What A Difference A Decade Makes

As of this writing, bitcoin has been around for nearly 12 years, with the original Satoshi white paper published in 2008, the blockchain network going live in 2009. I will be writing about bitcoin’s scarcity model as an entire series unto itself, and this is the first article in that series. So, let’s dig in!

It’s hard to imagine a world before Covid-19, but just try to think through the eons in cultural, societal, economic shifts that have taken place since 2008. Seriously, 2008, we were just seeing the unraveling of “too big to fail” and the housing market crisis. You literally had 3-4 years to invest in bitcoin, go about your business, and wait for 2021 to arrive, cash in and live the big life in fiat (dollars). Okay, any true cryptonian is cringing at that sentence, so let’s say you had years to accumulate a massive pile of sats (Satoshis, the smallest unit of a Bitcoin) with very few funds.

Seriously, take a few moments, after reading this, to close your eyes (because you can’t finish the sentence until after reading it, duh!), and think through some big events that have happened to you since 2008. Any important purchases? A house, a car? Remember a favorite album or going to see a favorite movie? Were people renting videos from Blockbuster? Did you get married? Is there a loved one who is no longer with you, or a new baby somewhere in that time? If so, can you believe how fast they’ve grown?

If you joined in the experiment, you’ve attached a true value to the time a decade represents. Now, I want you to consider the numerous factors Satoshi weighed when designing what they hoped was a model for better money, a peer-to-peer payment system that is electronic, trustless, efficient, and provably resistant to manipulation.

Gordon’s Introduction To Bitcoin’s Scarcity Model

If someone just resolved the difficulties in eliminating third party risk or guaranteeing that a network could get up and running, that would have been a breakthrough that decades of code-cracking hacker, cryptographer geniuses had yet to resolve. That would have been enough. But, Satoshi considered a lot more. They took a gamble on the philosophy of money just as much as the computational principles underlying.

Bitcoin is not just the solution to a riddle wrapped in cryptographic heritage; it is a phenomenon of economic intellectualism that marries technology and money-theory, seemingly to a level of accuracy that, thus far, it has survived more than a decade, but I believe even more than this, has not discouraged other projects, but encouraged them to find areas to tweak, improve, and to launch  vastly new expressions of computational economics.

Bitcoin is not perfect, and it will face a rocky regulational road, arguments over the programming, side-chains, layer-2 solutions, government acceptance, paid shill ‘news’ and hack-economists whose opinions are for sale to the lowest common denominator, and even worse, frauds in the crypto space who fork, and even pretend to be someone they are not (in the bad way, not the cool “I am crypto Gordon Freeman” way).

Thus far, bitcoin has survived an incredible list of hurdles, and the more that manipulative individuals and untrustworthy governments and banks intend to poke holes in the nefarious underbelly of crypto, bitcoin continues to prove it’s model.

21M: Join The Club

There will only be 21 million bitcoins. Ever. If they change the code, change the model, it will cause havoc the industry wide, and many true-to-the-bitcoin-core bitcoiners will permanently lose their faith in the potential of cryptocurrencies. If I spent the next 3 years doing nothing but spinning 500 different angles for you to view the beauty in simplicity, of a programmed limited supply added to computational difficulty, it would be worth the reader’s time to fully ingest that. What we have is adding reasonably simple elements together, and getting a multiples-of-complexity in value output. The results are not additive, they are exponential!

In the tight-knit crypto community, it is a well-established thing, that there will only be 21 million bitcoin ever minted. Sure, placing a cap on supply makes sense; it is one way to test a theory. You can also have an unlimited supply, you could have a supply that is “burned” over time, or as a result of specific market conditions. You could program supply to increase with demand. With electronic money, you can pretty much design the economic model however you wish.

A Sat For Your Thoughts

It is philosophically, mathematically, and economically significant for a “better” money system have defined goals, and for value to be protected over time. A hard cap on supply is the most logical, sound way to ensure this. Satoshi made the right choice. Some might say, that if bitcoin is supposed to become a huge deal globally, 21 million sounds like an awfully small number of coins to spread between 8 billion people. This is actually really good news for those who are already working to obtain them. But, this does not place a limitation on bitcoin’s usefulness in global finance.

Bitcoin is broken down into a unit, much like a penny is the smallest measure of a dollar; 1/100th of a dollar is as small as our units can go. A “SAT” is the penny to bitcoin’s dollar. A sat is the smallest unit of a fraction of a bitcoin, but while our current money system is limited to two digits behind the decimal, $0.01 = 1 penny, a sat is a whopping 8 digits after the decimal! Let’s work through this.

1 bitcoin = 1.0 BTC (the exchange-trade call name for Bitcoin)

1/10th of a bitcoin = 0.1 BTC

1/100th of a bitcoin = 0.01 BTC

1/1000th of a bitcoin = 0.001 BTC

1/10,000th of a bitcoin = 0.0001 BTC

1/100,000th of a bitcoin  = 0.00001 BTC

1/1,000,000th of a bitcoin = 0.000001 BTC

1/10,000,000th of a bitcoin = 0.0000001 BTC

and

1/100,000,000th of a bitcoin = 0.00000001 BTC

That last one: that is a single sat, or satoshi, a single unit… bitcoin’s penny. It takes 100 million satoshis to make 1 bitcoin! That means, not only is there a limited supply, making it electronically scarce and sought after, but it goes down to a unit so small, that it will still retain the fractional benefits of a penny to the dollar when a single bitcoin is worth $10 million.

Satoshi, thought, of, everything.

The programmed benefits aren’t additive; they’re exponential

Something that has always fascinated me, is variables that are simple in and of themselves, but when added together, tell a story. A limited supply, for instance, matched to a controlled release of coins over time, is an economic marvel that, again, was only a theory over a decade ago.

It would be one thing if someone solved cryptographic challenges, released open source code, got people to install it on their computers, and 21 million imaginary coins were dumped into the network up for grabs. There would still be the economic principle of scarcity, supply, demand. Of course, there would be the issue of how people were rewarded for their time and energy use. But, even if all bitcoins could immediately exist, yet hard to obtain, it would have been clever.

When you join this supply cap to scaled difficulty in mining, which means scaled minting and rewards, it adds to the theory that you increase the incentive of a network of people to run mining computers, by adding an intellectual and physical value of human capital, energy use, physical hardware invested, and something resembling the gold rush, of people incentivized to earn a bitcoin.

Since I’ll be digging deeper in this series, it isn’t important for me to go over every grain of sand in the bitcoin ocean. But, just to gain a grasp of the basics, it does require covering a lot of ground (it’s always nice when you can keep a consistent symbolism goin’!).

Bitcoin has a supply cap of 21 million coins. These coins cannot be forced upon the market, bought, or sold, until they are “minted”. Bitcoins are generated when the network of computers solve the math involved in cryptographic blocks of data that verify and confirm transactions on the network. This process has been digitally coded to increase in difficulty appropriate with the network’s capabilities, and it was known by the creator from the start, that it would be very easy to operate in this network with a cheap laptop to begin with, but if it caught on, over time it would require better technology, more power, more industrial investment. If these things did not occur, it would be a sign that Satoshi didn’t understand the landscape of technology and the rate of acceleration of computer hardware design. But, still thus far, he got this right.

When you match the limited supply to a scaled increase in difficulty in earning bitcoin’s for being a part of the network, you are generating value every minute, every day. It is a theoretical framework that creates the idea of sound money, but there is a real world, tangible value created in winning a mining reward and earning bitcoins, when the equipment that is used costs the user in hardware and electricity. If it were costly in the beginning, no one would see the value. If it were too easy 10 years later, greedy computer nerds would have overtaken the network and the experiment would be done.

The more that this gets you thinking about how he must have left something out, the more you will appreciate the perfection, simplicity, and absolute complexity in his design.

Please, Sir, I Want More

Now, let’s add a new variable into bitcoin’s value proposition. We have the hard cap in supply, the increased difficulty in computing transactions and earning bitcoin as a reward, and together these make infinitely more complex definitions in value, which thus far have held true. Now, add a third variable; the size of the reward.

Satoshi envisioned that bitcoin would be worth the fun math puzzles to an elect few in the first months, maybe even years, so if people earned hundreds, even thousands of bitcoins for their efforts, that could get the wheels turning, but the rest of the market would arrive later. Once a certain amount of mining occurs, Satoshi designed bitcoin so that the mining reward divides by two. So, there are only 21 million ever, it gets harder to mine them the more people, now corporations, care about mining them, and on top of that, this more costly, difficult process only rewards the miner 1/2 as much as it did a few years prior.

Dr. Phil likes to say “how’s that workin’ out for ya?”

The answer, is that it is working exactly as it was designed. Again, it is important to consider the economic climate this has weathered, and realize the significance of a decade. It is truly remarkable.

It’s Imagination, But It’s Also Code

We look at cryptocurrency as an experiment where in literal terms, and in theory, “code is law”. What you program, is what will happen. Likely, it will birth unintended consequences. Then, the developers must grapple with the best way to resolve zigs and zags in the difference between theory and reality. Realize, then, that bitcoin has been going and going and going for more than a decade, adding transactions to ledgers, getting validated from people’s computers around the world in the thousands and now tens of thousands. The changes, additions, updates to bitcoin’s code have been incredibly minimal compared to what you might think is necessary.

It is hard to put into words when something artistically beautiful has been chiseled in math, but that is a good description of bitcoin. From the outside looking in, people will have a hard time understanding how something imaginary can have value. Usually, a cryptonian (Gordon’s definition of a person who is into crypto, a saying that is starting to catch on by the way) will try to explain to newbies, that they think of a dollar (or their native fiat) as a real tangible thing. But, they are asked to explain how some people get paid with a check, deposit that into their bank, and then pay bills from that account, never seeing a paper dollar? Still others have their check digitally deposited to their bank account and their bills auto-paid. In that instance especially, there is never even a paper representation of a dollar. It is all digital, imaginary representation of a thing they assume exists.

Bitcoin has already established more tangible value, by imagining the right formula, and coding that into mathematical law, than anything the central banks and governments have managed in the literal history of money. You can say there is nothing tangible there, but you’re going to run into philosophical corners you paint yourself into, finding it really, really hard to draw a comparison for that argument.

Is a dollar backed by gold, for instance? Nope. Silver? Diamonds? Nope. Is it protected in value by the handling of it’s supply? Nope. Can you transact in dollars all year long without ever actually seeing, touching, or using a physical dollar? Yep. Sorry, then, which one is more tangible; bitcoin or the dollar?

We’ve just scratched the surface of just one aspect in Satoshi’s design. All of these things speak only to the scarcity model for bitcoin. The mining, minting, hardware and electricity expenses, the vast network of computers around the world, the increase in programmed difficulty and reduced gradual reward are all intricate, all affect one another in a unified manner, but importantly involved independent elements of tangible properties.

Code requires thought. Writing code correctly takes technical skill. Processing costs time, hardware and money. But, imagination is everything if those elements are attainable. In bitcoin’s case, it’s all there. Over time, one should expect the market to recognize bitcoin’s value more and more and more. This article is just the first in a line of appreciation of bitcoin’s appreciating value (see what I did there?).

Scarcity is everything. It is exponential. And still, it is just one single part of the Satoshi puzzle.

And with those big thoughts, a scarce crypto Gordon Freeman, super hero emeritus bitcoinus maximus… for now… out.