ETH.
5. I have thought about this and think there is probably something there (petrodollar vs. electrodollar), but don't really have anything more useful to say on the matter other than I think the value of bitcoin moving with the cost of energy better describes the network at maturity, i.e. in a hyperbitcoinized world where bitcoin has already accrued all the monetary premium, rather than the world we currently live in where bitcoin is accruing monetary premium (i.e. monetizing).
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1. It is true that bitcoin ownership is pseudonymous via public wallet addresses, not anonymous. That said, my understanding is that today it is wallets that are marked as dirty, not coins, or, more precisely, satoshis (technically, a satoshi is the atomic unit of a bitcoin; bitcoins are just 100,000,000 satoshis). That could change with ordinals, which is the inscription of information on a satoshi. Ordinals are a new discovery/invention as of January 2023 and are a hot topic of debate in the bitcoin community, with the primary fear being they might damage satoshi fungibility. On the other hand, once a satoshi has been inscribed it is immutable, so the concept of a satoshi that cannot be marked dirty because it has already been inscribed w a dog jpeg exists. One point is that, even before ordinals, satoshis were not perfectly fungible because each one contained metadata such as the block it was mined in. So you could imagine a world where some satoshis were considered more rare, or valuable, than others. For example, this satoshi was mined in the genesis block, this was the last satoshi ever mined, etc etc. I'll grant it remains to be seen how this plays out, and if non-fungibility is a threat to bitcoin's adoption as money.
2. So, bitcoin is not literally digital gold. That is just a useful, relatable analogy. It's something different. If you want digital gold, you can literally tokenize gold. In fact, I actually view pushing the adoption of tokenized gold as the best shot governments and central banks have at competing with bitcoin and preserving their current relative wealth. It would represent a return to the gold standard, but the supply of gold IOUs could be publicly audited and thus the temptation to issue more IOUs than gold you have (what happened with fiat money on the gold standard) would go away. Alas, a top-down decision to return to the gold standard would mean government's giving up their power to issue currency, and so I don't view it as likely. More likely, to me, is there is a bottom-up adoption of bitcoin, because such a thing is possible (and happening!), and a bitcoin standard is forced upon governments by the people.
Just to clarify #2 and #3 above - optically those gas fees seem high, but those gas fees are actually in the same ballpark as historical inflation data ... so it's really just about a tax on the velocity of money at that point